SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
October 31, 2000
Date of Report
(Date of Earliest Event Reported)
PACIFIC WEBWORKS, INC.
(Exact Name of Registrant as Specified in its Charter)
1760 Fremont Drive
Salt Lake City, Utah 84104
(Address of principal executive offices)
(801) 578-9020
Registrant's telephone number
NEVADA 000-26731 87-0627910
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
<PAGE>
In this report references to "Pacific WebWorks," "we," "us," and "our"
refer to Pacific WebWorks, Inc.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this report that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," or "continue" or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, many of which are not within
Pacific WebWork's control. These factors include but are not limited to
economic conditions generally and in the industries in which Pacific WebWorks
may participate; competition within Pacific WebWork's chosen industry,
including competition from much larger competitors; technological advances and
failure by Pacific WebWorks to successfully develop business relationships.
ITEM 2: ACQUISITION AND DISPOSITION OF ASSETS
On October 31, 2000, Pacific WebWorks, Inc. and Logio, Inc., a Nevada
corporation, entered into an Agreement and Plan of Reorganization by which we
will acquire Logio as a wholly-owned subsidiary through a stock-for-stock
exchange intended to qualify as a tax-free exchange. The agreement was
unanimously approved by both the Pacific WebWorks and Logio's board of
directors. However, the consummation of the acquisition is contingent upon
the approval of a majority of Logio's stockholders and registration of our
common shares to be issued in the exchange.
About Logio
Logio, Inc., formerly WordCruncher Internet Technologies, Inc., is a
development stage company historically engaged in the development and
marketing of a focused Internet directory and search engine which serves the
needs of the business professional. Logio launched its web site, logio.com,
on March 19, 2000. The web site was designed to provide a broad spectrum of
the information and services that are required by business people in their
daily work activities. In June 2000, Logio shifted its business model towards
the generation of revenues from set-up and maintenance fees from the sale of
its directory in private label form to certain Internet sites and corporate
Intranet. Logio is uncertain as to when it will emerge from the development
stage.
Summary of Agreement Terms
(1) Pacific WebWorks intends to acquire 100% of the issued and outstanding
common stock of Logio as of October 31, 2000 in a stock-for-stock
exchange.
(2) Pacific WebWorks will exchange 2.8 million shares of its common stock
for approximately 18.4 million shares of Logio common stock, or an
exchange ratio of 6.6 Logio shares for one Pacific WebWorks share.
(3) The acquisition is contingent upon stockholder approval by a majority
<PAGE> 2
of Logio's stockholders and Logio expects to obtain stockholder
approval at a special meeting of its stockholders to be held in January
2001.
(4) The acquisition is contingent upon registration of the 2.8 million
Pacific WebWorks shares. Pacific WebWorks has filed a registration
statement on Form S-4 to register the shares under the Securities Act
and the registration statement was declared effective on December 20,
2000.
(5) Upon completion of the acquisition Logio will be a wholly-owned
subsidiary of Pacific WebWorks.
(6) Pacific WebWorks plans to structure the acquisition as a tax-free,
stock-for-stock transaction which complies with the provisions of
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended.
(7) Termination of the agreement may occur if either party fails to comply
in any material respect with the covenants and agreements or if any
representations or warranties in the acquisition agreement are
materially inaccurate. Also, the parties may terminate the agreement by
mutual consent.
(8) Upon completion of the acquisition Logio's stockholders will hold
approximately 15.8% of the issued and outstanding shares of Pacific
WebWorks.
Consideration for the Acquisition. The consideration exchanged in the
acquisition was negotiated at "arms length" and our management used criteria
from similar proposals, including the market value of Logio's common shares,
the relative value of the assets of Logio, Logio's present and past business
operations, the future potential of Logio, certain members of the management
of Logio and the potential benefit to the stockholders of Pacific WebWorks.
The source of the consideration we intend to use to acquire our interest in
Logio is approximately 2.8 million authorized but unissued common shares of
Pacific WebWorks. The 6.6 to 1 exchange rate was based upon the
considerations listed above in addition to the trading history of both
companies' shares on the OTC Bulletin Board over the 30 days prior to the
letter of intent. Our board of directors determined that the consideration
for the exchange was reasonable based upon these factors. Our board did not
seek a third party fairness opinion or any valuation or appraisal of the
exchange. Thus, stockholders will not have the benefit of a third party
opinion that the exchange of shares is fair from a financial point of view.
Relationships Between Pacific WebWorks and Logio. In August 2000 our
management met with members of Logio to discuss sales and marketing ideas for
the Logio technology. As a result of this meeting our management realized
that Logio's technology would lend itself to the additional products we had
outlined in our business plan. Later that month our management returned to
Logio to evaluate its technology in more detail. During the next several
weeks the companies held meetings which culminated in the letter of intent in
September for the acquisition of Logio by Pacific WebWorks.
Except as described in this report, neither we, nor to the best of our
knowledge, any of our directors, executive officers or other affiliates had
any contract, arrangement, understanding or relationship with any other person
with respect to any Logio shares. Except as described in this report, there
have been no contacts, negotiations or transactions within the last two years
between us or any of
<PAGE> 3
our directors, executive officers or their affiliates, on the one hand, and
Logio or its affiliates, on the other hand, regarding the merger,
consolidation, acquisition of shares or election of directors.
Assets Involved. At September 30, 2000, Logio had $1,755,093 in total
assets. The majority of its assets, 84.4%, are fixed assets, which have a net
book value of $1,480,493. Logio's fixed assets consist mostly of computer
equipment, which are under capital leases and were acquired to run Logio's
Internet application. The computers are mostly Sun Microsystems servers and
workstations. Along with the Sun equipment, Logio has load balancing and
firewall equipment, which improve upon and protect the accessibility to their
application. Cash is the next most significant asset at September 30, 2000
totaling $171,226 or 9.8% of total assets. The balance of Logio's assets
include prepaid assets, deposits and receivables.
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements.
We have attached Logio, Inc. unaudited financial statements for the nine
month periods ended September 30, 2000 and 1999. This unaudited financial
information, in the opinion of Logio's management, includes all adjustments
consisting of normal recurring entries necessary for the fair presentations of
such data. We have also attached Logio's audited balance sheets at December
31, 1999 and 1998 and its statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 13, 1999
and cumulative amounts since inception.
(b) Pro Forma Financial Information.
The accompanying unaudited pro forma consolidated financial statements
have been prepared by management of Pacific WebWorks and Logio and give effect
to the acquisition of Logio. The following unaudited pro forma consolidated
statements of operations for the year ended December 31, 1999 and for the nine
months ended September 30, 2000 are presented as if the acquisition had
occurred on January 1, 1999.
The following unaudited pro forma consolidated balance sheet combines
the September 30, 2000 historical consolidated balance sheet of Pacific
WebWorks with the September 30, 2000 historical consolidated balance sheet of
Logio (formerly WordCruncher Internet Technologies, Inc.) The unaudited pro
forma consolidated balance sheet assumes that the acquisition was completed
September 30, 2000, with Pacific WebWorks treated as the acquiring entity for
financial statement purposes.
The pro forma adjustments include assumptions and preliminary estimates
and are subject to change. These pro forma statements may not be indicative
of the results that actually would have occurred if the acquisition had been
in effect on the dates indicated, and may not be indicative of financial
results that may be obtained in the future. These pro forma financial
statements should be read in conjunction with the accompanying notes and with
the historical financial information on Logio, included in this 8-K.
<PAGE> 4
(c) Exhibits.
Exhibit No. Exhibit
2.1 Agreement and Plan of Reorganization between Pacific WebWorks
and Logio, dated October 31, 2000. (Filed November 14, 2000)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Pacific WebWorks, Inc.
