-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D+bfjfyyrNMNB1Qku9raQk/CYwAOSzzo5Vb7wnbVv4TniMBntKcoQaxW0aoNhI8q HCgWWwK+lrKYkDP77ZwKWg== 0001021408-02-002313.txt : 20020414 0001021408-02-002313.hdr.sgml : 20020414 ACCESSION NUMBER: 0001021408-02-002313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMOTUS SOLUTIONS INC CENTRAL INDEX KEY: 0000832370 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954599440 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15569 FILM NUMBER: 02546442 BUSINESS ADDRESS: STREET 1: 1735 TECHNOLOGY WAY STREET 2: STE 790 CITY: SAN JOSE STATE: CA ZIP: 95125 BUSINESS PHONE: 4083671700 MAIL ADDRESS: STREET 1: 1705 TECHNOLOGY WAY STREET 2: SUITE 790 CITY: SAN JOSE STATE: CA ZIP: 95125 FORMER COMPANY: FORMER CONFORMED NAME: LORD ABBOTT INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK NET INC DATE OF NAME CHANGE: 19990707 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK SYSTEMS CORP /CA/ DATE OF NAME CHANGE: 19960723 10-Q 1 d10q.txt FORM 10-Q DATED DECEMBER 31, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2001 Commission file number: 1-15569 SEMOTUS SOLUTIONS, INC. ---------------------------------------------------- (Exact name of business issuer in its charter) Nevada 36-3574355 - ------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer Identification Incorporation or Organization) Number) 1735 Technology Drive, Suite 790, San Jose, CA 95110 ----------------------------------------------------------- (Address of Principal Executive Offices including zip code) (408) 367-1700 --------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] There were 17,293,477 shares of the Registrant's Common Stock outstanding as of February 14, 2002. Transitional Small Business Disclosure Format: Yes [ ] No [ X ] - -------------------------------------------------------------------------------- Page 1 SEMOTUS SOLUTIONS, INC. TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: a. Consolidated Balance Sheets as of December 31, 2001 and March 31, 2001 3 b. Consolidated Statements of Operations and Comprehensive Loss for the three and nine month periods ended December 31, 2001 and 2000 4 c. Consolidated Statements of Cash Flows for the nine months ended December 31, 2001 and 2000 5 d. Notes to the Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 24 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5. OTHER INFORMATION 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25 - -------------------------------------------------------------------------------- Page 2 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMNTS SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 ASSETS 2001 March 31 (unaudited) 2001 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 4,806,447 $ 7,844,042 Restricted cash 693,286 694,222 Trade receivables (net of allowance for doubtful accounts of $103,156 at December 31, 2001 and $62,887 at March 31, 2001) 687,286 462,368 Income and GST tax receivable 2,976 127,266 Other receivables 75,551 115,716 Inventory (net of reserve of $238,500 at December 31, 2001 and $188,500 at March 31, 2001) 308,773 387,547 Prepaid expenses 136,524 155,959 ------------ ------------ Total current assets 6,710,843 9,787,120 Property and equipment, net 862,760 977,678 Investments -- 151,000 Capitalized contract, net 721,198 -- GMP intellectual property, net (Note 5) 4,760,000 5,780,000 Goodwill, net (Notes 3 and 4) 7,057,424 4,760,746 Other assets 167,660 313,417 ------------ ------------ Total assets $ 20,279,885 $ 21,769,961 ============ ============ LIABILITIES Current liabilities: Accounts payable $ 962,518 $ 626,830 Accrued expenses and other current liabilities 388,901 228,340 Notes payable 693,401 694,222 Current portion of capital lease obligations 82,742 38,222 Current portion of advances on technology sales 218,428 307,390 Current portion of deferred revenue 1,363,028 111,333 ------------ ------------ Total current liabilities 3,709,018 2,006,337 Capital lease obligations, net of current portion 68,032 63,447 Advances on technology sales, net of current portion 690,786 835,170 Deferred revenue, net of current portion 250,087 -- ------------ ------------ Total liabilities 4,717,923 2,904,954 ------------ ------------ Commitments and contingencies (Note 9) PREFERRED SHAREHOLDERS' EQUITY: Convertible preferred stock, Series B: $0.001 par value; $13.00 liquidation value; authorized: 5,000,000 shares; issued and outstanding: 469,231 at December 31, 2001 and March 31, 2001 469 469 Additional paid-in capital 5,681,987 5,681,987 ------------ ------------ Total preferred shareholders' equity 5,682,456 5,682,456 ------------ ------------ COMMON SHAREHOLDERS' EQUITY: Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 17,293,477 at December 31, 2001 and 15,903,368 at March 31, 2001 172,935 159,034 Additional paid-in capital 60,285,752 55,217,626 Accumulated other comprehensive loss (139,800) (102,536) Notes receivable - related parties (877,290) (1,106,612) Accumulated deficit (49,562,091) (40,984,961) ------------ ------------ Total common shareholders' equity 9,879,506 13,182,551 ------------ ------------ Total liabilities, preferred and common shareholders' equity $ 20,279,885 $ 21,769,961 ============ ============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 3 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Wireless services $ 346,421 $ 324,859 $ 1,017,190 $ 1,365,086 Enterprise and commerce sales 604,208 744,273 2,068,402 2,650,818 Professional and related services 156,302 305,561 597,028 323,147 Logistic systems sales 316,662 -- 1,186,303 -- ------------ ------------ ------------ ------------ Total revenue $ 1,423,593 $ 1,374,693 $ 4,868,923 $ 4,339,051 Cost of revenue: Wireless services 108,785 166,408 420,031 743,324 Enterprise and commerce sales 412,390 525,410 1,534,038 1,823,427 Professional and related services 71,050 30,557 374,357 32,315 Logistic systems sales 141,567 -- 597,249 -- ------------ ------------ ------------ ------------ Total cost of revenue 733,792 722,375 2,925,675 2,599,066 ------------ ------------ ------------ ------------ Gross Profit 689,801 652,318 1,943,248 1,739,985 Operating Expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) Research and development 317,812 374,665 1,215,186 915,846 Sales and marketing 438,683 1,275,002 1,796,063 3,394,750 General and administrative 941,793 2,189,722 3,911,308 4,827,877 Net impairment of goodwill (Note 4) -- -- 650,000 -- Depreciation & amortization: Research and development 22,605 25,403 72,014 46,242 General and administrative 974,068 355,521 2,913,528 1,027,131 Stock, option and warrant expense: Sales and marketing 21,000 -- 63,000 -- General and administrative 74,847 37,564 323,275 97,955 ------------ ------------ ------------ ------------ Total operating expenses 2,790,808 4,257,877 10,944,374 10,309,801 ------------ ------------ ------------ ------------ Net loss from operations (2,101,007) (3,605,559) (9,001,126) (8,569,816) Net interest income 66,082 168,672 216,604 599,060 Other income, net (Note 7) 64,526 45,915 207,392 257,602 ------------ ------------ ------------ ------------ Total interest and other income 130,608 214,587 423,996 856,662 Net loss (1,970,399) (3,390,972) (8,577,130) (7,713,154) Other comprehensive loss - Translation adjustment (6,744) 6,113 (37,264) (7,501) ------------ ------------ ------------ ------------ Comprehensive loss $ (1,977,143) $ (3,384,859) $ (8,614,394) $ (7,720,655) ============ ============ ============ ============ Net loss per share: Basic $ (.11) $ (.22) $ (.51) $ (.51) Diluted $ (.11) $ (.22) $ (.51) $ (.51) Weighted average shares used in per share calculation, basic and diluted 17,185,991 15,585,819 16,882,685 15,006,031
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 4 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended December 31, 2001 2000 ------------ ------------ Cash flows from operating activities: Net loss $ (8,577,130) $ (7,713,154) Foreign currency translation adjustment (37,264) (7,501) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,985,542 1,073,373 Compensation expense related to stock issued for services 386,275 97,955 Amortization of technology advances (233,345) (266,375) Amortization of notes receivable 255,982 181,445 Net amortization of contract income (500,731) -- Non-cash compensation received for service -- (150,000) Impairment of goodwill 650,000 -- Changes in assets and liabilities, net of acquired assets and liabilities due to acquisitions: Accounts and other receivables 151,924 (831,216) Inventory 78,774 49,089 Prepaid expenses and other assets 34,408 192,074 Accounts payable 149,864 224,217 Accrued liabilities 176,303 (78,792) Deferred revenue 204,663 (107,658) ------------ ------------ Net cash used in operating activities (4,274,735) (7,336,543) ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment (20,707) (511,675) Cash received from FY 2002 acquisitions, net 1,096,472 -- Cost of FY 2001 acquisitions, net of cash acquired -- (196,004) Sale of Kinetidex technology 350,000 -- Other assets -- 36,561 ------------ ------------ Net cash provided by (used in) investing activities 1,425,765 (671,118) ------------ ------------ Cash flows from financing activities: Repayment of line of credit -- (37,364) Repayment of notes payable (154,283) -- Payment on shareholder's loan -- (13,244) Repayment of capital lease obligations (46,010) (8,434) Proceeds from exercise of options and warrants 11,668 2,017,206 ------------ ------------ Net cash (used in) provided by financing activities (188,625) 1,958,164 ------------ ------------ Net decrease in cash and cash equivalents (3,037,595) (6,049,497) Cash and cash equivalents, beginning of the period 7,844,042 16,360,776 ------------ ------------ Cash and cash equivalents, end of the period $ 4,806,447 $ 10,311,279 ============ ============
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 5 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) Nine Months Ended December 31, 2001 2000 ---------- ---------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 66,574 $ 68,154 ========== ========== Cash paid for income taxes $ 5,190 $ 1,600 ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Non-cash purchase consideration from acquisition of ISS, Inc. through the issuance of common stock $ -- $1,671,750 ========== ========== Non-cash purchase consideration from acquisition of Cross Communications, Inc. and Simkin, Inc. through the issuance of common stock $ -- $2,753,900 ========== ========== Consideration in connection with 40,000 common stock warrants to obtain option to repurchase license technology $ -- $ 217,000 ========== ========== Issuance of 800,000 common stock warrants to obtain GMP Intellecutal Property $ -- $6,800,000 ========== ========== Common stock issued for services $ 386,275 $ 97,955 ---------- ---------- Preferred stock converted to common stock $ -- $ 600 ---------- ---------- Non-cash purchase consideration for the acquisition of Wizshop, Inc. and Application Design Associates, Inc. through the issuance of common stock $4,666,000 $ -- ========== ========== Additional non-cash purchase consideration paid to shareholder of Cross Communications, Inc. pursuant to the first year performance criteria of the Merger Agreement $ 18,086 $ -- ---------- ---------- Property and equipment obligations under capital leases, net $ 122,971 $ 62,136 ========== ========== See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Page 6 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus(TM) Solutions, Inc. ("Semotus " or the "Company"), changed its name from Datalink.net, Inc. as of January 11, 2001. The Company, originally Datalink Systems Corporation, was formed under the laws of the State of Nevada on June 18, 1996. On June 27, 1996, the Company went public through an acquisition of a public corporation, Datalink Communications Corporation ("DCC"), which was previously Lord Abbott, Inc., a Colorado corporation formed in 1986. In the June 27, 1996 acquisition of DCC, the Company issued 3,293,064 shares of its $0.01 par value Common Stock (as adjusted for the 1 for 10 reverse split effective on February 9, 1998 and a 2 for 1 forward split effective April 27, 2000) to the holders of 100% of the outstanding Common Stock of DCC, and DCC became a wholly owned subsidiary of the Company. As a part of the transaction, the Company acquired a Canadian corporation, DSC Datalink Systems Corporation, now named Semotus Systems Corporation, incorporated in Vancouver, British Columbia. Semotus is a wireless infrastructure company providing end-to-end mobile data solutions to enterprises for their employees (productivity tools) and their customers (revenue tools). The Company enables enterprises and consumers to customize, interact with and respond to critical business data utilizing a new generation of wireless devices. Semotus leverages its core patented XpressLink(TM) technology across the high demand vertical markets of finance, medical, e-commerce and field force automation through its modular expansion of this market leading technology, and through acquisitions of established companies providing products and services to which Semotus can contribute value through wireless enhancement. Semotus' acquisition strategy, pursuant to which the Company has acquired six companies through December 31, 2001, focuses on companies in target markets that have a significant customer base and meaningful revenues. From this foundation, Semotus intends to strengthen and enhance the existing revenues and then provide wireless solutions to further enhance and grow revenues. See Note 3, "Acquisitions". BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Semotus Solutions, Inc. and its subsidiaries (see footnote 3, "Acquisitions"). The consolidated balance sheet as of December 31, 2001, the consolidated statements of operations and comprehensive loss for the three months and nine months ended December 31, 2001 and 2000, and the consolidated statements of cash flows for the nine months ended December 31, 2001 have been prepared by the Company, without audit and with the instructions to Form 10-Q and Regulation S-K. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-KSB for the year ended March 31, 2001. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All financial data and share data in this Form 10-Q give retroactive effect to the 2 for 1 stock split which was effected on April 27, 2000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These - -------------------------------------------------------------------------------- Page 7 policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Semotus Systems Corporation (Canadian subsidiary), Cross Communications, Inc., Simkin, Inc., Wares on the Web, Inc., Five Star Advantage, Inc., WizShop.com, Inc. and Application Design Associates, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. Operations of the Canadian subsidiary consist mainly of research and development and engineering on behalf of Semotus and its other subsidiaries. All other subsidiaries generate revenues from the sale of products and services. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LONG-TERM ASSETS Long-term assets, such as intellectual property rights and goodwill are amortized on a straight-line basis over the economic life of the assets. The expected useful life of those assets is currently five years. CAPITALIZED CONTRACT Semotus capitalizes the fair value of contracts acquired in business combinations as required by APB 16 "Business Combinations". Fair value is determined by estimating the cost expected to be incurred in order to perform the obligations under the contract plus adding a reasonable profit associated with the performance effort. The capitalized cost is amortized into cost of revenue as revenues are recognized. STOCK BASED COMPENSATION: Semotus has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. The fair value method is required for all stock-based compensation issued to non-employees, including consultants and advisors. Under the fair value method, compensation cost relating to issuances of stock options, warrants and appreciation rights are measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based transactions under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net income and earnings per share as if the fair value method has been adopted. The Company has elected to continue to account for stock based compensation under APB No. 25. Certain options, which have been repriced, are subject to the variable plan requirements of APB No. 25, that requires the Company to record compensation expense for changes in the fair value of the Company's common stock. REVENUE RECOGNITION: Semotus recognizes revenues in each of its lines of business based upon contract terms and completion of the sales process. Wireless services: revenue is generated from wireless services provided to enterprises and consumers. The revenue is generated from recurring monthly charges based on utilization fees, transaction fees, and maintenance and service charges. In the B2C business, the Company also receives a small revenue stream from pager rentals. Revenues are recognized over the service period and any revenue that relates to more than one service period is recognized ratably over those service periods. In the premise-based business, wireless software is delivered to the customer and revenue is recognized upon shipment, assuming no significant obligations remain. - -------------------------------------------------------------------------------- Page 8 Enterprise and commerce sales: revenue is generated from online sales, advertising, sponsorships, hosting fees and other services. Online sales revenue is recognized upon a completed sale and shipment of a product. Advertising and sponsorships revenue is recognized when payment is received. Hosting fees and other services, such as licensing, are recognized ratably over the service period. Professional and related services: revenue is generated from software engineering and sales and from training and consultation. Revenue is recognized when the engineering, training or consultation work has been performed in accordance with the contract. Logistic systems sales: revenue is generated from logistic software sales, computer equipment sales and system installation and consulting services. Revenue is recognized when the system installation is completed and/or consulting work has been performed in accordance with the contract. For multi-period contracts, usually for maintenance or licensing, revenue is recognized ratably over these service periods. COST OF REVENUE: The cost of revenue for the wireless services line of business principally includes costs to obtain data feeds from various exchanges, costs of engineering development directed to specifically identified products, costs of servicing and hosting customer products, costs for pager rental or depreciation and pager airtime for those customers without their own pagers, and certain telephone, computer and other direct operational costs. The cost of revenue for the enterprise and commerce sales and service line of business includes the purchase cost of the products, and advertising, servicing, hosting and shipping costs. Any engineering costs directly related to the products offered are also included as a cost of revenue. The cost of revenue for professional and related services is primarily personnel costs for engineering, training and consulting. The cost of revenue for the logistic system sales segment is the cost of the production of the software, purchased equipment costs and the cost of the personnel for engineering, installation and consulting. BASIC AND DILUTED NET LOSS PER SHARE: Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon conversion of convertible preferred stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Outstanding common shares and per share amounts have been adjusted for a 2 for 1 stock split, which was effective April 27, 2000. RECLASSIFICATIONS: Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. PURCHASE ACQUISITIONS: Acquisitions, which have been accounted for under the purchase method of accounting, include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their fair value to the Company at the date of acquisition. Goodwill is amortized over the economic life of the asset. The expected useful life is currently five years. Amortization will continue until the adoption of FASB Statement No. 142, beginning on April 1, 2002. (See Note 3, "Acquisitions" and Note 4, "Sale of Technology and Net Impairment of Goodwill".) COMPREHENSIVE INCOME (LOSS): In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income", which was adopted by the Company in the third - -------------------------------------------------------------------------------- Page 9 quarter of fiscal year 1999. SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Items to be included, which are excluded from net income (loss), include foreign currency translation adjustments. RECENT PRONOUNCEMENTS: In March 2000, the Emerging Issues Task Force (EITF) of the FASB published their consensus on EITF Issue No 00-3, "Application of AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, to Arrangements that Include the Right to Use Software Stored on Another's Entity's Hardware." The EITF consensus gives guidance on accounting for hosting arrangements. The Company does not expect the adoption of EITF Issue No. 00-3 to have a material effect on its consolidated results of operations or financial position. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25." Interpretation No. 44 clarifies the application of Opinion 25 for the following issues: (1) the definition of employee for purposes of applying Opinion 25, (2) the criteria for determining whether a plan qualifies as a noncompensatory plan, (3) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (4) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000. Due to the repricing of employee stock options in November 2001, the adoption of Interpretation No. 44 may have a material effect on the Company's financial position and results of operations in the future. For the three and nine month periods ended December 31, 2001, the effect was immaterial. In June 2001, the FASB finalized FASB Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30,2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using both the pooling-of-interests and purchase methods. The pooling-of-interests method does not result in the recognition of acquired goodwill or other intangible assets. As a result, the adoption of SFAS 141 and 142 will not affect the results of past transactions accounted for under the pooling-of-interests method. However, all future business combinations will be accounted for under the purchase method, which may result in the recognition of goodwill and other intangible assets, some of which will be recognized through operations, either by amortization or impairment charges, in the future. For purchase business combinations completed prior to December 31, 2001, the net carrying amount of goodwill is $7,057,424 and other intangible assets is $721,198. Amortization expense for goodwill during the three and nine month periods ended December 31, 2001 was $459,156 and $1,396,449, respectively. The Company intends to complete the transitional goodwill impairment test within six months from the date of adoption. The impact of the adoption of SFAS 141 and SFAS 142 on the Company's financial position and results of operations could be material. - -------------------------------------------------------------------------------- Page 10 In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143 addresses financial accounting and reporting for the retirement obligation of an asset. SFAS 143 states that companies should recognize the asset retirement cost, at its fair value, as part of the cost of the asset and classify the accrued amount as a liability in the balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal years beginning after June 15, 2002. At this time, the Company does not expect that the implementation of SFAS 143 will have any material impact on its financial position, results of operations, or cash flows. In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes the SFAS No. 121 by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The impact of adopting SFAS 144 on the Company's financial position and result of operations could be material. 3. ACQUISITIONS All acquisitions accounted for under the purchase method of accounting have their results of operations included in the financial statements as of the date of acquisition. Goodwill is currently amortized on a straight line basis over the economic life of the asset. The current estimated life is five years. (See Note 2, "Summary of Significant Accounting Policies: Purchase Acquisitions".) WizShop.com, Inc. ("WizShop") On April 6, 2001 WizShop's shareholders approved a merger transaction with Semotus. On May 7, Semotus acquired all the outstanding stock of WizShop and the transaction officially closed. The acquisition was accounted for under the purchase method of accounting. The value of common stock issued for the acquisition was approximately $3.4 million. Semotus recorded $3.4 million of goodwill. Semotus issued 699,993 shares of common stock and may issue up to another 750,000 shares over the next two years if certain revenue targets are met. Semotus has also agreed to issue additional shares if Semotus' common stock does not trade at or above $10.00 per share by the end of each year after such shares are issued. The maximum number of additional shares that can be issued is twice the initial shares and earnout shares that have not been sold by the original WizShop stockholders. The first of the measurement dates is August 2002. At that time, if the Company's common stock has not closed at $10.00 per share or above, additional shares will be issued to the original WizShop stockholders still holding the Semotus common stock. The effect of issuing any additional shares if certain revenue targets are met will be accounted for as additional purchase price consideration. The effect of issuing any additional shares if certain per share trading prices are not met has been accounted for in the Company's financial statements at the date of acquisition. WizShop builds and maintains outsourced e-commerce environments for Internet portal companies. WizShop is in the outsourced e-commerce market through WizShop-powered, co-branded shopping sites. WizShop also creates successful online sales and merchandising programs for its clients through WizShop's sales and marketing initiatives. (See footnote 13, "WizShop.com", for further information concerning WizShop.) Application Design Associates, Inc. On April 30, 2001, Semotus and Application Design Associates, Inc. ("ADA") signed a merger agreement. On May 15, 2001 Semotus acquired all the outstanding stock of ADA and the transaction officially closed. The acquisition was accounted for under the purchase method of accounting. The value of common stock issued for the acquisition was approximately $1.25 million. Semotus recorded $1.3 million of goodwill. Semotus issued 250,000 shares of the Company's common stock and may issue up to another 750,000 shares of common stock over the next three years if certain revenue targets are met. Semotus has also agreed to issue additional shares if Semotus' common stock does not trade at or above $5.00 per share by the end of each year after such shares are issued. The maximum number of additional shares that could be issued would be twice the initial shares and earn out shares, or 2 million shares. - -------------------------------------------------------------------------------- Page 11 The effect of issuing any additional shares if certain revenue targets are met will be accounted for as additional purchase price consideration. The effect of issuing any additional shares if certain per share trading prices are not met has been accounted for in the Company's financial statements at the date of acquisition. ADA creates proprietary software that is a complete logistical solution for automation of customer call centers, dispatching, equipment deployment, servicing and invoicing, while interfacing to existing corporate business functions and existing ERP solutions. Pro forma results The following summary, prepared on a pro forma basis, presents the results of the Company's operations (unaudited) as if the acquisitions accounted for under the purchase method since April 1, 2000 had been completed as of the beginning of each period. Nine Months Ended Three Months Ended December 31, December 31, 2000 2001 2000 ------------------ ------------------------------ (Unaudited) (Unaudited) (Unaudited) Revenue: $ 2,653,029 $ 5,007,772 $ 6,262,316 Net Loss: $ (4,247,457) $ (8,566,277) $(10,840,784) Net Loss per share- basic and diluted $ (0.25) $ (0.51) $ (0.67) The unaudited pro forma results of operations are not necessarily indicative of what actually would have occurred if the acquisitions had taken place as of the beginning of each period, nor is it a projection of the Company's results of operations for any future period. 