As filed with the Securities and Exchange Commission on August 31, 2005
Registration No. 333-___________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PACIFIC WEBWORKS, INC.
(Name of small business issuer in its charter)
Nevada 7372 87-0627910
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
(Address and telephone number of registrant's principal executive offices
and principal place of business)
Kenneth W. Bell, Chief Executive Officer
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
(Name, address and telephone number of agent for service)
Copies to:
Cindy Shy, Attorney
Cindy Shy, P.C.
2157 S. Lincoln Street, Suite 202
Salt Lake City, Utah 84106
(801) 323-2392
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
i
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of maximum maximum
each class of Amount offering aggregate Amount of
securities to to be price offering registration
be registered registered(1) per unit(2) price fee
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Common Stock 12,963,338 $ 0.175 $ 2,268,584.10 $ 267.01
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(1) Includes 3,083,335 underlying shares for the conversion of warrants.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act, based on the
average of the high and low trading prices as reported on August 29,
2005.
Pacific WebWorks, Inc. hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until we shall file a
further amendment which specifically states that this registration statement
shall become effective in accordance with Section 8(a) of the Securities Acts
of 1933 or until the registration statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
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PROSPECTUS
SUBJECT TO COMPLETION
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| The information in this prospectus is not complete and may be changed. |
| We may not sell these securities until the registration statement filed |
| with the Securities and Exchange Commission is effective. This |
| prospectus is not an offer to sell these securities and it is not |
| soliciting an offer to buy these securities in any state where the offer |
| or sale is not permitted. |
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Pacific WebWorks, Inc.
a Nevada corporation
12,963,338 shares of common stock, par value 0.001
We are registering 12,963,338 shares of our common stock. These shares are
presently owned by the selling stockholders named in this prospectus and they
will be sold by the selling stockholders.
We will not receive the proceeds from the sale of these common shares.
_________________________
Trading Symbol
OTC Bulletin Board: "PWEB"
Common stock prices as reported by the OTC Bulletin Board on August 30, 2005,
$0.16 bid and $0.17 ask
__________________________
This investment involves a high degree of risk, you should review the
"Risk Factors" beginning on page 4.
______________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined
if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
_________________
Prospectus dated August ___, 2005
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TABLE OF CONTENTS
Prospectus Summary..........................................................3
Risk Factors................................................................4
Use of Proceeds.............................................................9
Market for Common Equity....................................................9
Description of Business....................................................11
Property...................................................................17
Legal Proceedings..........................................................17
Management's Discussion and Analysis.......................................18
Management.................................................................25
Certain Related Transactions...............................................27
Principal Stockholders.....................................................27
Description of Common Stock................................................28
Selling Stockholders.......................................................28
Plan of Distribution.......................................................30
Other Information..........................................................31
Interest of Named Experts and Counsel......................................31
SEC's Position on Indemnification for Securities Act Liability.............32
Additional Information.....................................................32
Changes In and Disagreements With Accountants..............................32
Financial Statements.......................................................33
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PROSPECTUS SUMMARY
Pacific WebWorks, Inc.
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
(801) 578-9020
The Company
Our operations consist of Pacific WebWorks and its three operating
subsidiaries: Intellipay, Inc., TradeWorks Marketing, Inc. and FundWorks, Inc.
Pacific WebWorks is an application service provider and software development
firm that develops business software technologies and services for business
merchants and organizations using Internet and other technologies. We
specialize in turn-key applications allowing small- to medium-sized businesses
to expand their business over the Internet. Our product family provides tools
for web site creation, management and maintenance, electronic business
storefront hosting, and Internet payment systems for the small- to
medium-sized business and organization. Pacific WebWorks assists small
businesses in succeeding online through our Visual WebTools(TM) software, the
Intellipay payment systems, education and hosting services.
Our subsidiary, Intellipay Inc., specializes in providing online, secure and
real-time payment processing services for businesses of all sizes. Our
TradeWorks Marketing, Inc. subsidiary mass markets Pacific WebWorks and
Intellipay products. TradeWorks conducts educational/sales events related to
our technologies throughout the United States. FundWorks, Inc. provides
operating lease arrangements for certain TradeWorks customers. Further
discussions of our business and products can be found in "Description of
Business," starting on page 11.
The Offering
We are registering 12,963,338 shares of common stock to be sold by selling
stockholders, who are identified in "Selling Stockholders," starting on page
28. We are registering these shares as a result of agreements we have entered
into with the selling stockholders and these transactions and agreements are
described in more detail in "Selling Stockholders - Transactions Related to
the Selling Stockholders," starting on page 29.
We will not receive any of the proceeds from the sale of the shares which are
being registered for the selling stockholders. These shares will be sold from
time to time and at the total discretion of the selling stockholders. See
"Plan of Distribution," starting on page 30, for further details about the
possible methods of sale which may be used by the selling stockholders.
Common stock outstanding as August 26, 2005 35,018,395
Shares of common stock offered by selling stockholders 12,963,338
Common stock outstanding after the offering (assuming 38,101,730
the warrants being registered are exercised and the
underlying shares are sold.)
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RISK FACTORS
Potential investors should carefully consider the following risk factors
before deciding to buy our common stock. Each investor should also consider
the other information in this prospectus. Investing in our common stock
involves a high degree of risk and you should not invest in our common stock
unless you can afford to lose your entire investment.
This prospectus contains forward-looking statements and you should
not place undue reliance on these forward-looking statements.
We intend to identify forward-looking statements in this prospectus using
words such as "believes," "intends," "expects," "may," will," "should,"
"plan," "projected," "contemplates," "anticipates," or similar statements.
These statements are based on our beliefs, as well as assumptions we made
using information currently available to us. Because these statements reflect
our current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. Some, but not
all, of the factors that may cause these differences include those discussed
in this Risk Factors section, which apply only as of the date of this
prospectus.
RISKS RELATED TO THE OFFERING AND OUR STOCK PRICE
We have not paid cash or stock dividends on our common stock and
this may discourage potential investors from purchasing our shares.
Potential investors should not anticipate receiving dividends from our common
stock. We intend to retain future earnings to finance our growth and
development and do not plan to pay cash or stock dividends.
The future sale of the registered common stock may negatively affect
our stock price and you may be unable to resell your common stock
at or above the price you paid for it.
The market price of our common stock could drop as a result of sales of the
registered shares in the market, or the perception that such sales could
occur, after the effective date of this registration statement. We are
registering 12,963,338 shares of common stock and the selling stockholders
under this prospectus may sell none, some, or all of the shares of common
stock acquired from us, as well as common stock acquired upon the exercise of
the warrants held by them. We have no way of knowing whether the selling
stockholders will sell the shares covered by the prospectus. Depending upon
market liquidity at the time, a sale of shares covered by the registration
statement at any given time could cause the trading price of our common stock
to decline. The sale of a substantial number of shares of our common stock
under this prospectus could make it more difficult for us to sell equity or
equity-related securities in the future at a time and at a price that we might
desire.
Investors may have difficulty selling our common stock due to a
limited market and the "penny stock" rules.
Our common stock is traded on the OTC Bulletin Board and there has not been a
large public market for our common stock. We do not know the extent to which
investor interest in our stock will lead to the development of an active
trading market for our stock, or how liquid that market might be. Also, our
common stock qualifies as a "penny stock" under the Penny Stock Suitability
Reform Act of 1990 based on its market value and our net tangible assets.
Additional requirements under this Act affect the timing of purchases and
sales by investors, and the liquidity of penny stock because specific
disclosure procedures must be followed by all broker and dealers related to a
penny stock transaction. The rules require delivery by brokers and dealers of
a disclosure schedule before any transaction in a penny stock. The broker and
dealers must determine the suitability of the stock for a particular customer
and obtain a written agreement from the customer to purchase the stock. The
SEC recently adopted new regulations, effective September 12, 2005, which will
require a two-business day delay prior to execution of a trade in a penny
stock by a broker and dealer.
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RISKS RELATED TO OUR BUSINESS
We have a history of losses and anticipate future losses.
We are unable to fund our day-to-day operations from revenues alone. For the
six month period ended June 30, 2005, we incurred a net loss of $373,368
compared to a net loss of $488,627 for the year ended December 31, 2004. We
anticipate revenue from operations and equity transactions will fund our
operations for the next twelve months; however, we cannot assure you that we
will be able to attain or maintain profitability.
We may need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require $1 to $2 million
additional financing within the next twelve months to remain competitive in
our market. If we fail to obtain funds on acceptable terms, then we might be
forced to delay or abandon some or all of our business plans. Our success
will depend upon our ability to access equity capital markets and borrow on
terms that are financially advantageous to us. Also, we may not be able to
obtain additional funds on acceptable terms. If we are unable to obtain
additional capital, then we may not have sufficient working capital to develop
products, finance acquisitions, or pursue business opportunities. If we
borrow funds, then we could be forced to use a large portion of our cash
reserves to repay principal and interest on those funds. If we issue our
securities for capital, then the interests of investors and shareholders could
be diluted.
We are dependent upon the knowledge and skills of a member of our
management team who could leave us at anytime.
Our Vice President of Engineering, Allan E. Oepping, possesses particular
knowledge of our software technologies which is critical to our operations.
We do not have an employment agreement with this individual and he could leave
us at anytime. Should we lose his services, we may be unable to sustain our
current operations, we may experience delays in development of new products,
and/or we may not be able to service our customers in a satisfactory manner.
We are subject to intense competition from large and small companies
that limits our ability to obtain market share and may force our
prices down.
We face competition in the overall Internet software market, as well as in the
web site building market. Our ability to earn significant revenues from our
Visual WebTools(TM) or IntelliPay payment system will depend in part on their
acceptance by a substantial number of prominent online businesses. Broad
acceptance of our products and services and their use in large numbers is
critical to our success because a large portion of our revenues are derived
from one-time and recurring fees we charge to customers buying our products
and services. Our success in obtaining market share will depend upon our
ability to build name brand recognition and to provide cost-effective products
and services to our customers. We have developed our products to meet the
needs of small businesses and we believe the generality of our competitors'
services may be inadequately addressing the small business owner's needs. We
expect competition to persist, increase, and intensify in the future as the
markets for our products and services continue to develop and as additional
competitors enter our market. In addition, many of our current or potential
competitors have broad distribution channels that they may use to bundle
competing products directly to end-users or purchasers. If these competitors
were to bundle competing products for their customers, it could adversely
affect our ability to obtain market share and may force our prices down.
We may be unable to achieve market acceptance because technological
standards for payment processing are not established.
One obstacle to widespread market acceptance for the IntelliPay payment system
is that widely adopted technological standards for accepting and processing
payments over the Internet have not yet emerged. As a result, merchants and
financial institutions have been slow to select which service to use. Until
one or more dominant
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standards emerge, we must design, develop, test, introduce and support new
services to meet changing customer needs and respond to other technological
developments. To be successful, we must obtain widespread acceptance of our
technologies, or modify our products and services to meet whatever industry
standards do ultimately develop. It is not certain that we will be able to do
either.
We depend upon our proprietary rights, none of which can be completely
safeguarded against infringement.
Our ability to compete effectively will depend, in part, upon our ability to
protect our proprietary source code, Visual WebTools(TM) and the IntelliPay
payment system, through a combination of licenses and trade secrets. These
agreements and procedures may not effectively prevent disclosure of our
confidential information and may not provide us with an adequate remedy in the
event of unauthorized disclosure of such information. Intellectual property
rights, by their nature, are uncertain and involve complex legal and factual
questions. We rely upon trade secrets with respect to our source code and
functionalities and other unpatented proprietary information in our product
development activities. We seek to protect trade secrets and proprietary
knowledge in part through confidentiality agreements with our employees,
resellers, and collaborators.
If employees or collaborators develop products independently that may be
applicable to our products under development, disputes may arise about
ownership of proprietary rights to those products or services. Protracted and
costly litigation could be necessary to enforce and determine the scope of our
proprietary rights. It would be impossible to predict whether litigation
might be successful.
We rely in part on third party technology licenses which we cannot
guarantee will be available to us in the future.
We rely on certain technology which we license from third parties, including
software which is integrated with internally developed software and used in
our software to perform key functions. Our inability to maintain any of these
technology licenses could result in delays in distribution of our services or
increased costs of our products and services. We cannot assure you that third
party technology licenses will continue to be available to us on commercially
reasonable terms, or at all.
We must update our products and services and may experience increased
costs and delays which could reduce operating profit.
The electronic commerce, web hosting and merchant processing markets in which
we compete are characterized by technological change, new product
introductions, evolving industry standards and changing customer needs. In
order to remain competitive, we may be required to engage in a number of
research and development projects, which carries the risks associated with any
research and development effort, including cost overruns, delays in delivery
and performance problems. Any delay in the delivery of new products or
services could render them less desirable by our customers, or possibly even
obsolete. Any performance problem with a new product or service may require
significant funds to correct the problem. As a result of these factors, our
research and development efforts could result in increased costs that could
reduce our operating profit, a loss of revenue if promised new products are
not timely delivered to our customers, or a loss of revenue or possible claims
for damages if new products and services do not perform as anticipated.
We may experience software defects which may damage customer relations.
Despite rigorous testing, our software may nevertheless contain undetected
bugs, errors or experience failures when introduced, or when the volume of
services provided increases. Any material errors could damage the reputation
of our service or software, as well as damage our customer relations. We have
detected errors, defects, and bugs in the past and have corrected them as
quickly as possible. Correcting any defects or bugs we may discover in the
future may require us to make significant expenditures of capital and other
resources. We believe that we follow industry-standard practices relating to
the identification and resolution of errors, defects, or bugs encountered in
the development of new software and in the enhancement of existing features in
our products. As of this date we
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have not experienced any material adverse effect by reason of an error,
defect, or bug.
We may experience breakdowns in our hosting services, infrastructure
or payment processing systems, which may expose us to liabilities
and cause customers to abandon our products and services.
We would be unable to deliver our payment processing services or hosting
services if our system infrastructures break down or are otherwise
interrupted. Events that could cause system interruptions are:
. fire,
. earthquake,
. power loss,
. terrorist attacks,
. harmful software programs,
. telecommunications failure, and
. unauthorized entry or other events.
Although we regularly back up data from operations, and take other measures to
protect against loss of data, there is still some risk of such losses.
Despite the security measures we maintain, our infrastructure may be
vulnerable to computer viruses, hackers, rouge employees or similar sources of
disruption. Any problem of this nature could result in significant liability
to customers or financial institutions and also may deter potential customers
from using our services. We attempt to limit this sort of liability through
back-up systems, contractual provisions, insurance, and other security
measures. However, we cannot assure you that these contractual limitations on
liability would be enforceable, or that our insurance coverage would be
adequate to cover any liabilities we might sustain.
Also, a 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 or possible litigation.
We are dependent upon license renewal which cannot be assured to occur.
We derive revenues from user licenses and license renewals on a month to month
arrangement. We also intend to increase the brand recognition of our products
among users through these types of relationships. If a substantial number of
our customers were to decline to renew their contracts for any reason, then we
could experience a substantial drop in revenues. Our success in establishing
our products as a recognized brand name and achieving their acceptance in the
market will depend in part on our ability to continually engineer and deliver
new product technologies and superior customer service, so that customers
renew their licenses month to month.
We may pursue acquisitions of complementary service product lines,
technologies or business which may interfere with our operations and
negatively affect our financial position.
From time to time, we evaluate potential acquisitions of businesses, services,
products, or technologies. These acquisitions may result in a potentially
dilutive issuance of equity securities, the incurrence of debt and contingent
liabilities, and amortization of expenses related to goodwill and other
intangible assets. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies,
services, and products of the acquired companies; the diversion of
management's attention from other business concerns; risks of entering markets
in which we have no or limited direct prior experience; and, the potential
loss of key employees of the acquired company. As of the date of this filing,
we have no present commitment or agreement with respect to any material
acquisition of other businesses, services, products, or technologies.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could lead to
loss of investor confidence in our reported financial information.
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Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our
Annual Report on Form 10-KSB for the fiscal year ending December 31, 2006, we
will be required to furnish a report by our management on our internal control
over financial reporting. If we cannot provide reliable financial reports or
prevent fraud, then our business and operating results could be harmed,
investors could lose confidence in our reported financial information, and the
trading price of our stock could drop significantly.
In order to achieve compliance with Section 404 of the Act within the
prescribed period, we will need to engage in a process to document and
evaluate our internal control over financial reporting, which will be both
costly and challenging. In this regard, management will need to dedicate
internal resources, engage outside consultants and adopt a detailed work plan
to:
.. assess and document the adequacy of internal control over financial
reporting,
.. take steps to improve control processes where appropriate,
.. validate through testing that controls are functioning as documented,
and
.. implement a continuous reporting and improvement process for internal
control over financial reporting.
We can not assure you as to our, or our independent auditors', conclusions at
December 31, 2006 with respect to the effectiveness of our internal control
over financial reporting. There is a risk that neither we nor our independent
auditors will be able to conclude at December 31, 2006 that our internal
controls over financial reporting are effective as required by Section 404 of
the Act.