/s/ Christian Larsen 12/28/00
By: _____________________________________________ Date: _____________
Christian Larsen, President, CEO and Director
<PAGE> 5
Logio, Inc.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
------------- -------------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 171,226 $ 1,055,371
Short term investments - 1,462,147
Accounts receivable, net of allowance for
doubtful accounts of $6,000
as of September 30, 2000
(none as of December 31, 1999) 28,815 736
Interest receivable - 1,983
Note receivable - 1,955
Prepaid assets 68,748 311,199
------------- -------------
Total current assets 268,789 2,833,391
------------- -------------
PROPERTY & EQUIPMENT, net 1,480,493 1,930,335
OTHER ASSETS 5,811 6,011
------------- -------------
$ 1,755,093 $ 4,769,737
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term capital
lease obligations $ 312,880 $ 299,983
Accounts payable (Note 2) 99,866 306,349
Accrued expenses 57,091 86,319
Note payable (Note 2) 96,116 659,682
------------- -------------
Total current liabilities 565,953 1,352,333
CAPITAL LEASE OBLIGATIONS, less current maturities 38,582 253,350
COMMITMENTS AND CONTINGENCY (Notes 2, 6 and 7) - -
STOCKHOLDERS' EQUITY (Notes 3, 4, 5 and 6)
6% preferred stock, par value $0.01; liquidation
preference $1,000; authorized 50,000 shares;
issued and outstanding none as of September 30,
2000 and 6,300 as of December 30, 1999 - 63
Common stock, par value $0.001; authorized
60,000,000 shares; issued and outstanding
17,270,830 as of September 30, 2000 and
11,891,002 as of December 31, 1999 17,271 11,891
Additional paid-in capital 18,371,258 15,362,028
Accumulated other comprehensive income - 7,940
Deficit accumulated during the development stage (17,237,971) (12,217,868)
------------- -------------
Total stockholders' equity 1,150,558 3,164,054
------------- -------------
$ 1,755,092 $ 4,769,737
============= =============
The accompanying notes are an integral part of these financial statements
<PAGE> 6
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
amounts Three months ended Nine months ended
since September 30, September 30,
inception 2000 1999 2000 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues
Advertising $ 2,180 $ 646 $ - $ 2,180 $ -
Product 130,517 - 1,213 - 15,285
------------- ------------- ------------- ------------- -------------
132,697 646 1,213 2,180 15,285
Cost of sales 472,648 140,161 231 440,907 4,330
------------- ------------- ------------- ------------- -------------
Gross profit (loss) (339,951) (139,515) 982 (438,727) 10,955
------------- ------------- ------------- ------------- -------------
Research and development 3,263,488 113,264 266,379 1,672,316 596,395
Selling and marketing
expenses 1,651,787 28,417 357,046 658,034 534,000
General and
administrative 2,740,861 326,393 252,989 976,183 780,651
Depreciation and
amortization 802,134 205,137 42,288 606,141 80,949
Compensation expense
for stock options 2,083,853 50,400 430,801 631,242 1,135,988
------------- ------------- ------------- ------------- -------------
Total operating
expenses 10,542,123 723,611 1,349,503 4,543,916 3,127,983
------------- ------------- ------------- ------------- -------------
Loss from operations (10,882,074) (863,126) (1,348,521) (4,982,643) (3,117,028)
Other income (expense)
Interest income 261,665 20,167 61,181 55,002 158,428
Financing charges
(Note 3) (133,703) (133,703) - (133,703) -
Interest expense (151,661) (33,431) (652) (96,422) (3,561)
Loss on disposal of
equipment (2,215) (2,215) - (2,215) -
------------- ------------- ------------- ------------- -------------
(25,914) (149,182) 60,529 (177,338) 154,867
------------- ------------- ------------- ------------- -------------
Loss before
extraordinary item (10,907,988) (1,012,308) (1,287,992) (5,159,981) (2,962,161)
Extraordinary gain
(Notes 2 and 3) 204,238 204,238 - 204,238 -
------------- ------------- ------------- ------------- -------------
NET LOSS (10,703,750) (808,070) (1,287,992) (4,955,743) (2,962,161)
Deduction for dividends
and accretion (6,534,221) - (1,519,113) (64,360) (6,239,007)
Net loss attributable to
common stockholders $(17,237,971) $ (808,070) $ (2,807,105) $ (5,020,103) $ (9,201,168)
============= ============= ============= ============= =============
Net loss per common
share - basic and
diluted (Note 4):
Before extraordinary
item and deduction
for dividends and
accretion $ (1.39) $ (0.06) $ (0.11) $ (0.38) $ (0.25)
Extraordinary gain 0.03 0.01 - 0.02 -
Deduction for dividends
and accretion (0.83) - (0.13) (0.01) (0.52)
------------- ------------- ------------- ------------- -------------
Net loss per common
share attributable
to common
stockholders $ (2.19) $ (0.05) $ (0.24) $ (0.37) $ (0.77)
============= ============= ============= ============= =============
Weighted-average number
of shares outstanding-
basic and diluted 7,839,426 16,644,408 11,881,611 13,509,126 11,879,881
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative
amounts Nine months
since ended September 30,
inception 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(10,703,750) $ (4,955,743) $ (2,962,161)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation & amortization 802,134 606,141 80,949
Loss on disposal of equipment 2,215 2,215 -
Bad debt expense 6,000 6,000 -
Financing charge for stock conversion 133,703 133,703 -
Issuance of common stock and options
for compensation and other expenses 2,083,853 631,242 1,135,988
Issuance of warrants for consulting services 348,000 90,000 171,552
Extraordinary gain (204,238) (204,238) -
Changes in assets and liabilities
Accounts receivable (34,815) (34,079) (1,485)
Interest receivable - 1,983 (3,840)
Prepaid expenses and other assets (68,748) 242,451 15,294
Accounts payable 99,866 (77,336) 56,428
Accrued expenses 57,091 (14,586) 7,607
------------- ------------- -------------
Total adjustments 3,225,061 1,383,496 1,462,493
------------- ------------- -------------
Net cash used in operating activities (7,478,689) (3,572,247) (1,499,668)
------------- ------------- -------------
Cash flows from investing activities
Purchases of property and equipment (1,387,428) (92,829) (751,981)
(Increase) decrease in short-term investments - 1,454,207 (3,065,648)
Repayment of notes receivable from related
parties 117,700 1,955 -
Notes receivable issued to related parties (117,700) - 97,531
(Increase) decrease in other assets (5,811) 200 (5,076)
------------- ------------- -------------
Net cash provided by (used in)
investing activities (1,393,239) 1,363,533 (3,725,174)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock 2,292,762 907,600 22,400
Proceeds form issuance of preferred stock 6,300,000 - 6,300,000
Cash paid for fees associated with preferred
stock issuance (392,100) - (392,100)
Proceeds from issuance of notes payable
to related parties 1,423,000 1,423,000 -
Principal payments of notes payable to
related parties (250,000) (250,000) -
Principal payments under capital lease
obligations (532,401) (267,556) (16,006)
Proceeds from issuance of long term
obligations and notes payable 998,682 - -
Principal payments of long-term obligations
and notes payable (796,789) (488,475) (120,000)
------------- ------------- -------------
Net cash provided by financing activities 9,043,154 1,324,569 5,794,294
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 171,226 (884,145) 569,452
Cash and cash equivalents at beginning of period - 1,055,371 425,702
------------- ------------- -------------
Cash and cash equivalents at end of period $ 171,226 $ 171,226 $ 995,154
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 147,679 $ 98,551 $ 3,673
Cash paid during the period for income taxes - - -
</TABLE>
<PAGE> 8
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Non-cash financing activities:
During the nine months ended September 30, 2000 and 1999, the Company
purchased $65,685 and $3,594, respectively, in property and equipment
through capital lease obligations.
Also during the nine months ended September 30, 2000, a total of 6,300
shares of the Company's convertible preferred stock were converted into
625,000 shares of the Company's common stock. Convertible preferred
shareholders were also issued 727,756 and 61,650 shares of the Company's
common stock during the nine months ended September 30, 2000 for reset
provisions and cumulative dividends, respectively (Note 3).
During the nine months ended September 30, 2000, the Company settled
$244,670 in vendor payables for $51,225 in cash and $70,000 in stock.
These settlements resulted in $123,445 of forgiven debt and
extraordinary gain.
During the nine months ended September 30, 2000, the Company settled
$290,793 in notes payable and accrued interest for $210,000 in cash.
This settlement resulted in $80,793 of forgiven debt and extraordinary
gain.
During the nine months ended September 30, 2000, the Company converted a
total of $676,246 in debt and interest to 3,165,000 shares of the
Company's common stock at prices ranging from $0.2012 to $0.2510 per
share. The conversions resulted in a financing charge of $133,703
representing those conversions with price differences between fair
market values of the common stock on the dates of conversion and the
conversion prices.
During the nine months ended September 30, 2000, the Company converted a
total of $500,000 in notes payable to shareholders and interest of
$11,666 into 626,422 shares of the Company's common stock at prices
ranging from $0.81 to $0.82 per share. The conversions resulted in
an extraordinary gain of $315,909 representing those conversions with
price differences between fair market values of the common stock on the
dates of conversion and the conversion prices.
