10-K 1 logio10k.txt U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission file number: 000-27453 LOGIO, INC. (Exact name of registrant as specified in its charter) Nevada 84-1370590 ------ ----------- (State or incorporation) (I.R.S. Employer Identification No.) 180 South 300 West, Suite 400, Salt Lake City, Utah 84101 ----------------------------------------------------- ------- (Address of principal executive offices) (Zip) Issuer's telephone number, including area code: (801) 578-9020 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] State issuer's revenue for its most recent fiscal year: None As of March 26, 2002 the registrant had 18,425,830 shares of common stock outstanding. The registrant is a wholly-owned subsidiary whose voting stock is beneficially owned by its parent, Pacific WebWorks, Inc. Documents incorporated by reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] TABLE OF CONTENTS PART I Item 1. Business...........................................................3 Item 2. Properties.........................................................3 Item 3. Legal Proceedings..................................................4 Item 4. Submission of Matters to a Vote of Security Holders ...............4 PART II Item 5. Market For Common Equity and Related Stockholder Matters...........4 Item 6. Selected Financial Data............................................4 Item 7. Management's Discussion and Analysis and Results of Operations.....5 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........10 Item 8. Financial Statements and Supplementary Data.......................10 Item 9. Changes in and Disagreements With Accountants.....................32 PART III Item 10. Directors and Executive Officers; Compliance with Section 16(a)...32 Item 11. Executive Compensation............................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management....33 Item 13. Certain Relationships and Related Transactions....................34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...34 FORWARD LOOKING STATEMENTS In this annual report, references to "Logio," "we," "us," and "our" refer to Logio, Inc. This annual 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 annual 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 Logio's control. These factors include but are not limited to economic conditions generally and in the industries in which Logio may participate; competition within Logio's chosen industry, including competition from much larger competitors; technological advances and failure by Logio to successfully develop business relationships. 2 PART I ------- ITEM 1: BUSINESS Overview 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 to serve the needs of the business professional. Logio launched a web site, logio.com, on March 19, 2000, which was tailored to provide, under one roof, a broad spectrum of the information and services that are required by business people in their daily work activities. During the second and third quarters of fiscal year 2000 we realized minimal revenues from sales of advertising on our web site, and continued to suffer losses. In June 2000, our board of directors, due in part to changing market conditions and ongoing operating losses, named Kenneth W. Bell as the new chief executive officer of Logio. Mr. Bell undertook an immediate evaluation of all aspects of our operations, including product development, sales and marketing approaches, product positioning, employees and management, contracts and agreements, and significant costs incurred by Logio. As a result of Mr. Bell's recommendations, Logio repositioned its strategic direction, reduced personnel, re-negotiated and settled contracts, and aggressively pursued new financing sources. Budgets were established for sales and costs related to Logio products and operations. Executive management continually monitored progress related to our sales and cost reduction goals in an effort to reduce losses and achieve sales growth and profitability. Sales of Logio's directory did not meet budgeted expectations and, despite the measures taken to reduce costs, the company continued to suffer losses, although at a reduced rate. As a result of these ongoing losses and the continuing decline in the market price for our common stock, previously agreed upon funding was withdrawn and other traditional financing sources became unavailable at acceptable terms. Due to the continuing negative trends in the Internet industry and markets, the trading price of our stock continued to decline throughout third quarter 2000. Because of these conditions and the resulting lack of funding, the board of directors approved the pursuit of a merger, acquisition, strategic partnership, joint partnership or other forms of continuation that could potentially provide value to our stockholders. On October 31, 2000, Logio entered into an Agreement and Plan of Reorganization ("Plan") with Pacific WebWorks, Inc. to become its wholly owned subsidiary. The Plan was approved by the stockholders of Logio on January 31, 2001 and Articles of Exchange were filed with the state of Nevada on February 8, 2001. The Plan provided for the transfer of 18,425,830 shares of our outstanding common stock in exchange for 2,800,000 shares of Pacific WebWorks common stock. Pacific WebWorks filed a registration statement with the Securities Exchange Commission to register the 2,800,000 shares issued pursuant to the Plan. The registration statement was declared effective on December 20, 2000. In conjunction with the acquisition we ceased our development activities and preliminary operations related to the Logio business directory and directory services. At this time Logio is not actively marketing any products and the production and operation of a portal or directory have ceased. ITEM 2: PROPERTIES We do not currently own or lease any real property. We use office space at the corporate headquarters of our parent corporation, Pacific WebWorks. 3 ITEM 3: LEGAL PROCEEDINGS We are involved in various disputes and legal claims arising in the normal course of our business. In the opinion of management, any resulting litigation will not have a material effect on our financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We have not submitted a matter to a vote of our shareholders during the fourth quarter of the 2001 fiscal year. PART II ------- ITEM 5: MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information We do not have an active public trading market at this time. Our parent corporation, Pacific WebWorks, is the beneficial owner of all of our 18,425,830 outstanding common shares. We have not declared dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. Recent Sales of Unregistered Securities The following discussion describes all securities sold by Pacific WebWorks without registration during the past three years On October 25, 2000 our Board authorized the issuance of 1,500,000 common shares to Technology Equity Fund Corp. to convert a debt of $240,000 with interest. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) of the Securities Act. ITEM 6: SELECTED FINANCIAL DATA The financial information set forth below with respect to our statements of operations for each of the three years ended December 31, 2001, 2000, and 1999 and with respect to our balance sheets at December 31, 2001, 2000, and 1999 is derived from financial statements that have been audited by our independent certified public accountants, and is qualified by reference to their reports and notes related thereto. Years Ended December 31, 2001 2000 1999 ------------- ------------- ------------- Net revenues $ - $ 16,756 $ 23,355 Cost of revenues - 447,072 15,071 ------------- ------------- ------------- Gross profit (loss) - (430,316) 8,284 ------------- ------------- ------------- Research & development 12,072 1,757,739 1,198,546 4 General & administrative 137,562 1,315,226 1,340,486 Sales & marketing - 660,933 953,708 Depreciation and amortization 370,953 776,824 179,169 Impairment Losses 987,372 - - Compensation expense for stock options 161,405 660,590 1,452,610 ------------- ------------- ------------- Total operating expense 1,669,364 5,171,312 5,124,519 ------------- ------------- ------------- Operating loss (1,669,364) (5,601,628) (5,116,235) Other income (expense) Interest expense (44,980) (103,399) (9,955) Interest income 17 42,425 196,310 Financing charges (413) (217,403) - Other expense - (1,953) - Loss on disposal of equipment - (2,215) - ------------- ------------- ------------- (45,376) (282,545) 186,355 ------------- ------------- ------------- Loss before extraordinary item (1,714,740) (5,884,173) (4,929,880) Extraordinary gain - 217,180 - ------------- ------------- ------------- Net loss (1,714,740) (5,666,993) (4,929,880) Deduction for dividends and accretion - (64,360) (6,469,861) ------------- ------------- ------------- Net loss attributable to common stockholders $ (1,714,740) $ (5,731,353) $(11,399,741) ============= ============= ============= Net loss per common share attributable to common stockholders $ (0.09) $ (0.39) $ (0.96) ============= ============= ============= Weighted-average number of shares outstanding - basic and diluted 18,425,537 14,593,455 11,879,919 ============= ============= ============= See notes to Financial Statements for information concerning the computation of per share amounts. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS Results of Operations Comparison of 2001 and 2000 Year End Periods. Following is a comparison of our operating results for the year ended December 31, 2001 with the year ended December 31, 2000: Revenues. During the fiscal year ended December 31, 2001 we did not record revenues from the sale of products or services. However, during the fiscal year ended December 31, 2000 we recorded $16,756 in revenues which were primarily related to operations of the logio.com site and the related Logio directory, which became available on the marketplace in April 2000. The logio.com site, directory product and content services have not 5 been available for sale since November 2000 due to our acquisition by Pacific WebWorks and our change in business model to facilitate joint content products with Pacific Webworks. Cost of Sales. Cost of sales consist primarily of fees paid to third party service providers for use of their costs related to site operations, and costs related to the insertion of banner and other advertisements. We had no cost of sales for the 2001 fiscal year. Our cost of sales of $447,072 for the year ended December 31, 2000 included the cost of Logio services, hosting, support and monitoring related to the logio.com site. Research and Development. Research and development expenses consisted primarily of compensation to employees for site development, consulting services and other third party service providers. Research and development expenses decreased from $1,757,739 for the 2000 year to $12,072 for the 2001 year. The 2000 year expenses were due primarily to the number of employees and consultants engaged in continued site and directory development and enhancement, and for the retention of other third party service providers related to other site content in the first and second quarters 2000. We began reducing development personnel and overhead early in the second quarter 2000. By late third quarter 2000, we again reduced development personnel significantly due to the lack of funding that was previously committed by certain investors and subsequently withdrawn. Selling and Marketing. Selling and marketing expenses are related primarily to compensation to employees for strategic marketing, content, public relations and for other consultants and third party services. We did not have any selling and marketing expenses for the 2001 year compared to $660,933 for 2000 year. We abandoned our selling and marketing efforts in late September 2000 due to our lack of funding and our planned acquisition by Pacific WebWorks. General and Administrative. General and administrative expenses decreased from $1,315,226 for the 2000 year to $137,562 for the 2001 year. The decrease in general and administrative expenses is primarily due to our substantial cost cutting activities in the fourth quarter 2000 related to administrative personnel, office expenses and the salaries of certain members of key management. Depreciation and Amortization. Depreciation and amortization decreased from $776,824 for the 2000 year to $370,953 for the 2001 year. The decrease in depreciation and amortization is due to the impairment of long-lived assets related to the return of computer equipment and software technology to the vendors. Compensation Expense for Stock Options. Compensation expense for stock options decreased to $161,405 for the 2001 year compared to $660,590 for the 2000 year. These charges reflect the intrinsic value of stock options granted to employees and directors recorded as earned by the employee or director over each period of service. The decrease represents the forfeiture of options during 2000, management's efforts to discontinue granting of options at an exercise price less than fair market value since second quarter of 2000, and the completion of vesting periods for certain employee options. Total Operating Expenses. Our operating expenses decreased to $1,669,364 for the 2001 year compared to $5,171,312 for the 2000 year. This decrease was due primarily to temporary cessation of product development and sales of products and services, along with corresponding reductions in personnel. Other Income and Expense. Total other expense decreased from $282,545 for the 2000 year to $45,376 for the 2001 year. This decrease was primarily due to continued use of cash balances and liquidation of short-term investments over the year ended December 31, 2000 to fund operations and decreases in financing charges related to the intrinsic value of debt and accrued interest converted to Logio common stock. We did not conduct these type of activities during the 2001 year. 6 Net Loss. Net loss decreased from $5,666,993 for the 2000 year to $1,714,740 for the 2001 year. The decrease is primarily due to an overall reduction in expenses related to operations and resulted in a decrease in net loss per share from $0.39 for the 2000 year to $0.09 for the 2001 year. Comparison of 2000 and 1999 Year End Periods. Following is a comparison of our operating results for the year ended December 31, 2000 with the year ended December 31, 1999: Revenue. Our initial revenue related to the Logio directory was derived from sales of advertising on the Logio site in second and third quarters 2000. Revenues decreased $6,579, from $23,355 for the year ended December 31, 1999, to $16,756 for the year ended December 31, 2000. This 28.3% decrease is due to the change in focus from the sales of Logio's PC-based product ("WordCruncher") to a focus on the development and operations of the logio.com site and the related Logio directory, which became available on the marketplace in April 2000. The logio.com site, directory product and content services have not been available for sale since November 2000 due to our acquisition by Pacific WebWorks and our change in business model to facilitate joint content products with Pacific Webworks. Cost of Sales. Cost of sales consist primarily of fees paid to third party service providers for use of their content and services, certain costs related to site operations, and costs related to the insertion of banner and other advertisements. Our cost of sales of $447,072 for the year ended December 31, 2000 includes the cost of Logio services, hosting, support and monitoring related to the logio.com site. Cost of sales for the year ended December 31, 1999 totaled $15,071 and related to license fees to a university for technology re-sold in the WordCruncher product. Research and Development. Research and development expenses consisted primarily of compensation to employees for site development, consulting services and other third party service providers. Research and development expenses increased to $1,757,739 for the year ended December 31, 2000, an increase of $559,193 from the $1,198,546 for the year ended December 31, 1999. The increase in research and development expenses is due primarily to the significant increase in the number of employees and consultants engaged in continued site and directory development and enhancement and for the retention of other third party service providers related to other site content in first and second quarters 2000. This increase relates to the recent release of the Logio site and the related Logio directory to the marketplace. We began reducing development personnel and overhead early in the second quarter 2000. By late third quarter 2000, we again reduced development personnel significantly due to the lack of funding that was previously committed by certain investors and subsequently withdrawn. Selling and Marketing. Selling and marketing expenses related primarily to compensation to employees for strategic marketing, content, public relations and for other consultants and third party services. Selling and marketing expenses decreased to $660,933 for year ended December 31, 2000, a decrease of $292,775 from the $953,708 for the year ended December 31, 1999. The decrease in selling and marketing expenses is due primarily to our reduction in sales and marketing employees and consultants in April 2000 and our complete abandonment of selling and marketing efforts in late September 2000 due to our lack of funding and our planned acquisition by Pacific WebWorks. The larger amount of spending in 1999 related mostly to the hiring of several marketing employees and marketing consulting firms for strategic marketing planning and brand development in fourth quarter 1999. General and Administrative. General and administrative expenses decreased to $1,315,226 for the year ended December 31, 2000, a decrease of $25,260 from the $1,340,486 for the year ended December 31, 1999. The decrease in general and administrative expenses is primarily due to our substantial cost cutting activities in the fourth quarter 2000 related to administrative personnel, office expenses and the salaries of certain members of key management. 7 Depreciation and Amortization. Depreciation and amortization increased $597,655 to $776,824 for the year ended December 31, 2000 from $179,169 for the for the year ended December 31, 1999. The increase in depreciation and amortization is due to the purchase of computer equipment and software technology, mostly on capital leases, required to release and maintain the Logio site and related Logio directory in late 1999, and the related depreciation charges for the year ended December 31, 1999. In November 2000, we renegotiated our largest lease for our operational computer equipment and lengthened the term of our lease by 13 months. This caused the fair value of our lease to increase substantially and the related depreciation has also increased for the equipment. Compensation Expense for Stock Options. Compensation expense for stock options decreased to $660,590 for the year ended December 31, 2000, a decrease of $792,020 from $1,452,610 for the year ended December 31, 1999. These charges reflect the intrinsic value of stock options granted to employees and directors recorded as earned by the employee or director over each period of service. The decrease represents the forfeiture of options during 2000, management's efforts to discontinue granting of options at an exercise price less than fair market value since second quarter of 2000, and the completion of vesting periods for certain employee options. Total Operating Expenses. Our operating expenses increased during the year ended December 31, 2000 over the year ended December 31, 1999. This was due primarily to the continued efforts to develop the infrastructure of the logio.com site and the Logio directory, bringing products and services to the marketplace and to develop new and innovative ideas for implementation on the site and directory. Interest Income. Interest income decreased to $42,425 for the year ended December 31, 2000, a decrease of $153,885 from $196,310 for the year ended December 31, 1999. The decrease reflects the continued use of cash balances and liquidation of short-term investments over the year ended December 31, 2000 to fund operations. Interest Expense and Financing Charges. Interest expense totaled $103,399 for the year ended December 31, 2000, an increase of $93,444 from $9,955 for the year ended December 31, 2000. The increase is due primarily to capital leases entered into in late 1999 and early 2000 and other notes payable to vendors and shareholders. Financing charges of $216,703 incurred during 2000 represent the intrinsic value of debt and accrued interest converted to Logio common stock. In these transactions $1,357,642 of notes payable to shareholders and related accrued interest were converted to approximately 4,941,422 of our common stock at prices ranging from $0.16 to $0.25 to per share. These shares were issued at prices less than the fair market value of the common stock on the dates of conversion and, consequently, financing charges of $216,703 were incurred for the intrinsic values. Extraordinary Gain. From September to December 2000, Logio settled $558,098 of vendor payables for $340,918 cash and stock. The forgiven debt from these transactions resulted in $217,180 in extraordinary gain for the year ended December 31, 2000. Net