During the course of our testing we may identify deficiencies which we may not
be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404. In
addition, if we fail to achieve and maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue recognition, are
necessary for us to produce reliable financial reports and are important to
helping prevent financial fraud.
RISKS RELATED TO OUR INDUSTRY
We may not be able to adapt as the Internet market changes.
Our failure to respond in a timely manner to changing market conditions or
client requirements could have a material adverse effect on our business,
prospects, financial condition, and results of operations. The Internet is
characterized by:
.. rapid technological change;
.. changes in advertiser and user requirements and preferences;
.. frequent new product and service introductions embodying new
technologies; and
.. the emergence of new industry standards and practices that could render
our existing service offerings, technology, and hardware and software
infrastructure obsolete.
In order to compete successfully in the future, we must
.. enhance our existing products and develop new services and technology
that address the increasingly sophisticated and varied needs of our
prospective or current customers;
.. license, develop or acquire technologies useful in our business on a
timely basis; and
.. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
Our future success depends on continued growth in the use of the
Internet and Internet-based services for small business.
Because the Internet is a rapidly evolving industry, the ultimate demand and
market acceptance for our products will be subject to a high level of
uncertainty. Significant issues concerning the commercial use of the Internet
and
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online service technologies, including security, reliability, cost, ease of
use, and quality of service, remain unresolved and may inhibit the growth of
Internet business solutions that use these technologies. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation.
Regulation of the Internet and Internet-based services may decrease the
demand for our services and/or increase our cost of doing business.
Due to the increasing popularity and use of the Internet and online services,
federal, state, local, and foreign governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the Internet and other
online services. These laws and regulations may affect issues such as user
privacy, pricing, content, taxation, copyrights, distribution, and quality of
products and services. Any new legislation could hinder the growth in use of
the Internet generally or in our industry and could impose additional burdens
on companies conducting business online, which could, in turn, decrease the
demand for our services, increase our cost of doing business. The laws
governing the Internet remain largely unsettled, even in areas where
legislation has been enacted. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel,
and taxation, apply to the Internet. In addition, the growth and development
of the market for electronic commerce may prompt calls for more stringent
consumer protection laws, both in the United States and abroad, that may
impose additional burdens on companies conducting business via the Internet.
USE OF PROCEEDS
We are registering the shares for the benefit of the selling stockholders and
the selling stockholders will receive all of the proceeds from the sales. We
will pay the costs of this offering with the exception of the costs incurred
by the selling stockholders for their legal counsel and the costs they may
incur for brokerage commissions on the sale of their shares.
MARKET FOR COMMON EQUITY
MARKET INFORMATION
The principal market for our common stock is the NASD OTC Bulletin Board and
our common shares are traded over-the-counter under the symbol "PWEB." The
following table presents the range of the high and low bid of our common stock
for the first and second quarter of 2005 and each quarter for the past two
years, as reported by the OTC Bulletin Board Historical Data Service. These
quotations represent prices between dealers and may not include retail
markups, markdowns, or commissions and may not necessarily represent actual
transactions.
Year Quarter Ended High Bid Low Bid
---- ------------- -------- -------
2003 March 31 $ 0.14 $ 0.06
June 30 0.15 0.08
September 30 0.45 0.125
December 31 0.32 0.15
2004 March 31 $ 0.18 $ 0.11
June 30 0.13 0.09
September 30 0.10 0.052
December 31 0.10 0.06
2005 March 31 $ 0.095 $ 0.06
June 30 0.095 0.051
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Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and
Exchange Act, commonly referred to as the "penny stock" rule. The rule
provides that any equity security is considered to be a penny stock unless
that security is:
.. Registered and traded on a national securities exchange meeting specified
criteria set by the SEC;
.. Authorized for quotation from the NASDAQ stock market;
.. Issued by a registered investment company; or
.. Excluded from the definition on the basis of share price or the issuer's
net tangible assets.
These rules may restrict the ability of broker-dealers to trade or maintain a
market in our common stock and may affect the ability of shareholders to sell
their shares. Broker-dealers who sell penny stocks to persons other than
established customers and accredited investors must make a special suitability
determination for the purchase of the security. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 together with their spouse, and certain
institutional investors.
The rules require the broker-dealer to receive the purchaser's written consent
to the transaction prior to the purchase and require the broker-dealer to
deliver a risk disclosure document relating to the penny stock prior to the
first transaction. A broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, and current
quotations for the security. Finally, monthly statements must be sent to
customers disclosing recent price information for the penny stocks.
The SEC recently adopted new regulations for penny stock to become effective
September 12, 2005, that will require a two business day waiting period from
the date the broker or dealer sends an acknowledgment for the transaction to
the customer before a broker or dealer may execute a trade. The new
regulations also eliminate the exclusion from the definition of penny stock of
stock authorized for quotation on the NASDAQ stock market.
HOLDERS
As of August 4, 2005, we had approximately 405 stockholders of record of our
common stock, which does not include "street accounts" of securities brokers.
DIVIDENDS
We have not paid cash or stock dividends and have no present plan to pay any
dividends. We intend to retain any earnings to finance the operation and
expansion of our business and the payment of any cash dividends on our common
stock is unlikely. However, our board of directors may revisit this matter
from time to time and may determine our earnings, financial condition, capital
requirements and other factors allow the payment of dividends.
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DESCRIPTION OF BUSINESS
Historical Development
The company was incorporated in the state of Nevada on May 18, 1987, as
Asphalt Associates, Inc. and changed its name to Pacific WebWorks, Inc. in
January 1999. Pacific WebWorks has four wholly-owned subsidiaries,
Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc, which are
Delaware corporations, and World Commerce Network, LLC. Intellipay
specializes in providing online, secure and real-time payment processing
services for businesses of all sizes. TradeWorks Marketing was incorporated
in Delaware on July 17, 2003, to mass market our products and services.
FundWorks, Inc. was incorporated on August 5, 2003, to provide operating lease
arrangements for certain TradeWorks' customers. World Commerce Network, LLC
is a non-operating, discontinued operation.
Pacific WebWorks' Business
Pacific WebWorks is an application service provider and software development
firm that develops business software technologies and services for business
merchants and organizations using Internet and other technologies. We
specialize in turn-key applications allowing small- to medium-sized businesses
to expand over the Internet. Our product family provides tools for web site
creation, management and maintenance; electronic business storefront hosting
and Internet payment systems for the small- to medium-sized business and
organization.
We initially focused entirely on virtual retailing software solutions, meaning
merchants that do not have a physical store location and would exist only on
the Internet. Due to requests in the marketplace, we expanded our
technologies to include features for small- to medium-sized physical "brick
and mortar" entities, in addition to our virtual merchants. This is expected
to give these businesses and other organizations a complete solution for all
physical store and Internet concerns and at the same time reduce the costs of
operations and introduce new profit centers for them.
Products
Even though small business, including small office/home office, typically
understands how traditional brick and mortar businesses operate, we believe
they need assistance in order to replicate business processes effectively and
economically using the Internet. Pacific WebWorks assists small businesses in
succeeding online through our Visual WebTools(TM) software, the Intellipay
payment systems, education and hosting services.
We provide a comprehensive one-stop solution that incorporates our integrated
suite of e-commerce software tools, plus hosting, site management, web design
services, and education. By leveraging a shared commerce platform across many
customers, we bring economies of scale to our customers. We believe this
structure allows our customers to focus on their business instead of
technology, enabling them to achieve a much faster return on investments made
in technology and to experience more success on the Internet.
Visual WebTools Version 4.1 ("V4.1") - V4.1 is a suite of software programs
that fit together to perform the basic business functions we believe are the
most effective on the Internet. The following products are included as part
of this suite.
.. WebWizard is an easy-to-use web page design program that possesses a
simple user interface and templates for the novice, yet it has a very
powerful additional functionality for web design professionals. It
incorporates sophisticated site components like tables, frames, flash and
other multimedia capabilities in a straightforward, menu driven process.
No complicated programming skills are required to use the WebWizard tool.
Our customers can manage their sites' layout, colors, contents, tables,
and graphics easily. WebWizard includes a library of hundreds of graphics
that are freely accessible by our customers. WebWizard allows our
customers to quickly and easily create, update, modify, and enhance their
web
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sites. Changes can be uploaded to our servers within minutes 24 hours a
day, 7 days a week from any Internet-connected Microsoft Windows )
computer.
.. ClipOn Commerce(TM) is an e-storefront and product management system,
complete with shopping cart technology. ClipOn Commerce allows our
customers to build an Internet storefront. They can create a complete
product catalog, organize and search products by unlimited categories and
import/export to and from their database. ClipOn Commerce is designed to
function with a third party merchant account and is integrated with our
Intellipay payment system, which allows our clients to accept all major
credit cards online. ClipOn Commerce has support for QuickBooks(R)
accounting software enabling our customers to update between their
accounting records and Internet storefront. ClipOn Commerce also
features UPS shipping integration.
.. WebContacts is a contact management program. Companies that use our
system can utilize WebContacts to organize information about all the
entities they do business with, including customers, suppliers,
distributors, potential customers, etc. WebContacts will also enable
them to capture information about people who visit their website, if
those visitors elect to supply contact information at the site. This
database functionality enables our customers to be more effective when
using the web as a marketing and communications tool.
.. WebChannels is an e-mail distribution program that enables our customers
to send customized e-mails in either plaintext or HTML format to their
WebContacts database of visitors. Since email is the most popular
activity on the web, and one of the most effective forms of Internet
marketing, WebChannels provides our customers with a practical tool with
which to promote their businesses. For example, by using WebChannels, a
client could easily send out a weekly newsletter, coupons or special
offers to an entire customer base, certain visitor types or to a segment
of their customers
.. Web profiling tool is a form and survey creation tool that helps capture
feedback and valuable demographic information from customers and web site
visitors. Our clients can create customizable forms, surveys and
interactive questionnaires. The web profiling tool includes a catalog of
pre-designed questions, such as education level, hobbies, satisfaction
level, etc. The profiling forms may also be custom created by our
customers.
.. WebStats enables our customers to analyze visitor activities on their
websites in order to track pages viewed, hits, time of access, etc.
WebStats is a statistics program that provides detailed reports and
graphs related to referring pages, geographic location of visitors,
browsers and the operating systems web site visitors are using, what web
pages generate hits, and what pages are the most popular. WebStats can
produce reports of business information, including year-long trends and
the effectiveness of the clients' sites.
.. Auction Connection is a module that allows Visual WebTools customers to
list inventory items with Ebay at the click of a button.
Intellipay Payment System - This group of products offers payment
technologies for business-to-business and business-to-customer uses on the
Internet and in physical store locations. They allow our customers to accept
real time credit card payments from their web site, Internet appliances,
kiosks or at remote locations through their Nextel cell phone or at the
physical point of sale. The Intellipay products use the same standards used
by all major commerce sites, industry standard security components and
methods, and has been tested under strict banking network procedures.
Point-of-sale professionals provide technical support and ePayment
professionals can even help the business locate an Internet-approved merchant
account if needed. Once customers enter the necessary data in a secure form,
Intellipay quickly processes the transaction in real-time (2 - 5 seconds) and
returns the customer back to the business site. Intellipay also provides
methods for enterprise-level businesses to link Intellipay products, services
and features into their ecommerce web sites and transmit transactional data
for use in
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back-office systems.
.. ePayment System supports all major card types including Visa,
MasterCard, American Express, Discover, Diners Club and JCB. Also,
support is provided for Visa and MasterCard debit (check) cards and Level
Two corporate/commercial cards through various bank networks.
Transaction types include industry standard transactions such as normal
authorizations, pre-authorizations intended for delayed settlement, the
so-called "force" allowing a transaction authorized offline (possibly a
voice authorization) to be settled, credits for refunds and Intellipay's
innovative address verification system allows merchants to retrieve a
score and verify the account validity.
This Intellipay product allows our customers to control transaction level
behavior depending on AVS scores, duplicate transaction attempt
detection, and more. Intellipay also automatically settles merchant
batches nightly so our customers are freed from forcing settlement via
manual or programmatic methods, which also helps reduce our customer's
costs by settling within the 24-hour window mandated by most merchant
accounts. The Intellipay system is fully transportable meaning that a
customer can switch web site hosting companies, move between most
e-commerce software programs or change to or from many merchant account
providers. Our products can grow and change with our customer at little
or no additional charges and with minimal technology issues.
.. ExpertLink(TM) is Intellipay's proprietary connection protocol for
high-volume Internet businesses requiring reliable, high velocity
real-time transaction authorizations linked to their own secure web site
and/or back office systems. ExpertLink is a standards-based secure
communications method allowing web-developers and application developers
to build in the ePayment processing and various features, including batch
management commands, duplicate transaction detection and management, and
more. Our customers usually purchase ExpertLink or LinkSmart, and both
come with Smart Terminal and the Secure Account Management System.
.. LinkSmart(TM) gives our online customers the ePayment features with
minimal technical installation on their side. With LinkSmart, our
customer does not need to pay for installation and maintenance of
expensive secure servers since LinkSmart serves the secure, customizable
payment pages for them. LinkSmart offloads many expensive
mission-critical e-commerce tasks from the merchant.
.. Smart Terminal(TM) allows our customers to securely log into their
Intellipay account from any Internet browser and authorize manual
transactions and orders they have received through offline methods.
Smart Terminal supports industry-standard transactions including normal
authorizations, authorization-only for delayed settlement, settlement for
non-Intellipay authorized transactions, credits, partial credits and
more. Most clients receive Smart Terminal along with LinkSmart or
ExpertLink, but Smart Terminal can also be purchased as a stand alone
product.
.. Secure Account Management System ("SAMS") allows Intellipay customers to
securely log into Intellipay's Secure Account Management System from any
web browser to configure and control various Intellipay components and
behaviors. They can manage today's authorized transaction batches,
control passwords, enforce transaction data components, control various
features such as our new duplicate transaction detection and management
system, control email transaction receipts, access Smart Terminal,
control LinkSmart payment page contents, target returning live data
streams, configure Visa-required invoice numbering, and more. Customers
can also view transaction histories for any day in the past 180 day
period.
.. IntelliPay Desktop Terminal ("IDT") IntelliPay Desktop Terminal brings
all of the functionality of a Virtual Terminal application to your
desktop while supporting hardware such as a card reader and receipt
printer. This allows merchants to receive a qualified discount rate on
their transactions and save hundreds of dollars in equipment and
processing fees. They can also take advantage of sharing printers
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on their network allowing several terminals to print to the same receipt
printer, reducing the amount of hardware they need to purchase.
.. IntelliPay Wireless Terminal ("IWT") IntelliPay is now submitting
wireless transactions with retail qualifications using Nextel data
service. This allows a merchant to accept either swiped or keyed
transactions using a Nextel Cellular / Data phone using a card reader.
The merchant has all of the benefits of retail rates with the added value
of visual batch management and settlement process. IntelliPay Wireless
Terminal is the perfect solution for all mobile merchants that also use a
cellular phone.
Education Services - We provide more than our software, we also assist our
customers with education and site design services. We believe this
information helps our clients understand how to use the Internet more
effectively.
.. Coaching Services are personalized electronic/telephonic instruction on
the use of our product technologies. These services are directed towards
assisting clients in making their virtual operations successful. We
recommend eight to twelve, one-half hour training sessions for our new
customers.
.. Retreats are workshops that are held one to two times per year for
certain TradeWork's customers for informative direction on Internet
marketing strategies.
Rent-a-Pro offers custom web site design services to clients who elect to hire
Pacific WebWorks to build their web site for them rather than building it
themselves.
Technical Support is offered via online chat or e-mail from 8 a.m. to 9 p.m.
(MST), or by phone from 8 a.m. to 5 p.m. (MST).
Hosting Infrastructure allows us to host our customers' web sites, therefore
eliminating the cost of hardware investment and maintenance for them.
Domain Names are offered to customers online at retail prices. These include
".com," ".org," ".biz," ".net," ".us" and ".info."
Sales and Marketing
In July 2003 we incorporated TradeWorks Marketing to conduct marketing events
in locations throughout the United States. TradeWorks Marketing's product
offerings include Intellipay Virtual Terminal Software, Pacific WebWorks
Visual WebTools Web site manager and builder, including integration with
ebay(TM).com. TradeWorks Product Club and training. TradeWorks Marketing also
has entered into factoring arrangements with an outside leasing company with
recourse for certain sales of e-commerce software and merchant accounts.
In August 2003 we incorporated FundWorks, Inc. to provide operating lease
arrangements for certain TradeWorks' customers. The operating lease
agreements are for the purchase of e-commerce software and merchant accounts
over 24 to 36 months for the price of $59.95 per month. The customers relying
on these operating lease agreements have a higher credit risk.
We do not believe that our competitors are effectively targeting our market
niche: A totally Internet based, end-to-end business solution for small- and
medium-sized businesses. We believe that our products will allow businesses
to generate leads, sell products, run sales promotions, capture demographic
information about web site visitors, communicate with web site visitors, and
obtain intelligent information about who is visiting their web sites and what
they are doing while they are there. Our products allow our customers to stay
in complete control of their web sites and provide tools that can facilitate a
successful Internet experience for them.