The accompanying notes are an integral part of these financial statements
<PAGE> 9
<TABLE>
<CAPTION>
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2000 (unaudited)
and years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Accumulated accumulated
Additional other during the
Price per Preferred Stock Common Stock paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ --------- -------- -------- ----------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at November 5,
1996 - $ - - $ - - $ - $ - $ - $ -
Net loss - - - - - - - - -
-------- -------- ----------- ------- ------------ ------------ ------------
Balances at December 31,
1996 - - - - - - - - -
Issuance of stock for
cash to organizers Jan-97 0.001 - - 622,500 623 52 - -
Issuance of stock for
cash Feb-97 0.001 - - 67,500 67 8 - -
Issuance of stock for
licence agreement Feb-97 - - - 110,742 111 (111) - -
Issuance of stock to
employees for
services Sep-97 0.333 - - 252,450 252 83,898 - -
Issuance of stock for
services Aug-97 1.092 - - 37,875 38 41,337 - -
Net loss for the year - - - - - - - - (335,218)
-------- -------- ----------- ------- ------------ ------------ ------------
Balances at December 31,
1997 - - - - 1,091,067 1,091 125,184 - (335,218)
(Continued)
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Nine months ended September 30, 2000 (unaudited)
and years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Accumulated accumulated
Additional other during the
Price per Preferred Stock Common Stock paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ --------- -------- -------- ----------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock
for cash Jul-98 4.17 - - 120,000 120 499,880 - -
Reverse acquisition and
reorganization
adjustment Jul-98 - - - 9,885,435 9,886 (8,550) - -
Issuance of stock
for cash Jul-98 0.725 - - 690,000 690 499,310 - -
Issuance of stock for
debt conversion Jul-98 0.96 - - 13,500 13 12,987 - -
Issuance of stock for
services Oct-98 1.90 - - 39,000 39 70,161 - -
Issuance of stock for
software technology Oct-98 1.80 - - 13,000 13 23,387 - -
Issuance of stock for
insurance coverage Nov-98 1.00 - - 25,000 25 24,975 - -
Net loss for the year - - - - - - - - (482,909)
------ --------- -------- -------- ----------- ------- ------------ ------------ ------------
Balances at December 31,
1998 - - - - 11,877,002 11,877 1,247,334 - (818,127)
(continued)
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Nine months ended September 30, 2000 (unaudited)
and years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Accumulated accumulated
Additional other during the
Price per Preferred Stock Common Stock paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ --------- -------- -------- ----------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of warrants for
consulting services Jan-99 - - - - - 258,000 - -
Issuance of preferred
stock for cash, net of
offering costs Feb-99 1,000 6,100 61 - - 5,719,839 - -
Issuance of preferred
stock for cash, net of
offering costs Mar-99 1,000 200 2 - - 187,998 - -
Issuance of common stock
for exercise of options Jun-99 0.11 - - 2,000 2 21,998 - -
Issuance of common stock
for exercise of options Aug-99 0.10 - - 4,000 4 396 - -
Issuance of common stock
for conversion of debt Dec-99 3.25 - - 8,000 8 25,992 - -
Issuance of stock
options to employees Jan-
for compensation Dec 99 - - - - - 1,430,610 - -
Accretion of intrinsic
value of preferred Feb-
stock Dec 99 - - - - - 6,131,944 - (6,131,944)
Dividends on preferred Feb-
stock Dec 99 - - - - - 337,917 - (337,917)
Unrealized gain on
short-term investments - - - - - - - 7,940 -
Net Loss for the year - - - - - - - - (4,929,880)
-------- -------- ----------- ------- ------------ ------------ ------------
Balances at December 31,
1999 - - 6,300 63 11,891,002 11,891 15,362,028 7,940 (12,217,868)
(Continued)
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Logio, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Nine months ended September 30, 2000 (unaudited)
and years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Accumulated accumulated
Additional other during the
Price per Preferred Stock Common Stock paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ --------- -------- -------- ----------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for exercise of options Jan 00 0.10 - - 2,000 2 198 - -
Issuance of common stock
for exercise of warrants Jan 00 5.00 - - 100,000 100 499,900 - -
Conversion of preferred
stock to common stock Feb 00 - (2,500) (25) 248,016 248 (223) - -
Issuance of common stock
for exercise of options Mar 00 0.10 - - 12,000 12 1,188 - -
Issuance of common stock
for exercise of warrants Mar 00 7.00 - - 58,000 58 405,942 - -
Conversion of preferred
stock to common stock Mar 00 - (3,800) (38) 376,984 377 (339) - -
Issuance of common stock
for reset shares Mar 00 - - - 727,756 728 (728) - -
Dividends on preferred Jan-
stock Mar 00 - - - - - 64,360 - (64,360)
Issuance of common stock
for preferred dividends
paid Mar-00 - - - 61,650 62 (62) - -
Issuance of common stock
for exercise of options Apr-00 0.10 - - 2,000 2 198 - -
Issuance of stock for
conversion of notes 0.20-
payable (Note 3) Sep-00 0.2510 - - 3,165,000 3,165 806,514 - -
Issuance of stock for
conversion of notes
payable to shareholders 0.81-
(Notes 2 and 3) Sep-00 0.82 - - 626,422 626 511,040 - -
Issuance of warrants
for consulting May -
services Sep 00 - - - - - 90,000 - -
Issuance of stock options
to employees for Jan -
compensation Sep 00 - - - - - 631,242 - -
Unrealized gain on Jan-
marketable securities Sep 00 - - - - - - 6,071 -
Net realized gain on Jan-
marketable securities Jun 00 - - - - - - (14,011) -
Net loss for the interim
period ended September
30, 2000 - - - - - - - - (4,955,743)
-------- -------- ----------- ------- ------------ ------------ ------------
Balances at September 30,
2000 - - - $ - 17,270,830 $17,271 $18,371,258 $ - $(17,237,971)
======== ======== =========== ======= ============ ============ ============
The accompanying notes are an integral part of this financial statement
</TABLE>
<PAGE> 13
Logio, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Logio, Inc., formerly WordCruncher Internet Technologies, Inc., (the Company)
is a development stage company engaged in the development and marketing of a
focused Internet directory and search engine which serves the needs of the
business professional.
The Company commenced planned principal operations on March 19, 2000 of its
Internet portal and directory, but has not produced any significant revenues.
On September 29, 2000, the Company changed its focus from its business
Internet portal to its continuing developmental efforts on the Logio business
directory.
The Company was incorporated on November 5, 1996 in the State of Utah under
the name of Redstone Publishing, Inc. During July 1998, the Company merged
with Dunamis, Inc. a public Company organized in the State of California. The
merger was recorded as a reverse acquisition, therefore WordCruncher is the
accounting survivor.
In connection with the merger, Dunamis, the legal survivor, changed its name
to WordCruncher Internet Technologies, Inc. and changed its domicile to the
State of Nevada. The Company's headquarters are in Draper, Utah.
On April 18, 2000, the Board of Directors approved the change of the Company's
name to Logio, Inc. The change was approved by the Company's stockholders in
June 2000. The Company also amended its articles of incorporation and filed
the appropriate documents with the state of Nevada in June 2000 when the
Company officially changed its name to Logio, Inc.
The Company conducts its business within one industry segment.
The accompanying unaudited consolidated financial statements reflect 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. Certain prior period balances have been reclassified to conform
with current period presentation.
NOTE 2 - SETTLEMENT OF LIABILITIES
During the nine months ended September 30, 2000, the Company settled $244,670
of vendor payables for $51,225 in cash and $70,000 in stock. These
settlements resulted in $123,445 of forgiven debt and extraordinary gain.
Also during the nine months ended September 30, 2000, the Company settled
$290,793 in notes payable and accrued interest for $210,000 in cash. This
settlement resulted in $80,793 of forgiven debt and extraordinary gain.
<PAGE> 14
Logio, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
NOTE 2 - SETTLEMENT OF LIABILITIES (Continued)
In June 2000, the Company was loaned $500,000 from three principal
shareholders and officers of the Company in exchange for notes payable bearing
interest of 8% annually. Principal and interest were due in full on July 1,
2001. The notes were not collateralized. On September 26, 2000 the Company
converted the notes and $11,666 of accrued interest into 626,422 of the
Company's common stock at $0.81 to $0.82 per share, which represents prices in
excess of the fair market value ($0.3125) of the common shares on the date of
conversion.
The Company was also released from approximately $406,000 of other long-term
commitments with certain of its vendors that would have expired through April
2002 by obtaining releases and giving consideration through settlements as
discussed above.
NOTE 3 - SHAREHOLDERS' EQUITY
Preferred stock conversion
--------------------------
In February and March 2000, holders of the Company's convertible preferred
stock converted 6,300 preferred shares into 625,000 common shares. The
preferred stockholders also received 727,756 shares of the Company's common
stock in conjunction with the "reset" provisions of the preferred stock
agreement. Common stock totaling 61,650 shares were also issued to preferred
shareholders representing a six percent cumulative dividend.
Stock purchase agreement
------------------------
On July 6, 2000, the Company signed a purchase agreement with five investors
for the sale of two million shares of its common stock for a total purchase
price of $1.4 million. The terms of the agreement required the deposit of
$1.4 million into an escrow account before July 31, 2000. The monies were
agreed to be released to the Company upon the effective registration of the
shares with the Securities and Exchange Commission on or before October 31,
2000. In September 2000, the Securities and Exchange Commission declared the
registration effective. As of September 30, 2000, the investors have not
released the funds and are in default of the agreement.
Conversion of notes payable to equity
-------------------------------------
In September 2000, the Company was advanced a total of $603,000 from various
parties to fund the settlement of liabilities in the form of notes payable.
Also in September 2000 the Company then converted the notes payable and $2,976
of accrued interest into 2,815,000 of the Company's common stock at prices
ranging from $0.2012 to $0.251 per share. The conversion prices did not
represent the fair market value of the common shares on the date of
conversion. As such, the Company incurred $88,576 in financing charges.
<PAGE> 15
Logio, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
NOTE 3 - SHAREHOLDERS' EQUITY (Continued)
Conversion of notes payable to equity - continued
-------------------------------------------------
In September 2000, a corporation assumed $130,045 in liability from one of the
Company's vendors. Also in September 2000, the Company converted $70,000 of
this liability into 350,000 shares of the Company's common stock and was
forgiven of $60,045 in liability by the assuming creditor (as discussed
above). The liability was converted at $0.20 per share, which did not
represent the fair market value of the Company's common shares on the date of
conversion. As such, the Company incurred $45,127 in financing charges.
As discussed in Note 2, in September 2000, the Company converted $511,666 of
notes payable and interest to shareholders to 626,422 shares of its common
stock. The fair market value of the shares on the date of conversion was
$0.3125 and the conversion prices ranged from $0.81 to $0.82 per share.
