<PAGE>
LOGNET, INC.
1999 CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
LOGNET, INC.
1999 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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PAGE
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FINANCIAL STATEMENTS:
INDEPENDENT AUDITORS' REPORT 1 - 2
EXHIBIT "A" - CONSOLIDATED BALANCE SHEETS 3
EXHIBIT "B" - CONSOLIDATED STATEMENTS OF OPERATIONS 4
EXHIBIT "C" - CONSOLIDATED STATEMENTS OF CASH FLOWS 5 - 6
EXHIBIT "D" - CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 7 - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - 16
<PAGE>
F R E E M A N & D A V I S L L P
C e r t i f i e d P u b l i c A c c o u n t a n t s
Harold N. London, CPA
Robert H. Feldstein, CPA 225 West 34th Street, Suite 320
Stuart H. Levitt, CPA New York, N.Y. 10122-0397
Gerald Lubowsky, CPA
Arthur Schwartzman, CPA
Zvi Levavy, CPA Telephone: 212-594-8155
Telecopier: 212-465-0520
-----------------------
Philip J. London
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors and Stockholders of
LogNet, Inc.:
We have audited the consolidated balance sheets of LogNet, Inc. and
subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Lognet Systems, Ltd., a wholly-owned subsidiary, whose statements reflect total
assets constituting approximately 75% and 55% respectively as of December 31,
1999 and 1998 and total revenues constituting approximately 75% and 100%
respectively of the related consolidated totals for the years then ended. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for LogNet
Systems, Ltd., is based solely on the report of the other auditors.
We conducted our audits 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 disclosure 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our report dated May 12, 2000, we stated that because of inadequacies in
the Company's records, we were unable to form an opinion regarding the
stockholders' equity (deficit) amounts reflected on the Company's balance sheet
as at December 31, 1999. As reflected in the accompanying financial statements,
the components of the stockholders' equity (deficit) amounts as at December 31,
1999 have been determined and subjected to satisfactory audit tests.
Accordingly, our present opinion on the 1999 financial statements, as presented
herein, is different from that expressed in our previous report.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of LogNet, Inc. and subsidiary as of
December 31, 1999 and 1998 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,632 during the year ended December 31,
1999 and, as of that date had a working capital deficiency of $653 and a
deficiency in stockholders' equity of $556. (All preceding amounts are presented
in U.S. dollars in thousands). These conditions raise substantial doubt about
the Company's ability to continue as a going concern. As described in Note 1 to
the financial statements, the Company is currently negotiating with a public
United States company for the sale of all of its capital stock. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
FREEMAN & DAVIS LLP
New York, New York
May 22, 2000
<PAGE>
EXHIBIT "A"
LOGNET, INC.
CONSOLIDATED BALANCE SHEETS
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1999 1998
------ ------
A S S E T S
CURRENT ASSETS
Cash and cash equivalents $ 68 $ 824
Accounts receivable:
Trade 342 315
Other - primarily employees 27 14
Inventories 102 168
------ ------
TOTAL CURRENT ASSETS 539 1,321
------ ------
SEVERANCE PAY FUND 133 150
------ ------
PLANT AND EQUIPMENT 378 414
Less: Accumulated depreciation 194 238
------ ------
NET PLANT AND EQUIPMENT 184 176
------ ------
$ 856 $1,647
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term indebtedness to bank $ 386 $ 116
Accounts payable:
Trade 370 651
Other - primarily government authorities and
accrued expenses 436 410
------ ------
TOTAL CURRENT LIABILITIES 1,192 1,177
------ ------
ACCRUED SEVERANCE PAY 220 256
------ ------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, Series A cumulative convertible,
$.001 per value per share:
Authorized 5,000,000 shares
Issued and outstanding 968,925 shares 1 1
Liquidation preference $1,350