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We market and sell our products primarily through reseller channels, including
our wholly-owned reseller TradeWorks Marketing, our own internal sales force
and strategic partnerships. We sell our products to our partners at
wholesale. The partners then mark the products up and sell them at retail.
We also sell our products through resellers who are paid a commission for each
merchant who purchases our products and subsequent services. Each merchant
must sign a purchase agreement with the reseller, which the reseller must in
turn provide to us. We then provide software to the resellers' customers,
allowing them to create Internet web sites and/or complete e-business
solutions. We provide the initial reseller with training in the use of the
software.
We believe we may be able to develop a substantial presence in our target
market through a combination of broad channels of distribution, marketing
strategy, unique proprietary technology, technical expertise, and training and
education in the use of our products. It is our opinion that in the past,
businesses which have attempted to maintain interactive web sites and conduct
business on the Internet have either developed technical expertise themselves,
paid employees to create and maintain their web sites, or retained contract
"web professionals" to do so. We believe our products allow small businesses
to participate in Internet commerce by creating and managing their own
Internet web sites and storefronts at a reasonable cost.
Competition
Our market is quickly evolving, very competitive and subject to rapid
technological change. We expect competition to persist, increase, and
intensify in the future as the markets for our products and services continue
to develop and as additional companies enter our markets. A number of
companies are now providing Internet services to small businesses. They
include organizations like Microsoft, Yahoo!, Bigstep, Zyweb, Register.com,
GoDaddy, Bizfinity, MeZine.com and many others. Our success in our target
market will depend upon our ability to build name brand recognition and to
provide quality, cost-effective products and services to our customers.
At the present time, we have not identified any other companies that are using
an identical approach to ours. Nonetheless, it is probable that larger
interests will choose to enter the market we are developing or that a new
market may emerge. Although we feel the market is vast and should accommodate
many technology providers, we may not be able to compete effectively with
current and future competitors.
In our estimation, few major competitors currently offer products comparable
to the Visual WebTools(TM) product family. We believe that "Yahoo! Store" is
our most significant competitor, with its brand name recognition and
significantly greater financial, technical, marketing, and managerial
resources. Yahoo! Store has significantly higher sales and customers than we
do and has entered into a significantly higher number of license agreements
with third parties. We believe that our product provides a comparable service
for a lower price than that provided by Yahoo! Store. In addition, because we
have focused our efforts on small businesses, including providing Internet
tools which allow businesses to develop their own Web sites, we believe that
the generality of the Yahoo! Store may be inadequately addressing potential
customer needs and that we will be better able to address their site
development needs.
Our Intellipay payment system competes with AuthorizeNet products and certain
VeriSign products, along with other companies that provide e-commerce
solutions.
Our ability to successfully compete will depend upon a number of factors,
including:
.. our ability to successfully maintain and sell existing products;
.. our ability to conceive, develop, improve, and market new products;
.. our ability to identify and take advantage of emerging technological
trends within our target markets;
.. our ability to respond effectively to technological changes or new
product announcements by competitors; and,
.. our ability to recruit resellers who can market and sell our products and
services in significant volumes to the market.
We believe that we will need to make significant expenditures for research and
development and marketing in the
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future to compete effectively.
Major Customers
Our client base includes approximately 9,000 active paying customer accounts.
We rely on the efforts of third party resellers, including our wholly-owned
reseller, TradeWorks Marketing, to add accounts to our customer base. A
significant portion of our customer accounts were provided by previous Pacific
WebWorks and Intellipay resellers who no longer resell our products and
services. While we continue to add additional and significant resellers, we
are dependent upon these resellers. If we lose them, then we expect our
revenues to be adversely affected by attrition in our customer account
portfolios if there is not immediate replacement. During the year ended
December 31, 2004, we experienced continued declines in hosting and payment
processing revenues, although at a significantly reduced rate from the
previous year, due to the loss of resellers and general attrition. We expect
to see this decline in hosting and payment processing revenues to cease by
year end 2005.
Trademark, Licenses and Intellectual Property
On October 9, 1998 Utah WebWorks filed a trademark application for Visual
WebTools(TM) that we acquired and became responsible for upon our merger with
Utah WebWorks. In December of 1998 the United States Patent and Trademark
Office assigned Serial No. 567,136 to this mark. In addition we have
trademarks for Pacific WebWorks(TM) and ClipOn Commerce(TM).
On October 25, 2002 we received notice of acceptance and acknowledgment from
the U.S. Department of Commerce Patent and Trademark Office validating our
registration of a trademark for Intellipay through October 29, 2006. The mark
may be renewed one year prior to its expiration.
Our success will depend, in part, on our ability to obtain and protect our
trademark and trade secrets and operate without infringing upon the
proprietary rights of others in the United States and other countries. If we
were to become involved in a dispute regarding our intellectual property, it
may become necessary for us to participate in interference proceedings before
the United States Patent and Trademark Office to determine whether we have a
valid claim to the rights involved. We could also be forced to seek a
judicial determination concerning the rights in question. These proceedings
could be costly and time consuming, even if we were to eventually prevail.
Should we not prevail, we could be forced to pay significant damages, obtain a
license to the technology in question, or stop marketing one or more of our
products.
All of our core technology was developed internally by either our engineers or
by the engineers of Utah WebWorks and Intellipay. Other than Internet
connectivity and other information technology infrastructure, the performance
of our products does not significantly rely on any third party technology,
although we continue to support as many third party technologies as possible.
We also rely upon trade secrets, proprietary know-how, and confidentiality
provisions in agreements with employees, consultants, and resellers to protect
our intellectual property rights. There are risks that these other parties
may not comply with the terms of their agreements with us, and that we may not
be able to adequately enforce our rights against these parties. We have
adopted a policy of requiring our employees and resellers to execute
confidentiality agreements when they commence employment with us or resell our
products. These agreements generally provide that all confidential
information developed or made known to the employees or resellers during the
course of their relationship with us is to be kept confidential and not
disclosed to third parties, except under certain specific circumstances. In
the case of employees, the agreements also provide that all inventions
conceived by the employees in the course of their employment will be our
exclusive property.
Research and Development
We continue to improve our existing products and release new related products.
We recorded research and
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development expenses of $242,012 for the year ended December 31, 2004
primarily related to the development of the Intellipay Wireless Terminal
product and maintenance of our core products. During the year ended December
31, 2003, we recorded research and development expense of $164,999, primarily
related to development of our online auction connector product, Intellipay
Desktop Terminal, and the updating of our core products.
Material Contracts
We initially entered into an informal agreement with Electric Lightwave, Inc.
for telecommunications and Internet access in January 1998. We formalized the
agreement in February 1998 and negotiated an extension in November 2001, which
terminated in January 2004. As of the date of this filing, this contract is
on a month-to-month basis. The extension agreement requires that we pay
approximately $4,300 per month for a dedicated DS3 Internet and telephone
connection, and a redundant T-1.
Employees
As of the date of this filing we have 21 employees. We have six employees in
administration, two in sales/marketing, seven in operations and five
development engineers. Our employees are not presently covered by any
collective bargaining agreement. We have not experienced any work stoppages
and believe that our relations with our employees are good.
PROPERTY
Our principal offices are located in the Westgate Business Center, which is
located in Salt Lake City, Utah. This property serves as our main office and
data center. We believe this property will be adequate for our near term
needs. We lease approximately 8,000 square feet of commercial office space
and pay approximately $8,400 per month until the lease expires in December
2006.
LEGAL PROCEEDINGS
We are involved in various disputes and legal claims arising in the normal
course of our business. In the opinion of management, any resulting
litigation from these disputes and claims will not have a material effect on
our financial position and results of operations
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
Our revenues are primarily from the sale of access to our software technology,
financial services and continuing monthly service and hosting fees. We also
derive revenues for services related to web site design, training, education
and consulting. During the past year management has continued to focus on
marketing and distribution channels, which, while costly, are believed to be
the most effective short term solution to increase our sales.
We suffered declines in revenues in 2003 and management took steps to
diversify our marketing and distribution strategy between several of our
product offerings, which led to revenue growth for 2004. During the first six
months of 2005 we continued to refine and expand our marketing efforts. These
refinements resulted in significantly increased registrations, attendance and
product purchases at our June 2005 nationwide sales and training events. We
look forward to continued benefits from these marketing refinements as we seek
additional means to market our products to the small business community.
While our revenues have increased, we have recorded net losses for the past
two years. As a result, in June 2005 we supplemented revenues with loans and
equity financing. We entered into promissory note agreements with two
different lenders for an aggregate $200,000. We also negotiated a Unit
Purchase Agreement that could ultimately result in a capital injection to the
company of $850,000 if all the unit warrants are exercised. As of the date of
this filing, we have received a total of $500,000 from this agreement. The
remaining $350,000 from the equity financing is in the form of warrants that
are exercisable at $0.17 per share at some future date.
Our challenges continue to be in the area of stiff competition and advancing
technologies coupled with the need for capital and talent. We believe we are
making progress in all of these areas, but it is a constant challenge.
Pacific WebWorks and IntelliPay have great potential in the marketplace.
However, hurdles exist, such as identifying and implementing effective product
distribution channels, economic changes generally, gaining marketplace
acceptance and addressing shifting public attitudes for technology products
that could pose a threat to our success.
Liquidity and Capital Resources
We rely on the cash inflows from our sales efforts to fund our continuing
operations. We are dependent on the efforts of our resellers (including our
wholly-owned subsidiary, TradeWorks Marketing), independent sales
representatives and our in-house sales personnel to increase our revenues,
while we continue to work to control expenses. Our monthly cash outflows are
primarily related to our marketing and operating expenses. These cash
outflows can exceed monthly cash inflows based on timing differences between
marketing campaigns and sales.
We are unable to satisfy our total current liabilities, including those of our
discontinued operations, with our current cash. We expect to generate
positive cash flows through further development of our business and
distribution channels and we plan to address only the liabilities of our
operating subsidiaries with our current cash balances and inflows. It should
be noted that 51.7% of our current liabilities are made up of deferred
revenues that will be recognized over the next 8 to 12 months and this
liability does not require a specific cash outlay, but only that we remain a
going concern.
Net cash used in continuing operations for the six month period ended June 30,
2005 (the "2005 six month period") was $109,123 compared to $16,889 for the
for the six month period ended June 30, 2004 (the "2004 six month period").
The increase in net cash used by continuing operations for the 2005 six month
period was primarily the result of increased receivables and decreased
deferred revenue for that period.
Net cash used by continuing operations was $190,195 for 2004 compared to net
cash provided by continuing
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operating activities of $87,455 for 2003. The net cash used by operations for
2004 was primarily the result of increased advertising expense and commissions
paid to obtain revenues for our products and services and the related timing
differences in recognition of those deferred revenues, along with
non-recurring expenditures for enhancement of our data center and security
features related to our online credit card transaction processing product.
For the 2005 six month period, net cash provided by investing activities was
$50,959 compared to net cash used in investing activities of $57,235 for the
2004 six month period. Investing activities for the 2005 six month period
were primarily related to cash placed on reserve with a financial institution
related to TradeWorks Marketing's merchant account. Investing activities for
the 2004 six month period consisted primarily of purchases of property and
equipment and the liquidation of cash placed on reserve with a financial
institution related to TradeWorks Marketing's merchant account.
For 2004, net cash used by investing activities was $107,534 compared to net
cash provided by investing activities of $75,495 for 2003. Investing
activities for 2004 were primarily related to purchases of property and
equipment and cash placed on reserve with a financial institution related to
TradeWorks Marketing's merchant account. Investing activities for 2003
consisted primarily of the purchase of property and equipment, establishing a
cash reserve with a bank, the sale of a subsidiary, and the liquidation of a
certificate of deposit.
Financing
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 have. We
believe that we may need an additional $1million during the next twelve months
to continue to keep up with technological improvements and further our
business development strategies.
On July 1, 2005, we entered into a Unit Purchase Agreement with three
accredited investors. (See "Selling Shareholders," below for more details.)
Under this agreement we issued 4,166,670 units at a unit price of $0.06 for
net proceeds of $250,000. Also, warrants were executed for the purchase of an
additional 2,083,333 shares at $0.12 for net proceeds of $250,000. Warrants
to purchase an additional 2,083,333 shares at $0.17 per share remain
outstanding as of the date of this filing. We used $200,000 of these monies
to repay loans and intend to use the balance of this funding for operations.
Net cash provided by financing activities for the 2005 six month period was
$200,000 and was related to proceeds from promissory notes. The promissory
notes were executed on June 28 and 30, 2005 with two different lenders. We
borrowed an aggregate of $200,000, at 8% interest. Each note had a principle
amount of $100,000 and each note is due and payable on December 31, 2006. The
notes are collateralized by our business assets and are convertible into our
common stock at $0.06 per share.
Net cash provided by financing activities of $250,000 for 2004 was related to
sales of our common stock for cash. Net cash used in financing activities for
2003 was $24,557 and was primarily related to a payment on a note payable to
our largest reseller.
We believe additional funding may be obtained through additional debt
arrangements or equity offerings. However, if we are unable to obtain
additional funds on acceptable terms, then we might be forced to delay or
abandon some or all of our product development, marketing or business plans,
and growth could be slowed, which may result in declines in our operating
results and common stock market price.
If we rely on equity offerings for funding, then we will likely use private
placements of our common 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
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share of their common stock.
Commitments and Contingent Liabilities
Our operating commitments consist of our operating lease for our Salt Lake
City office that approximates $8,400 per month. Future minimum lease payments
under this lease are $101,760 per year through 2006. As of June 30, 2005, we
had an accrued liability of approximately $91,500 related to the Intellipay's
operating lease default. Intellipay defaulted on its operating lease in May
2002 after we closed Intellipay's physical office, located in Fremont,
California, and moved its technological infrastructure and operations to Salt
Lake City, Utah in February 2002. The Intellipay lease required approximately
$6,000 per month, plus late fees and interest, through December 2003. The
accrued liability has been reduced for time that the property was leased to a
third party by the property manager.
Our total current liabilities at June 30, 2005, were comprised of accounts
payable, accrued liabilities, deferred revenue, net current liabilities from
discontinued operations, and convertible notes payable. Accounts payable
totaled $177,641 and were related to operating costs such as advertising
expenses, professional fees and seminar expenses. Our accrued liabilities of
$173,189 were primarily the result of the operating lease default for the
Intellipay office space, contingent reseller commissions, payroll liabilities,
and estimated refunds and factoring obligations. Deferred revenues included
up-front fees received for license fees, software services and education not
yet performed or delivered and totaled $627,473 at June 30, 2005. Current
liabilities from discontinued operations were $235,274 and are related to
World Commerce Network, LLC. In addition, we had $200,000 of convertible
notes payable at June 30, 2005.
The operations of World Commerce Network, LLC, our subsidiary, are ceased and
discontinued. Management is attempting to negotiate settlements of World
Commerce Network's accrued liabilities. As of June 30, 2005, World Commerce
Network's accrued liabilities totaled $171,264 and included estimated
contingent recourse obligations and attorneys fees approximating $95,000
related to pending litigation and approximately $56,000 for estimated customer
refunds. In addition, World Commerce Network had a contingent liability of
approximately $65,000 plus interest related to an alleged default of
application for credit and personal guaranty made by a former officer of
Pacific WebWorks. We continue to work through various matters related to
these liabilities and management believes the recorded liabilities are
sufficient to cover any resulting liability. There has been no activity on
any of these accounts for over two years.
Certain customers of TradeWorks Marketing entered into operating leases to
purchase e-commerce software and merchant account agreements that were
assigned by TradeWorks Marketing to FundWorks. The customers pay $59.95 per
month for the operating lease agreement and the agreements have terms over 24
to 36 months and are non-cancelable. Related revenues are recorded monthly as
earned. The future annual minimum lease receipts for FundWorks' operating
leases as of June 30, 2005 were approximately $234,000 through June 30, 2006,
$207,000 through June 30, 2007, and $62,000 through June 30, 2008.
Collectability of future minimum lease receipts cannot be assured because the
customers placed in these operating leases have a higher credit risk.
Off-balance Sheet Arrangements
None.
Critical Accounting 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. Estimates of
particular significance in our financial statements include goodwill and the
annual tests for impairment, deferred revenue calculations, and liabilities
accrued as estimates for probable litigation and other contingencies.
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Goodwill related to Intellipay is assessed annually for impairment by
comparing the fair values of Intellipay to its carrying amount, including
goodwill. The fair value of Intellipay is estimated using both cash flow
information from internal budgets and multiples of revenue. In the event that
an impairment indicator arises prior to our annual impairment test of
goodwill, we will provide a full test relative to the indicator in the period
that the indicator is present.
Our ability to avoid impairment of the goodwill related to Intellipay is
largely dependent on Intellipay's ability to further generate revenues and
cash flows in accordance with budgeted amounts. We currently do not expect
impairment to occur for the Intellipay business unit in the near term;
however, if an impairment occurs it would have a material effect on our
financial condition by resulting in a net decrease in our consolidated assets
and consolidated net earnings. We performed a goodwill impairment test during
2004 and concluded there was no impairment of goodwill.