Loss. Net loss increased to $5,666,993 for the year ended December 31, 2000, an increase of $737,113 compared to a net loss of $4,929,880 for the year ended December 31, 1999. The increase in net loss is a result of our increased costs and expenses associated with the continued research, development, marketing and implementation of the Logio website and related directory and their operations. Net Loss Attributable to Common Stockholders. The accretion of the beneficial conversion feature of Series A Preferred Stock was fully recognized by fiscal year end 1999. The remaining cumulative 6% dividend to each of the Series A Preferred stockholders was recognized in the first quarter 2000, totaling $64,360. As such, net loss attributable to common shareholders totaled $5,731,353 for the year ended December 31, 2000. Net loss attributable to common stockholders for the year ended December 31, 1999 totaled $11,399,741 after giving effect to the dividends and accretion of the beneficial conversion feature of Series A Preferred Stock recognized during 8 the first nine months of 1999 for the year ended December 31,1999, totaling $6,469,861. This transaction resulted in an increase to additional paid-in capital and a corresponding increase in accumulated deficit during the quarters. Factors Affecting Future Performance . We currently are unable to finance our operations through revenues because we have temporarily ceased development of our products and business plan. As a result, we are unable to meet our current obligations and required additional financing to fund our operations. . We may not be able to obtain additional funds on acceptable terms. If we fail to obtain funds on acceptable terms, we might be forced to delay or abandon some or all of our business plans, which could have a material adverse effect on us. . We depend upon our proprietary rights, none of which can be completely safeguarded against infringement. Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions. We may unknowingly infringe upon the proprietary rights of others, thereby exposing us to significant liability and/or damages. To the extent we rely upon confidential information to maintain our competitive position, other parties may independently develop the same or similar information. Liquidity and Capital Resources At December 31, 2001, we had no cash on hand and no total current assets compared to $25,850 cash on hand and total current assets of $29,018 at the year ended December 31, 2000. Our total current liabilities were $844,018 at the 2001 year end compared to $490,455 at the 2000 year end. Our accumulated deficit was $19,663,960 at the 2001 year end. We have delayed operations, have had a limited operating history, have recorded losses since our inception and have relied upon equity and debt funding to support our operations. We may be unable to generate positive cash flows from operations in the foreseeable future. These factors raise substantial doubt that we can continue as a going concern. We have no material commitments for capital expenditures for the next twelve months and our major obligations are related to capital lease agreements which are in default and $1,067 owed for monthly management fees to Pacific WebWorks, plus $23,766 due to a bank for an overdraft. Net cash used in operating activities for the 2001 year was $135,512 compared to $3,956,340 for the 2000 year. Net cash provided by investing was $11,066 for the 2001 year compared to $1,409,110 for the 2000 year. Net cash provided by financing activities was $98,597 for the 2001 year and was primarily the result of proceeds from notes payable to our parent company. For the 2000 year $1,517,708 net cash was provided by financing activities primarily from the issuance of notes payable for $1,423,000 and proceeds of $908,100 from the issuance of common stock In March 2001 we were unable to make payments on our payables and capital lease agreements related to hardware and our operating infrastructure, which resulted in defaults under those agreements. Accordingly, we have recorded impairment losses of $987,372 for the 2001 year. We defaulted on a licensing agreement with Oracle Corporation and may no longer rely on that software license and we have recorded an impairment loss of $75,840 to the net asset and recorded a payable in default of approximately $100,000. We also defaulted on capital lease agreements with Sun Microsystems Finance from whom we leased the server equipment necessary to host our web site. We returned the equipment to Sun Microsystems in May 2001. Accordingly, our financials show impairment losses of $122,685, representing the cash down payments Logio made at the beginning of the leases which were amortized over the life of the lease, and $788,847 related to losses for equipment under capital leases and related software and equipment. Management intends to negotiate favorable settlements of the defaults, but cannot ensure that we will be successful in such negotiations. 9 In addition to defaults approximating $440,000, we are unable to pay liabilities of approximately $404,000 to various professional services firms, vendors, Pacific WebWorks and an overdraft in a bank account. In January 2001 we obtained a line of credit of $120,000 from our parent corporation, Pacific WebWorks. Pursuant to the agreement we would receive advancements up to $120,000 at 12% interest with the advancements collateralized by all the business assets of Logio. We owe $135,713 under this line of credit which is in excess of our agreement. We agreed to pay management fees of $1,067 per month to Pacific WebWorks and Pacific WebWorks agreed to rent certain of our fixed assets for $1,422 per month. Based upon our inability to satisfy our obligations we may be required to seek bankruptcy protection if we are unable to find another solution. Management expects to resume development and operations in the future when our market is improved and sufficient funding is available for specific products; however, management cannot predict when or if such funding may be obtained. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10 CHISHOLM & ASSOCIATES A Professional Certified Public Accountants Office (801)292-8756 Corporation P.O. Box 540216 Fax (801)292-8809 North Salt Lake, Utah 84054 _____________________________________________________________________________ INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Logio, Inc. We have audited the accompanying balance sheets of Logio, Inc. as of December 31, 2001 and 2000 and the related 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 conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 a evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above presently fairly, in all material respects, the financial position of Logio, Inc. as of December 31, 2001 and 2000 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Chisholm & Associates Chisholm & Associates North Salt Lake, UT January 31, 2002 11 Logio, Inc. (a development stage company) CONSOLIDATED BALANCE SHEETS ASSETS December 31, December 31, 2001 2000 -------------- ------------- CURRENT ASSETS Cash and cash equivalents $ - $ 25,850 Short term investments - - Accounts receivable, net of allowance for doubtful accounts - 3,168 Prepaid assets - - -------------- ------------- Total current assets - 29,018 -------------- ------------- PROPERTY & EQUIPMENT, net 91,791 1,485,182 -------------- ------------- $ 91,791 $ 1,514,200 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term capital lease obligations $ 460 $ 242,417 Capital lease obligations in default 438,373 - Overdraft in bank 23,766 - Accounts payable - 20,000 Accounts payable past due 213,688 200,605 Accrued expenses 32,018 27,433 Note payable - parent company 135,713 - -------------- ------------- Total current liabilities 844,018 490,455 CAPITAL LEASE OBLIGATIONS, less current maturities - 222,546 STOCKHOLDERS' EQUITY 6% preferred stock, par value $0.01; liquidation preference $1,000; authorized 50,000 shares; issued and outstanding none as of December 31, 2000 and 6,300 as of December 30, 1999 - - Common stock, par value $0.001; authorized 60,000,000 shares; issued 18,425,830 shares; outstanding 18,425,510 as of December 31, 2001, issued and outstanding 18,425,830 and 11,891,002 as of December 31, 2000 18,426 18,426 and 1999, respectively Additional paid-in capital 18,893,398 18,731,993 Accumulated other comprehensive income - - Deficit accumulated during the development stage (19,663,960) (17,949,220) -------------- ------------- Less treasury stock (91) - -------------- ------------- Total stockholders' equity (752,227) 801,199 -------------- ------------- $ 91,791 $ 1,514,200 ============== ============= The accompanying notes are an integral part of these financial statements 12

~~From~~Logio, ~~inception~~Inc. on(a ~~November~~development 5,stage ~~For~~company) ~~the~~CONSOLIDATED ~~Year~~STATEMENTS ~~ended~~OF ~~1996~~OPERATIONS ~~through~~Cumulative ~~December~~amounts ~~31,~~since Year ended December 31, ~~2000~~inception ~~1999~~2001 ~~1998~~ 2000 1999 -------------- ------------- ------------- -------------- ~~Net~~Revenues ~~revenues~~Advertising $ 16,756 $ ~~23,355~~- $ 8216,~~678~~756 $ ~~147,273~~- ~~Cost~~Product ~~of sales 447~~130,~~072~~517 ~~15,071~~- ~~15,864~~- ~~478~~23,~~813~~355 -------------- ------------- ------------- -------------- ~~Gross~~147,273 ~~profit~~- ~~(loss)~~16,756 ~~(430~~23,~~316)~~355 8Cost of sales 478,~~284~~813 66- 447,~~814~~072 ~~(331~~15,~~540)~~071 -------------- ------------- ------------- -------------- ~~Selling~~Gross &profit ~~marketing~~(loss) ~~expenses 660~~(331,~~933~~540) ~~953,708~~- 34(430,~~554~~316) 18,~~651,787~~284 Research &and development 3,361,201 12,072 1,757,739 1,198,546 ~~266~~Selling and marketing expenses 1,~~563~~651,787 3- 660,~~349~~933 953,~~129~~708 General &and administrative ~~expenses~~3,217,335 137,562 1,315,226 1,340,486 ~~217,318 3,082,585~~ Depreciation &and amortization 1,343,771 370,953 776,824 179,169 10Impairment losses 987,~~406~~372 ~~972~~987,~~818~~372 - - Compensation expense for stock options 2,274,605 161,405 660,590 1,452,610 - ~~2,113,200~~ -----------~~---~~ ------------- ------------- -------------- Total operating expenses 12,836,071 1,669,364 5,171,312 5,124,519 ~~528,841 11,169,519~~ -------------- ------------- ------------- -------------- ~~Operating~~Loss ~~loss~~from operations (13,167,611) (1,669,364) (5,601,628) (5,116,235) Other income (~~462~~expense) Interest income 249,~~027~~105 17 42,425 196,310 Financing charges (217,816) (11413) (216,~~501~~703) - Interest expense (203,~~059~~617) (44,980) (103,399) (9,955) Other expense (4,765) - (2,653) - Loss on disposal of equipment (2,215) - (2,215) - ------------ ------------- ------------- -------------- ~~Other Income and~~ (~~Expenses~~179,308) ~~Interest income 42,425 196,310 7,276 249,088 Financing charges~~ (~~217~~45,~~403~~376) ~~- -~~ (~~217~~282,~~403~~545) ~~Other expense (1~~186,~~953)~~355 ------------ ------------- ~~(1,953)~~------------ ------------- Loss onbefore ~~disposal~~extraordinary ofitem ~~equipment~~ (213,~~215~~346,919) ~~- -~~ (21,~~215~~714,740) ~~Interest expense~~ (~~103~~5,~~399~~884,173) (94,~~955~~929,880) ~~(28~~Extraordinary gain 217,~~158)~~180 ~~(158~~- 217,~~637)~~180 - ------------- ------------- ------------- -------------- ~~Total~~NET ~~Other~~LOSS ~~Income~~(13,129,739) (~~Expenses~~1,714,740) (~~282~~5,~~545~~666,993) ~~186~~(4,~~355~~929,880) Deduction for dividends and accretion (206,~~882~~534,221) - (~~131~~64,~~120~~360) (6,469,861) -------------- ------------- ------------- -------------- ~~Loss~~Net ~~Before~~loss ~~Extraordinary~~attributable ~~Item~~to common stockholders $(519,~~884~~663,~~173~~960) $ (41,~~929~~714,~~880~~740) $(~~482~~5,~~909~~731,353) $(11,~~632~~399,~~179~~741) ============= ============= ============ ============= Net loss per common share - basic and diluted: Before extraordinary item and deduction for dividends and accretion $ (1.31) $ (0.09) $ (0.40) $ (0.41) Extraordinary gain ~~217,180~~0.01 - 0.01 - ~~217,180~~Deduction for dividends and accretion (0.65) - - (0.54) ------------ ------------- ------------- ------------- Net loss per common share attributable to common stockholders $ (1.94) $ (0.09) $ (0.39) $ (0.96) ============ ============= ============ ============= Weighted-average number of shares outstanding - basic and diluted 10,124,031 18,425,537 14,593,455 11,879,919 ============ ============= ============ ============= The accompanying notes are an integral part of these financial statements~~. -6-~~

Logio, Inc. (~~formerly~~a ~~WordCruncher~~development ~~Internet~~stage ~~Technologies~~company) CONSOLIDATED STATEMENTS OF CASH FLOWS Cumulative amounts since Year ended December 31, ~~Inc.)~~inception (a2001 ~~Development~~2000 ~~Stage~~1999 ~~Company)~~------------- ~~Consolidated~~------------- ~~Statements~~------------- of------------- ~~Operations~~Increase (~~Continued~~decrease) in cash and cash equivalents Cash flows from operating activities Net ~~Loss~~loss $(13,129,739) $ (1,714,740) $ (5,~~666~~731,~~993~~353) $ (4,929,880) Adjustments to reconcile net loss to net cash used in operating activities Depreciation & amortization 1,343,771 370,953 776,824 179,169 Impairment losses 987,372 987,372 - - Loss on disposal of equipment 26,215 24,000 2,215 - Bad debt expense 34,169 3,169 31,000 - Financing charge for stock conversion 217,403 - 217,403 - Issuance of common stock, options and warrants for compensation and other expenses 2,945,773 161,405 829,632 1,710,610 Other adjustment 34,661 34,661 - - Extraordinary gain (~~482~~217,~~909~~180) - (11217,~~414~~180) - Changes in assets and liabilities Accounts receivable - - (33,~~999~~433) (736) Interest receivable - - 1,983 8,035 Prepaid expenses and other assets - - 311,199 (311,199) Accounts payable 213,688 (6,917) (85,744) 295,928 Accrued expenses 32,018 4,585 (58,886) 61,827 ------------- ------------- ------------- ------------- Total adjustments 5,617,890 1,579,228 1,775,013 1,943,634 ------------- ~~Deduction~~------------- ~~for~~------------- ~~dividends~~------------- ~~and~~Net ~~accretion~~cash used in operating activities (647,~~360~~511,849) (6135,~~469~~512) (3,~~861~~956,340) - (62,~~534~~986,~~221~~246) -------------- ------------- ------------- -------------- ~~NET~~Cash ~~Loss~~flows ~~Attributable~~from toinvesting ~~Common~~activities ~~Stockholders~~Purchases $of property and equipment (51,~~731~~462,~~353~~392) $- (61,003) (1,260,831) Proceeds from disposal of assets 11,~~399~~066 11,~~741~~066 - - (Increase) $decrease in short-term investments - - 1,462,147 (~~482~~1,~~909~~454,207) $Repayment of notes receivable from related parties (17117,~~949,220~~700) ~~==============~~- ~~=============~~1,955 ~~=============~~110,745 ~~==============~~Notes ~~Net~~receivable ~~loss~~issued ~~per~~to ~~common~~related ~~share~~parties 117,700 - ~~basic~~- ~~and~~(12,500) ~~diluted:~~(Increase) ~~Before~~decrease ~~extraordinary~~in ~~item~~other ~~and~~assets ~~deduction~~- ~~for~~- ~~dividends~~6,011 ~~and~~- ~~accretion~~------------- $------------- ~~(.41)~~------------- $------------- Net cash provided by (~~.41~~used in) $investing activities (~~.08~~1,451,326) $11,066 (1~~.43~~,409,110 (2,616,793) ~~Extraordinary~~------------- ~~gain~~------------- $------------- ~~.02~~------------- $Cash flows from financing activities Overdraft in bank 23,766 23,766 - $- Proceeds from issuance of common stock 1,909,250 - $908,100 ~~.02~~400 ~~Deduction~~Proceeds ~~for~~form ~~dividends~~issuance ~~and~~of ~~accretion~~preferred $stock 6,300,000 - $- 6,300,000 Repurchase of common stock (~~.54~~91) $(91) - $- Cash paid for fees associated with preferred stock issuance (~~.80~~392,100) ~~Net~~- ~~loss~~- ~~per~~(392,100) ~~common~~Proceeds ~~share~~from ~~attributable~~issuance of notes payable to ~~common~~related ~~stockholders~~parties $2,557,395 135,713 1,423,000 685,682 Principal payments on long-term obligations (~~.39~~1,435,045) $ (~~.96~~60,791) $ (~~.08~~813,392) $ (~~2.21~~361,274) ~~==============~~------------- ~~=============~~------------- ~~=============~~------------- ~~==============~~------------- ~~Weighted~~Net ~~Average~~cash ~~Number~~provided ofby ~~Shares~~financing ~~Outstanding~~activities 8,963,175 98,597 1,517,708 6,232,708 ------------- ~~Basic~~------------- ------------- ------------- Net increase (decrease) in cash and ~~Diluted~~cash 14equivalents - (25,~~593~~849) (1,~~455~~029,522) 11629,~~879~~669 Cash and cash equivalents at beginning of period - 25,~~919~~849 61,~~100~~055,~~679~~371 8425,~~122~~702 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period $ - $ - $ 25,~~053~~849 $ 1,055,371 ============== ============= ============= ============== ~~The~~Supplemental ~~accompanying~~disclosures ~~notes~~of ~~are~~cash anflow ~~integral~~information: ~~part~~Cash paid during the period for interest $ 182,838 $ 21,243 $ 29,888 $ 4,584 Cash paid during the period for income taxes - - - - Non-cash financing activities: Purchase of ~~these~~equipment ~~financial~~with ~~statements.~~lease obligations $ 1,059,195 $ - $ 241,018 $ 766,987 Unrealized gain on securities 7,940 - - 7,940 Issuance of common stock for debt conversion 39,000 - 26,000 13,000 Payment of stock dividend to preferred shareholders 64,360 - 64,360 -

Logio, Inc. (~~formerly WordCruncher Internet Technologies, Inc.) (~~a ~~Development~~development ~~Stage~~stage ~~Company~~company) ~~Consolidated~~CONSOLIDATED ~~Statement~~STATEMENT ofOF ~~Stockholders~~STOCKHOLDERS' ~~Equity~~EQUITY ~~For the~~ Years ~~Ended~~ended December 31, 2000, ~~and~~ 1999, ~~and~~1998, ~~From~~1997, ~~Inception~~and onperiod from November 5, 1996 (inception) to December 31, ~~2000~~1996 ~~Deficit~~Accumu- ~~Accumulated~~lated ~~Accumulated~~Deficit ~~Additional~~other ~~Other~~accumulated ~~During Price Per~~ Preferred Stock Common Stock ~~Paid~~Additional compre- during the Price --------------- ----------------- paid-in ~~Comprehensive~~Treasury ~~Development~~hensive development Date ~~Share~~share Shares Amount Shares Amount ~~Capital~~capital ~~Income~~stock ~~Stage~~income stage ------ ---- --- ------- --------- ---------- -------~~----~~ ---------- --------~~---~~ ----------- ------------ Balances at November 5, 1996 - $ - - $ - - $ - $ - $ - $ - $ - Net loss ~~for~~- ~~the year ended December 31, 1996~~ - - - - - - - - - ------- -- ----- ----- ---- ------- ---------- --------~~---~~ ----------- ------------ 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~~licence agreement Feb-97 - - - 110,742 111 (111) - - ~~Issuance of stock for services performed Aug~~-97 ~~1.092 - - 37,875 38 41,337 - -~~ Issuance of stock to employees for services Sep-97 0.333 - - 252,450 252 83,898 - - ~~Net loss for the year ended December 31, 1997~~ - ~~- - - - - - - (335,217) --------- ---------- ----------- ---------- ----------- ---------- ------------ Balance at December 31, 1997 - - - - 1,091,067 1,091 125,184 - (335,217)~~ 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~~Aug-9897 1.90092 - - 3937,~~000~~875 3938 7041,~~161~~337 - - ~~Issuance of stock for software technology Oct~~-98 ~~1.80 - - 13,000 13 23,387 - - Issuance of stock for insurance overage Nov-98 1.00 - - 25,000 25 24,975 - -~~ Net loss for the year ~~ended~~- ~~December 31, 1998~~ - - - - - - - - (~~482~~335,~~909~~217) ------- -- ----- ----- ---- ------- ---------- --------~~---~~ ----------- ------------ ~~Balance~~Balances at December 31, ~~1998~~1997 - - - - ~~11,877,002 11,877~~ 1,~~247~~091,~~334~~067 ~~- (818,126) Issuance of warrants for consulting services Nov-98 - - - - - 258,000 - - Issuance of preferred stock for cash, net of offering costs Feb-99~~ 1,~~000~~091 6125,~~100~~184 61 - - 5(335,~~719,839~~217) - - Issuance of preferred stock for cash, net of offering costs Mar-99 1,000 200 2 - - 187,998 - - 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 for compensation Jan-Dec-99 - - - - - 1,430,610 - - The accompanying notes are an integral part of these financial statements. 9(continued)