NOTE 4 - NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Cumulative
amounts Three months ended Nine months ended
since September 30, September 30,
inception 2000 1999 2000 1999
------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Common shares
outstanding during
the entire period - 13,479,408 11,879,002 11,891,002 11,879,002
Weighted-average
common shares issued
during the period 7,839,426 3,165,000 2,609 1,618,124 879
------------ ------------ ------------- ------------- ------------
Weighted-average
common shares used
in basic EPS 7,839,426 16,644,408 11,881,611 13,509,126 11,879,881
Dilutive effects of
potential common
shares - - - - -
------------ ------------ ------------- ------------- ------------
Weighted-average
number of common
shares and dilutive
potential common
stock used in
diluted EPS 7,839,426 16,644,408 11,881,611 13,509,126 11,879,881
============ ============ ============= ============= ============
</TABLE>
The computation of net loss per common share is based on the weighted-average
number of shares outstanding during each period presented. Diluted loss per
common share would include the dilutive potential effects of options,
warrants, and convertible and reset features of series A preferred stock, but
were not included in the calculation of diluted net loss per common share
because their effects were anti-dilutive.
<PAGE> 16
Logio, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
NOTE 5 - EQUITY INCENTIVE PLAN
On April 18, 2000, the Board of Directors adopted the Logio, Inc. 2000 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 2,500,000 shares of the Company's common stock
under the Plan. This includes 1,450,116 options, each to purchase one share
of the Company's common stock, outstanding as of September 30, 2000. The Plan
was approved by the Company's stockholders in June of 2000.
During the nine months ended September 30, 2000, the Company granted 1,283,000
options, each to purchase one share of the Company's common stock to
employees, directors and certain consultants at exercise prices ranging from
$0.625 to $7.7813 per share. Approximately 886,834 of these options were
forfeited during the nine months ended September 30, 2000.
Common stock issued in relation to the exercise of warrants and options during
the nine months ended September 30, 2000 totaled 174,000 shares.
On May 15, 2000, the Company entered into an agreement with a consultant to
provide investor relations, public relations, and fulfillment services related
to financing in exchange for warrants. A total of 200,000 warrants were
issued at an exercise price of $3.00 per share and an additional 200,000
warrants were issued at an exercise price of $4.00 per share under the terms
of this agreement. Vesting of the warrants commenced as follows: 25% on
agreement date (May 15, 2000), 25% on June 30, 2000, and 50% on September 30,
2000. Consulting charges related to this agreement total $90,000 representing
the fair market value of the services performed through
September 30, 2000. The agreement terminates on January 15, 2001 when the
services are completed. The vested warrants expire on May 15, 2005.
NOTE 6 - LETTER OF INTENT
On September 29, 2000, the Company entered into a letter of intent with
Pacific WebWorks, Inc. (Pweb). The letter outlines, among other things,
Pweb's intent to acquire Logio, Inc. for an estimated ratio of one Pweb common
share for every 6.6 shares of Logio, Inc., which is estimated to total
2,700,000 Pweb shares. Logio, Inc. and Pweb underwent a 30-day due diligence
period to evaluate and conclude the acquisition.
NOTE 7 - CONTINGENCY
The Company is currently in dispute with one of its vendors for services that
were not performed adequately, not received or not requested. The vendor is
currently reviewing approximately $130,000 of billings that the Company claims
are erroneous. The Company intends to rigorously defend itself against any
portion of the over-billings that may be re-submitted by the vendor.
<PAGE> 17
Logio, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
NOTE 8 - SUBSEQUENT EVENTS
Conversion of note payable to equity
------------------------------------
In October 2000, the Company was advanced $169,300 from a related party to
fund the Company through the possible acquisition discussed in Note 6. The
Company converted this note into 1,150,000 shares of its common stock. The
conversion price did not represent the fair market value of the common shares
on the date of conversion. As such, the Company incurred $83,700 in financing
charges.
Issuance of stock for exercise of options
-----------------------------------------
In October 2000, the Company issued 5,000 shares of its common stock to an
employee who exercised stock options.
Agreement and plan of reorganization
------------------------------------
On October 31, 2000, the Company entered into an Agreement and Plan of
Reorganization (Plan) with Pweb. The Plan includes the transfer of 18,425,830
shares of the Company's common stock in exchange for 2,800,000 shares of
Pweb's common stock subject to the provisions of the Plan. Pweb has also
committed to file a registration statement with the Securities Exchange
Commission to cover the 2,800,000 shares issued pursuant to the Plan. Upon
approval of the Plan by the Company's stockholders, the Company will be a
wholly owned subsidiary of Pweb.
<PAGE> 18
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
WordCruncher Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheet of WordCruncher
Internet Technologies, Inc. (a development stage company), as of December 31,
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements, audited by other auditors, for the period from November
5, 1996 (inception) to December 31, 1998 reflect total revenues and net loss
of $107,162 and $818,127, respectively, of the related totals. Our opinion
insofar as it relates to the cumulative amounts since inception included for
such prior period, is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the 1999
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of WordCruncher Internet
Technologies, Inc. (a development stage company), as of December 31, 1999, and
the consolidated results of their operations and their consolidated cash flows
for the year then ended and cumulative amounts since inception in conformity
with generally accepted accounting principles.
<PAGE> 19
The Company is in the development stage as of December 31, 1999. Recovery of
the Company's assets is dependent on future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's
development plan and its transition, ultimately, to attaining profitable
operations, is dependent upon obtaining adequate financing to fulfil its
development activities and achieving a level of sales adequate to support the
Company's cost structure.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has incurred consolidated cumulative net losses attributable to common
stockholders of $12,217,868 since inception of operations. This factor, among
others, as discussed in Note B to the financial statements, raises substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/Grant Thornton LLP
Salt Lake City, Utah
March 6, 2000
<PAGE> 20
CROUCH, BIERWOLF & CHISHOLM
Certified Public Accountants
50 West Broadway, Suite 1130
Salt Lake City, Utah 84101
Office: (801) 363-1175
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of WordCruncher Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of WordCruncher
Internet Technologies, Inc. (a development stage company) as of December 31,
1998 and 1997 and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1998, 1997 and 1996 and from
inception of the development stage on November 5, 1996 through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
WordCruncher Internet Technologies, Inc. (a development stage company) as of
December 31, 1998 and 1997 and the results of its consolidated operations and
cash flows for the years ended December 31, 1998, 1997 and 1996 and from
inception of the development stage on November 5, 1996 through December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 21, 1999
<PAGE> 21
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1999 1998
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 1,055,371 $ 425,702
Short-term investments (Note C) 1,462,147 -
Prepaid expenses 311,199 -
Interest receivable 1,983 -
Current maturities of notes receivable (Note F) 1,955 -
Accounts receivable 736 -
------------- -------------
Total current assets 2,833,391 425,702
------------- -------------
PROPERTY AND EQUIPMENT, at cost (Note E) 1,930,335 81,419
NOTES RECEIVABLE, less current maturities (Note F) - 100,200
OTHER ASSETS (Note D) 6,011 16,296
------------- -------------
$ 4,769,737 $ 623,617
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations
(Note G) $ - $ 120,000
Current maturities of capital lease obligations
(Note H) 299,983 16,006
Notes payable 659,682 -
Accounts payable 306,349 10,421
Accrued expenses 86,319 24,492
------------- -------------
Total current liabilities 1,352,333 170,919
CAPITAL LEASE OBLIGATIONS, less current maturities
(Note H) 253,350 11,614
COMMITMENTS (Notes H and I) - -
STOCKHOLDERS' EQUITY (Notes B, C, I, J, K, M and N)
6% preferred stock, par value $0.01; liquidation
preference $1,000; authorized 50,000 shares;
issued and outstanding 6,300 shares in 1999
and none in 1998 63 -
Common stock, par value $0.001; authorized
60,000,000 shares; issued and outstanding
11,891,002 shares in 1999 and 11,877,002 shares
in 1998 11,891 11,877
Additional paid-in capital 15,362,028 1,247,334
Accumulated other comprehensive income 7,940 -
Deficit accumulated during the development stage (12,217,868) (818,127)
------------- -------------
Total stockholders' equity 3,164,054 441,084
------------- -------------
$ 4,769,737 $ 623,617
============= =============
The accompanying notes are an integral part of these statements.
<PAGE> 22
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
amounts
since Year ended December 31,
inception 1999 1998 1997
------------- ------------- ------------- ------------
Revenues $ 130,517 $ 23,355 $ 82,678 $ 24,484
Cost of sales 31,741 15,071 15,864 806
------------- ------------- ------------- ------------
Gross profit 98,776 8,284 66,814 23,678
Selling expenses 993,536 953,708 34,554 5,274
Research and
development 1,591,390 1,198,546 266,563 126,281
General and
administrative 1,764,678 1,340,486 217,318 206,874
Depreciation and
amortization 195,994 179,169 10,406 6,419
Compensation expense
for common stock and
options (Note K) 1,452,610 1,452,610 - -
------------- ------------- ------------- ------------
Total operating
expenses 5,998,208 5,124,519 528,841 344,848
------------- ------------- ------------- ------------
Loss from operations (5,899,432) (5,116,235) (462,027) (321,170)
Other income (expense)
Interest income and
other 206,663 196,310 7,276 3,077
Interest expense (55,238) (9,955) (28,158) (17,125)
------------- ------------- ------------- ------------
151,425 186,355 (20,882) (14,048)
------------- ------------- ------------- ------------
NET LOSS $ (5,748,007) $ (4,929,880) $ (482,909) $ (335,218)
============= ============= ============= ============
Deduction for dividends
and accretion (Note J) $ (6,469,861) $ (6,469,861) $ - $ -
============= ============= ============= ============
Net loss attributable
to common stockholders $(12,217,868) $(11,399,741) $ (482,909) $ (335,218)
============= ============= ============= ============
Net loss per common
share - basic and
diluted (Note M) $ (2.09) $ (0.96) $ (0.08) $ (0.61)
============= ============= ============= ============
Weighted-average number
of shares outstanding
basic and diluted 5,850,408 11,879,919 6,100,679 545,535
============= ============= ============= ============
The accompanying notes are an integral part of these statements.