4. SALE OF TECHNOLOGY AND NET IMPAIRMENT OF GOODWILL The reduction in goodwill for Simkin in June 2001 of $1,000,000 is comprised of two components: (i) the sale of Simkin's Kinetidex technology for $350,000 and (ii) an impairment charge to goodwill related to Simkin for $650,000. In June 2001, Semotus announced the sale by Simkin of a software program called Kinetidex 2.0 to Micromedex, Inc., the joint developer and exclusive distributor of the product. Kinetidex is a drug dosing software program that was jointly developed by the Company's Simkin subsidiary and Micromedex. Semotus received $350,000 from Micromedex for the sale of the product and all future royalty rights. Additionally, Simkin agreed to discontinue the sale of the product Kinetidex replaced, Capcil. Semotus' management performs an on-going analysis of the recoverability of its goodwill and other intangibles and the value of its investments in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative measures, the Company assesses the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. A number of factors indicated that impairment may have arisen in the period ended June 30, 2001, specifically for Semotus' Simkin subsidiary. The above mentioned sale of the Kinetidex technology for $350,000 was one factor considered. Future prospects for the business was another factor considered. Additionally, a third critical factor was that the consideration paid by Semotus for Simkin was in the form of the issuance of shares of the Company's common stock at a time when its stock price was much higher than at June 30, 2001. The Company's stock price was approximately $14.375 at the time of the acquisition. At June 30, 2001, the Company's stock price was $1.59. Finally, Simkin was privately held at the time of the acquisition and its fair value was and is subjective and not readily determinable. At the time of the acquisition, market valuations for such a company were at historically high levels. Since the end of the calendar year 2000, stock prices and market valuations in Simkin's industry and similar industries have fallen substantially in response to a variety of factors, including a general downturn in the economy, a curtailment in the availability of capital and a general reduction in technology expenditures. - -------------------------------------------------------------------------------- Page 12 Based on the factors described above, the Company determined that the goodwill in its Simkin subsidiary may have become impaired. In accordance with SFAS No. 121, the Company performed an undiscounted cash flow analysis of its acquisition to determine whether an impairment existed. When the undiscounted cash flows were less than the carrying value of the net assets, management determined a range of fair values using a combination of valuation methodologies. The methodologies included: - - Discounted cash flow analysis, which is based upon converting expected future cash flows to present value. - - Changes in market value since the date of acquisition relative to the following: - the Company's stock price; - comparable companies; - - Contribution to the Company's market valuation and overall business prospects. The methodologies used were consistent with the specific valuation methods used when the original purchase price was determined. The Company's best estimate of the fair value of Simkin was determined from the range of possible values after considering the relative performance, future prospects and risk profile of Simkin. As a result of Semotus' review, management determined that the carrying value of goodwill was not fully recoverable and an impairment charge of $650,000 was taken in the quarter ended June 30, 2001. At December 31, 2001, the Company determined that the carrying value of its goodwill and other intangibles are recoverable. The Company will continue to analyze the recoverability of its long-lived assets and assess the need to record impairment losses when impairment indicators are present. 5. GMP INTELLECTUAL PROPERTY AND J.P. MORGAN CHASE MANHATTAN WARRANTS On July 7, 2000 the Company granted an affiliate of J.P. Morgan Chase & Co. common stock warrants to purchase up to 800,000 shares of Semotus common stock at a price of $30.00 per common share. These warrants have a five year life, are non-callable, and were granted in exchange for all royalty and intellectual property rights associated with the Global Market Pro ("GMP") product, including all copyrights, patents and trade secrets. The value of these warrants as calculated on the date of grant using the Black-Sholes pricing model amounted to $6,800,000 and is being amortized to expense over a five-year period. This amount was recorded in intellectual property with a corresponding increase to additional paid-in capital. For the three months and nine months ended December 31, 2001, amortization amounted to $340,000 and $1,020,000 respectively, with accumulated amortization of $2,040,000 at December 31, 2001. 6. REVENUE The Company derives revenue from its customers as discussed in Footnote 2, "Summary of Significant Accounting Policies: Revenue Recognition". One customer of WizShop in the enterprise and commerce segment accounted for 41% and 38% of the segment's revenues for the three months and nine months ended December 31, 2001. The revenues from this customer will continue over the remaining 15 months of the contract. For the three and nine months ended December 31, 2000, one customer of FiveStar in the enterprise and commerce segment accounted for approximately 7.5% and 25% respectively of the Company's revenues. Since then, this customer's contribution as a percentage of total revenues has declined in actual contribution and as more enterprise customers have been added. 7. OTHER INCOME: Other income (expense) consists of the following items: - -------------------------------------------------------------------------------- Page 13 Three Months Ended Nine Months Ended December 31, December 31, DESCRIPTION 2001 2000 2001 2000 - ----------- ----------- ----------- ----------- ----------- Owner's fee sales $ (392,250) $ (392,250) $(1,176,750) $(1,176,750) of technology Interest on note from sales of technology 392,250 392,250 1,176,750 1,176,750 Amortization of technology advances 75,731 60,315 233,345 266,375 Miscellaneous expense (11,205) (14,400) (25,953) (8,773) ----------- ----------- ----------- ----------- Total other income $ 64,526 $ 45,915 $ 207,392 $ 257,602 =========== =========== =========== =========== 8. EARNINGS PER SHARE (EPS) DISCLOSURES: The Company has adopted SFAS No. 128 "Earnings Per Share " (EPS). Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. For the nine months ended December 31, 2001 and 2000, 7,319,276 potential shares and 6,193,164 potential shares, respectively, were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 9. COMMITMENTS AND CONTINGENCIES: The Company is subject to various lawsuits and claims with respect to matters arising in the normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the consolidated results, liquidity or financial position of the Company. 10. SEGMENT INFORMATION Due to additional businesses resulting from the acquisitions, Semotus began reporting segment information in the fourth quarter of the fiscal year ended March 31, 2001. The Company has reclassified the three months and nine months ended December 31, 2000 for comparison purposes, although Semotus did not have separate segments at that time. Semotus' business has evolved into four segments: wireless services, enterprise and commerce sales, professional and related services and logistic system sales. Semotus' wireless services segment is its wireless line of business, which focuses in three areas: business to business ("B2B") application service provider ("ASP") solutions, B2B premise-based solutions, and B2C solutions. The Company creates wireless information products by customizing and delivering actionable and time sensitive information whenever that information is most valuable to the customer. Services and applications are device agnostic and protocol independent, integrating seamlessly into every enterprise infrastructure and working with every wireless carrier and all text messaging devices. Semotus provides two different wireless solutions: (i) ASP, where Semotus hosts and manages the information on its servers and (ii) premise based, where Semotus installs and engineers the software and information on the customer's servers. Semotus' enterprise and commerce sales line of business provides online transactional information and sales of products and services. This line of business also serves as the platform for the Company's m-commerce initiatives. The online services include website development and maintenance, sales, marketing, customer retention programs and services, logistics, distribution, and tracking and reporting. - -------------------------------------------------------------------------------- Page 14 Semotus uses the enterprise and commerce business to add-on wireless products such as alerts to wireless devices, comparative data information and real time messaging. Semotus' professional services line of business provides customers with online and wireless information and operations consulting, software engineering and training. This line of business provides the software tools and management to install and efficiently run online and wireless operations. The professional and related services business provides Semotus with access to customers who have wireless requirements that can be met with Semotus' wireless solutions. The logistic system sales line of business provides proprietary software with complementary hardware and consulting to satisfy a customer's complete logistical needs. These system installations provide automated logistical solutions for equipment deployment, call centers, dispatching and servicing. As Semotus continues to acquire companies, the nature and structure of the business segments may change. All segment financial information presented is unaudited.
Professional Logistic Wireless Enterprise and and related system Corporate Services commerce sales services sales and other Total ------------ ------------ ------------ ------------ ------------ ------------ As of and for the Three Months Ended December 31, 2001 Revenue $ 346,421 604,208 156,302 316,662 -- $ 1,423,593 Gross Profit $ 237,636 191,818 85,252 175,095 -- $ 689,801 Operating loss* $ (122,550) (47,035) 33,737 (119,979) (1,845,180) $ (2,101,007) Depreciation and Amortization $ 73,742 38,261 77,122 8,393 799,155 $ 996,673 Capital Expenditures $ 4,172 -- -- -- -- $ 4,172 Total Assets, December 31, 2001* $ 8,797,980 4,979,388 930,871 1,417,831 4,153,816 $ 20,279,885 As of and for the Nine Months Ended December 31, 2001 Revenue $ 1,017,190 2,068,401 597,029 1,186,303 -- $ 4,868,923 Gross Profit $ 597,159 534,364 222,671 589,054 -- $ 1,943,248 Operating loss* $ (638,950) (766,211) (505,857) (133,640) (6,956,468) $ (9,001,126) Depreciation and Amortization $ 233,873 107,127 196,751 21,402 2,426,389 $ 2,985,542 Capital Expenditures $ 14,992 -- -- 5,715 -- $ 20,707 Total Assets, December 31, 2001* $ 8,797,980 4,979,388 930,871 1,417,831 4,153,816 $ 20,279,885 As of and for the Three Months Ended December 31, 2000 Revenues $ 324,859 744,273 305,561 -- -- $ 1,374,693 Gross Profit $ 158,451 218,863 275,004 -- -- $ 652,318 Operating loss* $ (417,884) (234,584) (159,502) -- (2,793,589) $ (3,605,559) Depreciation and Amortization $ 38,513 7,128 13,222 -- 322,061 $ 380,924 Capital Expenditure $ 196,794 -- -- -- -- $ 196,794 Total Assets, December 31, 2000* $ 13,374,176 1,767,041 3,343,107 -- 5,938,539 $ 24,422,862 As of and for the Nine Months Ended December 31, 2000 Revenues $ 1,365,086 2,650,818 323,147 -- -- $ 4,339,051 Gross Profit $ 621,762 827,391 290,832 -- -- $ 1,739,985 Operating loss* $ (1,185,619) (381,797) (156,125) -- (6,846,275) $ (8,569,816) Depreciation and Amortization $ 77,658 17,338 13,222 -- 965,155 $ 1,073,373 Capital Expenditure $ 511,675 -- -- -- -- $ 511,675 Total Assets, December 31, 2000* $ 13,374,175 1,767,041 3,343,107 -- 5,938,539 $ 24,422,862 * Certain corporate marketing, research and development and general and administrative costs have not been allocated to the segments and have been included in "Corporate and other". The $4,153,816 and $5,938,539 of assets at December 31, 2001 and 2000 respectively under "Corporate and other" is comprised of the GMP Intellectual Property, Semotus' Global Market Pro wireless financial product.
