WILLOW SYSTEMS LIMITED
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
<PAGE>
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENTS....................................................1
FINANCIAL STATEMENTS
Balance Sheets.............................................................2
Statements of Income and Retained Earnings.................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
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<PAGE>
Independent Auditors' Report
To the Board of Directors
Willow Systems Limited
We have audited the accompanying balance sheets of WILLOW SYSTEMS LIMITED as of
December 31, 1998 and 1997, and the related statements of income, retained
earnings, and cash flows for the years ended December 31, 1998, 1997 and 1996.
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.
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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Willow Systems Limited as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
March 24, 2000
<PAGE>
WILLOW SYSTEMS LIMITED
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------- ---------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 127,577 $ 73,242
Accounts receivable 198,647 42,394
-------- --------
Total current assets 326,224 115,636
-------- --------
FIXED ASSETS:
Lab and office equipment 20,222 5,070
Computer equipment and software 57,838 41,566
-------- --------
78,060 46,636
Accumulated depreciation and amortization (33,704) (15,913)
-------- --------
44,356 30,723
-------- --------
$ 370,580 $ 146,359
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 15,098 $ 1,049
Accrued payroll and related taxes 98,523 25,132
Current income taxes payable 36,500 15,397
Accrued liabilities 9,409 10,980
-------- --------
Total current liabilities 159,530 52,558
-------- --------
DEFERRED INCOME TAXES 11,451 5,954
-------- --------
CONTINGENCIES:
Contingencies - -
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares
authorized; 200 shares issued and
outstanding at December 31, 1998 and 1997 200 200
Retained earnings 199,399 87,647
-------- --------
199,599 87,847
-------- --------
$ 370,580 $ 146,359
======== ========
</TABLE>
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The accompanying notes are an integral part of these financial statements.
<PAGE>
WILLOW SYSTEMS LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
REVENUES:
<S> <C> <C> <C>
Net sales $1,039,117 $ 551,331 $ 33,298
--------- -------- -------
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and benefits 678,913 356,361 -
Equipment and supplies 32,618 19,047 1,430
Rent 23,821 10,357 1,413
Utilities 15,141 10,392 -
Bad debt - 20,685 -
Depreciation 17,791 10,393 5,520
Other 94,514 28,274 4,356
--------- -------- -------
862,798 455,509 12,719
--------- -------- -------
INCOME FROM OPERATIONS 176,319 95,822 20,579
--------- -------- -------
OTHER INCOME (EXPENSES):
Interest income 40 - -
Interest expense - - -
--------- -------- -------
40 - -
--------- -------- -------
INCOME BEFORE INCOME TAXES 176,359 95,822 20,579
--------- -------- -------
INCOME TAXES
Current tax expense 59,029 18,697 4,103
Deferred tax expense 5,578 5,954 -
--------- -------- -------
64,607 24,651 4,103
--------- -------- -------
NET INCOME 111,752 71,171 16,476
RETAINED EARNINGS, BEGINNING OF YEAR 87,647 16,476 -
--------- -------- -------
RETAINED EARNINGS, END OF YEAR $ 199,399 $ 87,647 $ 16,476
========= ======== =======
</TABLE>
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The accompanying notes are an integral part of these financial statements.
<PAGE>
WILLOW SYSTEMS LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 111,752 $ 71,171 $ 16,476
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities -
Depreciation 17,791 10,393 5,519
(Increase) Decrease in accounts receivable (156,253) (36,544) (5,850)
Increase (Decrease) in accounts payable 14,049 (26) 1,075
Increase (Decrease) in accrued payroll and
and related taxes 73,391 25,132 -
Increase (Decrease) in income taxes payable 21,103 15,397 -
Increase (Decrease) in accrued liabilities (1,571) 2,697 8,284
Increase (Decrease) in deferred income tax 5,497 5,954 -
------- ------- -------
Net cash provided by (used in) operating
activities 85,759 94,174 25,504
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (31,424) (41,117) (5,519)
------- ------- -------
Net cash used in investing activities (31,424) (41,117) (5,519)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock - - 200
------- ------- -------
Net cash used in financing activities - - 200
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 54,335 53,057 20,185
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 73,242 20,185 -
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $127,577 $ 73,242 $ 20,185
======= ======= =======
</TABLE>
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The accompanying notes are an integral part of these financial statements.
<PAGE>
WILLOW SYSTEMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Willow Systems Limited (Willow) is a company incorporated
on May 23, 1996 in New Mexico for the purpose of designing and marketing
motion control systems and robotics and the development of other
technology which has potential application in a wide range of businesses
and other business activities.