Preferred Stock, Series B convertible,
$2.992 stated value per share:
Authorized 334,225 shares
Issued and outstanding 150,400 shares 450 -
Common Stock, $.001 par value per share:
Authorized 10,000,000 shares
Issued and outstanding 702,175 shares 1 1
Additional paid-in-capital 1,444 1,045
Accumulated deficit (2,482) (850)
Accumulated other comprehensive income 30 17
------ ------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (556) 214
------ ------
$ 856 $1,647
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EXHIBIT "B"
LOGNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- ------
SALES $ 1,678 $1,446
COST OF SALES 355 449
------- ------
GROSS PROFIT 1,323 997
RESEARCH AND DEVELOPMENT COSTS, NET 848 637
SELLING AND MARKETING EXPENSES 504 793
GENERAL AND ADMINISTRATIVE EXPENSES 1,529 370
------- ------
OPERATING LOSS (1,558) (803)
OTHER INCOME (EXPENSE), NET (74) 46
------- ------
NET LOSS $(1,632) $ (757)
======= ======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EXHIBIT "C"
LOGNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- ------
Net loss $(1,632) $ (757)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash items:
Depreciation 75 59
Value of options and warrants issued for
services received by the Company 62 77
Capital loss 8 --
Changes in assets and liabilities affecting
operating activities:
Decrease (increase) in assets:
Accounts receivable:
Trade (net) (34) 8
Other (6) 68
Inventories 66 129
Increase (decrease) in liabilities:
Accounts payable:
Trade (net) (281) 153
Other 26 207
Accrued severance pay, net (19) (64)
------- ------
NET CASH USED IN OPERATING ACTIVITIES
(CARRIED FORWARD) (1,735) (120)
------- ------
(CONTINUED)
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EXHIBIT "C"
(CONTINUED)
LOGNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
YEAR ENDED
DECEMBER 31,
-----------------
1999 1998
------- -----
NET CASH USED IN OPERATING ACTIVITIES
(BROUGHT FORWARD) $(1,735) $(120)
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for plant and equipment additions (126) (14)
Proceeds from realization of fixed assets 35 --
------- -----
NET CASH USED IN INVESTING ACTIVITIES (91) (14)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net 787 911
Net proceeds of short-term indebtedness to banks 270 21
------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,057 932
------- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 13 20
------- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (756) 818
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 824 6
------- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 68 $ 824
======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 23 $ 20
Income taxes $ 1 --
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
EXHIBIT "D"
LOGNET, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1999
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
<CAPTION>
PREFERRED PREFERRED ADDITIONAL
STOCK STOCK COMMON PAID-IN
SERIES A SERIES B STOCK CAPITAL
-------- -------- ----- -------
<S> <C> <C> <C> <C>
BALANCE (DEFICIT)- JANUARY 1, 1998 $- $-- $1 $ 58
Issuance of 717,735 shares Series A ($.001 par value per
share) cumulative convertible preferred stock at $1.394
per share, net of $89 of costs associated with the
issuance (adjusted for effect of a stock dividend in
February 1999, described in Note 1) 1 -- - 910
Issuance of options and warrants for services received - -- - 77
Net loss for year - -- - --
Cumulative translation adjustments - -- - --
-- ---- -- ------
TOTAL COMPREHENSIVE INCOME (LOSS)
BALANCE (DEFICIT) - DECEMBER 31, 1998 1 -- 1 1,045
Issuance in May 1999 of 251,190 shares Series A
($.001 par value per share) cumulative
convertible preferred stock at $1.394 per share - -- - 350
Issuance in November 1999 of 150,400 shares
Series B convertible preferred stock at $2.992
stated value per share - 450 - --
Costs associated with the issuance of
Series A and Series B preferred stock - -- - (13)
Issuance of options and warrants for services received - -- - 62
Net loss for year - -- - --
Cumulative translation adjustments - -- - --
-- ---- -- ------
TOTAL COMPREHENSIVE INCOME (LOSS)