Logio, Inc. (~~formerly WordCruncher Internet Technologies, Inc.) (~~a ~~Development~~development ~~Stage~~stage ~~Company~~company) ~~Consolidated~~CONSOLIDATED ~~Statement~~STATEMENT ofOF ~~Stockholders~~STOCKHOLDERS' ~~Equity~~EQUITY ~~For~~- ~~the~~CONTINUED Years ~~Ended~~ended December 31, 2000, ~~and~~ 1999, ~~and~~1998, ~~From~~1997, ~~Inception~~and onperiod from November 5, 1996 (inception) to December 31, ~~2000~~1996 ~~Deficit~~Accumu- ~~Accumulated~~lated ~~Accumulated~~Deficit ~~Additional~~other ~~Other~~accumulated ~~During Price Per~~ Preferred Stock Common Stock ~~Paid~~Additional incompre- ~~Comprehensive~~during ~~Development~~the ~~Date~~Price ~~Share Shares Amount Shares Amount Capital Income Stage~~ ---------- -----~~-----~~ --------- ---------- paid-~~----------~~in ~~----------~~Treasury ~~-----------~~hensive ~~----------~~development ~~------------~~Date ~~Accretion~~share ofShares ~~intrinsic~~Amount ~~value~~Shares ofAmount ~~preferred~~capital stock ~~Feb-Dec-99~~income -stage - - - - ~~6,131,944~~ - ~~(6,131,944) Dividends on preferred stock Feb~~-~~Dec-99~~ - - - - - ~~337,917~~ - ~~(337,917) Unrealized gain on marketable securities~~ - - - - - - - ~~7,940~~ - ~~Net loss for the year ended December 31, 1999~~ - - - - - - - - ~~(4,929,880)~~ --------- -------~~---~~ ----------- ---------- ----------- ---------- -~~-----------~~ ~~Balance December 31, 1999 - - 6,300 63 11,891,002 11,891 15,362,028 7,940 (12,217,867)~~ Issuance of ~~common~~ stock for ~~exercise~~cash ~~options Jan~~Jul-0098 04.1017 - - 2120,000 2120 ~~198~~499,880 - - ~~Issuance of common stock for exercise of warrants Jan~~-00 ~~5.00~~Reverse -acquisition -and ~~100,000~~reorganization ~~100~~adjustment ~~499,900~~ Jul-98 - ~~Conversion of preferred stock to common stock Feb~~-00 - (29,~~500)~~885,435 ~~(25) 248~~9,~~016~~886 ~~248~~ (~~223~~8,550) - - ~~Issuance of common stock for exercise options Mar~~-00 ~~0.10 - - 12,000 12 1,188 - -~~ Issuance of ~~common~~ stock for ~~exercise~~cash ~~of warrants Mar~~Jul-0098 70.00725 - - 58690,000 58690 ~~405~~499,~~942~~310 - - ~~Conversion of preferred stock to common stock Mar~~-00 ~~- (3,800) (38) 376,984 377 (339) - -~~ Issuance of ~~common~~ stock for ~~reset~~debt ~~shares~~conversion ~~Mar~~Jul-0098 -0.96 - - ~~727~~13,~~756~~500 ~~728~~13 ~~(728) - - Dividends on preferred stock Jan-Mar-00 - - - - - 64~~12,~~360~~987 - ~~(64,360) Issuance of common stock for preferred dividends paid Mar~~-00 - ~~- - 61,650 62 (62) - -~~ Issuance of ~~common~~ stock for ~~exercise~~services ~~options Apr-~~Oct-0098 01.1090 - - 739,000 739 ~~693 - - Unrealized gain on marketable securities Jan-Sep-00 - - - - - - 6~~70,~~071~~161 - ~~Net realized gain on marketable securities Jan~~-~~Jun-00~~ - ~~- - - - - (14,011) -~~ Issuance of stock for ~~conversion~~software ~~0.16-~~technology ~~of notes payable Sep~~Oct-0098 01.~~251~~80 - - 413,~~315,~~000 ~~4,315~~13 123,~~058,364~~387 - - - Issuance of stock for ~~conversion~~insurance ofcoverage ~~notes payable to Sep & 0.81~~Nov-98 ~~shareholders Oct-~~1.00 ~~0.82~~ - - ~~626~~25,~~422~~000 ~~626~~25 ~~511~~24,~~040~~975 - - ~~Issuance of warrants for consulting May~~ - ~~services Dec-00 - - - - - 169,042 - - Issuance of stock options to employees Jan - for compensation Dec-00 - - - - - 660,590 - -~~ Net loss for the year ~~ended~~- ~~December 31, 2000~~ - - - - - - - - (5482,~~666,993~~909) ------- -- ----- ----- ----- ------- ---------- --------~~---~~ ----------- ------------ Balances at December 31, ~~2000~~1998 - - - $ - 1811,~~425~~877,~~830~~002 ~~$ 18~~11,~~426~~877 ~~$18~~1,~~731~~247,~~993~~334 $- - $(17818,~~949,220~~127) ~~========= ========== =========== ========== =========== ========== ============ The accompanying notes are an integral part of these financial statements. 9~~(Continued)

Logio, Inc. (~~Formerly~~a ~~WordCruncher~~development ~~Internet~~stage ~~Technologies, Inc.~~company) (aCONSOLIDATED ~~Development~~STATEMENT ~~Stage~~OF ~~Company)~~STOCKHOLDERS' ~~Consolidated~~EQUITY ~~Statements~~- ofCONTINUED ~~Cash~~Years ~~Flows~~ended ~~From~~December ~~inception~~31, on2000, ~~November~~1999, 51998, ~~For~~1997, ~~the~~and ~~Year~~period ~~ended~~from November 5, 1996 ~~through~~(inception) to December 31, ~~December~~1996 ~~31,~~Accumu- ~~2000~~lated ~~1999~~Deficit ~~1998~~other ~~2000~~accumulated Preferred Stock Common Stock Additional compre- during the Price ------------- --~~-----------~~ ------------- ----~~----------~~ ~~Cash Flows From Operating Activities Net income (loss) $ (5,731,353) $ (4,929,880) $ (482,909) $ (11,479,360) Non~~paid-~~cash~~in ~~items:~~Treasury ~~Depreciation~~hensive &development ~~amortization~~Date ~~776,824~~share ~~179,169~~Shares ~~10,406~~Amount ~~972,818~~Shares ~~Loss~~Amount oncapital ~~disposal~~stock ofincome ~~equipment~~stage ~~2,215~~ - - ~~2,215 Bad debt expense 31,000~~ - - ~~31,000 Financing charge for stock conversion 217,403~~ - - ~~217,403 Stock issued for services 660,590 1,452,610 95,200 2,333,925 Warrants issued for services 169,042 258,000~~ - ~~427,042 Extraordinary gain (217,180)~~ - - ~~(217,180) (Increase)/decrease in current assets: Prepaid Expenses 311,199 (311,199)~~ - - ~~Accounts receivable (33,433) (736)~~ - ~~(34,169) Interest receivable 1,983 8,035 (7,141)~~ - ~~Increase/(decrease) in current liabilities: Accounts payable (85,744) 295,928 4,251 220,605 Accrued expenses (58,886) 61,827 19,063 27,433~~ ------- ------- ----------~~---~~ -------~~------~~ ----------~~----~~ ~~Net Cash Used in Operating Activities (3,956,340) (2,986,246) (361,130) (7,498,268)~~ --------~~------~~ ------------- ------------ Issuance of warrants for consulting services Jan-99 - - - - -~~---------~~ ~~Cash~~258,000 ~~Flows~~- ~~from~~- ~~Investing~~- ~~Activities~~Issuance ~~Cash~~of ~~paid~~preferred stock for ~~property~~cash, ~~equipment~~net ~~and~~of ~~software~~offering ~~technology~~costs ~~(61,003)~~Feb-99 (1,~~260,831)~~000 ~~(18~~6,~~627)~~100 ~~(1,340,461)~~61 ~~Increase)/Decrease~~- ~~in short~~-~~term~~ ~~investments 1~~5,~~462~~719,~~147~~839 ~~(1,454,207)~~- - - ~~Cash~~Issuance ~~received~~of onpreferred ~~notes~~stock ~~receivables~~for 1cash,~~955~~ ~~110,745~~net 5of offering costs Mar-99 1,000 ~~117,700~~200 ~~Cash~~2 ~~advanced~~- on- ~~notes~~187,998 ~~receivable~~- - ~~(12,500)~~- ~~(23,200)~~Issuance ~~(117,700)~~of ~~Cash~~common ~~paid~~stock for ~~deposits~~exercise ~~6,011~~of options Jun-99 ~~(5,076)~~0.11 - -~~-------------~~ 2,000 2 21,998 -~~------------~~ -~~------------~~ -~~-------------~~ ~~Net~~Issuance ~~Cash~~of ~~Provided~~common bystock ~~(Used~~for ~~in)~~exercise ~~Investing~~of ~~Activities~~options ~~1,409,110~~Aug-99 ~~(2,616,793)~~0.10 ~~(41,903)~~- (1- 4,~~340,461)~~000 ~~--------------~~4 396 -~~------------~~ -~~------------~~ -~~-------------~~ ~~Cash~~Issuance ~~Flows~~of ~~from~~common ~~Financing~~stock ~~Activities~~for ~~Cash~~conversion ~~received~~of ~~from~~debt ~~stock~~Dec-99 ~~issuance~~3.25 ~~908,100~~- ~~6,300,400~~- 18,000~~,000~~ 8 25,~~209,250~~992 ~~Payment~~- - - Issuance of stock ~~issuance~~options ~~fees~~to -employees ~~(392,100)~~for Jan - ~~(392,100)~~compensation ~~Cash~~Dec ~~received~~99 ~~from~~- ~~debt~~- ~~financing~~- - - 1,~~423~~430,~~000~~610 ~~685,682~~- ~~13,000~~- ~~2,421,682~~- ~~Principal~~Accretion ~~payments~~of onintrinsic ~~long~~value of preferred Feb-~~term~~ ~~debt~~stock ~~(813,392)~~Dec ~~(361,274)~~99 ~~(194~~- - - - - 6,~~634)~~131,944 - - (16,~~374~~131,~~254~~944) Dividends on Feb - preferred stock Dec 99 - - - - - 337,917 - - (337,917) Unrealized gain on short-term investments - - - - - - - - 7,940 - Net Loss for the year - - - - - - - - - (4,929,880) ------- ------ ---------- ---- ~~Net Cash Provided by Financing Activities 1,517,708 6,232,708 818,366 8,864,578~~ --- ----------- --------~~-----~~ ------------- -------------- ~~Increase/(decrease)~~Balances inat ~~Cash~~December (131,~~029,522)~~ ~~629,669~~1999 ~~415,333~~- 25- 6,~~849~~300 ~~The~~63 ~~accompanying~~11,891,002 ~~notes~~11,891 ~~are~~15,362,028 an- ~~integral~~7,940 ~~part~~(12,217,867) ~~of these financial statements. -10-~~(Continued)

Logio, Inc. (~~Formerly~~a ~~WordCruncher~~development ~~Internet~~stage ~~Technologies~~company) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED Years ended December 31, ~~Inc.)~~2000, (a1999, ~~Development~~1998, ~~Stage~~1997, ~~Company)~~and ~~Consolidated~~period ~~Statements~~from ofNovember ~~Cash~~5, ~~Flows~~1996 (~~Continued~~inception) ~~Cash~~to ~~and~~December ~~Cash~~31, ~~Equivalents~~1996 atAccumu- ~~Beginning~~lated ofDeficit ~~Period~~other ~~1,055,371~~accumulated ~~425,702~~Preferred ~~10,369~~Stock Common Stock Additional compre- during the Price --------------- ----------------- paid-in Treasury hensive development Date share Shares Amount Shares Amount capital stock income stage ------ ------- ------- ------- ~~Cash~~---------- ~~and~~------- ~~Cash~~----------- ~~Equivalents~~-------- at-------- ~~End~~------------- Issuance of ~~Period~~common $stock 25for exercise of options Jan 00 0.10 - - 2,~~849~~000 $2 1198 - - - Issuance of common stock for exercise of warrants Jan 00 5.00 - - 100,~~055,371~~000 $100 ~~425~~499,~~702~~900 $- - - Conversion of preferred stock to common stock Feb 00 - (2,500) (25) 248,~~849~~016 ~~==============~~248 ~~=============~~(223) ~~=============~~- ~~==============~~- ~~Supplemental~~- ~~Cash~~Issuance ~~Flow~~of ~~Information:~~common ~~Cash~~stock ~~paid~~for exercise of options Mar 00 0.10 - - 12,000 12 1,188 - - - Issuance of common stock for ~~interest~~exercise $of 29warrants Mar 00 7.00 - - 58,~~888~~000 $58 4405,~~584~~942 $- 29- - Conversion of preferred stock to common stock Mar 00 - (3,~~888~~800) $(38) 79376,~~016~~984 ~~Cash~~377 ~~paid~~(339) - - - Issuance of common stock for ~~income~~reset ~~taxes~~shares $Mar 00 - $- - $727,756 728 (728) - $- - ~~Non~~Dividends on Jan -~~cash~~ ~~financing~~preferred ~~transactions:~~stock ~~Purchase~~Mar of00 ~~equipment~~- ~~with~~- ~~lease~~- ~~obligations~~- $- ~~241~~64,~~018~~360 $- ~~766~~- (64,~~987~~360) $Issuance of common stock for preferred dividends paid Mar 00 - $- 1- 61,~~059~~650 62 (62) - - - Issuance of common stock for exercise April & of options Oct 00 0.10 - - 7,~~195~~000 7 693 - - - Unrealized gain on marketable Jan - securities $Sep 00 - $- 7- - - - - 6,~~940~~071 $- Net realized gain on marketable Jan - $securities 7Jun 00 - - - - - - - (14,~~940~~011) - Issuance of ~~common~~ stock for ~~debt~~ conversion $of notes Sep - 0.16 - payable Oct 00 0.251 - - 4,315,000 4,315 1,~~574~~058,~~345~~364 $- 26- - Issuance of stock for conversion of notes payable to Sep & 0.81 - shareholders Oct 00 0.82 - - 626,~~000~~422 $626 13511,~~000~~040 $- 1- - Issuance of warrants for consulting May - services Dec 00 - - - - - 169,~~613~~043 - - - Issuance of stock options to employees for Jan- compensation Dec 00 - - - - - 660,~~345~~590 ~~Payment~~- - - Net loss for the year ended December 31, 2000 - - - - - - - - - (5,666,993) ------- ------- ---------- ------- ----------- -------- -------- ------------- Balances at September 30, 2000 - - - - 18,425,830 18,426 18,731,993 - - (17,949,220) ------- ------- ---------- ------- ----------- -------- -------- ------------- Repurchase of stock ~~dividend~~Feb-01 $- 64- - - - - (91) - - Issuance of stock options to employees for Jan - compensation Dec 01 - - - - - 161,~~360~~405 $- - - Net loss for the year ended December 31, 2001 - - - - - - - - - (1,714,740) ------- ------- ---------- ------- ----------- -------- -------- ------------- - - - $ - 18,425,830 $18,426 $18,893,398 $ (91) $ - $(19,663,960) ======= ======= ========== ======= =========== ======== ======== ============= The accompanying notes are an integral part of this financial statement