11. WIZSHOP.COM The WizShop relationship started in June 2000 with the negotiation and execution of an agreement for Semotus to build and host an m-commerce wireless platform for WizShop's proprietary online shopping mall. The wireless platform's functionality included wireless alerts, comparison pricing and transaction purchases. In November 2000, as the web-based, online business market weakened, WizShop discontinued the online shopping mall project and refocused its efforts on its core business, building and private labeling online shopping malls for large portals. - -------------------------------------------------------------------------------- Page 15 Semotus recognized $350,000 of revenues for the engineering work performed under the WizShop agreement in the quarter ended September 30, 2000. The Company also recognized $200,000 in cost of goods sold, and $150,000 in gross profit. Semotus was compensated as follows: (i) 1% of WizShop's equity in the form of common stock, valued at $150,000 and (ii) engineering services, including a shopping website for Semotus' B2C wireless products, which is linked to Semotus' website and to WizShop's large portal customer's shopping websites, valued at the standard engineering costs for WizShop portal customers. Semotus will not recognize the balance of the contract since the project has been discontinued. Semotus maintains the rights to the wireless applications developed for WizShop. In February 2001, with the continued decline in online shopping and the decline in the economy, the board of directors of WizShop decided to sell the company. In late February, WizShop contacted Semotus, among others, to inquire about acquiring WizShop. A definitive purchase agreement was signed March 13, 2001 and the transaction was approved by WizShop shareholders on April 6, 2001. 12. SUBSEQUENT EVENT - STRATEGIC INVESTMENT IN ADA On January 18, 2002 the Global Beverage Group "GBG", a Canadian-based direct store delivery consortium, completed a strategic investment in Semotus' ADA subsidiary. GBG is now a 49% shareholder in ADA. For its 49% stock purchase, GBG paid $250,000 in cash and agreed to invest $1 million in ADA over the next 15 months in order to help with the development of the next generation of ADA asset tracking and management software. Additionally, as part of the transaction, GBG assumed a personal loan of the President of ADA and received the 250,000 shares of Semotus stock securing the loan. GBG has also received 5 year warrants exercisable into 150,000 shares of Semotus stock. At the end of 15 months, GBG has the option to purchase Semotus' 51% ownership of ADA for either (i) $2.5 million in cash or (ii) return of the 250,000 shares of common stock received for assuming the personal loan. These shares also carry a price guaranty, for which Semotus could issue up to an additional 250,000 shares (see footnote 3, "Acquisitions - Application Design Associates, Inc.") Global Beverage Group's suite of products are designed to streamline the entire order-to-cash cycle for wholesalers that provide direct delivery of products to stores, offices and homes. The company's solutions are designed to handle complex order management, customer service and distribution logistics such as direct-store-delivery, direct-home-delivery, mobile workforces and vendor managed inventory. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the attached financial statements and notes thereto. Except for the historical information contained herein, the matters discussed below are forward-looking statements that involve certain risks and uncertainties, including, among others, the risks and uncertainties discussed below. OVERVIEW Semotus is organized into four business segments: wireless services, enterprise and commerce sales, professional and related services, and logistic system sales. In the wireless services segment, Semotus is concentrating on providing consulting and engineering services and turnkey applications for wireless enablement of corporate Intranets, Internet and e-commerce transactions. Semotus' enterprise and commerce sales line of business provides online transactional information and sales of products and services. Semotus' professional service line of business provides customers with online and wireless information and operations consulting, software engineering, and training. Finally, the logistic system sales line of business provides customers with proprietary software and complementary hardware and consulting services to satisfy a customer's complete logistical needs. Semotus has focused its operational and financial efforts into reducing its net loss and its cash burn. Significant cost reduction programs have been instituted and the Company has consolidated and centralized its operating units. Further, Semotus has eliminated non-margin revenues and customers that were not cost effective to manage. - -------------------------------------------------------------------------------- Page 16 As a result of the operating improvements, the net loss declined to $1,970,399 from $3,390,972 and to $0.11 per share from $0.22 per share in the three months ended December 31, 2001 versus 2000. Likewise, the overall cash decline was reduced to $3,037,595 from $6,049,497 in the nine months ended December 31, 2001 versus 2000. RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000 REVENUES Revenues for the three months and nine months ended December 31, 2001 were $1,423,593 and $4,868,923, respectively, as compared to $1,374,693 and $4,339,051, respectively, for the three and nine months ended December 31, 2000. Notwithstanding the decline in economic activity and the weakening of capital and consumer spending for technology products and services, Semotus has increased revenues 3.5% and 12.2% in the three and nine months ended December 31, 2001 versus 2000. These increases resulted from the addition of system integration sales at ADA and for the nine months ended December 31, 2001, additional professional services contracts at Wares. The revenue increases were offset by declines in sales in the wireless segment and in the enterprise and commerce sales segment over the last nine months. Wireless sales marginally increased in the three month period, but declined in the nine month period from the prior fiscal year due to the completion of a large contract in the last fiscal year and due to the declines in sales of consumer products, offset by increases in sales of field force automation products. The enterprise and commerce segment revenue decline is substantially the result of the large drop in sales from a FiveStar customer who had decided to fulfill its on-line sales in-house. FiveStar has replaced a portion of this lost revenue through enhanced marketing programs. Wireless Services The 6.6% increase in revenues in the three months ended December 31, 2001 versus 2000 is due to the increased sales of the newest version of Hiplink XS, Semotus' field force automation product. The 25.5% decline in revenues in the nine months ended December 31, 2001 versus 2000 results from the completion of a large wireless services contract in the last fiscal year, which did not affect the current fiscal year. Enterprise and Commerce Sales The 18.8% and 22.0% decline in revenues in the three months and nine months ended December 31, 2001 versus 2000 is largely due to above mentioned customer loss at Five Star. Although the lost customers have been replaced by new customers, this has not been sufficient to offset all of the decline in revenues. Further, Five Star has been affected by a decline in consumer spending in fiscal year 2002 as the economy has been in a recession. Professional and Related Services The 84.8% increase in revenues in the nine months ended December 31, 2001 versus 2000 is due to additional professional service contracts at Wares. Additionally, Wares revenues are only included from the acquisition date in mid-November 2000 in the last fiscal year. The 48.9% decline in revenues in the three months ended December 31, 2001 versus 2000 is directly the result of the sale of Simkin's Kinetidex 2.0 product in June 2001. Simkin's revenues will remain at lower levels for the remainder of this fiscal year. Logistic System Sales This is a new segment for Semotus, which is made up of the revenue from ADA, which focuses on the sales of proprietary software and hardware systems that manage the logistics and tracking of assets. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased slightly to 48.5% from 47.5% in the three months ended December 31, 2001 versus 2000 and it was essentially the same in the nine months ended December 31, 2001 versus 2000 at 39.9% versus 40.1% respectively. The increase is the result of changes in product mix from lower margin enterprise and commerce segment product to higher margin wireless and logistic system segment - -------------------------------------------------------------------------------- Page 17 products. This product mix enhancement, when combined with increased sales, has improved the overall gross profit margin in the third quarter of fiscal year 2002. The product mix shift is not as pronounced in the nine months ended December 31, 2001, as the changes occurred mostly in the three month period ended December 31, 2001. Wireless services The gross profit margin for this segment has increased significantly to 68.6% from 48.8% in the three months ended December 31, 2001 versus 2000 and to 58.7% from 45.6% in the nine months ended December 31, 2001 versus 2000. This increase is the result of a changing product mix: i) increased higher margin sales of enterprise products such as Global Market Pro, ii) the introduction in July of a higher margin version of Hiplink, a field force automation wireless product, and iii) the reduction and discontinuance of lower margin consumer products. Cost of revenues in this segment principally includes costs to obtain data feeds from various exchanges, costs of engineering development directed to specifically identified products, costs of servicing and hosting customer products, costs for pager rental and pager airtime for those customers without their own pagers, and certain telephone, computer and other direct operational costs. Enterprise and commerce sales The gross profit margin for this segment increased to 31.8% from 29.4% in the three month period ended December 31, 2001 versus 2000, due to the addition of WizShop and its higher gross margin products, including the contract for the customer loyalty and tracking software. The gross profit margin declined to 25.8% from 31.2% in the nine months ended December 31, 2001 versus 2000 due to the decline in gross margin at FiveStar from the reduced sales with higher gross profit margins of the one customer mentioned previously. Further, the decline in consumer spending has shifted the product mix to lower margin items. Professional and related services The gross profit margin in this segment has declined to 54.5% and 37.3% in the three and nine months ended December 31, 2001 from approximately 90% gross profit margin in the same three and nine month periods of the last fiscal year due to different allocations of costs pre-and-post acquisition in November 2000. Additionally, the gross profit declined due to additional costs incurred to complete and meet deadlines on a software engineering contact at Wares. The cost of revenue in this segment is principally personnel costs related to providing consulting and training services, with some computer hardware costs included for one Wares customer. Logistic system sales The gross profit margin for this segment was 55.3% and 49.7%, respectively, for the three and nine months ended December 31, 2001. The cost of revenues is principally personnel costs related to software programming, consultation and installation of the systems. Also included in the cost of revenues is the computer hardware costs related to each system installation. OPERATING EXPENSES Operating expenses declined overall in the three month period ended December 31, 2001 versus the same period in the last fiscal year, but increased slightly in the nine month period ended December 31, 2001 versus 2000. Semotus expanded its management and staff in the last fiscal year including the personnel at the six acquired companies. These employees include engineering, sales and marketing. However, during the three months ended September 30, 2001 and extending into the three months ended December 31, 2001, Semotus has installed a corporate-wide cost reduction and cash management program, which has significantly reduced overall operating expenses. The Company categorizes operating expenses into five major categories: research and development, sales and marketing, general and administrative, depreciation and amortization, and stock, option and warrant expense. The table below summarizes the changes in these five categories of operating expenses (unaudited): - -------------------------------------------------------------------------------- Page 18
Percentage Increase Percentage Increase Three Months Ended (Decrease) Nine Months Ended (Decrease) December 31 ------------------- December 31, ------------------- Description 2001 2000 % 2001 2000 % - ----------------- ----------- ----------- ----------- ----------- ----------- ----------- Research and development $ 317,812 $ 374,665 (15.2)% $ 1,215,186 $ 915,846 32.7% Sales and marketing 438,683 1,275,002 (65.6)% 1,796,063 3,394,750 (47.1)% General and administrative 941,793 2,189,722 (57.0)% 3,911,308 4,827,877 (19.0)% Net impairment of goodwill -- -- 650,000 -- -- Depreciation and amortization 996,673 380,924 161.7% 2,985,542 1,073,373 178.2% Stock, option and warrant expense 95,847 37,564 155.2% 386,275 97,955 294.3% ----------- ----------- ----------- ----------- ----------- ----------- Total $ 2,790,808 $ 4,257,877 (34.5)% $10,944,374 $10,309,801 6.2% =========== =========== =========== =========== =========== ===========
Research and development expenses are expenses incurred in developing new products and product enhancements for current products. These expenditures are charged to expense as incurred. The increase in these costs for the nine months ended December 31, 2001 is due principally to hiring additional engineering personnel, for the development of updates to existing products, such as an equity version of the Global Market Pro(TM) product and the new release of the Company's premise-based wireless product, HiplinkXS. In the three months ended December 31, 2001, much of the development work for these products has been completed which has reduced research and development expenses. Sales and marketing expenses consist of costs incurred to develop and implement marketing and sales programs for the Company's product lines. These include costs required to staff the marketing department and develop a sales and marketing strategy, participation in trade shows, media development and advertising, and web site development and maintenance. These costs also include the expenses of hiring sales personnel and maintaining a customer support call center. These costs have declined principally due to the reduction in general advertising and non-sales supported marketing. There has also been a reduction in marketing personnel as the Company has shifted to emphasizing marketing and sales support for its existing products. General and administrative expenses include senior management, accounting, legal and consulting. This category also includes the costs associated with being a publicly traded company, including the costs of the Nasdaq and AMEX listings, investor and public relations, rent, administrative personnel, and other overhead related costs. These costs declined during the three and nine months ended December 31, 2001 as personnel and offices were reduced and operating functions were consolidated. The net reduction of goodwill is comprised of two components: (i) the sale of Simkin's Kinetidex technology for $350,000 and (ii) an impairment charge to goodwill related to Simkin for $650,000. As noted in footnote 4, "Sale of Technology and Net Impairment of Goodwill", Semotus elected to sell the royalty rights and software of Kinetidex 2.0 to Micromedex, Inc., the joint developer and exclusive distributor of the product. Semotus received $350,000 for the product and all future royalty rights. Semotus considered a variety of factors for a potential impairment of goodwill, which included the sale of the technology, future prospects of Simkin's business, and importantly, the consideration paid for Simkin, which was substantially all common stock. Subsequent to the acquisition, the price of the common stock of Semotus has declined from $14.375 to $0.75 as of December 31, 2001. Consequently, Semotus elected to take a goodwill impairment charge of $650,000. Depreciation and amortization expense includes depreciation of computers and other related hardware and certain fixtures. Amortization includes goodwill costs and certain intellectual property costs. The increase in this expense is primarily the result of the amortization of goodwill from the Company's acquisitions and the amortization associated with the warrants awarded to Chase in connection with Global Market Pro. The non-cash charges for compensation consists mainly of grants of stock, options and warrants for services provided to the Company. Such services include financial, marketing and public relations consulting. Additionally, common stock was issued for certain accrued liabilities. - -------------------------------------------------------------------------------- Page 19 The common stock issued was valued at its fair market value at the time of issuance, or in the instance of common stock purchase warrants, in accordance with the Black-Scholes pricing guidelines. Certain employee stock options, which have been repriced, are subject to the variable plan requirements of APB No. 25, that requires the Company to record compensation expense for changes in the fair value of the Company's common stock. While no compensation expense was required to be recognized in the three months and nine months ended December 31, 2001 or 2000, expense will be recognized in the future if the stock price increases above the revised exercise price of the options. NON-OPERATING INCOME AND EXPENSES Non-operating income and expenses for the three and nine months ended December 31, 2001 and 2000 are primarily interest income from invested cash, interest expense from notes payable, amortization of advances from technology sales received in previous periods, and the owner's fees and offsetting interest income recognized, related to the technology sales. The following tables reflect the changes in other income (unaudited). Three Months Ended Nine Months Ended December 31, December 31, DESCRIPTION 2001 2000 2001 2000 - ----------- ----------- ----------- ----------- ----------- Owner's fee sales of technology $ (392,250) $ (392,250) $(1,176,750) $(1,176,750) Interest on note from sales of technology 392,250 392,250 1,176,750 1,176,750 Amortization of technology advances 75,731 60,315 233,345 266,375 Miscellaneous expense (11,205) (14,400) (25,953) (8,773) ----------- ----------- ----------- ----------- Total non-operating income $ 64,526 $ 45,915 $ 207,392 $ 257,602 =========== =========== =========== =========== Net Interest Income $ 66,082 $ 168,672 $ 216,604 $ 599,060 =========== =========== =========== =========== Net Interest income declined as less cash was available for investment during the three and nine month periods ended December 31, 2001 versus 2000. The major source of cash for the three months and nine months ended December 31, 2000 was the exercise of common stock warrants and options. Amortization of technology advances decreased somewhat in the nine months ended December 31, 2001, due to the application of the effective interest method of amortization on the balances. COMPREHENSIVE LOSS The 41.6% reduction in the comprehensive loss of $1,977,143 or $(0.11) per share for the three months ended December 31, 2001, compared to $3,384,859 or $(0.22) per share for the three months ended December 31, 2000, is a direct result of the implementation of cost reduction programs which have consolidated and centralized Semotus' operating units. The comprehensive loss of $8,614,394 or $(0.51) per share in the nine months ended December 31, 2001 as compared to $7,720,655 or $(0.51) per share in the nine months ended December 31, 2000 was due primarily to two factors: (i) a very large increase in non-cash charges from acquisitions including goodwill and impairment, and the amortization of intellectual property, and (ii) an increase in engineering costs related to the introduction of upgraded wireless products. SEGMENT RESULTS Due to additional businesses resulting from the acquisitions, Semotus began reporting segment information in the fourth quarter of the fiscal year ended March 31, 2001. The Company has reclassified the three and nine months ended December 31, 2000 for comparison purposes, although Semotus did not have separate segments at that time. - -------------------------------------------------------------------------------- Page 20 Semotus' business has evolved into four segments: wireless services, enterprise and commerce sales, professional and related services and logistic system sales. (See Footnote 10, "Segment Information" for further information about each of the segments.) Specific results of the segments are discussed under "Revenues" and "Cost of Revenues and Gross Margin" in this section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations". All segment financial information presented is unaudited.