BALANCE (DEFICIT) - DECEMBER 31, 1999 $1 $450 $1 $1,444
== ==== == ======
(CONTINUED)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
EXHIBIT "D"
LOGNET, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1999
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
(CONTINUED)
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
ACCUMULATED INCOME INCOME EQUITY
DEFICIT (LOSS) (LOSS) (DEFICIT)
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE (DEFICIT)- JANUARY 1, 1998 $ (93) $(3) $ (37)
Issuance of 717,735 shares Series A ($.001 par value
per share) cumulative convertible preferred stock at $1,394
per share, net of $89 of costs associated with the
issuance (adjusted for effect of a stock dividend in
February 1999, described in Note 1) -- -- 911
Issuance of options and warrants for services received -- -- 77
Net loss for year (757) -- $ (757) (757)
Cumulative translation adjustments -- 20 20 20
------- --- ------- -------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (737)
=======
BALANCE (DEFICIT) - DECEMBER 31, 1998 (850) 17 214
Issuance in May 1999 of 251,190 shares Series A
($.001 par value per share) cumulative convertible
preferred stock at $1.394 per share -- -- 350
Issuance in November 1999 of 150,400 shares
Series B convertible preferred stock at $2.992
stated value per share -- -- 450
Costs associated with the issuance of
Series A and Series B preferred stock -- -- (13)
Issuance of options and warrants for services received -- -- 62
Net loss for year (1,632) -- $(1,632) (1,632)
Cumulative translation adjustments -- 13 13 13
------- --- ------- -------
TOTAL COMPREHENSIVE INCOME (LOSS) $(1,619)
=======
BALANCE (DEFICIT) - DECEMBER 31, 1999 $(2,482) $30 $ (556)
======= === =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
LOGNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
U.S. DOLLARS IN THOUSANDS
(EXCEPT SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF PRESENTATION AND BUSINESS ACTIVITIES
On September 15, 1998 Lognet, Inc. was incorporated under the laws of
the State of New York. The accompanying financial statements include the
accounts of Lognet, Inc. (the "Parent") and Lognet Systems, Ltd. and its
subsidiary* (the "Subsidiary") on a consolidated basis (the "Company"). All
significant intercompany accounts and transactions are eliminated in
consolidation.
* Lognet Systems, Inc., a Massachusetts corporation, is the
wholly-owned subsidiary of Lognet Systems, Ltd. In 1999, the Massachusetts
corporation was liquidated and all of its assets and liabilities were
transferred to the Parent.
In September 1998 Lognet, Inc. acquired all of the 123,250 outstanding
common A shares of Lognet Systems, Ltd., an Israeli company in exchange for the
issuance of 123,250 shares of its common stock. The transaction has been
accounted for in a manner similar to that in "pooling of interests" accounting
pursuant to which the recorded assets and liabilities of the individual
companies are carried forward at their recorded amounts and the consolidated
income includes income of the individual companies since January 1, 1998.
Separate balance sheets and separate details of operations of each of the
combining companies before the 1998 combination are not presented inasmuch as
Lognet, Inc. did not exist prior to the business combination.
On November 13, 1998, the Parent issued 143,547 shares of cumulative
convertible preferred stock, at $6.97 per share for an aggregate price of $1,000
($1 million).
In February 1999, the board of directors of the Parent declared a
"stock dividend" whereby the Parent issued 4 additional shares of its common and
preferred stock for every 1 outstanding share.
On March 12, 1999, the Parent was merged into Lognet Acquisition, Inc.
("Acquisition"), a Delaware Corporation that had no assets and liabilities or
operations. One common share of Acquisition common stock was issued for each
outstanding common share of the Parent. In addition, one share of Acquisition
cumulative convertible preferred stock was issued in connection with the merger
for each share of the Parent Series A cumulative convertible preferred stock
outstanding. The surviving Company's name was changed to Lognet, Inc.