<PAGE> 23
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
<TABLE>
<CAPTION>
Deficit
Preferred Stock Common Stock Accumulated accumulated
Price --------------- ------------------ Additional other during the
per Number of Number of paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ ------- --------- ------- ----------- ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
at November 5, 1996 - $ - - $ - - $ - $ - $ - $ -
Net loss - - - - - - - - -
--------- ------- ----------- ------- ----------- ------------- ------------
Balances
at December 31, 1996 - - - - - - - - -
Issuance of stock for
cash to organizers Jan 97 0.001 - - 622,500 623 52 - -
Issuance of stock
for cash Feb 97 0.001 - - 67,500 67 8 - -
Issuance of stock for
license agreement
(Note I) Feb 97 - - - 110,742 111 (111) - -
Issuance of stock to
employees for services Sep 97 0.333 - - 252,450 252 83,898 - -
Issuance of stock for
services performed Aug 97 1.092 - - 37,875 38 41,337 - -
Net loss for the year - - - - - - - - (335,218)
--------- ------- ----------- ------- ----------- ------------- ------------
Balances
at December 31, 1997 - - - - 1,091,067 1,091 125,184 - (335,218)
Issuance of stock
for cash Jul 98 4.17 - - 120,000 120 499,880 - -
Reverse acquisition
and reorganization
adjustment Jul 98 - - - 9,885,435 9,886 (8,550) - -
(Continued)
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Preferred Stock Common Stock Accumulated accumulated
Price --------------- ------------------ Additional other during the
per Number of Number of paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ ------- --------- ------- ----------- ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock
for cash Jul 98 0.725 - - 690,000 690 499,310 - -
Issuance of stock for
debt conversion Jul 98 0.96 - - 13,500 13 12,987 - -
Issuance of stock for
services Oct 98 1.90 - - 39,000 39 70,161 - -
Issuance of stock for
software technology Oct 98 1.80 - - 13,000 13 23,387 - -
Issuance of stock for
insurance coverage Nov 98 1.00 - - 25,000 25 24,975 - -
Net loss for the year - - - - - - - - (482,909)
--------- ------- ----------- ------- ----------- ------------- ------------
Balances
at December 31, 1998 - - - - 11,877,002 11,877 1,247,334 - (818,127)
Issuance of warrants
for consulting
services (Note K) Jan 99 - - - - - 258,000 - -
Issuance of preferred
stock for cash, net
of offering costs
(Note J) Feb 9 1,000 6,100 61 - - 5,719,839 - -
Issuance of preferred
stock for cash, net
of offering costs
(Note J) Mar 99 1,000 200 2 - - 187,998 - -
(Continued)
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, 1997,
and period from November 5, 1996 (inception) to December 31, 1996
Deficit
Preferred Stock Common Stock Accumulated accumulated
Price --------------- ------------------ Additional other during the
per Number of Number of paid-in comprehensive development
Date share Shares Amount Shares Amount capital income stage
------ ------- --------- ------- ----------- ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to employees
for compensation Jun 99 0.11 - - 2,000 2 21,998 - -
Issuance of common
stock for exercise
of options Aug 99 0.10 - - 4,000 4 396 - -
Issuance of common
stock for conversion
of debt Dec 99 3.25 - - 8,000 8 25,992 - -
Issuance of stock
options to employees Jan -
for compensation Dec 99 - - - - - 1,430,610 - -
Accretion of intrinsic
value of preferred Feb -
stock (Note J) Dec 99 - - - - - 6,131,944 - (6,131,944)
Dividends on preferred Feb -
stock (Note J) Dec 99 - - - - - 337,917 - (337,917)
Unrealized gain on
marketable securities
(Note C) - - - - - - - 7,940 -
Net loss for the year - - - - - - - - (4,929,880)
--------- ------- ----------- ------- ----------- ------------- ------------
Balances
at December 31, 1999 - - 6,300 $ 63 11,891,002 $11,891 $15,362,028 $ 7,940 $(12,217,868)
========= ======= =========== ======= =========== ============= =============
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
Cumulative
amounts
since Year ended December 31,
inception 1999 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (5,748,007) $ (4,929,880) $ (482,909) $ (335,218)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 195,994 179,169 10,406 6,419
Issuance of common stock and options
for compensation and other expenses 1,673,335 1,452,610 95,200 125,525
Issuance of warrants for consulting
services 258,000 258,000 - -
Changes in assets and liabilities
Prepaid expenses (311,199) (311,199) - -
Interest receivable (1,983) 8,035 (7,141) (2,877)
Accounts receivable (736) (736) - -
Accounts payable 301,349 295,928 4,251 1,170
Accrued expenses 86,319 61,827 19,063 5,429
------------- ------------- ------------- ------------
Total adjustments 2,201,079 1,943,634 121,779 135,666
------------- ------------- ------------- ------------
Net cash used in operating activities (3,546,928) (2,986,246) (361,130) (199,552)
------------- ------------- ------------- ------------
Cash flows from investing activities
Purchases of property and equipment (1,279,458) (1,260,831) (18,627) -
Increase in short-term investments (1,454,207) (1,454,207) - -
Repayment of notes receivable
from related parties 115,745 110,745 5,000 -
Notes receivable issued to related parties (117,700) (12,500) (23,200) (82,000)
Increase in deposits (5,076) - (5,076) -
------------- ------------- ------------- ------------
Net cash used in investing activities (2,740,696) (2,616,793) (41,903) (82,000)
------------- ------------- ------------- ------------
(Continued)
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
WordCruncher Internet Technologies, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
Cumulative
amounts
since Year ended December 31,
inception 1999 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuance of common stock 1,001,150 400 1,000,000 750
Proceeds from issuance of preferred stock 6,300,000 6,300,000 - -
Payment of fees associated with issuance
of preferred stock (392,100) (392,100) - -
Proceeds from issuance of notes payable 685,682 685,682 - -
Proceeds from issuance of long-term
obligations 313,000 - 13,000 300,000
Principal payments under capital lease
obligations (256,423) (241,274) (6,320) (8,829)
Principal payments of long-term obligations (308,314) (120,000) (188,314) -
------------- ------------- ------------- ------------
Net cash provided by investing activities 7,342,995 6,232,708 818,366 291,921
------------- ------------- ------------- ------------
Net increase in cash and cash equivalents 1,055,371 629,669 415,333 10,369
Cash and cash equivalents at beginning of period - 425,702 10,369 -
------------- ------------- ------------- ------------
Cash and cash equivalents at end of period $ 1,055,371 $ 1,055,371 $ 425,702 $ 10,369
============= ============= ============= ============
Supplemental disclosures of cash flow information
-------------------------------------------------
Cash paid during the period for:
Interest $ 49,128 $ 4,584 $ 29,888 $ 14,656
Income taxes - - - -
Noncash financing activities
----------------------------
Purchase of equipment through lease
obligations $ 818,177 $ 766,987 $ - $ 51,190
Unrealized gain on available-for-sale
securities 7,940 7,940 - -
Issuance of common stock for debt conversion 39,000 26,000 13,000 -
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 28
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
1. Organization and principles of consolidation
WordCruncher Internet Technologies, Inc. (the Company) was incorporated
on November 5, 1996 in the State of Utah under the name of Redstone
Publishing, Inc. On March 10, 1997, the Company changed its name to
WordCruncher Publishing Technologies, Inc. During July 1998, the Company
merged with Dunamis, Inc. a public company organized in the State of
California. Dunamis had approximately $1 million of cash and essentially no
other assets and liabilities. Management of Dunamis resigned and management
of the Company now manages the consolidated entity. The merger was recorded
as a reverse acquisition, therefore WordCruncher is the accounting survivor.
In connection with the merger, Dunamis, the legal survivor, changed its
name to WordCruncher Internet Technologies, Inc. and changed its domicile to
the State of Nevada. The Company's headquarters are in Draper, Utah, where
the Company is engaged in the development and marketing of a business
information Internet site. The Internet site is specialized for business
professionals and the business-to-business marketplace. The Company has
acquired a license agreement from a University wherein the Company has an
exclusive, worldwide right to sell, develop and manufacture the "WordCruncher"
technology.
2. Stock split and change in par value
In July 1998, the Company authorized a 3 for 1 forward stock split.
These financial statements have been retroactively restated to reflect the
stock split. Pursuant to the reverse merger with Dunamis, the Company's par
value of its common stock changed to $.001 per share. This change has also
been retroactively applied.
3. Development stage company
The Company is a development stage company and is concentrating
substantially all of its efforts in raising capital and developing its
business information Internet site for future commercial release.
4. Software development costs
Software development costs incurred in the development of software
related products are charged to expense as incurred. Material software
development costs incurred subsequent to the establishment of technological
feasibility are capitalized. Technological feasibility is established by the
Company upon completion of a working model. Software development costs
incurred by the Company subsequent to technological feasibility have been
insignificant.
<PAGE> 29
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Recognition of revenue
The Company recognizes income and expense on the accrual basis of
accounting. During the development stage, the Company has received revenues
for certain services provided for indexing printed materials to online format.