Professional Logistic Wireless Enterprise and and related system Corporate Services commerce sales services sales and other Total ------------ ------------ ------------ ------------ ------------ ------------ As of and for the Three Months Ended December 31, 2001 Revenue $ 346,421 604,208 156,302 316,662 -- $ 1,423,593 Gross Profit $ 237,636 191,818 85,252 175,095 -- $ 689,801 Operating loss* $ (122,550) (47,035) 33,737 (119,979) (1,845,180) $ (2,101,007) Depreciation and Amortization $ 73,742 38,261 77,122 8,393 799,155 $ 996,673 Capital Expenditures $ 4,172 -- -- -- -- $ 4,172 Total Assets, December 31, 2001* $ 8,797,980 4,979,388 930,871 1,417,831 4,153,816 $ 20,279,885 As of and for the Nine Months Ended December 31, 2001 Revenue $ 1,017,190 2,068,401 597,029 1,186,303 -- $ 4,868,923 Gross Profit $ 597,159 534,364 222,671 589,054 -- $ 1,943,248 Operating loss* $ (638,950) (766,211) (505,857) (133,640) (6,956,468) $ (9,001,126) Depreciation and Amortization $ 233,873 107,127 196,751 21,402 2,426,389 $ 2,985,542 Capital Expenditures $ 14,992 -- -- 5,715 -- $ 20,707 Total Assets, December 31, 2001* $ 8,797,980 4,979,388 930,871 1,417,831 4,153,816 $ 20,279,885 As of and for the Three Months Ended December 31, 2000 Revenues $ 324,859 744,273 305,561 -- -- $ 1,374,693 Gross Profit $ 158,451 218,863 275,004 -- -- $ 652,318 Operating loss* $ (417,884) (234,584) (159,502) -- (2,793,589) $ (3,605,559) Depreciation and Amortization $ 38,513 7,128 13,222 -- 322,061 $ 380,924 Capital Expenditure $ 196,794 -- -- -- -- $ 196,794 Total Assets, December 31, 2000* $ 13,374,176 1,767,041 3,343,107 -- 5,938,539 $ 24,422,862 As of and for the Nine Months Ended December 31, 2000 Revenues $ 1,365,086 2,650,818 323,147 -- -- $ 4,339,051 Gross Profit $ 621,762 827,391 290,832 -- -- $ 1,739,985 Operating loss* $ (1,185,619) (381,797) (156,125) -- (6,846,275) $ (8,569,816) Depreciation and Amortization $ 77,658 17,338 13,222 -- 965,155 $ 1,073,373 Capital Expenditure $ 511,675 -- -- -- -- $ 511,675 Total Assets, December 31, 2000* $ 13,374,175 1,767,041 3,343,107 -- 5,938,539 $ 24,422,862 * Certain corporate marketing, research and development and general and administrative costs have not been allocated to the segments and have been included in "Corporate and other". The $4,153,816 and $5,938,539 of assets at December 31, 2001 and 2000 respectively, of assets under "Corporate and other" is comprised of the GMP Intellectual Property, Semotus' Global Market Pro wireless financial product.
LIQUIDITY AND CAPITAL RESOURCES The overall decrease in the cash position of Semotus is due to the continued operating losses at the Company. Cash continued to be spent on operating resources and upgrading wireless products although a cash management and cost reduction program has been implemented and has reduced the overall cash loss by 49.8%. In the nine months ended December 31, 2000 warrants and options were converted to common stock, which provided cash and which has been reduced significantly in the nine months ended December 31, 2001. The sources and uses of cash are summarized as follows (unaudited): - -------------------------------------------------------------------------------- Page 21 NINE MONTHS ENDED DECEMBER 31, 2001 2000 ----------- ----------- Cash used in operating activities $(4,274,735) $(7,336,543) Cash provided by (used in) investing activities 1,425,765 (671,118) Cash (used in) provided by financing activities (188,625) 1,958,164 ----------- ----------- Net decrease in cash and cash equivalents $(3,037,595) $(6,049,497) =========== =========== Cash used in operating activities consisted principally of a net loss of $8,577,130 offset somewhat by non-cash charges of $2,985,542 of depreciation and amortization and $386,275 of stock based compensation. Further, the impairment of goodwill of $650,000 also offset the net loss. Other operating activities that contributed to offsetting the use of cash were $795,936 in the net change of current assets and current liabilities. This largely resulted from receivable collections of $151,924 and increases in accounts payable of $149,864 and accrued liabilities of $176,303. Cash provided from investing activities of $1,425,765 resulted principally from $1,096,472 of cash received, net of assets acquired from the two companies acquired in the period ended June 30, 2001, plus $350,000 from the sale of the Kinetidex technology. Cash flows from financing activities produced a net decrease in cash of $188,625 which resulted from $200,293 of repayments on notes payable and capital leases offset slightly by $11,668 in cash received from the exercise of stock options. As of December 31, 2001, the Company had cash and cash equivalents amounting to $4,806,447, a decrease of $3,037,595 from the balance at March 31, 2001. Working capital decreased to $3,001,825 from $7,780,783 at the fiscal 2001 year end. The decrease in working capital is from the resources used in the operations of Semotus as explained above. The Company has not yet generated sufficient revenues to cover the costs of continued product development and support, sales and marketing efforts and general and administrative expenses. There are no material commitments for capital expenditures at December 31, 2001. Management believes that it has adequate working capital for the next 12 months. RECENT PRONOUNCEMENTS: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not currently or intend to engage in any derivative or hedging activities. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB 101B which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 provides guidance on necessary disclosures relating to revenue recognition policies in addition to outlining the criteria that must be met in order to recognize revenue. SAB 101 did not have a material effect on the Company's consolidated results of operations or financial position. In March 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) published their consensus on EITF Issue No 00-3, "Application of AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, to Arrangements that Include the Right to Use Software Stored on Another's Entity's Hardware". The EITF consensus gives guidance on accounting for hosting arrangements. The Company does not expect the adoption of EITF Issue No. 00-3 to have a material effect on its consolidated results of operations or financial position. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion - -------------------------------------------------------------------------------- Page 22 No. 25". Interpretation No. 44 clarifies the application of Opinion 25 for the following issues: (1) the definition of employee for purposes of applying Opinion 25, (2) the criteria for determining whether a plan qualifies as a noncompensatory plan, (3) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (4) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000. Due to the repricing of employee stock options in December 2000, the adoption of Interpretation No. 44 may have a material effect on the Company's financial position and results of operations in the future. For the periods ended June 30, 2001 and 2000, the effect was immaterial. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combination (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using both the pooling-of-interests and purchase methods. The pooling-of-interests method does not result in the recognition of acquired goodwill or other intangible assets. As a result, the adoption of SFAS 141 and 142 will not affect the results of past transactions accounted for under the pooling-of-interests method. However, all future business combinations will be accounted for under the purchase method, which may result in the recognition of goodwill and other intangible assets, some of which will be recognized through operations, either by amortization or impairment charges, in the future. For purchase business combinations completed prior to December 31, 2001, the net carrying amount of goodwill is $7,057,424 and other intangible assets is $721,198. Amortization expense for goodwill during the three and nine month period ended December 31, 2001 was $459,156 and $1,396,449 respectively. The Company intends to complete the transitional goodwill impairment test within six months from the date of adoption. The impact of the adoption of SFAS 141 and SFAS 142 on the Company's financial position and results of operations could be material. In August 2001, the FASB issued SFAS No. 143 (SFAS 143) "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143 addresses financial accounting and reporting for the retirement obligation of an asset. SFAS 143 states that companies should recognize the asset retirement cost, at its fair value, as part of the cost of the asset and classify the accrued amount as a liability in the balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. SFAS 143 will be effective for fiscal years beginning after June 15, 2002. At this time, the Company does not expect that the implementation of SFAS 143 will have any material impact on its financial position, results of operations, or cash flows. In October 2001, the FASB issued SFAS No. 144 (SFAS 144) "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes the SFAS No. 121 by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The - -------------------------------------------------------------------------------- Page 23 impact of adopting SFAS 144 on the Company's financial position and result of operations could be material. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report includes forward-looking statements relating to, among other things, projections of future results of operations, our plans, objectives and expectations regarding our future services and operations and our acquisitions of Cross, Simkin, Wares, Five Star, Tech-ni-comm, WizShop and Application Design Associates and general industry and business conditions applicable to us. We have based these forward-looking statements on our current expectations and projections about future events. You can find many of these forward-looking statements by looking for words such as "may", "should", "believes", "expects", "anticipates", "estimates", "intends", "projects", "goals", "objectives", or similar expressions in this document or in documents incorporated herein. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us that could cause actual results to differ materially from those in such forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to, our limited operating history, our historical losses, the infancy of the wireless data industry where there is no established market for our products and services, our ability to adapt to rapid technological changes, our dependence on wireless networks owned and controlled by others, and the other factors that we describe in the section entitled "Risk Factors" in the Form 10KSB that we filed with the SEC on June 26, 2001. Semotus Solutions claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK We have limited exposure to financial market risks, including changes in interest rates. At December 31, 2001, we had cash and cash equivalents of $4,806,447 and restricted cash of $693,286. Cash and cash equivalents consisted of demand deposits and money market accounts. Because of the cash equivalency of the money market accounts and the liquidity thereof, there is no material exposure to interest rates for these accounts. The Company also has short-term notes payable in the amount of $693,401, at December 31, 2001. These notes are due and payable within one year. Because of the short-term nature of the notes and the fixed rate on the notes, there is no material exposure to changes in interest rates for these accounts. The Company does not have any derivative or hedge instruments at December 31, 2001. Semotus has a permanent engineering operation in Vancouver, B.C., Canada and therefore has an exposure to the Canadian and U.S. dollar exchange rate. The Company, in the ordinary course of its business, transfers funds to the Canadian company and records the translation at the current exchange rate. The Company records translation gains and losses in Comprehensive Income. At December 31, 2001, the cumulative translation loss was $139,800. Given the relative stability of the Canadian and U.S. dollar exchange rate, the Company has not deemed it necessary to hedge this exposure. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, management believes that liabilities arising from these matters will not have a material adverse effect on the consolidated results of operations or financial position of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company issued securities, which were not registered under the Securities Act of 1933, as amended, as follows: During the Quarter ended December 31, 2001, the Company issued a total of 245,697 shares of its common stock to suppliers of services to the Company or to settle certain liabilities of the Company. With respect to these transactions, the Company relied on Section 4(2) of the Securities Act of 1933, as amended. The investors were given complete information - -------------------------------------------------------------------------------- Page 24 concerning the Company. The appropriate restrictive legend was placed on the certificates and stop transfer instructions were issued to the transfer agent. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits Exhibit 2.1 - Common Stock Purchase Agreement by and among Application Design Associates, Inc., John Hibben and 2007978 Ontario, Inc. dated January 18, 2002. Exhibit 2.2 - Agreement to Amend the Merger Agreement and Employment Agreement by and among Semotus Solutions, Inc., Application Design Associates, Inc., and John Hibben dated January 18, 2002. Exhibit 4.1 - Warrant to purchase 150,000 shares of Semotus' common stock issued to 2007978 Ontario, Inc. dated January 18, 2002 b) Reports on Form 8-K: None. - -------------------------------------------------------------------------------- Page 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. SEMOTUS SOLUTIONS, INC. Date: February 14, 2002 By: /s/ Anthony N. LaPine -------------------------------------- Anthony N. LaPine, President and Chief Executive Officer (Principal Executive Officer) By: /s/ Charles K. Dargan, II -------------------------------------- Charles K. Dargan, II, Chief Financial Officer (Principal Financial Officer) and Director - -------------------------------------------------------------------------------- Page 26 EX-2.1 3 dex21.txt COMMON STOCK PURCHASE Exhibit 2.1 APPLICATION DESIGN ASSOCIATES, INC. ----------------------------------- COMMON STOCK PURCHASE AGREEMENT ----------------------------------- JANUARY 18, 2002 This Common Stock Purchase Agreement (the "Agreement") is made as of January 18, 2002 by and among Application Design Associates, Inc., a Delaware company (the "Company") a wholly owned subsidiary of Semotus Solutions, Inc., a Nevada company ("Semotus"), John Hibben ("Hibben"), and 2007978 Ontario Inc., an Ontario company (the "Purchaser"). RECITALS WHEREAS Semotus has agreed to sell shares of the Company's common stock representing 49% of the issued and outstanding common stock of the Company to the Purchaser; and grant to the Purchaser an option to purchase the remaining shares of the Company at a specified future date, and a warrant to purchase shares of common stock of Semotus; WHEREAS the Purchaser has agreed to purchase the Purchased Shares, and accept the Warrant and Option in consideration of the Purchase Price, on the terms and conditions contained herein; WHEREAS, all defined terms defined herein shall have the meanings given to them in Schedule A hereto and otherwise in this Agreement. NOW THEREFORE, for good and valuable consideration, in consideration of the mutual covenants and conditions set forth herein, and with the intent to be legally bound hereby, the Company, Semotus, Hibben and the Purchaser agree to the following: SECTION 1: SALE OF COMMON STOCK 1.1 SALE OF COMMON STOCK. Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase at the Closing, and Semotus agrees to sell to the Purchaser for an aggregate purchase price of $250,000 (the "Purchase Price"), (a) 49 shares of the Company's Common Stock free and clear of all Encumbrances (being 49% of the issued and outstanding stock of the Company as of the Closing Date) (the "Purchased Shares"), (b) a warrant to purchase 150,000 shares of Semotus common stock at an exercise price per share of $.75, on the terms and conditions contained in a Warrant between the Purchaser and Semotus, in substantially the form attached hereto as Schedule 1.1(b), and (c) an option granted by Semotus (the "Option") to purchase all of the remaining outstanding shares (being 51% of the issued and outstanding stock of the Company) free and clear of all Encumbrances ("Option Shares") as set forth in Section 1.2 hereof. 1.2 OPTION TO PURCHASE. (a) The Purchaser shall have the right (but not the obligation) to exercise the Option by giving written notice to Semotus in accordance with Section 11.5 hereof no later than March 1, 2003 (the "Option Exercise Date"), subject only to compliance by the Purchaser, or waiver by Semotus of the covenants set forth in Sections 8.1 and 8.2 of this Agreement up to the Option Exercise Date. If the Option is exercised, the closing of the purchase of the Option Shares shall be completed no later than April 1, 2003 (provided there is compliance or waiver of Sections 8.1 and 8.2 up to April 1, 2003), or such other date to which the Closing may be accelerated pursuant to Section 1.3 (the "Option Closing Date"). The consideration for the Option Shares (the "Option Price") shall be, at the Purchaser's sole and absolution discretion, (a) $2.5 million in cash payable by cheque or wire transfer to Semotus, as directed by Semotus, on the Option Closing Date; OR (b) the 250,000 shares of the common stock of Semotus owned by Hibben on the Closing Date (the "Hibben Shares"), (which are as of Closing held by the Arapahoe Bank & Trust ("Arapahoe") as security for the Acquisition Loan (as defined in Section 6.9)), together with such other shares of Semotus as may be issued to Hibben by Semotus at any time between the Closing Date and the Option Closing Date pursuant to the terms and conditions of the Merger Agreement (as defined in Section 6.9) (the "Additional Hibben Shares"). The transfer of the Hibben Shares, and any Additional Hibben Shares, shall be in full consideration of the Option Price. (b) If the Purchaser exercises the Option, then Semotus and the Purchaser shall be deemed to have made the representations and warranties contained in Sections 4 and 5 hereof, respectively, as if made as of the Option Closing Date, and the survival of such representations and warranties, and the indemnification by Semotus and the Purchaser respect thereto, shall be effective as and from the Option Closing Date for the periods outlined in Section 10 hereof. On the Option Closing Date, each of Semotus and the Purchaser shall provide a certificate of its President confirming that the representations and warranties contained in Sections 4 and 5, respectively, are true and correct as of the Option Closing Date, and if this is not the case, shall specify the extent to which same are no longer true and valid, and such information related thereto as requested by the other party. If the Purchaser determines in its sole discretion that the extent to which such representations and warranties are no longer true and valid will have a Material Adverse Effect on the Option Shares, the Purchaser may withdraw the Option exercise, and shall have no further obligation or liability with respect to the purchase of the Option Shares. 1.3 ACCELERATION OF OPTION. Notwithstanding anything to the contrary herein, if at any time between the Closing Date and the Option Closing Date Semotus' cash in the bank (as reported quarterly in the financial statements of Semotus or as otherwise reviewed by the Purchaser as provided herein) drops below one million dollars ($1,000,000) for thirty consecutive days, then upon discovery of such deficiency, either party shall immediately notify the other, the Option shall accelerate and become immediately exercisable, and the Purchaser shall have the right (but not the obligation) to exercise the Option for the consideration as set forth and as payable in Section 1.2 above, and the Option Closing Date, and all references and obligations with respect thereto, shall be deemed to be amended in accordance with the acceleration. The Purchaser shall have the right to review the books and records of Semotus at all reasonable times on 24 hours prior notice to monitor compliance with the foregoing. 1.4 SECURITY FOR OPTION SHARES. (a) Semotus shall deliver to the Purchaser, on Closing: (i) the Option Shares duly endorsed in blank for transfer, to be held by the Purchaser; and (ii) a share pledge agreement (the "Pledge") whereby Semotus pledges the Option Shares as security for the obligations of Semotus pursuant to this Agreement with respect to the Option Shares as outlined in the Pledge. (b) Hibben shall deliver to the Purchaser on Closing a direction to Semotus to issue any Additional Hibben Shares to the Purchaser. SECTION 2: CLOSING DATE, DELIVERY 2.1 CLOSING DATE. The closing (the "Closing") shall be held at 1735 Technology Drive, Suite 790, San Jose, CA 95110 on January [___], 2002 (the "Closing Date") or at such other time and place upon which the parties may agree. 2.2 DELIVERY. At the Closing, Semotus will deliver to the Purchaser a certificate representing the Purchased Shares duly endorsed and registered in the name of the Purchaser, the Option and the Warrant in exchange for the Purchase Price, payable by wire transfer to Semotus in accordance with Semotus' instructions. SECTION 3: REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY The Company and Semotus hereby jointly and severally represent and warrant to the Purchaser as follows, and acknowledge that the Purchaser is relying upon these representations and warranties in connection with the entering into of this Agreement and the completion of the transactions contemplated hereby: 3.1 CORPORATE ORGANIZATION AND AUTHORITY. The Company is a company duly organized and existing under and is in good standing under the laws of the State of Delaware. The Company has the corporate power and corporate authority to own and operate its properties and to carry on its Business as now conducted, and as proposed to be conducted, and is qualified to do business as a foreign corporation in Colorado and as outlined on Schedule 3.1. Neither the nature or location of the Business nor the location or character of the property owned or leased by the Company requires it to be registered, licensed or otherwise qualified as a foreign corporation in any jurisdiction other than Colorado, except where the failure to be so registered, licensed, or otherwise qualified would not have a Material Adverse Effect. 3.2 NO INSOLVENCY OF COMPANY - The Company has not taken any steps to file bankruptcy, nor have any steps been taken by any other person with respect to the bankruptcy, insolvency, winding up, liquidation or dissolution of the Company, nor has the Company defaulted on any obligation of the Company which would allow any Person to take any action against the Company for non-payment of an obligation. 3.3 CAPITALIZATION. As of immediately prior to the Closing, the authorized and issued capital stock of the Company and the ownership of the issued capital stock of the Company, is as set forth in Schedule 3.3. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable shares of capital stock of the Company, and are not subject to any pre-emptive rights or rights of first refusal created by the certificate of incorporation of the Company (the "Certificate") or the Company's by-laws (the "By-Laws") or any agreement to which the Company is a party or by which it is bound. There are no other options, warrants, calls, rights, commitments or agreements of any character to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of the Company or obligating the Company to enter into any such option, warrant, call, right, commitment or agreement. Except for the agreements contemplated by this Agreement, there are no contracts, commitments or agreements relating to voting, purchase or sale of Company's capital stock (i) between or among the Company and any of its security holders and (ii) between or among any of Company's security holders. All outstanding shares of capital stock of the Company were issued in compliance with all applicable federal and state securities laws. No holder of any of the issued capital stock of the Company has granted options or other rights to purchase any such shares from such holder. The Company has no obligation to declare or pay any dividend or make any other distribution in respect of any of the issued capital stock of the Company. 3.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of all obligations under this Agreement and for the sale, issuance and delivery of the Purchased Shares has been taken. This Agreement, and all ancillary agreements when executed and delivered by the Company, will constitute legally binding and valid obligations of the Company, enforceable in accordance with their terms, except as limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditor's rights generally, or general principles of equity. 3.5 VALIDITY OF SHARES. The Purchased Shares, when issued, sold and delivered in accordance with the terms and for the consideration expressed in this Agreement, shall be duly and validly issued (including, without limitation, issued in compliance with applicable federal and state securities laws), fully-paid and non-assessable, and free and clear of all Encumbrances. 3.6 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and performance by the Company of this Agreement will not result in any violation of or constitute a default under, with or without the passage of time or the giving of notice, (i) any provision of the Certificate or the By-Laws; (ii) any provision of any judgment, decree or Order to which the Company is a party or by which it is bound; (iii) any material contract, obligation or commitment to which the Company is a party or by which it is bound; or (iv) any statute, rule or governmental regulation applicable to the Company or Semotus. 3.7 NO DEFAULTS OR VIOLATIONS. The Company is not in violation of any term or provision of its Certificate or Bylaws, each as currently in effect, or any material term or provision of any indebtedness, mortgage, indenture, contract, agreement, judgment, statute, rule or regulation, decree or Order to which the Company is a party or by which it is bound. 3.8 CORPORATE RECORDS AND MINUTE BOOKS - The corporate records and minute books of the Company have been delivered to the Purchaser. The minute books include complete and accurate minutes of all formal meetings of the directors and/or stockholders of the Company held to date or resolutions passed by the directors or stockholders by written consent, since the date of its incorporation. The stock ledger book, register of stockholders, register of transfers and register of directors of the Company are complete and accurate. 3.9 BOOKS AND RECORDS - All Books and Records have been delivered to the Purchaser for inspection and fairly and correctly set out and disclose the financial position of the Company, and all financial transactions relating to the Business have been accurately recorded in the Books and Records. 3.10 APPROVAL OF BOARD OF DIRECTORS - The Board of Directors of the Company has, by resolutions duly executed, approved this Agreement and the transactions contemplated hereby. None of the resolutions has been amended or otherwise modified in any respect since the date of adoption thereof, and all such resolutions remain in full force and effect. 3.11 ARTICLES OF INCORPORATION AND BY-LAWS - True and complete copies of the Certificate and By-Laws, including any and all amendments have been delivered to the Purchaser, and such Certificate and By-Laws as so amended are in full force and effect and no amendments have been made or proposed prior to the Closing Date. 3.12 OFFICERS AND DIRECTORS - Set forth on Schedule 3.12 is a list of the current officers and directors of the Company. Each person holding a power of attorney or similar grant of authority on behalf of the Company is also listed on Schedule 3.12. Except as disclosed on such Schedule, the Company has not given any revocable or irrevocable powers of attorney to any person, firm, corporation or organization for any purpose whatsoever. 3.13 SUBSIDIARIES - The Company does not own or have any interest in any securities issued by, or any equity or ownership interest in, any other Person nor has the Company entered into any contract or agreement to acquire any other securities. 