18 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies consistently applied in the presentation of the accompanying consolidated financial statements follows. 1. The Company ----------- Logio, Inc., formerly WordCruncher Internet Technologies, Inc., (the Company) is a development stage company, historically engaged in the development and marketing of a focused Internet directory and search engine intended to service the needs of the business professional. The Company has temporarily ceased the development and operations of its products and has not produced any significant revenues to date. The Company was incorporated on November 5, 1996 in the State of Utah under the name of Redstone Publishing, Inc. The name was changed from Redstone Publishing, Inc. to WordCruncher Publishing Technologies, Inc. in early 1997. 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 was 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 Salt Lake City, 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. On February 8, 2001, Pacific WebWorks, Inc. completed its acquisition of Logio, Inc., in a stock-for-stock exchange. Pacific WebWorks exchanged 2,800,000 shares of its common stock for 18,425,830 shares of common stock. This transaction was accounted for on the purchase method of accounting using generally accepted accounting principles and valued at approximately $2,450,000 representing the fair value of the Pacific WebWorks shares on the date of exchange. Logio's results of operations are included in the Pacific WebWorks, Inc. consolidated results of operations from the acquisition date to December 31, 2001 and the fair value of its assets and liabilities have also been recorded on the acquisition date and are included in the Pacific WebWorks, Inc. consolidated balance sheet. The Company conducts its business within one industry segment. 19 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 2. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing the financial statements are reasonable and prudent; however, actual results could differ from these estimates. 3. Cash Equivalents ---------------- The Company considers all highly liquid debt instruments with maturity of three months or less when purchased to be cash equivalents. 4. 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. 5. Fair value of financial instruments ----------------------------------- The fair value of the Company's cash and cash equivalents, receivables, accounts payable, accrued liabilities and capital lease obligations approximate carrying value based on their effective interest rates compared to current market prices. 6. Impairment of Long-Lived and Intangible Assets ---------------------------------------------- The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires that impairment losses be recognized on such assets when indicators of impairment are discovered and estimated undiscounted future cash flows to be generated from those assets are less than their carrying value. During the nine months ended September 30, 2001, as a result of certain events (Notes C and D) and management's assessment of impaired assets due to the Company's inability to generate cash flows, the Company recorded $987,372 in losses relating to the impairment of certain long-lived assets. 20 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. Income Taxes ------------ The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. No provision for income taxes has been recorded due to net operating loss carry forwards totaling approximately $11,850,000 that will be offset against future taxable income, if any. These carry forwards begin to expire in 2013. No tax benefit has been reported in the financial statements because the Company has not yet proven it can generate taxable income. Deferred tax assets and the valuation account are as follows at December 31, 2001 and 2000: 2001 2000 ------------- ------------- Deferred tax asset: NOL carry forward $ 3,555,000 $ 2,951,162 Valuation allowance (3,555,000) (2,951,162) ------------- ------------- Total $ - $ - ============= ============= 8. Net Loss Per Share ------------------ The computation of net loss per share of common stock is based on the weighted average number of shares outstanding during each period presented. Potentially issuable common shares would have been excluded from the calculation of diluted loss per share because their effects were anti-dilutive. 9. Stock Split and Change in Par Value ----------------------------------- In July 1998, the Company authorized a three for one forward stock split. These financial statements have been retroactively restated to reflect this split. Pursuant to the reverse merger with Dunamis, the Company's par value changed to $0.001 which has also been retroactively applied. 21 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 10. Development Stage Company ------------------------- The Company is a development stage company as defined in Financial Accounting Standards Board Statement No. 7. 11. Short-Term Investments ---------------------- Short-term investments held during 2000 are comprised of various governmental securities, commercial paper and other securities maturing 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. During December 2000, all remaining short-term investments were liquidated and the Company recorded a gain of $14,011 on these securities. 12. Recently Issued Accounting Pronouncements ----------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations" and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which establishes new standards for the treatment of goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001. SFAS 142 prescribes that amortization of goodwill will cease as of the adoption date. The Company does not believe that SFAS 141 or 142 will have a material impact on its financial position and results of operations. In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS replaces Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 144 prescribes, among other things, an accounting model for long-lived assets to be disposed of including sales and discontinued operations. The Company is evaluating the impact of this pronouncement on its financial position and results of operations in future filings. 22 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE B - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a limited operating history and has sustained losses since inception. In addition the Company had negative cash flows from operations of $135,512, $3,956,340 and $2,986,246 during the years ended December 31, 2001, 2000, and 1999 respectively. The company had negative working capital of $844,018 at December 31, 2001 and $461,437 at December 31, 2000. As a result, the Company has relied significantly upon equity and debt funding, including loans from its parent company, to support certain of its development. In March 2001, the Company became unable to make payment on its payables and certain of its capital lease agreements related to hardware and infrastructure. As a result of these defaults, the Company's most significant debtor obtained possession of the equipment under its lease agreements in May of 2001 and filed a complaint for the full amount of the lease balance (see Note H). These events have caused impairments related to the loss of the equipment under capital leases and other long-lived assets related to the equipment to be recorded during second quarter 2001 (see Note D). Impairment losses recorded for these events totaled $987,372 for the nine months ended September 30, 2001. The Company may not be able to generate positive cash flows from operations in the foreseeable future as it is unable to obtain funding from traditional sources, has ceased operations and development and has no cash balances. In addition to the lease defaults approximating $440,000, the Company is unable to pay liabilities approximating $391,500 to various professional services firms, vendors, the Company's parent and an overdraft in a bank. Based upon these facts, the Company may be required to seek bankruptcy protection. There is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 23 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE C - PROPERTY AND EQUIPMENT Property and equipment includes the following: December 31, Estimated 2001 2000 useful lives ------------ ------------ ------------ Computer Equipment $ 125,691 $ 1,527,077 3-5 Furniture and fixtures 34,870 58,175 3-7 Software 12,083 872,011 2-3 ------------ ------------ 172,644 2,457,263 Less Accumulated Depreciation (80,853) (972,081) ------------ ------------ $ 91,791 $ 1,485,182 ============ ============ In February 2001, in conjunction with the acquisition of the Company by Pacific WebWorks, fixed assets were adjusted $266,795, along with corresponding accumulated depreciation to reflect their estimated fair value as cost. NOTE D - IMPAIRMENT LOSSES As discussed in Note B, in March 2001, the Company was unable to make payment on some of its capital lease obligations. The Company transferred the equipment back to the vendor in May 2001. The default on these and other capital lease obligations, approximating $440,000 at December 31, 2001, results in impairment losses of $122,685, representing cash down payments by Logio at the beginning of the leases that were being amortized over the life of the leases and $788,847 in equipment under capital leases and related software and equipment. The leases would have expired through December 2002. In January 2001, the Company was notified by a software vendor that, due to its default on financing arrangements, the software license was terminated. The termination of the software license represents an impairment of $75,840 to the net asset and the payable in default of approximately $100,000 is included in payables past due. 24 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE E - PREFERRED STOCK On January 19, 1999, the Board of Directors organized a Series A Convertible Preferred Stock with 15,000 shares authorized. The preferred stock has a stated value of $1,000 and a cumulative dividend of 6%. The Company issued 6,300 shares of the Series A Convertible Preferred Stock in February and March 1999. Under the terms of the underlying agreement, the shares were convertible into 624,999 shares of common stock at a conversion rate of $10.08 per share, upon registration of the common stock. The conversion price was based on the average closing price of the Company's common stock during the 20 period immediately preceding the closing of the preferred issuance. The preferred shares hold no voting rights and up to 20% of the preferred stock was available for conversion into common shares during each month following the effective date of the Company's prospectus. The preferred stock included a "lock-out" provision which prevented the preferred shareholders from converting into common stock for a period of five months after the issuance of the preferred stock. Preferred shareholders had a limited right to receive additional shares of common stock at certain times if the market price of the common stock was less than $12.096 per share. On the tenth trading day after each of July 8, 1999, October 6, 1999 and February 13, 2000, preferred shareholders were entitled to receive the number of shares of common stock equal to one-third of the purchase price for their Series A Preferred Stock times the difference between the ten day average closing price of the common stock and $12.096, divided by the ten day trading average. On the dates that the Series A Convertible Stock were issued, the intrinsic values of the beneficial conversion feature totaled $10,995,740 and $31,944, respectively. The intrinsic value was calculated as the difference between the conversion price and the market value of the common stock on the day of the preferred stock issuance, times the number of common shares into which the preferred stock was convertible. The proceeds received from the sale of the convertible instruments were $6,100,000 and 200,000, respectively. Since the intrinsic values of the beneficial conversion feature are greater than the proceeds, the discounts assigned to the convertible instruments are $6,100,000 and $31,944 respectively, creating a total discount of $6,131,944. This amount was being accreted over a five month period, which is the period to the security's earliest conversion date of November 30, 1999, and is reflected in the statement of operations as a deduction for dividends and accretion. Offering costs related to the issuance of Preferred Stock total $392,100 and were netted with the proceeds for reporting purposes. Cumulative dividends totaled $337,917 as of December 31, 1999. 