Revenue is recorded when the services are completed. The Company also
generates revenues during the development stage from the sale of its
publishers' proprietary version of the search engine technology. This
technology is sold separately without future performance such as upgrades or
maintenance, and is not sold with support services, therefore revenue is
recorded upon the sale and delivery of the product. Licensing fees are also
received from the sublicensing of this technology which is included in the
software of certain sublicenses. Licensing fees are recorded as revenue as
software is reported as sold by the sublicensee.
6. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
7. Short-term investments
Short-term investments are comprised of various government securities,
commercial paper and other securities, which mature in one year or less and
are classified as available-for-sale. Available-for-sale securities are
measured at fair value with net unrealized gains and losses reported in
equity.
8. Fair value of financial instruments
The fair value of the Company's cash equivalents, receivables, accounts
payable and accrued liabilities approximate carrying value due to the
short-term maturity of the instruments. The fair value of long-term
obligations approximate carrying value based on their effective interest rates
compared to current market rates.
9. Use of estimates
In preparing the Company's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
10. 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.
<PAGE> 30
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Depreciation and amortization - continued
Property and equipment under capital leases are amortized over the lessor
of the life of the asset or the term of the lease.
Maintenance, repairs, and renewals which neither materially add to the
value of the property nor appreciably prolong its life are charged to expense
as incurred. Gains or losses on dispositions of property and equipment are
included in earnings.
11. Income taxes
In 1997, WordCruncher Publishing Technologies, Inc. elected to file
federal and state income taxes under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company did not pay
corporate income taxes on its taxable income during that period of time.
Instead, the stockholders were liable for individual income taxes on their
respective shares of the Company's net operating income in their individual
income tax returns. Effective July 1, 1998, the Company filed consolidated
tax returns with its parent and terminated its S-Corporation status.
Since July 1, 1998, the Company utilizes the liability method of
accounting for income taxes. Under the liability method, deferred income tax
liabilities are provided based on the difference between the financial
statement and tax bases of assets and liabilities as 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.
12. Comprehensive income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes
standards for disclosure and financial statement display for reporting total
comprehensive income and its individual components. Comprehensive income, as
defined, includes all changes in equity during a period from nonowner sources.
The Company's comprehensive income includes net loss and unrealized gains on
investments and is displayed in the statement of stockholders' equity.
13. Net loss per common share
The computation of net loss per common share is based on the
weighted-average number of shares outstanding during each period presented.
Diluted loss per common share would include the dilutive potential effects of
options, warrants, and convertible and reset features of Series A preferred
stock, but were not included in the calculation of diluted EPS because their
effects were antidilutive.
<PAGE> 31
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Certain reclassifications
Certain nonmaterial reclassifications have been made to the 1998 and 1997
financial statements to conform to the 1999 presentation.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. However, the Company is a development
stage company, has generated only limited revenue through
December 31, 1999, and has sustained losses from operations each period since
inception. In addition, it has a deficit accumulated during the development
stage of $12,217,868. Also, the Company has used cash in, rather than
provided cash from, its operations.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing
and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence.
The Company has taken the following steps to revise its operating and
financial requirements which it believes are sufficient to provide the Company
with the ability to continue in existence:
* During February and March 1999, Company received a total of
$6,300,000 for a preferred stock offering (Note J).
* During December 1999, the Company's pending S-1 Registration
Statement became effective.
* Through January 2000, the Company entered into agreements with
prominent ad serving and reporting technology companies to utilize
various technologies for its site management.
* Also in January 2000, the Company has selected a full-service
advertising agency to promote its planned business information
Internet site.
* In March of 2000, negotiations were underway to obtain up to
$15,000,000 of additional financing.
* In March 2000, the Company completed a working model of its planned
business information Internet site.
<PAGE> 32
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE C - SHORT-TERM INVESTMENTS
At December 31, 1999, the cost, fair value and unrealized gain on
short-term investments are as follows:
Fair value $ 1,462,147
Cost 1,454,207
----------------
Unrealized gain $ 7,940
================
NOTE D - OTHER ASSETS
Other assets consist of the following:
1999 1998
------------- -------------
Deposits $ 5,076 $ 5,076
Other 935 1,202
Interest receivable - 10,018
------------- -------------
$ 6,011 $ 16,296
============= =============
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment, at cost and estimated useful lives are as
follows:
Estimated
useful
1999 1998 lives
------------ ------------- -------------
Computer equipment $ 1,217,668 $ 54,352 5
Furniture and fixtures 49,392 5,358 7
Software technology 858,868 38,400 3
------------ -------------
2,125,928 98,110
Less accumulated depreciation 195,593 16,691
------------ -------------
Total property and equipment $ 1,930,335 $ 81,419
============ =============
<PAGE> 33
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE F - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable consist of the following:
1999 1998
------------- -------------
8% note receivable from a former employee,
interest and principal due in full April 2000,
not collateralized $ 1,955 $ -
8% note receivable from an officer, interest
and principal due in full January 1, 2000,
received in full in 1999 - 66,700
8% note receivable from an officer, interest
and principal due in full January 1, 2002,
received in full in 1999 - 29,500
8% note receivable from a corporation owned
by an officer, interest and principal due in
full January 1, 2000, received in full in 1999 - 4,000
------------- -------------
1,955 100,200
Less current maturities 1,955 -
------------- -------------
$ - $ 100,200
============= =============
NOTE G - LONG-TERM OBLIGATIONS
At December 31, 1998, the Company had prime plus 1.5 percent (9.25
percent) notes payable to officers in the amount of $120,000. Interest
payments were due monthly, and principal was due in December 1999. The notes
were not collateralized and were paid in full in 1999.
NOTE H - LEASES
1. Operating leases
The Company leases their office facilities under an operating lease,
which expires in March 2002. Future minimum lease payments are as follows:
Year ending December 31,
-----------------------
2000 $ 44,933
2001 44,933
2002 11,233
Thereafter -
----------------
$ 101,099
=================
<PAGE> 34
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE H - LEASES - CONTINUED
2. Capital lease obligations
Included in property and equipment is $818,177 and $51,101 of computer
equipment under capital leases at December 31, 1999 and 1998, respectively.
The related accumulated amortization is $56,411 and $16,333 at December 31,
1999 and 1998, respectively.
Future minimum lease payments at December 31, 1999, are as follows:
Year ending December 31,
-----------------------
2000 $ 335,930
2001 260,923
2002 3,388
Thereafter -
------------
Total minimum lease payments 600,241
Less amount representing interest 46,908
------------
Present value of net minimum lease payments 553,333
Less current maturities 299,983
------------
Noncurrent portion $ 253,350
============
NOTE I - COMMITMENTS
1. Licenses
On February 14, 1997, the Company signed an exclusive license agreement
with Brigham Young University (BYU), a Utah nonprofit corporation and
educational institution, wherein the Company has the worldwide rights to
market, modify, develop and manufacture the "WordCruncher" technology, which
is a software program used to search data for specific items (search engine).
The term of the license covers the underlying period of the patent as provided
for by federal law, which is 17 years. The agreement calls for license fees
and royalties of three percent of adjusted gross sales, and 50 percent of
royalty payments from sublicenses. Annual minimum royalties begin for the
calendar year 1999 and are due the quarter following the year end, as
specified below. Minimum royalty payments will be capped at $150,000 from
2002 forward. The Company acquired the license through stock issuance, and
was required to maintain BYU's equity interest of 10 percent through July
1998.
<PAGE> 35
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE I - COMMITMENTS - CONTINUED
1. Licenses - continued
The Company is committed to minimum royalty payments as follows:
Year ending December 31,
-----------------------
2000 $ 50,000
2001 100,000
2002 150,000
2003 150,000
2004 150,000
Thereafter 1,368,750
--------------
$ 1,968,750
==============
These minimum royalties are due as long as the license agreement is in
effect.
2. Employment agreements
The Company has six employment and severance agreements with certain
officers and a manager of the Company. Salaries covered by these agreements
range from $100,000 to $120,000 annually, subject to annual adjustment.
Contracts with three individuals provide for annual salaries of $120,000 (plus
annual increases of at least eight percent and cash bonuses determined by the
board of directors or the compensation committee), and are for terms of three
years expiring in August 2001. The agreements provide for severance equal to
one year's salary if the individual is terminated without cause. Furthermore,
if there is a change in control as defined by these three agreements, the
contracts provide for compensation equal to five times the average of the sum
of amounts paid to the executive for salary for the five fiscal years
immediately preceding the date of the change in control. The other three
contracts provide for annual salaries of $84,000 to $100,000 (plus monthly
commissions equal to 50 percent of monthly base salary and/or annual incentive
bonuses equal to 30-60 percent of annual base salary), and are for terms of
two years expiring April through December 2001. The agreements also provide
for severance equal to 90 days of the employee's base salary plus the maximum
amount of incentive pay the employee would have earned in the same 90 day
period. Furthermore, if there is a change in control, as defined by these
agreements, the contracts provide for compensation equal to the employee's
annual base salary. There is no provision for any severance payments under
these employment contracts.
3. Consulting and development contract
The Company has entered into a consulting and development contract in
connection with the launch of its website. The Company is required to pay a
fixed price of $500,000 in exchange for these services, to be paid in four
installments based upon meeting certain milestones. At December 31, 1999,
$275,000 remains payable under this contract.