3.14 TITLE TO THE ASSETS - Except as set out in Schedule 3.14, the Company is the sole legal and beneficial owner of all of its assets and interests in assets, real and personal, with good, marketable and valid title thereto including, without limitation, all such assets reflected in the Financial Statements and the Unaudited Financial Statements, free and clear of all Encumbrances, except Permitted Encumbrances. 3.15 LOCATION OF THE ASSETS - All of the assets of the Company are situated at the properties located as outlined on Schedule 3.15. 3.16 CONDITION OF ASSETS -The Fixed Assets are in good condition, repair and (where applicable) proper working order, normal wear and tear excepted, having regard to their use and age, and have been properly and regularly maintained. Schedule 3.16 contains a list of all Fixed Assets, and since the date of most recent Unaudited Financial Statements, the Company has not sold or disposed of any Fixed Assets nor have any of the Fixed Assets ceased to function or become obsolete. 3.17 MANAGEMENT RECOMMENDATION LETTERS - Neither the Company nor Semotus nor their respective Board of Directors has received from its auditors or accountants during the last five years any management recommendation letters which raised issues concerning the financial condition or practices of the Company. 3.18 ABSENCE OF CONFLICTING AGREEMENTS - The Company is not a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, obligation, instrument, charter or by law provision, order, judgment, decree, license or permit, or any law, statute or regulation, which would be violated, contravened, breached by, or under which default would occur or an encumbrance would be created as a result of the execution and delivery of, or the performance by the Company of any of its obligations provided for under, this Agreement or any other agreement required hereunder, other than as outlined on Schedule 3.18. 3.19 ABSENCE OF INDEBTEDNESS - Except as disclosed in the Financial Statements or Unaudited Financial Statements or Schedule 3.19, the Company does not have any bonds, debentures, mortgages, promissory notes or other indebtedness and the Company is not under any obligation to create or issue any bonds, debentures, mortgages, promissory notes or other indebtedness. 3.20 REGULATORY APPROVALS - No Governmental Authorization, approval, order, consent or filing is required on the part of the Company, in connection with the execution, delivery and performance of this Agreement or any other documents and agreements to be delivered under this Agreement, or the performance of the Company's obligations under this Agreement. There are no licenses, permits or other authorizations required to be obtained from any Governmental Authorities for the sale or distribution of the Products by the Company. 3.21 FINANCIAL STATEMENTS - The Financial Statements have been prepared in accordance with GAAP, and are true and complete and fairly present the financial condition of the Company, including the assets and liabilities and the revenues, expenses and results of the operations of the Company for such periods. 3.22 UNAUDITED FINANCIAL STATEMENTS - The Unaudited Financial Statements have been prepared by management of the Company and fairly present: (a) all of the assets, liabilities and financial position of the Company as at the end of the period covered by the Unaudited Financial Statements; and (b) the sales, earnings and results of operation of the Company for the period covered by the Unaudited Financial Statements. 3.23 ABSENCE OF LIABILITIES - There are no liabilities (whether accrued, absolute, contingent or otherwise) of the Company and there is no basis for assertion against the Company of any liabilities of any kind, other than (a) as disclosed on Schedule 3.23, or (b) disclosed in the Financial Statements or Unaudited Financial Statements, or (c) which have been incurred since the end of the period covered by the Unaudited Financial Statements in the ordinary course of business and which do not individually or in the aggregate exceed $5,000, or (d) are liabilities under the executory portion of any written purchase order, sales order, lease, agreement or commitment of any kind which was entered into in the ordinary course of business which, individually or in the aggregate, has or would have a Material Adverse Effect. 3.24 ABSENCE OF CHANGES - Except as disclosed on Schedule 3.24, since the end of the period covered by the Unaudited Financial Statements, there has not been: (a) any Material Adverse Change in the financial condition, liabilities or operations of the Company other than as disclosed in the Financial Statements or Unaudited Financial Statements, and other than changes in the ordinary and usual course of business; (b) any damage, destruction, loss or labour trouble (whether or not covered by insurance) affecting the Business, assets or properties of the Company which, individually or in the aggregate, has or would have a Material Adverse Effect. 3.25 ABSENCE OF UNUSUAL TRANSACTIONS - Except as disclosed on Schedule 3.25, since the end of the period covered by the Unaudited Financial Statements, the Company has carried on the Business in the ordinary course and has not done any of the following, which, individually or in the aggregate, has or would have a Material Adverse Effect: (a) transferred, assigned, sold or otherwise disposed of any of the assets shown or reflected in the Unaudited Financial Statements or cancelled any debts or entitlements except, in each case, in the ordinary and usual course of business; (b) except as set forth in Section 3.25, discharged or satisfied any Encumbrance, or paid any obligation or liability (fixed or contingent) other than liabilities included in the Unaudited Financial Statements and liabilities incurred since the end of the period covered by the Unaudited Financial Statements in the ordinary and usual course of business; (c) suffered an operating loss or any extraordinary loss, waived or omitted to take any action in respect of any rights of substantial value, or entered into any commitment or transaction not in the ordinary and usual course of business; (d) granted any bonuses, whether monetary or otherwise, or made any general wage or salary increases in respect of Employees, executive officers or other supervisory personnel of the Company, or changed the terms of employment for any Employee or amended, modified or changed any Pension/Benefit Plans, except in the ordinary course of business and consistent with past practice; (e) hired or dismissed any senior Employees; (f) mortgaged, pledged, subjected to Encumbrance, granted a security interest in or otherwise encumbered any of its assets or property, whether tangible or intangible; (g) directly or indirectly, declared or paid any dividends or declared or made any other payments or distributions on or in respect of any of its shares and has not, directly or indirectly, purchased or otherwise acquired any of its shares; (h) suffered any change in the relations with or loss of its customers or suppliers, or any loss of business or change in the terms offered to customers, operations or financial condition; (i) made any individual capital expenditure (including any capital leases) in excess of $5,000; (j) issued or sold any additional shares of capital stock, options or rights to acquire capital stock or the securities of the Company; (k) entered into any borrowing transaction; (l) changed the terms of its relationship with any bank, lender or creditor; (m) changed its accounting methods, practices or principles; (n) terminated or waived any rights of value to the Company; (o) changed the terms of indebtedness of the Company for borrowed money, or experienced any other transaction or event other than in the ordinary course of business; (p) entered into any lease of greater than 12 months, or unusual contractual purchase commitment, or other transaction, or engaged in any conduct inconsistent with past business practices; (q) adopted or amended any Pension/Benefit Plans; or (r) authorized, agreed or otherwise become committed to do any of the foregoing. 3.26 RESERVES AND ACCRUALS - The reserves and Accrued Liabilities disclosed on or reflected in the Financial Statements, Unaudited Financial Statements, and the Books and Records are sufficient to provide for the liabilities in respect of which they have been established to the best of the Company's knowledge. 3.27 NON-ARM'S LENGTH TRANSACTIONS - Except as disclosed in the Financial Statements, the Unaudited Financial Statements and Schedule 3.27 to this Agreement, no director or officer, former director or officer, shareholder or Employee or any other Person not dealing at Arm's Length with the Company has any indebtedness, liability or obligation to the Company, and the Company is not indebted or otherwise obligated to any such Person. 3.28 NO JOINT VENTURE INTERESTS, ETC. - Except as disclosed on Schedule 3.28, the Company is not a partner, beneficiary, trustee, co-tenant, joint venturer or otherwise a participant in any partnership, trust, joint venture, co-tenancy or other similar jointly owned business undertaking and the Company has no other significant investment interests in any business owned or controlled by any third party. 3.29 ABSENCE OF GUARANTEES - Except as disclosed on Schedule 3.29, the Company has not given or agreed to give, or is a party to or bound by, any guarantee or indemnity in respect of indebtedness, or other obligations, of any Person, or any other commitment by which the Company is, or is contingently, responsible for such indebtedness or other obligations. 3.30 ABSENCE OF WARRANTIES - Except as described in Schedule 3.30: (a) the Company has not given any warranty in respect of any of the Products sold or the services provided by it, except for warranties implied by Law, and warranties made in the ordinary course of the Business and in the form of the Company's standard written warranties, copies of which have been provided to the Purchaser and are attached as Schedule 3.30, and; (b) the Company is not required to provide any letters of credit, bonds or other financial security arrangements in connection with any transactions with its suppliers or customers. 3.31 MAJOR SUPPLIERS AND CUSTOMERS - Schedule 3.31 sets forth a comprehensive listing of the major suppliers of goods and services to, and the five largest customers of, the Company. To the Company's knowledge, there have been no Material Adverse Changes in the business relationships of the Company and the major customers or major suppliers, there are no disputes between the Company and any of its suppliers or customers, and no major supplier or customer of the Company has advised the Company orally or in writing to change its relationship with or the terms upon which it conducts business with the Company as a result of the transfer of the Purchased Shares as contemplated in this Agreement, except as set forth on Schedule 3.31. Schedule 3.31 also lists all of the Contracts with customers which are in excess of $5,000, copies of which have been delivered to the Purchaser. 3.32 GOVERNMENT GRANTS - Schedule 3.32 contains a complete list of all current contracts or agreements relating to grants or other forms of assistance including, without limitation, loans with interest at below market rates, received by the Company from any Governmental Authority. 3.33 TRADE ALLOWANCES - Except as disclosed on Schedule 3.33, no customer of the Company is entitled to or customarily receives discounts, allowances, volume rebates or similar reductions in price. Schedule 4.33 sets out the current product price lists and fees for services of the Company. 3.34 ACCOUNTS RECEIVABLE - Except as provided on Schedule 3.34, the Accounts Receivable (i) are fairly recorded in the Books and Records, (ii) are bona fide accounts receivable, (iii) have arisen in the ordinary course of business, (iv) are not subject to any defence, counterclaim or set off of which the Company has received written notice and, (v) subject to the allowance for doubtful accounts contained in the Unaudited Financial Statements, are fully collectible within 120 days of the date of invoice for each such Account Receivable. 3.35 INVENTORY - Except as disclosed in Schedule 3.35, the inventories reflected in the Unaudited Financial Statements are (i) free from defects in workmanship and material, (ii) not obsolete, and (iii) saleable in the ordinary course of business. The level of inventories is consistent with that maintained by the Company prior to the date of this Agreement in accordance with its normal business practices. 3.36 BUSINESS IN COMPLIANCE WITH LAW - The Business has been and is now conducted in compliance with all applicable Laws of each jurisdiction in which the Company carries on or has carried on the Business, except where the violation or failure to comply, individually or in the aggregate, would not have a Material Adverse Effect. The Company has not received any notice of any alleged breach of any such Laws. The Company has all Governmental Authorizations required by the Company to carry on the Business in compliance with applicable Laws and such Governmental Authorizations are in full force and effect in accordance with their terms, and there have been no violations thereof and no notice of any such violation has been issued by any Governmental Authority and no proceedings are pending or, threatened, which could result in their revocation or limitation. 3.37 RESTRICTIVE COVENANTS - The Company is not a party to or bound or affected by any commitment, agreement or document containing any covenant expressly limiting the freedom of the Company to compete in any line of business or geographic area, transfer or move any of its assets or operations or which materially or adversely affects the business practices, operations or conditions of the Company as presently conducted. 