Our consolidated financial statements include estimates for contingent
liabilities that are considered probable. Material estimates for contingent
liabilities include approximately $123,000 for our operating companies and
approximately $151,000 in net current liabilities of our discontinued
operations. From a liquidity standpoint, any settlement or judgment received
by us from pending or threatened litigation may have a direct affect on our
cash balances of $596,819 at June 30, 2005. Any judgments that may be
received by us for pending or threatened litigation related to discontinued
operations may not have a direct affect on our assets as management does not
intend to satisfy such claims with the assets of our operating companies.
Management believes that all amounts estimated and recorded as contingent
liabilities approximate the amount of liabilities that could be owed to
parties in the form of settlement or in a judgment. Any settlements that
might occur below amounts accrued would result in a favorable impact to our
earnings and working capital.
Results of Operations
Three and Six Month Period Ended June 30, 2005 and 2004
-------------------------------------------------------
The following discussions are based on the consolidated financial statements
for the three and six month periods ended June 30, 2005 and 2004 for Pacific
WebWorks, Intellipay, TradeWorks Marketing, Fundworks and the discontinued
operations of World Commerce Network, LLC, a non-operating company. The
following discussions should be read in conjunction with the financial
statements, and notes thereto, included with this prospectus starting on page
34.
Comparison of 2004 and 2005 Three and Six Month Period Operations
- -----------------------------------------------------------------
Six months Six months Three months Three months
ended ended ended ended
June 30, 2004 June 30, 2005 June 30, 2004 June 30, 2005
-------------- -------------- -------------- --------------
Revenues, net $ 1,571,688 $ 1,848,403 $ 945,762 $ 984,022
Cost of sales 573,277 517,398 336,750 308,564
Gross profit 998,411 1,331,006 609,012 675,458
Total operating
expenses 1,442,990 1,707,633 832,341 912,478
Net loss from
operations (444,579) (376,628) (223,329) (237,020)
Total other
income (expense) 3,321 3,260 794 (4,348)
-21-
Net earnings (loss) (441,258) (373,368) (222,535) (241,368)
Net earnings (loss)
per share $ (0.02) $ (0.01) $ (0.01) $ (0.01)
We recognize hosting, maintenance, transaction and processing fees in the
period in which fees are fixed or determinable and the related products or
services are provided to the user. Revenues from up-front fees from customers
are recorded on the balance sheets as deferred revenues and are recognized
over the period services are performed. Fees for the set-up of merchant
accounts are deferred and recognized as services are delivered, which is
generally two months. Training and design revenues are recognized as the
related services are performed.
Even with the deferral of a significant amount of our sales, our revenues
increased by 17.6% for the 2005 six month period compared to the 2004 six
month period. Revenues increased 4.0% for the three month period ended June
30, 2005 (the "2005 second quarter") compared to the three month period ended
June 30, 2004 (the "2004 second quarter"). These increases in the 2005
periods were primarily the result of sales and training events conducted by
our subsidiary, TradeWorks Marketing.
Cost of sales include fulfillment, customer service, certain royalties and
commissions, amortization of purchased customer portfolios, service personnel,
telecommunications and data center costs. Cost of sales for the 2005 periods
were approximately 30% of net revenues compared to approximately 35% of net
revenues for the 2004 periods. As a result of increased revenues and
decreased cost of sales, our gross profit increased 33.3% for the 2005 six
month period compared to 2004 six month period and increased 10.9% for the
2005 second quarter compared to 2004 second quarter.
Total operating expenses increased 18.3% for the 2005 six month period
compared to 2004 six month period and increased 9.6% for the 2005 second
quarter compared to the 2004 second quarter. As a result of our new marketing
approach, selling expenses increased 13.8% for the 2005 six month period
compared to 2004 six month period and increased 3.3% for the 2005 second
quarter compared to the 2004 second quarter. Research and development
expenses increased 7.8% for the 2005 six month period compared to 2004 six
month period and increased 2.3% for the 2005 second quarter compared to the
2004 second quarter. General and administrative expenses increased 30.7% for
the 2005 six month period compared to 2004 six month period and increased
39.3% for the 2005 second quarter compared to the 2004 second quarter.
Depreciation and amortization decreased 46.5% for the 2005 six month period
compared to 2004 six month and decreased 47.3% for the 2005 second quarter
compared to the 2004 second quarter.
We recorded total other income for the 2005 and 2004 six month periods and for
the 2004 second quarter primarily due to interest income. We recorded total
other expense in the 2005 second quarter due to miscellaneous expenses.
As a result of the above items, we recorded a net loss for both the 2005 and
2004 comparable periods.
Balance Sheet - The following chart summarizes our balance sheets at June 30,
2005.
Summary Balance Sheet
---------------------
For year ended For the quarter ended
December 31, 2004 June 30, 2005
-------------------- ---------------------
(Audited) (Unaudited)
Cash and cash equivalents $ 452,983 $ 596,819
Total current assets 623,445 819,351
Total assets 3,799,588 3,919,970
-22-
Total current liabilities 937,125 1,213,576
Total long term liabilities - 200,000
Accumulated deficit (12,726,727) (13,100,095)
Total stockholders equity $ 2,862,762 $ 2,506,394
At June 30, 2005, our total current liabilities increased primarily due to a
45.4% increase in deferred revenue.
Years Ended December 31, 2004 and 2003
--------------------------------------
The following discussions are based on the consolidated financial statements
for the year ended December 31, 2004 and 2003 for Pacific WebWorks,
Intellipay, TradeWorks Marketing, Fundworks and the discontinued operations of
World Commerce Network, LLC, a non-operating company. The financial
statements for the year ended December 31, 2003 also include the accounts of
Logio, Inc., a non-operating, development stage company, through the date of
its sale in July 2003. The following discussions are a summary of our
financial statements for the years ended December 31, 2004 and 2003 and should
be read in conjunction with the financial statements, and notes thereto,
included with this prospectus starting on page 34.
Comparison of 2003 and 2004 Fiscal Year Operations
----------------------------------------------------
2003 2004
-------------- ---------------
Revenues, net $ 2,237,197 $ 3,617,486
Cost of sales 541,026 1,071,241
Gross profit 1,696,171 2,546,245
Total operating expenses 2,050,161 3,036,640
Loss from operations (353,990) (490,395)
Other income and (expense), net 6,086 2,068
Income taxes 300 300
Net income (loss) from continuing operations (348,204) (488,627)
Total gain on discontinued operations 274,778 -
Net earnings (loss) (73,426) (488,627)
Net earnings (loss) per share $ (0.00) $ (0.02)
Sales decreased during the first half of 2003 primarily due to steady
attrition of our monthly hosting and payment processing service portfolios
coupled with no significant replacement of monthly paying customers through
December 31, 2003. In addition, new marketing plans and strategies
implemented in the last quarter of 2003 resulted in the deferral of certain
revenues until the earnings process was deemed complete. Despite the deferral
of a significant amount of our 2004 sales, our sales increased by over 61.7%
for the year ended 2004. Increases for
-23-
2004 were primarily the result of sales and training events conducted by our
subsidiary, TradeWorks Marketing. These events focus on the sales of Pacific
WebWorks and Intellipay products and the training necessary to properly
utilize these products.
Cost of sales increased 98% for 2004 primarily as a result of our new
marketing strategy and related increases in reseller fees and commissions. In
spite of our increased cost of sales, our gross profit increased 50% for 2004
compared to 2003.
Total operating expenses increased 48.1% from 2003 to 2004. Selling expenses
for 2004 more than doubled from 2003, research and development expenses
increased 46.7%, and general and administrative expenses increased 2.4%.
However, depreciation and amortization decreased 44.9% and we did not record
any compensation expense related to options and warrants in 2004. The 2003
compensation expenses related to warrants granted to consultants in 2001 and
2002, that expired through May 2004. The compensation expense represents the
fair market value of the warrants, estimated on the date of grant.
Net other income for 2003 and 2004 was primarily related to interest income
earned on certificates of deposit.
Our financial statements for 2003 include the accounts of Logio, Inc., our
former non-operating subsidiary, as discontinued operations through the date
of its sale on June 27, 2003. We sold all of the shares we held in Logio for
$50,000 cash and the purchasers' assumption of Logio's current liabilities.
This disposal resulted in the realization of $274,778 in gain from the sale
of discontinued operations, which was realized during the second quarter 2003.
As a result of the above items, our net loss increased for 2004 and we
recorded a net loss per share of $0.02 for 2004 and $0 for 2003.
-24-
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Pacific WebWorks are listed below,
with their respective ages, positions and biographical information. Our
articles of incorporation provide for a board of directors consisting of at
least three, but no more than nine persons. As of the date of this prospectus
we have one vacancy on our board of directors. Our directors serve until our
next annual meeting or until each is succeeded by a qualified director. Our
executive officers are chosen by our board of directors and serve at its
discretion. R. Brett Bell is the son of Kenneth W. Bell.
Name Age Position Held Director since
- ----------------------- ---- ---------------------------- --------------
Christian R. Larsen 31 President and Director April 1999
Kenneth W. Bell 55 Chairman of the Board, January 2001
Chief Executive Officer,
Treasurer, and Director
R. Brett Bell 29 Secretary and Controller
Christian R. Larsen - Mr. Larsen currently serves as our President and he
served as our Chief Executive Officer from April 1999 through January 2001.
Prior to 1999 he served as Chief Operating Officer of Pacific WebWorks and as
a consultant for Utah WebWorks. He has over eight years experience providing
computer consulting and business management services.
Kenneth W. Bell - On April 14, 2004, our board of directors appointed Kenneth
W. Bell as Chairman of the Board. On July 15, 2004, our board of directors
appointed him to serve in the capacity of Treasurer.
He has served as our Chief Executive Officer since January 2001. Prior to
that time Mr. Bell was President and Chief Executive Officer of Logio, Inc.
He formerly served as President and Chief Financial Officer of Kelmarc
Corporation, a financial and management advisory company. He has over thirty
years experience in a variety of finance and management positions, including
employment for fifteen years in the commercial banking industry in Utah and
California. Mr. Bell received a bachelors degree from Brigham Young
University in 1972.
R. Brett Bell - On April 14, 2004 our board of directors appointed Robert
Brett Bell as Secretary of the company. He has been employed as a controller
for Pacific WebWorks since 2001. Prior to becoming a controller for Pacific
WebWorks, he held positions in Investor Relations and Accounting with Logio,
Inc. from 1998 to 2001. He studied Economics and Finance at the University of
Utah.
EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers in all capacities during the past three fiscal years.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation ----------------------
Name and principal ---------------------- Securities underlying
position Year Salary ($) Bonus ($) options/SARs (#)
- -------------------- -------- ------------ ---------- ----------------------
Christian R. Larsen 2004 $ 70,396 $ 5,000 250,000
President 2003 67,896 4,000 275,000
2002 20,708 2,500 50,000
-25-
Kenneth W. Bell 2004 $ 94,250 $ 5,000 250,000
CEO, Treasurer 2003 90,917 4,000 300,000
2002 81,708 2,500 50,000
R. Brett Bell 2004 $ 58,458 $ 2,000 175,000
Secretary 2003 52,107 1,500 100,000
Controller 2002 44,657 0 35,000
OPTION/SAR GRANTS IN LAST FISCAL YEAR (2004)
Individual Grants
----------------
Percent of
Number of total
securities Options/SAR's
underlying granted to Exercise or
Options/SAR's employees in base price Expiration
Name granted (#)(1) fiscal year ($/sh) date
- ------ ---------------- ------------ ----------- ----------
Christian R. Larsen 250,000 15.3% 0.07 10/20/09
Kenneth W. Bell 250,000 15.3% 0.07 10/20/09
R. Brett Bell 175,000 10.7% 0.07 10/20/09
(1) One half of the options granted vest six months after the date of
grant and the remaining half of the options granted vest after twelve
months.
Employment Contracts
On April 1, 2004 we entered into employment agreements with Kenneth W. Bell
and Christian R. Larsen. Mr. Bell was employed as the Chief Executive Officer
of Pacific WebWorks with a salary of $96,000 a year and will devote 80% of his
working time to the business of the company. Mr. Larsen was employed as the
President of Pacific WebWorks with a salary of $72,000 per year and will
devote 100% of his working time to the business of the company. The remaining
material terms of the employment agreements are identical.
The employment agreements terminate on March 31, 2006. Each year the salary
shall be increased at a rate determined by the board of directors or in the
amount of 6%. Each executive is entitled to yearly bonuses as determined by
the board of directors, along with health and medical insurance and four weeks
vacation time. Each executive agreed not to disclose company confidential
information to third parties. If the executive resigns his position, he will
be entitled to compensation for services rendered only. The company may
terminate his employment for cause; but if his employment is terminated other
than for cause, then he will receive a lump sum payment of his salary and
incentive compensation within 30 days of the termination. Upon termination
each executive shall have continued coverage under the insured employee
benefit plan. Each executive promised to not release any proprietary
information about the company for a period of two years after his termination
of employment.
In the event the executive's employment is terminated due to a change in
control of the company, as defined in the agreement, then he will receive two
times the average sum of amounts paid to him for salary, bonus and profit
sharing for the five fiscal years immediately preceding the date of change in
control. If the executive suffers disability while employed, then he is
entitled to a portion of his salary for an 18 month period. If he dies during
-26-
his employment, then the company will pay one year's salary and incentives to
his estate. Each executive is entitled to request by written notice that any
shares he holds be registered, subject to itemized limitations in the
employment agreement, when the company files certain registration statements.
Compensation of Directors
We do not have any standard arrangement for compensation of our directors for
any services provided as director, including services for committee
participation or for special assignments. Under our 2001 Equity Incentive
Plan, an independent director is eligible to receive 5,000 shares of our
common stock or options to acquire our common stock each year in which they
serve as a member of our board of directors and 10,000 options upon joining
our board of directors. At this time we do not have any independent
directors.
CERTAIN RELATED TRANSACTIONS
We have not engaged in any transactions in excess of $60,000 during the past
two years involving our executive officers, directors, 5% or more stockholders
or immediate family members of such persons.
PRINCIPAL STOCKHOLDERS
The following table lists the beneficial ownership of our outstanding common
stock by our management and each person or group known to us to own
beneficially more than 5% of our outstanding common stock. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Based on
these rules, two or more persons may be deemed to be the beneficial owners of
the same securities. Except as indicated by footnote, the persons named in
the table below have sole voting power and investment power with respect to
the shares of common stock shown as beneficially owned by them. The
percentage of beneficial ownership is based on 35,018,395 shares of common
stock outstanding as of August 26, 2005, plus any shares which each of the
following persons may acquire within 60 days by the exercise of rights,
warrants and/or options.
MANAGEMENT
Name and Address of Number of Shares of Percentage
Beneficial Owners Common Stock Options (1) of Class
- -------------------------- -------------------- ----------- -----------
Christian R. Larsen 878,000 (2) 900,000 5.0%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101
Kenneth W. Bell 217,311 (3) 1,237,878 4.0%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101
R. Brett Bell 0 347,273 Less than 1%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101
All executive officers and 1,095,311 2,485,151 9.6%
directors as a group
(1) Represents options exercisable within the next 60 days.
(2) Represents 878,000 shares held by Net Strategic Investments
LLC of which Mr. Larsen is an affiliate.
(3) Represents shares owned jointly with his spouse.
-27-
DESCRIPTION OF COMMON STOCK
COMMON STOCK
Our Articles of Incorporation, as amended, authorize 50,000,000 shares of
common stock. Each holder of common stock is entitled to one vote for each
share owned of record on all matters voted upon by stockholders, and a
majority vote of the outstanding shares present at a stockholders' meeting is
required for actions to be taken by stockholders. Directors are elected by a
majority vote and the holders of the common stock do not have cumulative
voting rights. Accordingly, the holders of a majority of the voting power of
the shares voting for the election of directors can elect all of the directors
if they choose to do so. The common stock bears no preemptive rights, and is
not subject to redemption, sinking fund or conversion provisions. Holders of
common stock are entitled to receive dividends out of funds legally available
if, and when, declared by our Board of Directors and to participate pro rata
in any distribution of assets available for distribution upon liquidation of
Pacific WebWorks. Any dividends declared with respect to shares of common
stock will be paid pro rata in accordance with the number of shares of common
stock held by each stockholder.
STOCK OPTIONS
We have reserved shares of common stock for issuance to key employees,
officers, directors and consultants upon the exercise of options available for
grant under our Pacific WebWorks, Inc. 2001 Incentive Equity Plan. The grant
of an option under the plan entitles the grantee to purchase shares of common
stock at an exercise price established by our board of directors. As of
December 31, 2004, we have granted 4,912,151 options under the plan.
TRANSFER AGENT
Our transfer agent is Standard Registrar Company, located in Draper, Utah.