<PAGE> 36
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE J - PREFERRED STOCK
In January of 1999, the Board of Directors approved the creation of
Series A Convertible Preferred Stock (Preferred Stock) and authorized 50,000
shares. The Preferred Stock has a stated value of $1,000 per share, and a
cumulative dividend of 6 percent. The Company issued 6,100 and 200 shares of
the Preferred Stock in February and March of 1999, respectively. The
Preferred Stock is convertible into a total of 625,000 shares of the Company's
common stock at a conversion rate of $10.08 per share. The conversion price
is based on the average closing price of the Company's common stock during the
20 day period immediately preceding the closing of the preferred issuance.
The Preferred shares hold no voting rights and have liquidation preferences of
$1,000 per share and cumulative dividends.
The Preferred shareholders have a limited right to receive additional
shares of common stock ("reset shares") if the market price of the common
stock is less than the "reset price" of $12.096 per share for a ten day period
of time following certain reset dates (adjustment price). The additional
shares are calculated as the difference between the reset price and the
adjustment price, multiplied by one third of the purchase price of Preferred
stock divided by the conversion price, divided by the adjustment price. The
reset dates commence 150, 240 and 360 calendar days following the issuance of
the Preferred Stock. As of December 31, 1999, the holders of Preferred stock
are entitled to receive 574,867 shares of common stock under this provision.
On the dates that the Preferred Stock was issued, the intrinsic values of
the beneficial conversion feature were $10,995,740 and $31,994 in February and
March, respectively. The intrinsic values were derived by the difference
between the conversion price and the market value of the common stock on the
day of the preferred stock issuance multiplied by the number of common shares
into which the Preferred Stock is convertible. The closing price of the stock
was $28.25 and $11.69 at each of the respective closing dates. The proceeds
received from the sale of these convertible instruments were $6,100,000 and
$200,000, respectively. Because the intrinsic values of the beneficial
conversion features are greater than the proceeds received, the discounts
assigned to the convertible instruments are $6,100,000 and $31,944,
respectively, creating a total discount of $6,131,944. The Preferred Stock
became fully convertible into common stock as of November of 1999 and the
discount was accreted accordingly during 1999 and is reflected on the
statement of operations as a deduction for dividends and accretion.
Offering cost related to the issuance of Preferred Stock total $392,100
and have been netted with the proceeds for reporting purposes.
Cumulative Preferred dividends total $337,917 as of December 31, 1999.
<PAGE> 37
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS
1. Stock options
The Company provides for issuance of stock options to certain employees,
directors, officers and others. There has been no formal stock option plan
adopted as of December 31, 1999. The Board of Directors has approved the
granting of options as follows:
Directors, officers and key employees have been granted options to
acquire 1,079,000 shares of common stock. The options were granted at various
dates at prices ranging from $0.10 to $5.54 per share, which amounts represent
prices below market price of the Company's shares on the dates granted as
determined by the Board of Directors. The options vest periodically through
November 2002 and expire through June 2003.
Fair market value of options granted
The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". Therefore, the Company accounts for stock based compensation
under Accounting Principles Board Opinion No. 25, under which compensation
cost has been recognized using the intrinsic value method. Under this method,
compensation cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the stock. Had
compensation cost been determined based upon the fair value of the options at
the grant date consistent with the methodology prescribed by SFAS 123, the
Company's net loss and loss per share would have been changed to the following
pro forma amounts:
1999
--------------
Net loss attributable to As reported $ (11,399,741)
common stockholders Pro forma (11,453,549)
Net loss per common share As reported (.96)
basic and diluted Pro forma (.96)
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: expected volatility of 120 percent; risk-free
interest rate of 6.5 percent; and expected life of 3.50 years. The
weighted-average fair value of options granted was $4.75.
Option pricing models require the input of highly sensitive assumptions,
including the expected stock price 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.
<PAGE> 38
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS - CONTINUED
Information with respect to the Company's stock options is as follows:
Weighted-
average
Stock Exercise exercise
options price price
----------- ------------ ------------
Outstanding at January 1, 1997 - $ - $ -
Granted - - -
Exercised - - -
Canceled/expired - - -
----------- ------------ ------------
Outstanding at December 31, 1997 - - -
Granted - - -
Exercised - - -
Canceled/expired - - -
----------- ------------ ------------
Outstanding at December 31, 1998 - - -
Granted 1,079,000 0.10 - 5.54 1.79
Exercised (4,000) 0.10 0.10
Canceled/expired - - -
----------- ------------ ------------
Outstanding at December 31, 1999 1,075,000 $0.10 - 5.54 $ 1.80
=========== ============ ============
Exercisable at December 31, 1999 116,833 $ 0.10 $ 0.10
=========== ============ ============
Additional information regarding stock options outstanding and
exercisable at December 31, 1999 is summarized as follows:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (years) price exercisable price
------------------- ----------- ------------ --------- ----------- ---------
$ 0.10 440,000 13.3 $ 0.10 116,833 $ 0.10
$ 2.72 - $ 2.77 550,000 21.0 2.73 - -
$ 3.00 - $ 3.47 35,000 1.3 3.17 - -
$ 5.54 50,000 1.9 5.54 - -
----------- -----------
1,075,000 37.5 $ 1.80 116,833 $ 0.10
=========== ===========
<PAGE> 39
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE K - STOCK OPTIONS AND WARRANTS - CONTINUED
2. Warrants
Series A, B and C warrants
In connection with the sale of Series A Convertible Preferred Stock (Note
J), purchasers, were issued Series A and B warrants to purchase the Company's
common stock. Series C warrants were also issued to a third party for a
finder's fee.
Series A warrants allow holders to purchase up to an aggregate of 71,069
shares of common stock at a weighted-average price of $34.53 per share.
Series B warrants allow holders to purchase up to an aggregate of 47,380
shares of common stock at a weighted-average of $41.44 per share.
Series C warrants allow holders to purchase up to 189,000 shares of
common stock at a weighted-average price of $29.01 per share.
All 307,449 Series A, B and C warrants expire in February 2004.
Other warrants issued for services
In January of 1999, and in conjunction with the sale of Series A
Convertible Preferred Stock (Note J), the Company issued warrants to purchase
200,000 shares of the Company's common stock to its investor relations
consultant. The warrants were issued with an exercise price of $5.00 per
share and are fully vested at December 31, 1999. The fair value of $1.29 was
estimated as the value of the services performed. Consulting expenses
relating to these warrants totaled $258,000 during 1999.
Information with respect to the Company's warrants is as follows:
Weighted-
Number average
of shares exercise price
----------- --------------
Outstanding at January 1, 1997 - $ -
Granted - -
Exercised - -
Forfeited - -
----------- --------------
Outstanding at December 31, 1997 - -
Granted - -
Exercised - -
Forfeited - -
----------- --------------
Outstanding at December 31, 1998 - -
Granted 507,449 $ 21.48
Exercised - -
Forfeited - -
----------- --------------
Outstanding at December 31, 1999 507,449 $ 21.48
=========== ==============
Warrants exercisable at December 31, 1999 507,449 $ 21.48
=========== ==============
<PAGE> 40
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE L - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the
federal statutory rate of 34 percent is as follows:
1999 1998
------------- ------------
Income tax benefit at statutory rate $ (1,676,159) $ (164,189)
Income tax attributed to the S-Corporation - 8,560
State income tax benefit, net of federal tax benefit (115,157) (15,936)
Nondeductible option compensation 493,887 -
Deductible stock option compensation (6,068) -
Change in valuation allowance 1,301,627 169,896
Other, net 1,870 1,669
------------- ------------
Income tax expense $ - $ -
============= ============
Deferred income tax assets and liabilities are as follows:
1999 1998
------------- ------------
Deferred tax assets
Deferred expenses $ 146,465 $ -
Net operating losses 1,442,150 169,896
------------- ------------
1,588,615 169,896
Less valuation allowance (1,471,524) (169,896)
------------- ------------
117,091 -
------------- ------------
Deferred tax liabilities
Deferred income (117,091) -
------------- ------------
Net deferred tax assets (liability) $ - $ -
============= ============
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or 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 and
consequently, there is no income tax provision or benefit for any of the
period presented. The increase in the valuation allowance was $1,301,628 and
$169,896 for the years ended December 31, 1999 and 1998, respectively.
As of December 31, 1999, the Company had net operating loss
carryforwards for tax reporting purposes of approximately $3,866,354 expiring
in various years through 2019.
Through June 30, 1998, the Company elected to file federal and state
income taxes under the provisions of Subchapter S of the Internal Revenue
Code. Effective July 1, 1998, the Company revoked its S election, and will
therefore be a taxable entity under the provisions of Subchapter S of the
Internal Revenue Code.
<PAGE> 41
WordCruncher Internet Technologies, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE M - NET LOSS PER COMMON SHARE
Cumulative
amounts
since Year ended December 31,
inception 1999 1998 1997
------------- ------------- ------------- -----------
Common shares outstanding
during the entire period - 11,877,002 1,091,067 -
Weighted-average common
shares issued during the
period 5,850,408 2,917 5,009,612 545,535
------------- ------------- ------------- -----------
Weighted-average common
shares used in basic EPS 5,850,408 11,879,919 6,100,679 545,535
Dilutive effects of
potential common shares - - - -
------------- ------------- ------------- -----------
Weighted-average number
of common shares and
dilutive potential
common stock used in
diluted EPS 5,850,408 11,879,919 6,100,679 545,535
============= ============= ============= ===========
For the years ended December 31, 1999, 1998 and 1997, and for cumulative
amounts since inception, all of the convertible securities, reset provisions,
options and warrants discussed in Notes J and K were not included in the
computation of diluted EPS because to do so would have been antidilutive.