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 in 2000 representing a six percent cumulative dividend. 25 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE F - STOCKHOLDERS' EQUITY 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, at which point the investors had not released the funds and are in default of the agreement. Conversion of notes payable to common stock ------------------------------------------- In October 2000, notes payable totaling $170,000 were converted to 1,150,000 shares of the Company's common stock. The liability was converted at $0.16 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 recorded $83,700 as financing charges for this transaction. In September 2000, the Company was advanced a total of $605,976 from various parties to fund the settlement of liabilities in the form of notes payable. Also in September 2000, the Company converted the notes 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 recorded $88,576 as financing charges for this transaction. In September 2000, a corporation assumed $130,045 in liability from one of the Company's vendors. The Company then 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 corporation. 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 recorded $45,127 as financing charges for this transaction. As discussed in Note I, in September 2000, the Company converted $511,666 of notes payable and interest to shareholders and officers 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. Acquisition by Pacific WebWorks, Inc. ------------------------------------- As discussed in Note A, in February of 2001, the Company was effectively acquired by Pacific WebWorks, Inc. in a stock-for-stock exchange. Pacific WebWorks exchanged 2,800,000 shares of its common stock with the Logio common share holders for 18,425,830 shares of their common stock. Pursuant to this acquisition, dissention rights were offered to the Logio shareholders previous to the effective date of acquisition and 320 shares were repurchased as treasury stock by Logio, Inc. for a total of $91. 26 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE G - STOCK OPTIONS AND WARRANTS On April 18, 2000, the Company's Board of Directors adopted the Logio, Inc. Equity Incentive Plan. The Plan allows for the granting of awards in the form of stock options, stock appreciation rights, and 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. The Plan was approved by the Company's stockholders in June 2000. In February 2001 and immediately previous to the completion of the acquisition of Logio, Inc. by Pacific WebWorks, Inc., approximately 90,000 Logio, Inc. options were accelerated in their vesting terms in accordance with the terms of the grant agreements. This acceleration resulted in a $161,405 charge for the remaining, unearned intrinsic value of the options accelerated. Also, in February 2001, and in conjunction with the acquisition of the Company by Pacific WebWorks, Inc., the board of directors of the Company's Parent converted Logio options to Pacific WebWorks options at a rate of one Pacific WebWorks option for every 6.6 Logio option held on the date the acquisition was effectively completed (February 8, 2001). The Company has adopted only the disclosure provisions of the Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" (FAS 123). Therefore, the Company accounts for stock-based compensation under the Accounting Principles Board Opinion No. 25, under which approximately $161,405, $660,590 and $1,452,610 has been recognized for the years ended December 31, 2001, 2000 and 1999, respectively for compensation earned related to options issued at exercise prices that were less than the fair market value of the Company's stock on the date of grant. Had compensation cost for the stock-based compensation been determined based upon the fair value of options at the grant date consistent with the methodology set forth by FAS 123, the Company's net loss and loss per share would have increased to the following proforma amounts: 2001 2000 1999 ------------- ------------- ------------- Proforma net loss As reported $ (1,714,740) $ (5,731,353) $(11,399,741) Pro forma (1,714,740) (6,492,228) (11,453,549) Net loss per common share- Basic and fully diluted As reported $ (0.09) $ (0.39) $ (0.96) Pro forma (0.09) (0.44) (0.96) 27 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE G - STOCK OPTIONS AND WARRANTS - CONTINUED The fair value of these options was estimated at the date of grant using the Black-Scholes American option-pricing model with the following weighted-average assumptions for 2000 and 1999: expected volatility of 157 percent and 120 percent, respectively; risk free interest rate of 6.5 percent and 6.5 percent, respectively; and expected life of 1.5 to 3.5 years. The weighted average fair value of options granted is $1.41 and $4.75 in 2000 and 1999 respectively. Option pricing models require the input of highly sensitive assumptions, including expected stock volatility. Also, the Company's stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. Information with respect to the Company's stock options at December 31, 2001 is as follows: Weighted- average Stock Exercise exercise options price price ------------ ------------ ------------ Outstanding at January 1, 1999 - $ - $ - Granted 1,079,000 0.10-5.54 1.79 Exercised (4,000) 0.10 0.10 Forfeited - - - ------------ ------------ ------------ Outstanding at December 31, 1999 1,075,000 0.10-5.54 1.79 Granted 1,283,000 0.63-7.78 1.29 Exercised (21,000) 0.10 0.10 Forfeited (1,048,334) 0.10-7.78 2.40 ------------ ------------ ------------ Outstanding at December 31, 2000 1,288,666 0.10-5.88 2.21 Granted - - - Exercised - - - Forfeited - - - Accelerated/Converted (1,288,666) 0.10-5.88 2.21 ------------ ------------ ------------ - $ - $ - ============ ============ ============ In May 2000, the Company issued warrants to purchase 400,000 shares purchase 400,000 shares of common stock to its investor relations consultant. A total of 200,000 of these warrants were issued with an exercise price of $4.00 per share and 200,000 warrants were issued with an exercise price of $3.00 per share. The fair value of $0.42 per share was estimated as the value of the services performed using the Black Scholes model. Consulting expenses recorded for the value of these warrants totaled $169,042 during the year ended December 31, 2000. 28 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE G - STOCK OPTIONS AND WARRANTS - CONTINUED These warrants were cancelled in conjunction with the acquisition of the Company by Pacific WebWorks, Inc. In January of 1999, and in conjunction with the sale of Series A Convertible Preferred Stock, 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 $5.50 per share. The fair value of $1.29 per share was estimated as the value of the services performed. Consulting expenses recorded for the value of these warrants totaled $258,000 during the year ended December 31, 1999. These warrants were cancelled in conjunction with the acquisition of the Company by Pacific WebWorks, Inc. The Company has granted 250,449 warrants in connection with the sale of Preferred Stock in 1999. The warrants have exercise prices ranging from $7 per share to $8.40 per share and they expire in February 2004. Logio has no options issued or outstanding as of December 31, 2001. NOTE H - COMMITMENTS AND CONTINGENCIES Threatened litigation --------------------- As previously discussed, in March 2001, the Company was unable to make payment on some of its capital lease obligations. The Company transferred the equipment back to the vendor in May of 2001. The default on these and other capital lease obligations totals $440,174. These leases have been classified as current liabilities in accordance with the terms of default under the lease agreements. The creditor filed a complaint pursuant to the default seeking the full amount of the default plus legal fees. This matter was dismissed without prejudice in the State of Minnesota on September 24, 2001. The Company is also in default of approximately $100,000 to a software corporation for a payable that is past due. The Company is involved in other various disputes in the normal course of business. It is not possible to state the ultimate liability, if any, in these matters. In the opinion of management, any resulting litigation will have no material effect on the financial position and results of operations of the Company in excess of amounts recorded. 