SHARES ELIGIBLE FOR FUTURE SALE
At August 26, 2005, we had warrants outstanding to purchase 3,083,335 shares
of common stock. Assuming the exercise of all of the warrants, we would have
38,101,730 shares of common stock outstanding. Of those shares, approximately
12,923,338 could be immediately resold pursuant to this prospectus. Sales of
substantial amounts of common stock in the public market could adversely
affect the prevailing market prices of our common stock.
SELLING STOCKHOLDERS
The following table identifies the selling stockholders under this prospectus
and identifies their relationship to Pacific WebWorks during the past three
years. The table also lists the number of shares of common stock owned by
each selling stockholder prior to the offering, the estimated number of shares
to be offered for the selling stockholder's account and the estimated number
of shares and percentage of outstanding shares to be owned by each selling
stockholder after the completion of the offering. The information as to
ownership prior to the offering is based upon our records; however, the
selling stockholders may have sold, transferred or otherwise disposed of
shares in transactions exempt from the registration requirements of the
Securities Act since the date of our records.
Since the selling stockholders may sell all, a portion, or none of their
shares from time to time, no firm estimate can be made of the aggregate number
of shares that will be owned by each selling stockholder upon completion of
the offering. Accordingly, the ownership amount and percentage after the
offering assumes the sale of all of the registered shares by the selling
stockholders.
As used in this prospectus "selling stockholder" includes donees, pledgees,
transferees or other successors-in-interest selling shares received form the
named selling stockholders as a gift, pledge, distribution or other non-sale
related transfer.
-28-
- --------------------------------------------------------------------------------------
Securities
Securities owned prior Number of owned after
to offering shares being offering
Name and relationship Shares Warrants registered(1) Shares Percent
- ---------------------------- ------------ ------------ ------------- -------- --------
<s> <c> <c> <c> <c> <c>
Broad Investment Partners
Investor 1,715,000 0 1,715,000 0 0
- --------------------------------------------------------------------------------------
Chesapeake Group, Inc.
Investor relations firm 0 1,000,000 1,000,000 0 0
- --------------------------------------------------------------------------------------
Compass Equity Partners, LLC
Investor 1,666,667 833,334 2,500,001 0 0
- --------------------------------------------------------------------------------------
Empire Fund Managers
Investor 1,666,667 833,334 2,500,001 0 0
- --------------------------------------------------------------------------------------
First Equity Holdings Corp.
Investor 1,416,669 416,667 1,833,336 0 0
- --------------------------------------------------------------------------------------
Liberty Partners
Investor 1,700,000 0 1,700,000 0 0
- --------------------------------------------------------------------------------------
Niki Group
Investor 1,715,000 0 1,715,000 0 0
- --------------------------------------------------------------------------------------
Total 9,880,003 3,083,335 12,963,338 0 0
- --------------------------------------------------------------------------------------
(1) Includes shares issuable upon exercise of warrants.
TRANSACTIONS RELATED TO THE SELLING STOCKHOLDERS
Unit Purchase Agreement
On July 1, 2005, Pacific WebWorks entered into a Unit Purchase Agreement with
three accredited investors, Compass Equity Partners, LLC, Empire Fund
Managers LLC, and First Equity Holdings Corp. Under this agreement we sold
4,166,670 units at a unit price of $0.06. Each unit consisted of one share of
common stock and one warrant to purchase one additional share of common stock
at a specified price. One half of the warrants had an exercise price of $0.12
per share and one half had an exercise price of $0.17 per share. The warrants
were immediately exercisable and will expire one year from the effective date
of a registration statement to be filed registering the unit shares. The
units were granted registration rights, described in more detail below.
Compass Equity Partners, LLC and Empire Fund Managers LLC each purchased
1,666,667 units and were granted warrants to purchase 833,334 shares at $0.12
per share and warrants to purchase 833,334 shares at $0.17 per share. First
Equity Holdings Corp purchased 833,334 units and was granted warrants to
purchase 416,667 shares at $0.12 per share and warrants to purchase 416,667
shares at $0.17 per share. In July 2005 an aggregate of 2,083,333 warrants
were exercised at $0.12 by the unit purchasers.
The purchase agreement requires that an investor cannot acquire an amount of
shares of common stock that will result in that investor owning more than
4.99% of our then issued and outstanding common stock.
The unit purchase agreement will terminate on the date that all the shares are
sold, the date that the shares may be sold under the provision of Rule 144,
without volume limitation, or five years after the closing date.
The warrants are subject to a "call" provision. In the event the closing bid
price of the common stock is greater
-29-
than $5.00 per share for 10 consecutive trading days, then we have the right
to call the warrant in whole or part within 10 trading days after the 10
consecutive trading days.
The registration rights agreement required that we file a registration
statement to register the shares and the underlying shares of the warrants on
or prior to August 31, 2005. We must use our best efforts to have the
registration statement effective on or before October 31, 2005. If we fail to
file the registration statement by the August deadline and/or it is not
effective by the October deadline, then we are obligated to pay liquidated
damages of 5% of the purchase price of the securities to be registered for
every 30-day period until the registration statement is filed or declared
effective. We also must file amendments as necessary to maintain the
registration statement until all of the shares have been sold by the investors
or their assigns. The registration rights agreement terminates when all of
the shares have been registered, they can be sold without registration
pursuant to Rule 144 or five years from the issuance of the registered shares.
Investor Relations Agreement
On July 1, 2005, we entered into a consulting agreement with Chesapeake Group,
Inc. (the "Chesapeake Group"). Chesapeake Group will provide consulting
services regarding all phases of our investor relations with broker or dealers
and the investing public in consideration for warrants to purchase 1,000,000
shares. Chesapeake Group agreed to provide consultation in the areas of our
marketing to investors, advising us on securing nationwide interest in our
securities, assist us with conference calls and road shows and help us with
the preparation and dissemination of press releases and news announcements.
The consulting agreement may be terminated by either party with a 90-day
written notice. We granted registration rights for the underlying shares to
Chesapeake Group and are registering the underlying shares in this
registration statement.
Private Transactions
In December 2004 we sold our common stock to accredited investors to raise
funds for operations. On December 1, 2004, we sold 1,215,000 shares of common
stock to Nikki Group for $85,050. On December 20, 2004, we sold 1,215,000
shares of common stock to Broad Investments Partners for $85,050. On December
22, 2004, we sold 1,200,000 shares of common stock to Liberty Partners for
$79,200. These investors have acquired additional shares in subsequent
transactions with private parties. We are registering these investors' shares
in this registration statement.
PLAN OF DISTRIBUTION
We are registering these shares for the benefit of the selling stockholders,
but the registration of these shares does not necessarily mean that any of
them will be offered or sold by the selling stockholders. Except in the case
of the initiation of the call provision related to the warrants, the selling
stockholders will have absolute discretion as to when and if the registered
shares will be sold, and the manner and timing of sales of the shares. They
may sell all or a portion of the shares through public or private
transactions, on or off established markets, or in negotiated transactions or
otherwise. We will not use the services of underwriters or dealers in
connection with the sale of the shares registered under this prospectus.
The shares may be sold by the selling stockholders either directly or through
brokers or dealers, or in a distribution by one or more underwriters on a firm
commitment or best-efforts basis. The methods by which the shares may be sold
may include:
.. a block trade, which may involve crosses, in which the broker or dealer
will attempt to sell the securities as agent but may position and resell
a portion of the block as principal to facilitate the transaction;
.. purchases by a broker or dealer as principal and resale by the broker or
dealer for its own account;
.. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
.. privately negotiated transactions; and
.. any other method permitted by law.
-30-
The sale price to the public may be: the market price prevailing at the time
of sale;
.. a price related to the prevailing market price;
.. at negotiated prices; or
.. any other price as the selling stockholders determine from time to time.
The selling stockholders and any broker-dealers participating in the
distribution of the shares may be deemed to be "underwriters" within the
meaning of the Securities Act and any profit on the sale of the shares by the
selling stockholders and any commissions received by any broker-dealers may be
deemed to be underwriting commissions or discounts under the Securities Act.
Since the selling stockholders may be deemed to be "underwriters" they will be
subject to the prospectus delivery requirements of the Securities Act.
We and the selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations promulgated under it,
including, without limitation, Regulation M. Regulation M restricts certain
activities of the selling stockholders and may limit the timing of purchases
and sales of any of the shares by the selling stockholders or any other
person. Also, Regulation M may restrict the ability of any person engaged in
the distribution of the shares to engage in market-making activities with
respect to the particular shares being distributed for a period of up to five
business days prior to the commencement of a distribution. All of these
limitations may affect the marketability of our shares and the ability of any
person or entity to engage in market-making activities with respect to our
shares.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the selling
stockholders. These broker-dealers may also receive compensation from the
purchasers of shares for whom the broker-dealers may act as agents or to whom
they sell as a principal. This compensation might be in excess of customary
commissions as to a particular broker-dealer. Market makers and block
purchasers purchasing the shares will do so for their own account and at their
own risk. It is possible that selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price.
In the event a block trade or other special offering of these shares is
arranged, then we will distribute a prospectus supplement, if required, that
will identify the name of any dealers or agents and any commissions and other
terms constituting compensation from the selling stockholders and as well as
any other required information.
Some states securities laws may require the shares be sold only through
registered or licensed brokers or dealers. In addition, in some states, these
shares may not be sold unless they have been registered or qualified for sale
in that state or an exemption from the registration or qualification
requirement of that state is available and is complied with.
OTHER INFORMATION
INTEREST OF NAMED EXPERTS AND COUNSEL
We are not aware of any expert or legal counsel named in this prospectus who
will receive a direct or indirect substantial interest in the offering. Our
financial statements for the year ended December 31, 2004 and 2003 were
audited by Chisholm, Bierwolf & Nilson LLC, Certified Public Accountants. We
have included the financial statements in this prospectus in reliance on the
reports provided by Chisholm, Bierwolf & Nilson, LLC given on their authority
as experts in accounting and auditing. Cindy Shy, P.C. has provided an
opinion regarding the validity of the shares to be registered.
-31-
SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or persons controlling Pacific
WebWorks, we have been informed that in the opinion of the SEC this type of
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
In the event that a claim for indemnification against these liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
ADDITIONAL INFORMATION
This prospectus does not contain all of the information in or attached as an
exhibit to the registration statement. Investors should refer to the exhibits
to the registration statement for the complete text. The registration
statement and its exhibits may be inspected at the office of the SEC without
charge. A copy of the registration statement, any post-effective amendment
and exhibits may be accessed through the SEC's EDGAR database located at the
SEC's web site at http://www.sec.gov. Other information can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024
of the SEC's office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549. Additional updating information with respect to the securities covered
by this prospectus may be provided to purchasers in the future by means of
amendments to this prospectus.
In addition, the information incorporated by reference is available to you
without charge upon your written or oral request. Pacific WebWorks agrees to
respond to your requests for the additional information within one business
day of receipt of the request. Pacific WebWorks will send the copies of the
document by first class mail or other equally prompt means. You must address
your request to:
Investor Relations
Pacific WebWorks, Inc.
180 South 300 West, Suite 400
Salt Lake City, Utah 84101
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In our current report dated February 9, 2004, we reported that our independent
auditors, Chisholm & Associates, Certified Public Accountants, resigned as our
independent auditors and we engaged Chisholm, Bierwolf & Nilson, LLC to serve
as our independent auditors.
-32-
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended June 30, 2005 and 2004
Consolidated Balance Sheets......................................... 34
Consolidated Statements of Operations............................... 35
Consolidated Statements of Cash Flows............................... 36
Notes to the Consolidated Financial Statements................... 37-46
For the Years Ended December 31, 2004 and 2003
Auditors' Report.................................................... 47
Consolidated Balance Sheets......................................... 48
Consolidated Statements of Operations............................... 49
Consolidated Statements of Stockholders' Equity..................... 50
Consolidated Statements of Cash Flows............................... 51
Notes to the Consolidated Financial Statements................... 52-66
-33-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2004 2005
------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 452,983 $ 596,819
Receivables
Trade, less allowance for doubtful
receivables of $127,000 in 2004 and
$306,000 in 2005 96,260 164,760
Prepaid expenses 74,502 57,772
------------- -------------
Total current assets 623,745 819,351
PROPERTY AND EQUIPMENT, NET AT COST 70,382 58,824
OTHER ASSETS
Restricted Cash 136,519 81,704
Goodwill 2,946,253 2,946,253
Other, net 22,989 13,839
------------- -------------
Total other assets 3,105,761 3,100,619
------------- -------------
$ 3,799,888 $ 3,919,970
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 89,165 $ 177,641
Accrued liabilities 181,109 173,189
Deferred revenue 431,578 627,473
Net current liabilities from
discontinued operations 235,274 235,274
------------- -------------
Total current liabilities 937,126 1,213,576
------------- -------------
CONVERTIBLE NOTES PAYABLE - 200,000
STOCKHOLDERS' EQUITY
Common stock - par value $0.001; authorized
50,000,000; issued and outstanding 28,517,622
in 2004 and 28,767,622 in 2005 28,518 28,768
Additional paid-in capital 15,560,971 15,577,720
Accumulated deficit (12,726,727) (13,100,095)
------------- -------------
Total stockholders' equity 2,862,762 2,506,394
------------- -------------
$ 3,799,888 $ 3,919,970
============= =============
The accompanying notes are an integral part of these statements.
-34-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended Three months ended
June 30, June 30,
2004 2005 2004 2005
------------ ------------- ------------ -------------
<c> <c> <c> <c>
Revenues, net
Software, access and license fees $ 247,456 $ 376,987 $ 150,576 $ 151,413
Hosting, gateway and maintenance fees 674,988 829,092 343,353 421,729
Training and education 310,872 226,338 225,637 111,872
Merchant accounts, design and other 338,373 415,985 140,962 299,009
------------ ------------- ------------ -------------
1,571,688 1,848,403 945,762 984,022
Cost of sales 573,277 517,398 336,750 308,564
------------ ------------- ------------ -------------
Gross profit 998,411 1,331,006 609,012 675,458
Selling expenses 766,931 872,675 495,950 479,425
Research and development 116,550 125,687 62,116 63,550
General and administrative 530,705 693,857 259,822 361,880
Depreciation and amortization 28,805 15,414 14,454 7,623
------------ ------------- ------------ -------------
Total operating expenses 1,442,990 1,707,633 832,341 912,478
------------ ------------- ------------ -------------
Net loss from operations (444,579) (376,628) (223,329) (237,020)
------------ ------------- ------------ -------------
Other income (expense)
Interest income 2,148 4,326 958 2,762
Other income, net 1,173 (1,066) (164) (7,110)
------------ ------------- ------------ -------------
3,321 3,260 794 (4,348)
------------ ------------- ------------ -------------
Net loss from continuing
operations before income taxes (441,258) (373,368) (222,535) (241,368)
Income taxes - - - -
------------ ------------- ------------ -------------
Net income (loss) from continuing
operations (441,258) (373,368) (222,535) (241,368)
Discontinued operations
Gain (loss) from operations (net of
income tax) - - - -
Gain on disposal (net of income tax) - - - -
------------ ------------- ------------ -------------
Total gain (loss) from
discontinued operations - - - -
------------ ------------- ------------ -------------
NET EARNINGS (LOSS) $ (441,258) $ (373,368) $ (222,535) $ (241,368)
============ ============= ============ =============
Net earnings (loss) per common share -
basic and diluted
Net income (loss) from continuing
operations $ (0.02) $ (0.01) $ (0.01) $ (0.01)
Gain (loss) from discontinued
operations - - - -
------------ ------------- ------------ -------------
Net earnings (loss) $ (0.02) $ (0.01) $ (0.01) $ (0.01)
============ ============= ============ =============
Weighted-average number of shares
outstanding - Basic and diluted 24,587,622 28,607,125 24,587,622 28,695,644
============ ============= ============ =============
The accompanying notes are an integral part of these statements.
-35-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the
six months
ended June 30,
2004 2005
--------------- --------------
<s> <c> <c>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (441,258) $ (373,368)
Less: Loss (gain) from discontinued operations (net of taxes) - -
--------------- --------------
Loss from continuing operations (441,258) (373,368)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation & amortization 28,805 15,414
Bad debt expense 153,965 306,070
Loss on sale or abandonment of property and equipment - -
Changes in assets and liabilities
Receivables (230,369) (374,570)
Prepaid expenses and other assets 28,737 40,880
Accounts payable and accrued liabilities 37,849 80,556
Deferred revenue 405,383 195,895
--------------- --------------
Total adjustments 424,369 264,245
Net cash used in continuing operating activities (16,889) (109,123)
--------------- --------------
Cash flows from investing activities
Purchases of property and equipment (10,032) (3,856)
Purchase of certificate of deposit - -
Cash on reserve with bank (47,203) 54,815
Proceeds from sale of discontinued operations - -
--------------- --------------
Net cash provided by (used in) investing activities (57,235) 50,959
--------------- --------------
Cash flows from financing activities
Proceeds from convertible notes payable - 200,000
--------------- --------------
Net cash used in financing activities - 200,000
--------------- --------------
Net cash provided by (used in) continuing operations (74,123) 141,836
Net cash used in discontinued operations - -
--------------- --------------
Net increase (decrease) in cash and cash equivalents (74,123) 141,836
Cash and cash equivalents at beginning of period 500,712 452,983
--------------- --------------
Cash and cash equivalents at end of period $ 426,589 $ 594,819
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ - $ -
Cash paid for income taxes - -
Non-cash financing activities:
Stock issued for insurance services $ - $ 15,000
Stock issued for customer portfolio and technology - 17,000
The accompanying notes are an integral part of these statements.