NOTE N - SUBSEQUENT EVENTS
1. Company name change
In January 2000, the Company began conducting business under the name
"Logio".
2. Preferred stock conversion
Through March 2000, 6,300 shares of the Company's preferred stock were
converted into 625,000 common shares and 728,046 "reset shares" of the
Company's common stock were issued to preferred shareholders (Note J). Also,
through March 2000, cumulative dividends were paid to preferred shareholders
in the form of 61,650 shares of the Company's common stock.
3. Options granted
Through March 2000, options for 5,000 shares of the Company's common
stock were granted to an employee.
4. Options and warrants exercised
Through March 2000, warrants were exercised for 158,000 shares of the
Company's common stock and options were exercised for 4,000 shares of the
Company's common stock.
<PAGE> 42
PROFORMA - CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Pacific
Logio, Inc Webworks, Inc. Before Adjustments
September 30, September 30, Adjustments -------------------------- Proforma
2000 2000 NewCo DR CR NewCo
------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 171,226 $ 72,044 $ 243,270 - - $ 243,270
Accounts receivable 28,815 232,483 261,298 - - 261,298
Employee receivables - 3,924 3,924 - - 3,924
Prepaid assets 68,748 362,350 431,098 - - 431,098
------------- ------------- ------------- ------------ ------------- -------------
Total current assets 268,789 670,801 939,590 - - 939,590
------------- ------------- ------------- ------------ ------------- -------------
PROPERTY & EQUIPMENT, net 1,480,493 443,826 1,924,319 - - 1,924,319
OTHER ASSETS 5,811 4,631,723 4,637,534 1,999,442(A) - 6,337,060
------------- ------------- ------------- ------------ ------------- -------------
$ 1,755,093 $ 5,746,350 $ 7,501,443 $ 1,999,442 - $ 9,200,969
============= ============= ============= ============ ============= ============
CURRENT LIABILITIES
Current portion of long-term
capital lease obligations $ 312,880 $ - $ 312,880 - - 312,880
Accounts payable 99,866 473,599 573,465 - - 573,465
Accrued expenses 57,091 271,485 328,576 - - 328,576
Deferred Revenues - 2,967,088 2,967,088 - - 2,967,088
Notes Payable-Related Parties - 216,580 216,580 - - 216,580
Notes Payable - Vendors 96,116 - 96,116 - - 96,116
------------- ------------- ------------- ------------ ------------- ------------
Total current liabilities 565,953 3,928,752 4,494,705 - - 4,494,705
CAPITAL LEASE OBLIGATIONS,
less current maturities 38,582 - 38,582 - - 38,582
STOCKHOLDERS' EQUITY
Preferred stock - - - - - -
Common stock 17,271 14,858 32,129 17,271(B) 2,800(C) 17,658
Additional paid-in capital 18,371,258 9,763,603 28,134,860 18,371,258(B) 3,147,200(C) 12,910,803
Accumulated deficit (17,237,971) (7,960,863) (25,198,834) - 17,237,971(B) (8,260,779)
------------- ------------- ------------- ------------ ------------- ------------
Total stockholders' equity 1,150,558 1,817,598 2,968,156 18,288,529 20,387,971 4,667,682
------------- ------------- ------------- ------------ ------------- ------------
$ 1,755,092 $ 5,746,350 $ 7,501,442 $20,387,971 $ 20,387,971 $ 9,200,969
============= ============= ============= ============ ============= ============
(A) Goodwill from acquisition of Logio by Pacific.
(B) Elimination of Logio subsidiary
(C) Issuance of 2.8 million shares of Pacific stock to Logio shareholders
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
15
PROFORMA - CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Pacific
Logio, Inc. Webworks, Inc.
Nine Months Nine Months
Ended Ended Before Adjustments
September 30, September 30, Adjustments -------------------------- Proforma
2000 2000 NewCo DR CR NewCo
------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Advertising $ 2,180 $ - 2,180 - - $ 2,180
Product - 3,273,508 3,273,508 - - 3,273,508
------------- ------------- ------------- ------------ ------------- -------------
2,180 3,273,508 3,275,688 - - 3,275,688
Cost of sales 440,907 212,597 653,504 - - 653,504
------------- ------------- ------------- ------------ ------------- -------------
Gross profit (loss) (438,727) 3,060,911 2,622,184 - - 2,622,184
------------- ------------- ------------- ------------ ------------- -------------
Research and development 1,672,316 645,372 2,317,688 - - 2,317,688
Selling expenses 658,034 4,503,581 5,161,615 - - 5,161,615
General and administrative 976,183 2,255,464 3,231,647 - - 3,231,647
Depreciation and amortization 606,141 730,052 1,336,193 299,916(D) - 1,636,109
Compensation expense for
stock options 631,242 - 631,242 - - 631,242
------------- ------------- ------------- ------------ ------------- -------------
Total operating expenses 4,543,916 8,134,469 12,678,385 299,916 - 12,978,301
------------- ------------- ------------- ------------ ------------- -------------
Loss from operations (4,982,643) (5,073,558) (10,056,201) (299,916) - (10,356,117)
Other income (expense)
Interest income 55,002 - 55,002 - - 55,002
Financing charges (133,703) - (133,703) - - (133,703)
Loss on disposal of equipment (2,215) - (2,215) - - (2,215)
Interest expense (96,422) (100,553) (196,975) - - (196,975)
------------- ------------- ------------- ------------ ------------- -------------
(177,338) (100,553) (277,891) - - (277,891)
------------- ------------- ------------- ------------ ------------- -------------
Net loss before
extraordinary item (5,159,981) (5,174,111) (10,334,092) (299,916) - (10,634,008)
Extraordinary gain 204,238 - 204,238 - - 204,238
------------- ------------- ------------- ------------ ------------- -------------
NET LOSS (4,955,743) (5,174,111) (10,129,854) (299,916) - (10,429,770)
Deduction for dividends
and accretion (64,360) - (64,360) - - (64,360)
------------- ------------- ------------- ------------ ------------- -------------
Net loss attributable to
common stockholders $ (5,020,103) $ (5,174,111) $(10,194,214) $ (299,916) $ - $(10,494,130)
============= ============= ============= ============ ============= =============
Net loss per common share -
basic and diluted
Before extraordinary item
and deduction for dividends
and accretion (0.38) (0.41)
Extraordinary gain 0.020 -
Deduction for dividends
and accretion (0.01) -
------------- ------------- -------------
$ (0.37) $ (0.41) $ (0.69)
============= ============= =============
Weighted-average number of
shares outstanding - basic
and diluted 13,509,126 12,504,532 15,304,532
============= ============= =============
(D) Amortization of goodwill for nine months
16
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
PROFORMA - CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Pacific
Logio, Inc. Webworks, Inc.
Year Year
Ended Ended Before Adjustments
December 31, December 31, Adjustments -------------------------- Proforma
1999 1999 NewCo DR CR NewCo
------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Advertising $ - $ - $ - - - $ -
Product 23,355 305,628 328,983 - - 328,983
------------- ------------- ------------- ------------ ------------- -------------
23,355 305,628 328,983 - - 328,983
Cost of sales 15,071 42,874 57,945 - - 57,945
------------- ------------- ------------- ------------ ------------- -------------
Gross profit (loss) 8,284 262,754 271,038 - - 271,038
------------- ------------- ------------- ------------ ------------- -------------
Research and development 1,198,546 320,479 1,519,025 - - 1,519,025
Selling expenses 953,708 406,917 1,360,625 - - 1,360,625
General and administrative 1,340,486 773,283 2,113,769 - - 2,113,769
Depreciation and amortization 179,169 44,029 223,198 399,888(E) - 623,086
Compensation expense for stock
options and warrants 1,452,610 1,242,584 2,695,194 - - 2,695,194
------------- ------------- ------------- ------------ ------------- -------------
Total operating expenses 5,124,519 2,787,292 7,911,811 399,888 - 8,311,699
------------- ------------- ------------- ------------ ------------- -------------
Loss from operations (5,116,235) (2,524,538) (7,640,773) (399,888) - (8,040,661)
Other income (expense)
Interest income 196,310 1,246 197,556 - - 197,556
Loss on Investment (25,000) (25,000) - - (25,000)
Interest expense (9,955) (19,243) (29,198) - - (29,198)
------------- ------------- ------------- ------------ ------------- -------------
186,355 (42,997) 143,358 - - 143,358
------------- ------------- ------------- ------------ ------------- -------------
NET LOSS (4,929,880) (2,567,535) (7,497,415) (399,888) - (7,897,303)
Deduction for dividends and
accretion (6,469,861) - (6,469,861) - - (6,469,861)
------------- ------------- ------------- ------------ ------------- -------------
Net loss attributable to
common stockholders $(11,399,741) $ (2,567,535) $(13,967,276) $ (399,888) $ - $(14,367,164)
============= ============= ============= ============ ============= =============
Net loss per common share -
basic and diluted (Note 4) $ (0.96) $ (0.27) $ (1.16)
============= ============= =============
Weighted-average number of
shares outstanding - basic
and diluted 11,879,919 9,632,500 12,432,500
============= ============= =============
(E) Amortization of goodwill for one year.
</TABLE>