The Parent received gross proceeds of $800 in connection with the sale
of Series A preferred stock ($350) in May 1999 and Series B preferred stock
($450) in November 1999. Costs associated with the sales aggregated $13.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplates continuation of
the Company as a going concern. The Company has incurred substantial operating
losses from operations in 1998 and 1999 and as at December 31, 1999 reflects
deficiencies in working capital and stockholders' equity. These conditions
indicate that the Company may be unable to continue as a going concern.
Management is currently negotiating with a public United States company for the
sale of all of its capital stock. However, there can be no assurance that the
sale will be consummated. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties
NATURE OF OPERATIONS
The Company manufactures hardware and software products in Israel which
are designed for linkage between PC's and central computers. Sales, marketing
and customer support services for the Company's hardware and software products
are conducted in the United States. The Company's customers are located
primarily in Israel, the United States and Canada.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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 from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist of cash and cash equivalents and trade accounts
receivable.
CASH AND CASH EQUIVALENTS
The Company maintains its cash balances in several financial
institutions located in the United States and Israel. The United States balances
are insured by the Federal Deposit Insurance Corporation up to $100 in each
institution. As at December 31, 1999, the Parent has no bank statement balances
in excess of such insurance. As at December 31, 1999, management does not
believe that the Subsidiary is exposed to any significant credit risk with
regard to its cash balances.
Cash equivalents are considered by the Company to be highly liquid
investments which include short-term bank deposits originally purchased with
maturities of three months or less.
TRADE ACCOUNTS RECEIVABLE
The Company's trade receivables reflect a broad customer base, both
nationally and internationally. Credit limits, ongoing credit evaluation and
account monitoring procedures are utilized to minimize the risk of loss. The
Company does not generally require collateral. The Company maintains an
allowance for specific debts whose collection is doubtful. Management does not
believe significant credit risk exists at December 31, 1999.
REVENUE RECOGNITION
The Company recognizes revenues from sales of its products upon
shipment.
The Company generates revenues from licensing the rights to use its
software products directly to end users. Revenues from software license
agreements are recognized, in accordance with Statement of Position (SOP) 97-2
"Software Revenue Recognition", upon delivery of the software when collection is
probable, the license fee is fixed or determinable, vendor-specific evidence
exists to allocate the total fee to all undelivered elements of the arrangement
and persuasive evidence of an arrangement exists.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined as follows:
Raw materials and supplies - by the "first in - first out" method.
Finished products - on the basis of computed cost.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
ADVERTISING
Advertising costs are expensed as incurred.
ROYALTY-BEARING GRANTS
Royalty-bearing grants from the Government of Israel for funding of
approved research projects are recognized at the time the Company is entitled to
such grants on the basis of the related costs incurred.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost, less accumulated depreciation.
The cost of major improvements and betterments to existing plant and equipment
are capitalized, while maintenance and repairs are charged to expense when
incurred. Depreciation is computed on the cost of plant and equipment on the
straight-line method over the estimated useful lives of the assets.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
This statement prescribes the use of the liability method, whereby deferred tax
asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
RELATED PARTY TRANSACTIONS
The Company shares or allocates various selling, general and
administrative expenses between it and related parties. The aggregate amounts of
such expenses are approximately $173, net of reimbursements.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a separate component of accumulated
other comprehensive income in stockholders' equity (deficit).
NOTE 2. INVENTORIES
Inventories consist of the following at December 31, 1999 and 1998:
1999 1998
----- ----
Raw materials and supplies $ 67 $101
Finished products 35 67
---- ----
$102 $168
==== ====
NOTE 3. PLANT AND EQUIPMENT
The following is a summary of costs of plant and equipment and related
accumulated depreciation at year end dates, substantially all of which is owned
by the Subsidiary:
DECEMBER 31,
----------------
1999 1998
---- ----
Classification of Assets
Computer and electronic equipment $238 $246
Office furniture and equipment 57 50
Motor vehicles 83 118
---- ----
378 414
Less: Accumulated depreciation 194 238
---- ----
$184 $176
==== ====
As collateral for compliance with the terms of an investment grant of
$75 from the State of Israel under the "Law for The Encouragement of Capital
Investment, 1959", the Subsidiary has pledged its machinery, equipment, tools
and real estate in favor of the State of Israel.