-36-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(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.
Basis of Presentation
- ----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for form 10-QSB 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-KSB as of and for the year ended
December 31, 2004. The results of operations for the three months ended June
30, 2005 may not be indicative of the results that may be expected for the
fiscal year ended December 31, 2005. 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., TradeWorks Marketing, Inc., FundWorks, Inc., and World
Commerce Network, LLC. All significant intercompany accounts and transactions
have been eliminated in consolidation. The operations of World Commerce
Network, LLC have been discontinued.
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.
-37-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED
Revenue Recognition - Continued
- -------------------------------
The Company recognizes revenue in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements" and its revisions in SAB No. 104. SAB 101 and 104
clarify application of generally accepted accounting principles related to
revenue transactions. The Company also follows American Institue of Certified
Public Accountants Statement of Position ("SOP") 97-2, as amended by SOP 98-9.
In the third quarter 2003, the company adopted EITF Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables ("EITF Issue No. 00-21").
The Company recognizes revenues when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists, (2) delivery of products and
services has occurred, (3) the fee is fixed or determinable and (4)
collectibility is reasonably assured.
In an arrangement with multiple deliverables, the delivered item(s) are be
considered a separate unit of accounting if all of the following criteria are
met: (1) the delivered item(s) has value to the customer on a standalone
basis, (2) there is objective and reliable evidence of the fair value of the
undelivered item(s), and (3) if the arrangement includes a general right of
return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for
all units of accounting in an arrangement, the arrangement consideration is
allocated to the separate units of accounting based on their relative fair
values.
Revenues from up-front fees are deferred and recognized over the period
services are performed ranging from eight months to one year. Fees for the
set-up of merchant accounts are deferred and recognized as services are
completed (which is generally two months). Revenues from monthly hosting,
maintenance, transaction and processing fees are recorded when earned.
Operating lease revenues for merchant accounts and software are recorded as
they become due from customers.
Stock Based Compensation
- ------------------------
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method in accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and complies with the disclosure provisions of SFAS No. 123 as amended by SFAS
No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
an amendment of FASB Statement No. 123. For each option granted, the Company
calculated the minimum fair value on the date of the grant using the using the
Black-Scholes option-pricing model as prescribed by SFAS No. 123.
-38-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 3 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Based Compensation - Continued
- ------------------------------------
If the fair value based method had been applied in measuring stock-based
compensation expense, the pro forma effect on net earnings (loss) and net
earnings (loss) per share would have been as follows:
Six Months Ended Three Months Ended
June 30, June 30,
2004 2005 2004 2005
------------ ------------ ------------ ------------
Net income (loss),
as reported $ (441,258) $ (373,368) $ (222,535) $ (241,368)
Deduct: Total stock-based
charges determined under
fair value-based method (156,820) (395,540) (78,410) (252,454)
Pro forma net earnings
(loss) $ (598,078) $ (0.01) $ (300,945) $ (0.01)
Net earnings (loss) per
share basic and diluted,
as reported $ (0.02) $ (0.01) $ (0.01) $ (0.01)
Net earnings (loss) per
share basic and diluted,
pro forma $ (0.02) $ (0.01) $ (0.01) $ (0.01)
Earnings (loss) Per Share
- -------------------------
The computation of net earnings (loss) per share of common stock is based on
the weighted average number of shares outstanding during each period
presented. The Company utilizes the treasury stock method to calculate diluted
earnings (loss) per share. Potentially issuable common shares totaling
4,507,302 related to options were excluded from the calculation of diluted
loss per share for the three months ended June 30, 2004 because their effects
were anti-dilutive. Potentially issuable common shares totaling 4,747,151
related to options were excluded from the calculation of diluted loss per
share for the three months ended June 30, 2005 because their effects were
anti-dilutive.
-39-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 2 - OPERATING LEASE REVENUES
During quarter and six months ended June 30, 2005, certain customers of
TradeWorks entered into operating lease agreements that were assigned to
FundWorks to purchase e-commerce software and merchant accounts over 24 to 36
months for $59.95 per month. The leases are non-cancelable and related
revenue is recorded monthly as earned.
Future annual minimum lease receipts for FundWorks operating leases as of June
30, 2005 are as follows:
Through
June 30,
----------
2006 $ 234,000
2007 207,000
2008 62,000
Thereafter -
----------
$ 503,000
==========
Collectability of future minimum lease receipts cannot be assured as the
customers placed in operating leases are of a higher credit risk. TradeWorks
also enters into factoring arrangements for certain sales of e-commerce
software and merchant accounts to an outside leasing company with recourse.
Estimated recourse amounts are reduced from the amount funded to the company
and netted against sales for reporting purposes as they are not considered
realizable.
NOTE 3 - CONVERTIBLE NOTES PAYABLE
On June 28, 2005, the Company entered into a Promissory Note agreement with a
limited liability company for $100,000. The note bears interest at 8% per
annum, is due in full including principal and interest on December 31, 2006.
The note is collateralized by the Company's business assets. The note is
convertible into the Company's common stock at a price of $0.06 per share
which represents the fair market value of the stock on the date of note
issuance.
On June 30, 2005, the Company entered into an additional Promissory Note
agreement with a limited liability company for $100,000. The note bears
interest at 8% per annum, is due in full including principal and interest on
December 31, 2006. The note is collateralized by the Company's business
assets. The note is convertible into the Company's common stock at a price of
$0.06 per share which represents the fair market value of the stock on the
date of note issuance.
-40-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY
Stock Issuance
- --------------
During the six months ended June 30, 2005, the Company issued 20,000 shares of
its common stock to purchase a portfolio of recurring service customers and
related technology valued at $2,000.
During the three months ended June 30, 2005, the Company issued 250,000 shares
of its common stock for payment of $17,000 related to insurance premiums.
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 7,500,000 shares of the Company's
common stock under the Plan. The Plan has not been approved by the Company's
shareholders as of June 30, 2005.
As of June 30, 2004, a total of 4,507,302 options at exercise prices ranging
from $0.14 to $2.00 per share were outstanding, and exercisable at prices
ranging from $0.30 to $0.90 per share. As of June 30, 2004, a total of
3,502,302 options were exercisable at exercise prices ranging from $0.14 to
$2.00 per share. As of June 30, 2005, a total of 4,757,151 options were
outstanding at exercise prices ranging from $0.07 to $1.75 per share. As of
June 30, 2005, a total of 4,032,151 options were exercisable at exercise
prices ranging from $0.07 to $1.75 per share. Options expire through April
2011.
No options were granted during the three or six months ended June 30, 2004.
Options to purchase 50,000 shares of the Company's common stock were granted
during the three months ended June 30, 2005 at an exercise price of $0.10 per
share. These options vest through April 2006 and expire in April 2010.
-41-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 5 - DISCONTINUED OPERATIONS
The following includes the net current liabilities for the Company's
discontinued operations as of December 31, 2004 and March 31, 2005:
World
Commerce
Network, LLC
------------
ASSETS
Current assets $ -
Long-term assets -
------------
Total assets $ -
============
LIABILITIES
Payables past due 64,010
Accrued liabilities 171,264
------------
Total current liabilities $ 235,274
============
Net current liabilities $ 235,274
============
Discontinued subsidiary - World Commerce Network, LLC
- ------------------------------------------------------
In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to
discontinue World Commerce Network, LLC. Negotiations and settlements of
World Commerce liabilities are currently underway as the LLC is phasing out
its related operations. World Commerce Network became a consolidated entity
with the Company in March 2000.
Pending litigation
- ------------------
In September 2002, World Commerce Network, LLC received a complaint from a
leasing company for recourse obligations funded for customer leases during
2000 for seminar related activities. The agreement between World Commerce
Network and the leasing company provides for recourse on leases in which
customers have not made first payment. Estimated recourse obligations for
World Commerce Network approximate $95,000 at March 31, 2005 and December 31,
2002 and have been recorded as an accrued liability. Management believes that
the recorded liability for this matter is sufficient to cover any resulting
judgment from this claim.
In April 2001, one of World Commerce Network'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
-42-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 5 - DISCONTINUED OPERATIONS - CONTINUED
Discontinued subsidiary - World Commerce Network, LLC - Continued
- -----------------------------------------------------------------
liability for this matter. Management believes that the amount recorded is
sufficient to cover the resulting liability from this complaint.
NOTE 6 - OPERATING COMMITMENTS
Operating lease in default
- --------------------------
In June 2002, in conjunction with the migration of the Intellipay operations
to our Salt Lake City facilities, Intellipay, Inc. defaulted on its operating
lease for office space in Fremont, California. The lease agreement required
payment of approximately $6,000 per month plus applicable late fees and
interest through December 2003 when the lease expired.
As of March 31, 2005, Intellipay, Inc. has recorded an accrued liability of
approximately $91,500 related to the months of office lease under default,
less months re-leased by the property manager to others, including all
interest and late fees.
Other matters
- -------------
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.
-43-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 7 - SEGMENT REPORTING
Segment reporting by business unit follows:
Six months ended Pacific Trade- Fund- Discontinued
June 30, 2004(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ----------- ---------- ---------- -------- -------------
Revenues, net $ 487,497 $ 236,198 $ 827,131 $ 20,862 $ -
Income (loss) from
continuing operations (98,172) 45,589 (390,614) (1,262) -
Gain (loss) from
discontinued operations - - - - -
Net income (loss) $ (95,785) $ 45,557 $ (389,770) $(1,262) -
___________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes World Commerce Network, LLC. a non-operating, discontinued
subsidiary.
Six months ended Pacific Trade- Fund- Discontinued
June 30, 2005(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ----------- ---------- ---------- -------- -------------
Revenues, net $ 617,026 $ 259,740 $ 868,943 $102,694 $ -
Net income (loss) $ (66,508) $ 39,017 $(386,954) $ 41,307 $ -
___________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes World Commerce Network, LLC. a non-operating, discontinued
subsidiary.
-44-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 7 - SEGMENT REPORTING - CONTINUED
Three months ended Pacific Trade- Fund- Discontinued
June 30, 2004(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ----------- ---------- ---------- -------- -------------
Revenues, net $ 240,509 $ 118,772 $ 574,071 $ 12,410 $ -
Income (loss) from
continuing operations (64,828) 16,343 (176,656) 1,812 -
Gain (loss) from
discontinued operations - - - - -
Net income (loss) $ (64,848) $ 16,311 $(175,812) $ 1,812 $ -
___________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes World Commerce Network, LLC. a non-operating, discontinued
subsidiary.
Three months ended Pacific Trade- Fund- Discontinued
June 30, 2005(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ----------- ---------- ---------- -------- -------------
Revenues, net $ 311,819 $ 130,626 $ 486,484 $ 55,094 $ -
Net income (loss) $ (71,811) $ 26,353 $(221,842) $ 25,932 $ -
___________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and
expenses prior to elimination for consolidation.
(b) Includes World Commerce Network, LLC. a non-operating, discontinued
subsidiary.
-45-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 8 - SUBSEQUENT EVENTS
Unit Purchase Agreement
- -----------------------
On July 1, 2005, the Company entered into a Unit Purchase Agreement with
investors for up-to 4,500,000 units at $0.06 per unit. A unit consists of one
share of the Company's common stock and one warrant for the purchase of an
additional share at a specified exercise price. One half of the warrants have
an exercise price of $0.12 per share and one half have an exercise price of
$0.17 per share. Warrants are immediately exercisable and will expire one
year from the effective date of a registration statement to be filed covering
the shares.
During July 2005, 4,166,667 units were purchased resulting in the issuance of
4,166,667 shares of the Company's common stock for total funding of $250,000.
Also in July 2005, investors exercised warrants at $0.12 per share for
2,083,333 shares of the Company's common stock for $250,000 in cash.
Immediately following these transactions warrants representing 2,083,333
shares of the Company's common stock were outstanding at an exercise price of
$0.17 per share.
Payment of Convertible Notes Payable
- ------------------------------------
On July 1, 2005, convertible notes payable totaling $200,000 (Note 3) were
paid in full.
Issuance of Warrants for Investor Relations Services
- ----------------------------------------------------
On July 1, 2005, the Company issued warrants to purchase 1,000,000 shares of
the Company's common stock to an investor relations firm. The warrants are
immediately exercisable for 500,000 shares at $0.10 and 500,000 shares at
$0.15 and expire in July 2008. The fair value of this transaction totals
$9,832 which has been estimated using the Black Scholes option-pricing model.
-46-
Chisholm,
Bierwolf & 533 West 2600 South, Suite 250
Nilson, LLC Bountiful, Utah 84010
Office (801) 292-8756
Certified Public Accountants Fax (801) 292-8809
______________________________________________________________________________
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Pacific Webworks, Inc.
We have audited the accompanying consolidated balance sheets of Pacific
Webworks, Inc. as of December 31, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pacific Webworks, Inc. as of December 31, 2004 and 2003 and the results of
its operations and cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
/s/ Chisholm, Bierwolf & Nilson
Chisholm, Bierwolf & Nilson, LLC
Bountiful, UT
February 3, 2005
-47-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2003 2004
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 500,712 $ 452,983
Receivables
Trade, less allowance for doubtful
receivables of $72,000 in 2003
and $127,421 in 2004 29,649 96,260
Prepaid expenses 66,269 74,202
------------- -------------
Total current assets 596,630 623,445
------------- -------------
PROPERTY AND EQUIPMENT, NET AT COST 98,152 70,382
RESTRICTED CASH 50,951 136,519
GOODWILL 2,946,253 2,946,253
OTHER ASSETS, NET 70,029 22,988
------------- -------------
$ 3,762,015 $ 3,799,588
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,538 $ 89,164
Accrued liabilities 194,233 181,109
Deferred revenue 205,601 431,578
Current liabilities from discontinued operations 235,274 235,274
------------- -------------
Total current liabilities 687,646 937,125
------------- -------------
STOCKHOLDERS' EQUITY
Common stock - par value $0.001; authorized
50,000,000; issued and outstanding
24,587,622 shares in 2003 and
28,517,622 shares in 2004 24,588 28,518
Additional paid-in capital 15,288,181 15,560,971
Accumulated deficit (12,238,400) (12,726,727)
------------- -------------
Total stockholders' equity 3,074,369 2,862,762
------------- -------------
$ 3,762,015 $ 3,799,888
============= =============
The accompanying notes are an integral part of these statements.
-48-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
December 31,
2003 2004
------------- -------------
Revenues, net
Software, access and license fees $ 149,373 $ 655,440
Hosting, gateway and maintenance fees 1,693,359 1,430,328
Training and education 187,725 817,197
Merchant accounts, design and other 206,740 714,521
------------- -------------
2,237,197 3,617,486
Cost of sales 541,026 1,071,241
------------- -------------
Gross profit 1,696,171 2,546,245
Selling expenses 566,808 1,516,567
Research and development 164,999 242,012
General and administrative 1,199,925 1,228,324
Depreciation and amortization 90,285 49,736
Compensation expense for options and warrants 28,144 -
------------- -------------
Total operating expenses 2,050,161 3,036,640
------------- -------------
Net loss from operations (353,990) (490,395)
------------- -------------
Other income (expense)
Interest income 7,924 3,054
Other income (expense), net (1,838) (986)
------------- -------------
6,086 2,068
------------- -------------
Net income (loss) from continuing operations
before income taxes (347,904) (488,327)
------------- -------------
Income Taxes 300 300
------------- -------------
Net income (loss) from continuing operations (348,204) (488,627)
Discontinued operations
Gain (loss) from operations (net of income tax) - -
Gain on disposal (net of income tax) 274,778 -
------------- -------------
Total gain(loss) from discontinued operations 274,778 -
NET LOSS $ (73,426) $ (488,627)
============= =============
Net loss per common share - basic and dilutive
Net income loss from continuing operations $ (0.01) $ (0.02)
Gain from discontinued operations 0.01 -
------------- -------------
Net earnings (loss) $ - $ (0.02)
============= =============
Weighted-average number of shares outstanding
Basic 23,916,510 24,853,964
============= =============
Dilutive 24,008,185 25,165,075
============= =============
The accompanying notes are an integral part of these financial statements.