29 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED Line-of-Credit and Intercompany Agreement ----------------------------------------- The Company has entered into a Line-of-Credit and Intercompany Agreement with Pacific WebWorks, Inc. (its only shareholder and parent company). The Line-of-Credit Agreement, among other things, allows for the advancement of up to $120,000 as needed at an interest rate of 12%, is collateralized by substantially all business assets of the Company, and is payable on demand. The balance of this note exceeds the Line-of-Credit agreement as of December 31, 2001 and totals $135,713 at that date. The Company is also charged $1,067 monthly under the Intercompany Agreement for management related fees and records income of $1,422 monthly for rental of certain of its fixed assets to the parent company. The equipment may be rented by Pacific WebWorks until such time as Logio, Inc. re-commences development of its Internet products. Intercompany transactions under the Line-of Credit and Intercompany Agreement during the year ended December 31, 2001 are as follows: Management fee expense $ 12,804 Rental Income (17,064) Interest expense 12,902 Other (1,422) ---------- Net intercompany transactions $ 7,220 ========== 30 Logio, Inc. A wholly owned subsidiary of Pacific WebWorks, Inc. (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 NOTE I - SETTLEMENT OF LIABILITIES During the year ended December 31, 2000, the Company settled $558,098 of vendor payables for $340,918 in cash and stock. These settlements resulted in $217,181 of forgiven debt which was recorded as an extraordinary gain. In June 2000, the Company was loaned $500,000 from three principle shareholders and officers of the Company in exchange for notes payable bearing interest at 8% annually. Principal and interest were due in full on July 1, 2001. The note was not collateralized. On September 26, 2000, the Company converted the notes and $11,666 of accrued interest into 626,422 shares of the Company's common stock at $0.81 and $0.82 per share, representing prices in excess of fair market value ($0.3125) of the common shares on the date of conversion. The Company was also released from approximately $460,000 of other long-term debt commitments with certain of its vendors that would have expired through April 2002 by obtaining releases and giving consideration through settlements as discussed above. 31 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS As previously reported in March 2001, our Board of Directors authorized the engagement of Chisholm & Associates, CPA's as our independent certified public accountants for the fiscal year ended December 31, 2000, and concurrently, dismissed Grant Thornton LLP, which had served as our independent accountants since February 2000. As previously reported in February 2000, our Board of Directors authorized, the engagement of Grant Thornton LLP as our independent certified public accountants for the fiscal year ended December 31, 1999, and concurrently, dismissed Crouch Bierwolf & Chisholm, P.C., which had served as our independent accountants since 1998. PART III -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) Our executive officers and directors and their respective ages and positions are set forth below. Biographical information for each of those persons is also presented below. Our bylaws require three directors who serve until our next annual meeting or until each is succeeded by another qualified director who has been elected. Our executive officers are chosen by our Board of Directors and serve at its discretion. There are no existing family relationships between or among any of our executive officers or directors. Name Age Position ------------------------------ -------- ----------------------------------- Kenneth W. Bell 52 President, Secretary/Treasurer and Director Thomas R. Eldredge 33 Director James W. Johnston 49 Director Kenneth W. Bell: Mr. Bell joined Logio as Senior Vice President, Chief Financial Officer, Secretary and Treasurer and Director in February 1997. On April 18, 2000, the Board of Directors released Mr. Bell from his responsibilities as Secretary. On June 2, 2000, our Board of Directors appointed him as Chief Executive Officer and President of Logio, releasing him from his responsibilities as Senior Vice President and Chief Financial Officer. Then in January 2001 he was appointed as our Secretary/Treasurer. Prior to joining Logio, between April 1990 and December 1996, he served as President and Chief Financial Officer of Kelmarc Corporation, a financial and management advisory company. He has over thirty years experience in a variety of finance and management positions, including employment in the commercial banking area for fifteen years in Utah and California. Mr. Bell received his B.S. from BYU in 1972. Mr. Bell is a director of Pacific WebWorks, Inc. a reporting company. Thomas R. Eldredge: In April of 2000, Mr. Eldredge joined Logio as our Vice President of Finance and Corporate Secretary. On June 2, 2000, our Board of Directors appointed Mr. Eldredge as Senior Vice President and Chief Financial Officer. In January 2001 our Board of Directors appointed him as an interim director, releasing him from his responsibilities as Senior Vice President and Chief Financial Officer. Mr. Eldredge is a CPA and has over ten years of experience in accounting, audit and information technology. He spent over six years with Grant Thornton LLP, one of the nation's ten largest public accounting firms. Most recently he was a manager in the assurance department at Grant Thornton. Mr. Eldredge is an adjunct professor at the University of Utah in the accounting and information technology departments at the graduate and undergraduate levels and has instructed students for over four years at the University, Grant Thornton's National training center and Utah Valley State College. He received both his Bachelor of Science and Master of Professional Accountancy from the University of Utah. Mr. Eldredge is the President of the Utah Association of Certified Public Accountants - Southern Chapter. 32 James W. Johnston: Mr. Johnston was a co-founder of WordCruncher Publishing and has served as our Director since November 1996. He has also served as Chairman of the Board and Executive Vice President. From December 1990 to November 1996, he was president of Johnston & Company, which published virtual works using Logio technology, including the Constitution Papers (CD ROM). Mr. Johnston has over 15 years of expertise in developing and marketing products involving content presentation, analysis software and virtual publishing. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and person who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Officers, directors and greater than ten-percent beneficial owners are required by SEC regulations to furnish Pacific WebWorks with copies of all Section 16(a) reports they file. Based upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2001 and representations from these reporting persons that no Forms 5 were required, we believe all filing requirements under Section 16(a) were complied with in a timely manner. ITEM 11: EXECUTIVE COMPENSATION The following table summarizes the compensation paid to or earned by our chief executive officer and our three most highly-compensated executive officers whose total salary and bonus exceed $100,000 during each of the past three fiscal years SUMMARY COMPENSATION TABLE ------------------------------------------------------------------------------ Annual Compensation Long-Term Compensation Awards ----------------------------------- ------------ Other Securities Annual Underlying Name and Principal Compen- Options/ Position Year Salary ($) Bonus ($) sation ($) SARs (#) --------------------- ------- ------------ --------- ------------ ------------ Kenneth W. Bell 2001 $ 11,500 - - - President, 2000 94,833 - - 250,000 (1) Secretary, 1999 120,000 - - - Director --------------------- ------- ------------ --------- ------------ ------------ Thomas R. Eldredge 2001 10,792 - - - Director 2000 60,542 - - 180,000 (1) 1999 - - - - --------------------- ------- ------------ --------- ------------ ------------ James W. Johnston 2001 7,500 - - - Director 2000 90,833 - - 250,000 (1) 1999 120,000 - - - --------------------- ------- ------------ --------- ------------ ------------ (1) Theses underlying securities were converted to Pacific WebWorks shares after Logio was acquired by Pacific WebWorks. The 250,000 shares granted to Mr. Bell were converted to 37,879 Pacific WebWorks shares; Mr. Eldredge's 180,000 shares were converted to 27,273 Pacific WebWorks shares; and Mr. Johnston's 250,000 shares were converted to 37,879 Pacific WebWorks shares. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Our parent corporation beneficially owns 100% of our issued and outstanding shares. 33 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information summarizes certain transactions either we engaged in during at least the past two years or we propose to engage in involving our executive officers, directors, 5% stockholders or immediate family members of those persons: In June, 2000, Messrs. Johnston, Bell and M. Daniel Lunt, then officers and directors, loaned us an aggregate of $500,000 in exchange for notes bearing interest at 8% per annum, unsecured and due and payable on or before July 1, 2001. On September 26, 2000 these notes and accrued interest of $11,666 were converted into 626,422 shares of common stock. PART VI -------- ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K Exhibits Exhibit Description -------- ------------ 2.1 Agreement and Plan of Reorganization between Logio and Pacific WebWorks, Inc., dated October 31, 2000 3.1 Articles of Incorporation as amended (Incorporated by reference to exhibit 3.1 to Form 10-Q filed November 14, 2001) 3.2 Bylaws of the Company (Incorporated by reference to exhibit 3.6 of Form S-1, File No. 333-78537, as amended) 10.1 Employment Agreement between Logio and Kenneth W. Bell, dated September 1, 1998 (Incorporated by reference to exhibit 10.4 of Form S-1, File No. 333-78537, as amended) 10.2 Employment Agreement between Logio and James W. Johnston, dated September 1, 1998 (Incorporated by reference to exhibit 10.5 of Form S-1, File No. 333-78537, as amended) 10.3 Lease Agreement between Logio and Sun Microsystems Finance, as amended (Incorporated by reference to exhibit 10.3 of Form 10-Q, filed May 15, 2001) 10.4 License Agreement between Logio and Oracle Corporation (Incorporated by reference to exhibit 10.4 of Form 10-Q, filed May 15, 2001) 10.5 Line of Credit and Inter-company Agreement between Logio and Pacific WebWorks, dated January 2, 2001 (Incorporated by reference to exhibit 10.5 of Form 10-Q filed August 13, 2001) Reports on Form 8-K None. 34 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 8 April 2002 Date_________________ Logio, Inc. /s/ Kenneth W. Bell By: ______________________________________ Kenneth W. Bell President, Secretary/Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934. This report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 8 Apr 2002 /s/ Thomas R. Eldredge Date____________________ By: ______________________________________ Thomas R. Eldredge Director 8 April 2002 /s/ James W. Johnston Date____________________ By: ______________________________________ James W. Johnston Director 35

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