NOTE 4. SHORT-TERM INDEBTEDNESS TO BANK
In September 1999, the Parent was granted a $500 line of credit from
Pennsylvania Business Bank for direct borrowings. The line of credit will mature
on September 1, 2000 at which time the outstanding balance will become due. All
borrowings under the line are secured by a lien on the Parent's tangible and
intangible assets. Interest is payable monthly at the rate of 1.5% above the
Bank's prime rate. Repayment of the indebtedness is guaranteed by certain
stockholders and related parties, each of whom is jointly and severally liable
on this agreement.
As at December 31, 1999, the Company was directly indebted to
Pennsylvania Business Bank in the amount of $386.
The following summarizes short-term bank borrowings during the year
ended December 31, 1999:
Average amount of short-term borrowings during the year $258
Maximum amount of short-term borrowings at any month-end $386
NOTE 5. ACCRUED SEVERANCE PAY, NET
The Subsidiary's liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet date.
The Subsidiary records as expense the net increase in its funded or unfunded
severance liability. Employees are entitled to one month salary for each year of
employment, or a portion thereof. The Subsidiary's liability is fully provided
by monthly deposits with severance pay funds, insurance policies and by an
accrual. Deposits with severance pay funds and insurance policies are not under
the control of the Subsidiary.
NOTE 6. COMMITMENTS AND CONTINGENCIES
REAL PROPERTY LEASE COMMITMENT - PARENT
The Parent is committed under the terms of a 2 year lease for office
space which commenced on August 1, 1999 at an annual rental of $36.
CONTINGENCIES - SUBSIDIARY
A. Royalties to the Chief Scientist
In the event that the development of a specific product in which the
Chief Scientist participated is successful, the Subsidiary is required to pay
royalties at the rate of 3% - 5%, based on the sales revenues of that specific
Subsidiary product, up to 100% of the grant received (linked to the exchange
rate of the U.S. dollar). The balance of the commitment as of December 31, 1999
net of royalties paid or accrued, amounts to approximately $270.
B. A claim was filed against the Subsidiary for the payment of a debt
to a supplier in respect of products which were supplied in 1997 in the amount
of $75. A provision amounting to $75 in respect of the aforementioned was
included in the financial statements.
C. The Subsidiary is in negotiation with respect to nonpayment of
liabilities to an employee in the amount of $83. The Subsidiary disputed the
employee's demand and argues that the employee is not entitled to any additional
payment. Based upon the Subsidiary's legal counsel opinion, a full provision
considering the maximum exposure was recorded by the Subsidiary.
YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the Year 2000 as 1900 or some other date, resulting in errors. In addition,
similar problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The affects of the Year 2000 issue may be
experienced before, on or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect an entity's ability to conduct
normal business operations. It is not possible to be certain that all aspects of
the Year 2000 issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully resolved.
NOTE 7. INCOME TAXES
PARENT (LOGNET, INC.)
The Parent has incurred net operating losses for U.S. income tax
purposes in the aggregate amount of approximately $1,000 which are available
through 2019 as deductions from future income otherwise subject to U.S. income
taxes. No deferred tax asset is recognized in the balance sheet as at December
31, 1999 in connection with the Parent's net operating loss inasmuch as a full
valuation allowance has been established by management.
SUBSIDIARY (LOGNET SYSTEMS, LTD.)
A. The Subsidiary's production facilities have been granted an
"approved enterprise" status under the State of Israel "Law for the
Encouragement of Capital Investment, 1959". The Subsidiary is covered under two
investment plans.