-49-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional
Price per Common Stock Paid-in Accumulated
share Shares Amount Capital Deficit Totals
---------- ------------ ---------- ------------- ------------- -------------
<s> <c> <c> <c> <c> <c> <c>
Balances at
January 1, 2003 $ - 23,359,473 $ 23,360 $ 15,148,940 $(12,164,974) $ 3,007,326
Warrants exercised $ 0.5 1,000,000 1,000 49,000 - 50,000
Issuance of stock for
insurance policies $ 0.27 228,149 228 62,097 - 62,325
Consulting compensation
recognized for warrants
granted $ - - - 28,144 - 28,144
Net loss 2003 $ - - - - (73,426) (73,426)
------------ ---------- ------------- ------------- -------------
Balances at
December 31, 2003 24,587,622 24,588 15,288,181 (12,238,400) 3,074,369
Issuance of stock for
insurance policies $ 0.089 300,000 300 26,420 - 26,720
Issuance of common
stock for cash $ 0.07 3,630,000 3,630 246,370 - 250,000
Net loss 2004 $ - - - - (488,627) (488,627)
------------ ---------- ------------- ------------- -------------
Balances at
December 31, 2004 28,517,622 $ 28,518 $ 15,560,971 $(12,727,027) $ 2,862,462
============ ========== ============= ============= =============
The accompanying notes are an integral part of these statements.
-50-
Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
year ended
December 31,
2003 2004
------------- -------------
<s> <c> <c>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $ (73,426) $ (488,627)
Less: Gain from discontinued operations (net of taxes) (274,778) -
------------- -------------
Earnings (loss) from continuing operations (348,204) (488,627)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation & amortization 90,285 49,736
Issuance of options and warrants For compensation 28,144 -
Bad debt expense 380,532 512,914
Changes in assets and liabilities
Receivables (374,118) (579,525)
Prepaid expenses and other assets 133,910 65,827
Accounts payable and accrued liabilities 43,617 23,502
Deferred revenue 133,289 225,977
------------- -------------
Total adjustments 435,659 298,431
------------- -------------
Net cash provided by continuing operating activities 87,455 (190,195)
------------- -------------
Cash flows from investing activities
Purchases of property and equipment (25,090) (21,966)
Cash on reserve with bank (50,951) (85,568)
Cash received for sale of subsidiary 50,000 -
Sale (purchase) of certificate of deposit 101,536 -
------------- -------------
Net cash provided by (used in) investing activities 75,495 (107,534)
------------- -------------
Cash flows from financing activities
Payment on note payable to reseller (74,557) -
Proceeds on issuance of stock - 250,000
Proceeds on exercise of warrants 50,000 -
------------- -------------
Net cash used in financing activities (24,557) 250,000
------------- -------------
Net increase in cash and cash equivalents 138,393 (47,729)
Cash and cash equivalents at beginning of period 362,319 500,712
------------- -------------
Cash and cash equivalents at end of period $ 500,712 $ 452,983
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,076 $ -
Cash paid for income taxes $ 500 $ 800
Non-cash financing activities:
Issuance of stock for prepaid insurance policies $ 62,325 $ 26,720
Reseller note settlement $ 37,740 $ -
The accompanying notes are an integral part of these statements.
-51
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
presentation of the accompanying consolidated financial statements follows.
1. The Company
-----------
Pacific WebWorks, Inc. and its subsidiaries (Company), engages 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 also provides website development and
training for its customers.
The Company was organized under the laws of the state of Nevada on May 18,
1987 as Asphalt Associates, Inc. On December 31, 1998, the board of directors
changed the name of the Company to Pacific WebWorks, Inc. On January 11,
1999, the Company merged with Utah Webworks, Inc., a Utah corporation
organized April 10, 1997. The share exchange with Utah Webworks was accounted
for as a reverse merger; therefore, all financial information prior to January
11, 1999 is that of the accounting survivor, Utah Webworks.
TradeWorks Marketing, Inc. and FundWorks, Inc. were organized in the state of
Delaware in July and August of 2003, respectfully. TradeWorks began
operations in August 2003 and engages in the marketing and sales of Pacific
WebWorks and Intellipay products. FundWorks began operations in December 2003
and provides operating leases for customers with higher credit risk.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Pacific WebWorks, Inc. and its wholly owned subsidiaries, Intellipay, Inc.,
TradeWorks Marketing, Inc., FundWorks, Inc. and the discontinued operations of
World Commerce Network, LLC. (a non-operating company). The financial
statements also include the accounts of Logio, Inc. (a non-operating,
development company) through the date of its sale in July 2003. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain prior period balances have been reclassified to conform with current
period presentation.
3. 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. Significant estimates include the allowance for doubtful accounts,
impairment assessments of goodwill, and certain accrued liabilities such as
contingent liabilities.
-52
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. Cash Equivalents
----------------
The Company considers all highly liquid instruments maturing in three months
or less when purchased to be cash equivalents.
5. Depreciation and amortization
-----------------------------
Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives of the assets. Accelerated methods of
depreciation of property and equipment are used for income tax purposes.
6. Goodwill
--------
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, in
2002. Under SFAS No. 142, goodwill is no longer amortized, but is tested for
impairment at a reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount.
Events or circumstances which could trigger an impairment review include a
significant adverse change in legal factors or in the business climate, an
adverse action or assessment by a regulator, unanticipated competition, a loss
of key personnel, significant changes in the manner of our use of the acquired
assets or the strategy for our overall business, significant negative industry
or economic trends or projected future results of operations. For purposes of
financial reporting and impairment testing in accordance with SFAS No. 142,
the Company's Intellipay business unit operates in one principal business
segment, a provider of online credit card gateway services.
In testing for a potential impairment of goodwill, the estimated fair value of
the business unit is compared with book value, including goodwill. If the
estimated fair value exceeds book value, goodwill is considered not to be
impaired and no additional steps are necessary. If, however, the fair value of
the Company is less than book value, then the carrying amount of the goodwill
is compared with its implied fair value. The estimate of implied fair value of
goodwill may require independent valuations of certain internally generated
and unrecognized intangible assets such as our paying monthly gateway
portfolio, software and technology and trademarks. If the carrying amount of
our goodwill exceeds the implied fair value of that goodwill, an impairment
loss would be recognized in an amount equal to the excess. In accordance with
SFAS No. 142, the Company performed a goodwill impairment test during 2004 and
concluded there was no impairment of goodwill.
7. Fair value of financial instruments
-----------------------------------
The fair value of the Company's cash and cash equivalents, receivables,
accounts payable, accrued liabilities and capital lease obligations
approximate carrying value based on their effective interest rates compared to
current market prices.
-53-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. 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" and its revisions in SAB No. 104. SAB 101 and 104
clarify application of generally accepted accounting principles related to
revenue transactions. The Company also follows American Institue of Certified
Public Accountants Statement of Position ("SOP") 97-2, as amended by SOP 98-9.
The company also applies EITF Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables ("EITF Issue No. 00-21").
The Company recognizes revenues when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists, (2) delivery of products and
services has occurred, (3) the fee is fixed or determinable and (4)
collectibility is reasonably assured.
In an arrangement with multiple deliverables, the delivered item(s) are be
considered a separate unit of accounting if all of the following criteria are
met: (1) the delivered item(s) has value to the customer on a standalone
basis, (2) there is objective and reliable evidence of the fair value of the
undelivered item(s), and (3) if the arrangement includes a general right of
return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for
all units of accounting in an arrangement, the arrangement consideration is
allocated to the separate units of accounting based on their relative fair
values.
Revenues from up-front fees are deferred and recognized over the period
services are performed (which is generally one year). Fees for the set-up of
merchant accounts are deferred and recognized as services are completed (which
is generally two months). Revenues from monthly hosting, maintenance,
transaction and processing fees are recorded when earned. Operating lease
revenues for merchant accounts and software are recorded as they become due
from customers.
9. Cost of sales
-------------
Cost of sales includes costs related to fulfillment, customer service, certain
royalties and commissions, amortization of purchased customer portfolios,
service personnel, telecommunications and data center costs.
10. Sales and marketing costs
-------------------------
Sales and marketing expenses include advertising expenses, seminar expenses,
commissions and personnel expenses for sales and marketing. The Company has
expended significant amounts on sales and marketing, including national
television, radio, and print advertising. Marketing and advertising costs to
promote the Company's products and services are expensed in the period
incurred.
-54-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. Research and development costs
------------------------------
Product development expenses include expenses for the maintenance of existing
software and the development of new or improved software and technology,
including personnel expenses for the product engineering department. Costs
incurred by the Company to develop, enhance, manage, monitor and operate the
Company's technology services are generally expensed as incurred.
12. General and administrative costs
--------------------------------
General and administrative expenses include personnel expenses for executive,
finance, and internal support personnel. In addition, general and
administrative expenses include fees for bad debt costs, professional legal
and accounting services, insurance, office space, banking and merchant fees,
and other overhead-related costs.
13. Income taxes
------------
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities are
provided based on the difference between the financial statement and tax bases
of assets and liabilities measured by the currently enacted tax rates in
effect for the years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in deferred tax
assets and liabilities.
14. Stock-based compensation
-------------------------
The Company has applied the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure An amendment of FASB Statement No. 123," for the
years ended December 31, 2003 and 2004. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures
in both interim and annual financial statements about the method of accounting
for stock-based compensation and the effect of the method on reported results.
As permitted by SFAS No. 148, the Company continues to account for stock
options under APB Opinion No. 25, under which no compensation has been
recognized.
-55-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
15. Stock-based compensation
------------------------
The following table illustrates the effect on net losses and loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS 148 to stock-based compensation:
Year Ended December 31,
2003 2004
------------- ------------
Net loss
From continuing operations
As reported $ (348,204) $ (488,327)
Pro forma (1,085,245) (809,358)
Gain from discontinued operations
As reported $ 274,778 $ -
Pro forma 274,778 -
Net earnings (loss)
As reported $ (73,426) (488,327)
Pro forma (810,467) (809,358)
Net earnings (loss) per common
share from continuing operations
basic and fully diluted As reported $ (0.01) $ (0.02)
Pro forma (0.05) (0.03)
Gain (loss) from discontinued
operations basic and fully
diluted As reported $ 0.01 $ -
Pro forma 0.01 -
Net earnings (loss) per common
share As reported $ - $ (0.02)
Pro forma (0.04) (0.03)
The fair value of these options was estimated at the date of grant using the
Black-Scholes American option-pricing model with the following
weighted-average assumptions for options granted in 2003 and 2004: expected
volatility of 158 percent and 101 percent, respectively; risk-free interest
rate of 5.00 percent and 4.00 percent, respectively; and expected life of 3.25
and 3.5 years, respectively. The weighted-average fair value of options
granted was $0.19 and $0.05 in 2003 and 2004, respectively.
Option pricing models require the input of highly sensitive assumptions,
including expected stock volatility. Also, the Company's stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair
value estimate. Management believes the best input assumptions available were
used to value the options and that the resulting option values are reasonable.
-56-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
15. Net Loss Per Share
------------------
The computation of net loss per share of common stock is based on the weighted
average number of shares outstanding during each period presented. The Company
utilizes the treasury stock method to calculate loss per share. Potentially
issuable common shares totaling 4,783,695 related to options and 1,300,000
related to warrants were excluded from the calculation of diluted loss per
share because their effects were anti-dilutive for the year ended December 31,
2003. Potentially issuable common shares totaling 5,334,424 related to
options were excluded from the calculation of diluted loss per share because
their effects were anti-dilutive for the year ended December 31, 2004.
The following is the calculation for weighted average common shares used in
basic and dilutive net earnings (loss) per share:
Year ended December 31,
2003 2004
------------- -------------
Common shares outstanding during the period 23,359,473 24,587,622
Weighted average common shares issued 557,037 266,342
------------- -------------
Weighted average common shares used
in basic earnings (loss) per share 23,916,510 24,853,964
------------- -------------
Dilutive effects of potentially issuable
common shares (warrants) 91,675 311,111
------------- -------------
Weighted average number of common shares
and dilutive potential common stock used
in diluted earnings (loss) per share 24,008,185 25,165,075
============= =============
16. Recent Accounting Pronouncements
--------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
This Statement revises SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost will be
measured based on the fair value of the instruments issued. The Company will
be required to apply SFAS No. 123(R) as of the first interim reporting period
that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No.
123(R) in the third quarter of 2005. Management is currently evaluating the
impact SFAS No. 123(R) will have on the Company's results of operations as a
result of adopting this new Standard.
-57-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment includes the following:
Estimated
December 31, useful
2003 2004 life (years)
------------ ------------ ------------
Computer Equipment $ 334,722 $ 340,760 3-5
Equipment 102,197 116,710 2-10
Software 93,283 93,958 1-3
Furniture and Fixtures 86,087 86,780 3-10
Leasehold Improvements 4,598 4,598 Life of lease
------------ ------------
620,887 642,806
Less Accumulated Depreciation (522,735) (572,424)
------------ ------------
$ 98,152 $ 70,382
============ ============
NOTE C - OTHER ASSETS
Other assets include the following: December 31,
2003 2004
------------ -------------
Purchased customer portfolio $ 232,360 $ 278,309
Deposits 7,672 9,672
------------ -------------
240,032 287,981
------------ -------------
Accumulated amortization (170,003) (264,992)
------------ -------------
$ 70,029 $ 22,989
============ =============
Pacific WebWorks, Inc. has entered into agreements with resellers for the
purchase of residual interests in customer hosting and terminal portfolios.
These definite-life intangible assets are being amortized over the period of
expected future cash flows these charges are included in cost of sales.
NOTE D - ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following: December 31,
2003 2004
------------- -------------
Payroll related liabilities $ 37,774 $ 38,130
Sales contractor commissions 5,205 6,766
Contingent reseller commissions 39,790 39,790
Operating lease in default 83,364 90,357
Refunds and factor 27,610 4,426
Income tax payable 300 1,200
Other 190 440
------------- -------------
$ 194,233 $ 181,109
============= =============
-58-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE E - OPERATING LEASE REVENUES
During the years ended December 31, 2003 and 2004, certain customers of
TradeWorks entered into operating lease agreements that were assigned to
FundWorks to purchase e-commerce software and merchant accounts over 35 months
for approximately $59.95 per month. The leases are non-cancelable and related
revenue is recorded monthly as earned.
Future annual minimum lease receipts for FundWorks operating leases as of
December 31, 2004 are estimated as follows:
2005 $ 177,692
2006 173,196
2007 87,347
Thereafter -
----------
$ 438,235
==========
Collectability of future minimum lease receipts cannot be assured as the
customers placed in operating leases are of a higher credit risk.
TradeWorks also enters into factoring arrangements for certain sales of
e-commerce software and merchant accounts to an outside leasing company with
recourse. Estimated recourse amounts are reduced from the amount funded to
the company and netted against sales for reporting purposes as they are not
considered realizable. Additional amounts due under the factoring
arrangements are estimated and recorded as an accrued liability (Note D).
NOTE F - STOCKHOLDERS' EQUITY
1. 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 7,500,000 shares of the Company's
common stock under the Plan. The Plan has not been approved by the Company's
shareholders as of December 31, 2004
Directors, officers, and employees have been granted options to acquire
5,334,424 shares of the company's common stock and 3,934,424 of the options
are exercisable as of December 31, 2004. The options were granted at exercise
prices ranging from $0.14 - $2.00 per share. The options vest periodically
through April 2005 and expire through April 2011.
-59-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
1. Equity Incentive Plan - Continued
----------------------------------
Information with respect to the Company's stock options follows:
Weighted-average
Stock options Exercise price exercise price
-------------- -------------- ----------------
Outstanding at January 1, 2002 3,845,409 $0.14-$3.44 $0.78
Granted 1,625,000 0.23 0.23
Exercised - - -
Forfeited 774,107 0.14-3.44 1.07
-------------- --------------- --------------
Outstanding at December 31, 2003 4,696,302 $0.14-$2.00 $0.54
Granted 1,400,000 0.07 0.07
Exercised - - -
Forfeited 761,878 0.14-2.00 0.82
-------------- --------------- --------------
Outstanding at December 31, 2004 5,334,424 $0.07-$1.75 $0.37
============== =============== ==============
Options outstanding
Weighted-
Number Weighted-average average remaining
Exercise price outstanding exercise price contractual life (years)
- ------------------ -------------- ----------------- -----------------------
1.75 4,500 1.75 0.75
0.87 67,424 0.87 6
0.75 1,887,500 0.75 5.75
0.23 450,000 0.23 2.5
0.14 1,525,000 0.14 3.75
0.07 1,400,000 0.07 4.75
-------------
5,334,424
=============
Options exercisable
Weighted-
Number Weighted-average average remaining
Exercise price exercisable exercise price contractual life (years)
- ------------------ -------------- ----------------- -----------------------
1.75 4,500 1.75 0.75
0.87 67,424 0.87 6
0.75 1,887,500 0.75 5.75
0.23 450,000 0.87 2.5
0.14 1,525,000 0.14 3.75
0.07 - 0.07 4.75
-------------
3,934,424
=============
-60-
Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
2. Issuance of stock
-----------------
In July 2003, the Company's Board of Directors resolved to adjust the price
certain of the Company's warrants to purchase 1,000,000 shares of its common
stock from an exercise price $0.75 and $0.50 per share to an exercise price of
$0.05 per share. All of the warrants were exercised in July 2003 for $50,000
in cash.
In October 2003, the company issued a total of 228,149 shares of its common
stock in exchange for $62,325 of insurance premiums for one year.