Cash - The balance of the Company's general checking account was in excess
of $100,000 as of December 31, 1998. The Federal Deposit Insurance
Corporation insures all bank accounts up to $100,000. Management believes
its exposure to loss is minimal considering only the amounts in excess of
$100,000 are at risk and the depository bank is a well established
national bank and one of the nation's largest financial institutions.
Depreciation - The Company's property and equipment are depreciated over
their useful lives using the straight-line method.
Income taxes - Income taxes are provided for tax effects of transactions
reported in financial statements and consists of taxes currently due plus
deferred taxes. Deferred taxes arise primarily from differences between
the use of accelerated methods of depreciation for tax purposes and
straight-line methods for financial purposes. The deferred taxes represent
the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered
or settled.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported and contingent
assets and liabilities disclosed in the financial statements and
accompanying notes. Actual results inevitably will differ from those
estimates and such differences may be material to the financial
statements.
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WILLOW SYSTEMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(2) LEASES
The Company leases office space and various equipment under noncancelable
operating leases expiring in various years through 2001.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1998 for each of
the next five years and in the aggregate are:
<TABLE>
<S> <C>
Year ended December 31, 1999 $ 41,133
Year ended December 31, 2000 48,000
Year ended December 31, 2001 40,000
--------
Total minimum future rental payments $ 129,133
========
</TABLE>
In addition to the noncancelable operating leases, the Company also is
verbally committed to lease additional office space in Albuquerque, New
Mexico and Largo, Florida on a month-to-month basis. Total rental expense
was $23,821, $20,749 and $1,413 for the years ended December 31, 1998,
1997 and 1996, respectively.
Certain operating leases provide for renewal, and/or purchase options.
Generally, purchase options are at prices representing the expected fair
market value of the property at the expiration of the lease term. Renewal
options are for periods of one year at the rental rate specified in the
lease.
(3) INCOME TAXES
Income taxes attributable to income from operations consists of:
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
U.S. federal $ 50,680 $ 4,741 $ 55,421
State 8,349 837 9,186
--------- -------- --------
$ 59,029 $ 5,578 $ 64,607
========= ======== ========
</TABLE>
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WILLOW SYSTEMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(3) INCOME TAXES (CONTINUED)
For the year ended December 31, 1997:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
U.S. federal $ 14,973 $ 5,061 $ 20,034
State 3,724 893 4,617
--------- --------- --------
$ 18,697 $ 5,954 $ 24,651
========= ========= ========
</TABLE>
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
U.S. federal $ 3,108 $ - $ 3,108
State 995 - 995
--------- -------- --------
$ 4,103 $ - $ 4,103
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at December 31, 1998 and 1997 are attributable to the
difference between methods used to calculate depreciation of fixed
assets.
During 1998 and 1997, the Company paid $18,004 and $7,403 in income
taxes, respectively. The Company paid no income taxes during 1996.
(4) RELATED PARTY TRANSACTIONS
On November 2, 1999, Willow issued approximately 47 shares of its no par
value common stock to two employees of Willow as an agreed condition of
employment between Willow and the employees. No cash consideration was
given by the employees for the stock.
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<PAGE>
WILLOW SYSTEMS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(5) SUBSEQUENT EVENTS
On November 2, 1999, the Company entered into a merger with NextPath
Technologies, Inc. (NextPath), a Nevada corporation, whereas Willow became
a wholly owned subsidiary of Willow Systems, Inc., a Delaware corporation.
Willow Systems, Inc. was formed as a wholly owned subsidiary of NextPath.
NextPath is engaged in the development of new and innovative technologies.
Pursuant to the merger agreement, the shareholders of Willow received
650,000 shares of NextPath's restricted common stock and $1,800,000 in
cash. In addition, the shareholders entered into a covenant not to compete
with NextPath for a period of two years.
On November 2, 1999 Willow Systems, Inc. entered into employment
agreements with the three shareholders for a period of five years and
ensures the employees, among other items, of an annual salary, vacation
and an automobile allowance.
On November 2, 1999 the Company purchased two-thirds ownership in Reflex
LLC (Reflex), a New Mexico limited liability company engaged in the
business of stabilized camera systems from two of Willow's shareholders
for $1,000. Reflex thereby became a wholly owned subsidiary of Willow
since the Company already owned one-third of Reflex before the purchase.
Reflex is a holding company that currently owns 15% of Cineflex, a
California corporation. The ownership of Cineflex by Reflex will increase
to 20% upon successful completed of contracted work. At the time of
purchase, Reflex had no operating agreement or operating history.
On November 2, 1999 the Company purchased NextWave Photonics LLC, a
Florida limited liability company, engaged in the business of designing
and marketing fiber optic switching and other fiber optic technology from
two of Willow's shareholders for $1,000. At the time of purchase, NextWave
had no operating history.
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