The first plan is under the investment grant system. Income derived
from the "approved enterprise" that was granted to that part of the Subsidiary's
production facilities is liable to corporate tax at the rate of 25% during the
benefit period which ended in 1998.
The second plan (expansion plan) is under the alternative system of
benefits - waiver of grants in return for tax exemption and, accordingly, income
derived from the "approved enterprise" is tax-exempt for a period of ten years,
commencing with the year it first earns taxable income.
The Subsidiary is also entitled to claim accelerated deprecation on
fixed assets used by the "approved enterprise".
Distribution of cash dividends from income that was tax exempt due to
the "approved enterprise" status, is subject to corporate tax at the rate of
25%.
The period of tax benefits, detailed above, is subject to limits of 12
years from the commencement of production, or 14 years from the approval date,
whichever is earlier.
The above benefits are subject to compliance with the terms stipulated
in the law and in the related regulations and with the approvals according to
which the investments were made.
If the Subsidiary does not comply with the terms of the grant, it may
be required to refund the grant, in whole or in part, with interest and linkage
differences from the date of receipt. Through December 31, 1999, the Subsidiary
has complied with the terms of the grant.
B. Taxation under inflationary conditions:
In accordance with the Income Tax (Inflationary Adjustments) Law, 1985,
the results for tax purposes are measured in real terms, based on the changes in
the Israeli CPI.
C. The Subsidiary has not recorded a deferred tax asset due to the
uncertainty as to whether the asset will be utilized in the near future.
D. Carryforward losses:
As of December 31, 1999, the Subsidiary has Israel carryforward tax
losses, unlimited in time, in the aggregate amount of $2,400.
NOTE 8. STOCK OPTIONS AND WARRANTS
The Company accounts for stock-based compensation using the fair value
method prescribed in SFAS No. 123 "Accounting for Stock-Based Compensation",
under which compensation cost for all stock options and warrants issued (both
vested and non-vested) is measured at the grant date based on the fair value of
the options and warrants. Such cost is recognized over the service period (the
contract period).
The fair value of the options and warrants described below is estimated
at the date of the grant using the minimum value option valuation model with the
following assumptions: risk free interest rate of 6%, dividend yield of 0%,
volatility factors of the expected market price of the Company's stock of 0% and
the expected life of an option of three years.
Stock-based compensation charged to operations was $62 and $77 for the
years ended December 31, 1999 and 1998, respectively.
A. STOCK OPTIONS - EQUITY COMPENSATION PLAN
In 1999 and 1998, the Parent granted options to officers, directors,
employees, consultants, advisors and others to purchase up to approximately
282,000 of the Parent's common stock, after giving effect to a stock dividend
described in Note 1. The common stock options have exercise prices of $.10 per
share and expire at various dates after the grant date.
B. WARRANTS
1. PREFERRED STOCK WARRANTS
In 1999 and 1998, the Parent issued warrants to purchase up to 341,971
shares of the Parent's preferred stock (after giving effect to a stock dividend
described in Note 1) to certain stockholders. Substantially all of the warrants
are exercisable at $1.39 per share and expire at various dates after the grant
date.
2. COMMON STOCK WARRANTS
In 1999 and 1998, in connection with the sale of the Company's stock,
the Company granted warrants to three consultants for the purchase of up to
132,142 shares of common stock, after giving effect to the stock dividend
described in Note 1. Substantially all of the warrants are exercisable at $1.39
per share and expire at various dates after the grant date.
NOTE 9. SUBSEQUENT EVENT
On April 26, 2000, the Parent lost its Charter in the State of Delaware
due to its failure to file annual Delaware franchise tax reports for 1998 and
1999. As a result, the Parent lost the right to use the name "Lognet, Inc.". The
Parent is currently attempting to reincorporate in Delaware under the name
"Lognet 2000, Inc.".