In October 2004, the company issued a total of 300,000 shares of its common
stock in exchange for $26,270 of insurance premiums for one year.
In December 2004, the company issued a total of 3,630,000 shares of its common
stock to three separate companies for $250,000 in cash as a private offering.
NOTE G - DISCONTINUED OPERATIONS
The following includes the combined net current liabilities for the Company's
discontinued operations as of December 31, 2003 and 2004
World
Commerce
Network, LLC
------------
ASSETS
Current assets $ -
Long-term assets -
----------
Total assets $ -
==========
LIABILITIES
Payables past due 64,010
Accrued liabilities 171,264
----------
Total current liabilities $ 235,274
==========
Net current liabilities $ 235,274
==========
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE G - DISCONTINUED OPERATIONS (CONTINUED)
1. Discontinued subsidiary - Logio, Inc.
-------------------------------------
Sale of Logio, Inc.
In July 2003, the Company sold all of its shares in Logio, Inc. for $50,000
cash to a group of 11 investors. The disposal resulted in the realization of
approximately $274,000 in gain from the sale of discontinued operation, during
the second quarter 2003.
2. Discontinued subsidiary - World Commerce Network, LLC
-----------------------------------------------------
In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to
discontinue World Commerce Network, LLC and set forth a formal plan of
disposal. Negotiations and settlements of World Commerce liabilities are
currently underway as the LLC is phasing out its operations. World Commerce
Network became a consolidated entity with the Company in March 2000.
Other current liabilities
Other current liabilities of World Commerce Network, LLC consist of estimated
customer refunds approximating $56,000 and estimated contingent liabilities
from the legal matter noted below approximating $95,000 as of December 31,
2004.
Pending litigation
In September 2002, World Commerce Network, LLC received a complaint from a
customer financing company for recourse obligations funded for customer leases
during 2000 for seminar related activities. The agreement between World
Commerce Network and the leasing company provides for recourse on leases in
which customers have not made first payment. Estimated recourse obligations
and related attorney's fees for World Commerce Network approximate $95,000 at
December 31, 2003 and 2004 and have been recorded as a net current liability
of discontinued operations. Management believes that the recorded liability
for this matter is sufficient to cover any resulting judgment from this claim.
In April 2001, one of World Commerce Network's former vendors filed a
complaint alleging default under a certain application for credit and personal
guaranty made by a former officer of World Commerce Network. The vendor seeks
approximately $65,000 plus interest. World Commerce Network believes the
amount should be reduced based upon the vendor's performance and other
disputes. World Commerce Network has filed an answer to the complaint and
further litigation is pending. The Company has recorded amounts in net
current liabilities of discontinued operations. Management believes that the
amount recorded is sufficient to cover the resulting liability from this
complaint.
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Operating lease in default
-------------------------
In June 2002, in conjunction with the migration of the Intellipay operations
to our Salt Lake City facilities, Intellipay, Inc. defaulted on its operating
lease for office space in Fremont, California. The lease agreement required
payment of approximately $6,000 per month plus applicable late fees and
interest through December 2004.
As of December 31, 2004, Intellipay, Inc. has recorded an accrued liability of
$90,357 related to the months of office lease under default, less months
re-leased by the property manager, including all interest and late fees.
2. Operating leases
----------------
The Company has entered into a lease agreement for the lease of office space
for its operations in Salt Lake City, Utah. The lease requires $8,400 per
month from January 2005 through expiration in December 2006. Rent expense for
the Salt Lake offices for the years ended December 31, 2003 and 2004
approximates and $99,000 and $100,000 respectively. The following is a
schedule of future minimum lease payments under the operating lease:
Year ended Lease
December 31, Commitment
------------ ----------
2005 $ 101,760
2006 101,760
Thereafter -
-----------
$ 203,520
===========
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE I - INCOME TAXES
The tax effects of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
2003 2004
------------ ------------
Deferred tax assets
Allowance for doubtful accounts $ 15,099 $ 92,288
Net operating loss carryforwards 2,458,309 3,360,209
Excess book depreciation and amortization 65,162 71,615
Capital loss carryforwards 590,081 240,838
Other, net 30,505 31,142
------------ ------------
3,159,157 3,796,091
Less valuation allowance (3,159,157) (3,796,091)
------------ ------------
Net tax assets $ - $ -
============ ============
There were no deferred tax assets of income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero. The decrease in the
valuation allowance was $3,174,337 for the year ended December 31, 2003 and
increased $636,934 for the year ended December 31, 2004.
As of December 31, 2004, the Company has net operating loss carryforwards for
tax reporting purposes of approximately $9,200,000 expiring through 2023. As
of December 31, 2004, the Company had a capital loss carryforward for tax
reporting purposes of approximately $650,000 expiring in 2008.
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE J - SEGMENT REPORTING
Although the Company operates in one business segment, the production and
distribution of business e-commerce software, management reports by individual
business unit.
Segment reporting by business unit follows:
Year ended Pacific Trade Fund- Discontinued
December 31, 2003(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ------------ ------------- ----------- ---------- -------------
<s> <c> <c> <c> <c> <c>
Revenues, net $ 1,299,996 $ 554,878 $ 377,857 $ 4,466 $ -
Income (loss) from
continuing operations (71,879) 64,784 (335,629) (5,480) -
Gain (loss) from
discontinued operations 274,778 - - - -
Net income (loss) $ 202,899 $ 64,784 $ (335,629) $ (5,480) $ -
____________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and expenses
prior to elimination for consolidation.
(b) Includes Logio, Inc. through June 27, 2002 and World Commerce Network, LLC,
non-operating, discontinued subsidiaries.
Year ended Pacific Trade Fund- Discontinued
December 31, 2004(a) WebWorks Intellipay Works Works Operations(b)
- -------------------- ------------ ------------- ------------ ---------- -------------
<s> <c> <c> <c> <c> <c>
Revenues, net $ 1,081,088 $ 484,339 $ 1,936,246 $ 115,812 $ -
Income (loss) from
continuing operations (176,259) 75,635 (402,077) 11,233 -
Gain (loss) from
discontinued operations - - - - -
Net income (loss) $ (174,247) $ 75,565 $ (401,951) $ 12,306 $ -
____________________________________________________
(a) Amounts include all intercompany receivables, payables, revenues and expenses prior
to elimination for consolidation.
(b) Includes World Commerce Network, LLC, a non-operating, discontinued subsidiary.
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Pacific WebWorks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE K - MARKET RISK
We rely on the efforts of third party resellers to add accounts to our
customer base. A significant portion of our customer accounts were provided
by previous Pacific WebWorks and Intellipay resellers who no longer resell our
products and services. While we continue to add additional resellers,
including the Company's TradeWorks Marketing subsidiary, we are primarily
dependent upon further addition of reseller distribution channels for future
sales growth.
NOTE L - SUBSEQUENT EVENT
In February 2004, the Company agreed to purchase software technology and a
recurring fee-based customer portfolio for $6,800. The purchase was made with
20,000 shares of the Company's common stock, valued at $0.09 per share on the
date of the agreement and $5,000 in cash.
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_______________
We have not authorized any dealer,
salesman or any other person to give
any information or to make any
representations not contained in this
prospectus. Any information or
representation not contained in this __________
prospectus must not be relied upon as
having been authorized by Pacific PROSPECTUS
WebWorks, Inc. __________
_________________
TABLE OF CONTENTS
Prospectus Summary.................... 3
Risk Factors.......................... 4
Use of Proceeds....................... 9 PACIFIC WEBWORKS, INC.
Market for Common Equity.............. 9
Description of Business.............. 11
Property............................. 17
Legal Proceedings.................... 17 12,963,338 Common Shares
Management's Discussion and Analysis. 18
Management........................... 25
Certain Related Transactions......... 27
Principal Stockholders............... 27
Description of Common Stock.......... 28
Selling Stockholders................. 28
Plan of Distribution................. 30
Other Information.................... 31
Interest of Named Experts
and Counsel...................... 31
SEC's Position on Indemnification
for Securities Act Liability..... 32 August __, 2005
Additional Information............. 32
Changes In and Disagreements
With Accountants................... 32
Financial Statements................. 33
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PART II
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Neither our Articles of Incorporation nor our bylaws provide for the
indemnification of a present or former director or officer. However, pursuant
to Nevada Revised Statutes Section 78.750 and 78.751 we must indemnify a
director, officer, employee, or agent of the corporation who is successful on
the merits or otherwise in defense of any action or suit. This
indemnification shall include expenses, including attorney's fees actually or
reasonably incurred. Nevada law also provides for discretionary
indemnification for each person who serves as or at the request of the
corporation as our officer or director. We may indemnify these individuals
against all costs, expenses, and liabilities incurred in a threatened,
pending, or completed action, suit or proceeding brought because this
individual is our director or officer. The individual must have conducted
himself in good faith and reasonably believed that his conduct was in, or not
opposed to, our best interests. In a criminal action he must not have had a
reasonable cause to believe his conduct was unlawful. We maintain Director
and Officer Liability insurance with limits of $1 million per loss and $1
million per policy year.
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be paid for by Pacific WebWorks
in connection with the sale of the shares. We will pay all the costs of this
offering, with the exception of the costs incurred by the selling stockholders
for their legal counsel and the costs they may incur for brokerage commissions
on the sale of their shares. All the amounts shown include estimates of
future expenses, except for the registration fee:
Securities and Exchange Commission registration fee..............$ 267.01
Printing expenses................................................ 500.00
Legal fees and expenses.......................................... 10,000.00
Accounting fees and expenses..................................... 5,000.00
Transfer agent and registrar fees and expenses................... 1,000.00
Miscellaneous.................................................... 500.00
Total......................................................$ 7,267.01
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
RECENT SALE OF UNREGISTERED SECURITIES
The following discussion describes all securities sold without registration by
Pacific WebWorks during the past three years.
On July 1, 2005, we sold an aggregate of 4,166,670 units to three accredited
investors. We sold 1,666,667 units each to Empire Fund Managers LLC and
Compass Equity Partners LLC, and 833,334 units to First Equity Holdings Corp.
Each unit consisted of one share of common stock and one warrant to purchase
an additional share at a specified exercise price. One half of the warrants
had an exercise price of $0.12 and one half of the warrants had an exercise
price of $0.17. The warrants were immediately exercisable and will expire one
year from the effective date of a registration statement to be filed
registering the underlying shares. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On July 1, 2005, we granted an aggregate of warrants to purchase 1,000,000
shares of common stock to Chesapeake Group, Inc. The warrants were granted in
consideration for consulting services and were valued at $9,832, using the
Black-Scholes option pricing model. Warrants to purchase 500,000 shares have
an exercise price of $0.10 and warrants to purchase 500,000 shares have an
exercise price of $0.15. The warrants have an exercise term of three years,
expiring in July 1, 2008. We also granted registration rights to the
underlying shares of the warrants. We relied on an exemption from
registration for a private transaction not involving a public
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distribution provided by Section 4(2) of the Securities Act.
On May 17, 2005, we issued 230,770 shares of common stock to Universal
Business Insurance in payment of a Directors and Officers Policy insurance
premium of $15,000. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On April 4, 2005, we granted options to purchase 50,000 shares of common stock
to our new Intellipay business development officer. The options have an
exercise price of $0.10 per share and vest through April 2006 and expire in
April 2010. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On February 15, 2005, we agreed to issue 20,000 shares valued at $1,800 to
Winks Design, Inc. as partial consideration for a recurring fee-based customer
portfolio and software package valued at $6,800. We relied on an exemption
from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
On December 22, 2004, we issued 1,200,000 shares of common stock to Liberty
Partners for $79,200. We relied on an exemption from registration for a
private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
On December 20, 2004, we issued 1,215,000 shares of common stock to Broad
Investments Partners for $85,050. We relied on an exemption from registration
for a private transaction not involving a public distribution provided by
Section 4(2) of the Securities Act.
On December 1, 2004, we issued 1,215,000 shares of common stock to Nikki Group
for $85,050. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On October 20, 2004, we issued options to purchase 1,685,000 common shares to
employees pursuant to our 2001 Equity Incentive Plan. The options have an
exercise price of $0.07 and 50% vest on April 20, 2005 and 50% vest on October
20, 2005. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On October 3, 2003, our board of directors approved the grant of options to
purchase 1,625,000 shares of common stock pursuant to our 2001 Equity
Incentive Plan. The options were granted to employees and have an exercise
price of $0.225 and expire through October 3, 2008. Of these options, options
to purchase 812,500 shares vested upon grant, options to purchase 406,250
shares vest in April 2004 and the remaining options to purchase 406,250 shares
vest in October 2004. We relied on an exemption from registration for a
private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
On September 1, 2004, we issued 300,000 common shares, valued at $26,720, to
Universal Business Insurance as partial payment for our yearly premium for
director and officer liability insurance. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
Beginning in September 2003 our board of directors authorized the issuance of
an aggregate of 228,149 common shares to Universal Business Insurance in
consideration for insurance valued at $62,325. Our board of directors
authorized the issuance of 151,654 shares on September 4, 2003 and 76,495 on
October 8, 2003 for this insurance. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
In July 2003 our board of directors authorized the issuance of 1,000,000
common shares for $50,000 upon the exercise of warrants. The exercise price
of the warrants was $0.05 per share. We relied on an exemption from
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registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On September 4, 2002, we issued 272,969 common shares to Universal Business
Insurance in consideration for officers and directors insurance valued at
$32,756. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
In each of the private transactions above we believe that each purchaser was
aware:
.. That the securities had not been registered under federal securities
laws;
.. Acquired the securities for his/her/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 held indefinitely 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.
We believe that, in light of the foregoing, the sale of our securities to the
respective acquirers 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 27. EXHIBITS
No. Description.
3.1 Articles of Incorporation, as amended (Incorporated by reference to
exhibit No. 3.1 for Form 10-Q filed November 13, 2001)
3.2 Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated by
reference to exhibit No. 3.2 for Form 10, as amended, file No. 0-26731,
filed July 16, 1999.)
4.1 Unit Purchase Agreement between Pacific WebWorks and Investors, dated
July 1, 2005 (Incorporated by reference to exhibit 4.1 to Form 10-QSB,
filed August 12, 2005)
4.2 Form of Unit Warrants, dated July 1, 2005 (Incorporated by reference to
exhibit 4.2 to Form 10-QSB, filed August 12, 2005)
5.1 Opinion of Cindy Shy, P.C.
10.1 Master Service Agreement between Electric Lightwave, Inc., and Utah
WebWorks, Inc., dated February 2, 1998 (Incorporated by reference to
exhibit No. 10.1 for 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 Pacific WebWorks, Inc., dated January 1,
2002 (Incorporated by reference to exhibit No. 10.2 for Form 10-K, filed
March 26, 2002)
10.3 Lease Agreement between Pacific WebWorks, Inc. and Westgate Business
Center, dated November 20, 2003 (Incorporated by reference to exhibit
10.3 for Form 10-KSB, filed March 22, 2004)
10.4 Form of employment agreement for executive officers, dated April 1, 2004
(Incorporated by reference to exhibit 10.5 for Form 10-KSB, filed March
31, 2005)
10.5 Consulting agreement between Pacific WebWorks and Chesapeake Group,
Inc., dated July 1, 2005 (Incorporated by reference to exhibit 10.5 to
Form 10-QSB, filed August 12, 2005)
10.6 Registration Rights Agreement between Pacific WebWorks and Unit
Investors, dated July 1, 2005 (Incorporated by reference to exhibit 10.6
to Form 10-QSB, filed August 12, 2005)
21.1 Subsidiaries of Pacific WebWorks (Incorporated by reference to exhibit
21.1 for Form 10-QSB, filed November 13, 2003)
23.1 Consent of Chisholm, Bierwolf & Nilson, LLC
23.2 Consent of Cindy Shy, P.C. (See Exhibit 5.1)
24.1 Power of Attorney (See signature page)
ITEM 28: UNDERTAKINGS
Pursuant to Rule 415 of the Securities Act of 1933, the undersigned registrant
hereby undertakes to:
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(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement which will
include any prospectus required by Section 10(a)(3) of the Securities
Act; reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and include any additional or changed material
information on the plan of distribution;
(2) for the purpose of determining any liability under the Securities Act,
to treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering; and
(3) to file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
this indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against these liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Salt
Lake City, State of Utah, on August 31, 2005.
PACIFIC WEBWORKS, INC.
a Nevada Corporation
/s/ Christian R. Larsen
By: ____________________________________________________
Christian R. Larsen, President and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christian R. Larsen and Kenneth W. Bell, and
each of them, his attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments (including post effective amendments) to this
registration statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or any of them,
or their or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Christian R. Larsen
Date: August 31, 2005 By: ______________________________________________
Christian R. Larsen, President and Director
/s/ Kenneth W. Bell
Date: August 31, 2005 By: _______________________________________________
Kenneth W. Bell
Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting Officer and
Treasurer
/s/ R. Brett Bell
Date: August 31, 2005 By: _______________________________________________
R. Brett Bell
Secretary and Controller
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