3.38 INTELLECTUAL PROPERTY - (a) The Company owns or has a valid right to use and Schedule 4.38 lists all registered and unregistered Trade-marks, registered Copyrights, Patents, trade names and service marks, and any applications therefor included in the Intellectual Property, including the jurisdictions in which each such application and registration has been issued or registered, respective registration or application numbers and the names of all registered owners. Except as disclosed on Schedule 3.38, and to the Company's knowledge, the Company is the sole and exclusive owner of all Intellectual Property, with all right, title and interest in and to (free and clear of all Encumbrances except Permitted Encumbrances), and has the sole and exclusive right (and are not obligated in any way to pay any compensation to any Person in respect thereof) to the use thereof or the material thereby covered, except where the failure to be the exclusive owner, or have the sole and exclusive right would not have a Material Adverse Effect. (b) There are no restrictions on the ability of the Company to use and exploit all of its rights in the Intellectual Property, all statements contained in any Trade-mark and patent applications were true and correct in all material respects as of the date of such applications, the Trade-marks and trade names included in the Intellectual Property are in use, and none of the rights of the Company in the Intellectual Property will be impaired or affected in any way by the transactions contemplated by this Agreement. The Company has not entered into any agreement granting any person the right to use the Intellectual Property. (c) To the Company's knowledge, the conduct of the Business and the use of the Intellectual Property does not infringe, and the Company has not received any notice, complaint, threat or claim alleging infringement of any Intellectual Property or proprietary right of any other Person and there are no any grounds upon which any claim alleging infringement of Intellectual Property or proprietary right of any Person may be made successfully. To the Company's knowledge, no person has infringed the Intellectual Property rights of the Company. There has been no litigation commenced or threatened within the past five years with respect to the Intellectual Property or the rights of the Company therein. (d) The Company has not received written notice of any claim against the Company with respect to the use or performance of any Intellectual Property. 3.39 COMPUTER SYSTEMS - (a) Computer Hardware - Schedule 3.39 includes a list of all Computer Hardware owned or leased by the Company or used by the Company with a book value of $5,000 or more as of Closing. All Computer Hardware is in good condition and repair and in proper working order, normal wear and tear excepted. (b) Software - Schedule 3.39 includes a list of all Software used by the Company except Software consisting of standard off-shelf programs generally available for retail purchase. All Software listed in Schedule 3.39 is either owned by the Company, or licensed by the Company pursuant to written license agreements, and are not subject to any escrow agreements. There are no problems or defects in the Software, including, without limitation, bugs, logic errors or failures of the Software to operate as described in any related documentation. All Software is free from computer viruses and disabling codes. Any exception to any of the foregoing statements is set forth on Schedule 3.39. (c) Computer Systems - The Computer Systems used by the Company are sufficient to allow the Company to carry on the Business as it is currently being conducted. 3.40 EQUIPMENT CONTRACTS - Schedule 3.40 sets forth a complete list of all Equipment Contracts together with a description of the equipment and vehicles to which the Equipment Contracts relate. All of the Equipment Contracts are in full force and effect and no default exists on the part of the Company or on the part of any of the other parties thereto. The entire interest of the Company under each of the Equipment Contracts is held by it free and clear of any Encumbrances, except Permitted Encumbrances, and all payments due under the Equipment Contracts have been duly paid. 3.41 OWNED REAL PROPERTY - The Company does not own, nor has it ever owned, any real property. 3.42 LEASED REAL PROPERTY - (a) Schedule 3.42 sets forth a complete list of all Leased Real Property of the Company. (b) All interests held by the Company in the Leased Real Property are held pursuant to an existing lease, and all of which are free and clear of all Encumbrances (other than Permitted Encumbrances). (c) All payments required to be made by the Company pursuant to any lease have been duly paid in accordance with the terms of such lease, and the Company is not otherwise in default in meeting any of its obligations with respect to any lease of the Leased Real Property, and no event exists which, but for the passing of time or the giving of notice, or both, would constitute a default by the Company with respect to the Leased Real Property. (d) The Company does not have any option, right of first refusal or other contractual right relating to the Leased Real Property, other than the lease related thereto, and the Company has not waived, or omitted to take any action in respect of any rights, including any rights of renewal, with respect to the Leased Real Property. (e) For so long as the Company has been a tenant thereunder, the Leased Real Property has at all times been operated in compliance with all applicable real property laws and zoning by-laws. Any and all occupancy permits required by the Company have been obtained and are in good standing. 3.43 ENVIRONMENTAL MATTERS - With respect to the Leased Premises or any other site or property presently or formerly owned, operated, leased or used by the Company, to the best of the knowledge of the Company or Semotus, except as set forth on Schedule 3.43: (a) no methylene chloride or asbestos is contained in or has been used or released; (b) all Hazardous Substances and wastes have been disposed of in accordance with all Environmental Laws; (c) the Company has not received notice (either verbal or written) of any non-compliance of the Facilities or its past or present operations with Environmental Laws; (d) no notices, administrative actions or suits are pending or threatened relating to a violation of any Environmental Laws; (e) the Company is not a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), or state analog statute, arising out of events occurring prior to the Closing Date; (f) there have not been in the past, and are not now, any Hazardous Substances on, under or migrating to or from any such property; (g) there are not now, any underground tanks or underground improvements at, on or under any such property including without limitation, treatment or storage tanks, sumps, or water, gas or oil wells; (h) there are no polychlorinated biphenyls (PCBs) deposited, stored, disposed of or located on any such property or any equipment on any such property containing PCBs at levels in excess of 50 parts per million; (i) there is no formaldehyde, nor any insulating material containing urea formaldehyde; (j) the Company's uses and activities therein have at all times complied with all Environmental Laws; and (k) the Company has all permits and licenses required to be issued under federal, state or local laws regarding Environmental Laws and are in full compliance with the terms and conditions of those permits. 3.44 EMPLOYMENT MATTERS - (a) Schedule 3.44 sets forth a complete list of all Employees, together with the titles and terms of employment, including, current salaries, bonus, profit sharing, commissions and other compensation (whether monetary or otherwise) paid or payable to each Employee, the date upon which such compensation became effective and the date upon which such Employee was first hired by the Company or its predecessors. Except as disclosed in Schedule 4.44, no Employee is on long term disability leave, maternity leave, extended absence or receiving workers' compensation. (b) Except for those written employment contracts identified in Schedule 3.44, there are no written or oral contracts of employment entered into with any Employees which are not terminable at will by the Company. (c) Other than those listed in Schedule 3.44, there are no employment policies, practices or plans, including policies, practices or plans regarding incentive compensation, stock options, severance pay or other terms or conditions of employment or terms or conditions upon which Employees may be terminated, which are binding upon the Company. (d) The Company has been and is being operated in full compliance with all Laws relating to its Employees, including employment standards, occupational health and safety, pay equity and employment equity. There are no pending complaints under such Laws for which the Company has received notice, whether by any Governmental Authority or any other Person, against the Company. (e) There are no complaints or any threatened complaints, against the Company, before any employment standards agency, branch or tribunal or human rights agency, branch or tribunal. Nothing has occurred which might reasonably lead to a complaint against the Company, under any human rights legislation, equal opportunity or affirmative action legislation or employment standards legislation. There are no outstanding decisions or settlements or pending settlements under any employment standards legislation which place any obligation upon the Company to do or refrain from doing any act. (f) All current assessments under any workers compensation Laws applicable to the Company have been paid or accrued and the Company has not been subject to any special or penalty assessment under such legislation. 3.45 COLLECTIVE BARGAINING AGREEMENTS - (a) The Company is not a party, either directly or by operation of law, to any collective bargaining agreement, letters of understanding, letters of intent or other written communication with any trade union or association which may qualify as a trade union, which would cover any of the Employees or any of its dependent contractors. (b) There is no outstanding notice of any unfair labour practice pending before the National Labor Relations Board or labour tribunal proceedings of any kind, including any proceedings which could result in certification of a trade union as bargaining agent for Employees or dependent contractors of the Company, and there have not been any such proceedings within the last two years. (c) There are no threatened union organizing activities involving the Employees of the Company. (d) The Company has not had any work stoppage, labour dispute or other labour problems. 3.46 PENSION AND OTHER BENEFIT PLANS - (a) Schedule 3.46 lists, with respect to the Company and any ERISA Affiliate: (i) all employee benefit plans (as defined in Section 3(3) ERISA) currently maintained or contributed to by the Company or any ERISA Affiliate, (ii) each loan made by the Company to a non-officer employee of the Company, the outstanding principal balance of which is in excess of $10,000, (iii) each outstanding loan by the Company to any officer or director of the Company; (iv) any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Internal Revenue Code of 1986, as amended section 125) (the "Code") or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements currently maintained or contributed to by the Company, (v) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements currently maintained or contributed to by the Company, (vi) other fringe or employee benefit plans, programs or arrangements maintained or contributed to by the Company that apply to senior management of the Company and that do not generally apply to all employees, (vii) each current or former employment or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of the Company of greater than $5,000 remain for the benefit of, or relating to, any present or former employee, consultant or director of the Company; and (viii) any qualified plan under Code Section 401(a) (together, the "Employee Plans"). (b) The Company has furnished to Purchaser a copy of each of the Company's Employee Plans and any related plan documents (including current trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and any current employee communications relating thereto) and has, with respect to each Employee Plan which is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for the last three plan years. Any Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied (or has time remaining in which to apply) to the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination or has been established under a standardized prototype plan for which an Internal Revenue Service opinion letter has been obtained by the plan sponsor and is valid as to the adopting employer. The Company has also furnished Purchaser with the most recent Internal Revenue Service determination or opinion letter issued with respect to each such Employee Plan, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Employee Plan subject to Code Section 401(a). The Company has also furnished Purchaser with all registration statements and prospectuses prepared in connection with each Employee Plan. (c) None of the Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person other than as required under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); (ii) there has been no "prohibited transaction", as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect on the Company; (iii) each Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), and the Company and with respect to those Employee Plans referenced in Section 4.46(a)(i), its ERISA Affiliates have performed all obligations required to be performed by them under, are not in default under or violation of, and have no knowledge of any default or violation by any other party to, any of the Employee Plans; (iv) neither the Company nor any ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Employee Plans; (v) all contributions required to be made by the Company or ERISA Affiliate to any Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Employee Plan for the current plan years; (vi) with respect to each Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred; (vii) no Employee Plan is covered by, and neither the Company nor any ERISA Affiliate has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code; and (viii) each Employee Plan can be amended, terminated or otherwise discontinued after the Closing Date in accordance with its terms, without liability to Purchaser (other than ordinary administrative expenses typically incurred in a termination event). With respect to each Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, the Company has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Employee Plan. No suit, administrative proceeding, action (other than routine claims for benefits) or other litigation has been brought, or is threatened, against or with respect to any such Employee Plan, including any audit or inquiry by the Internal Revenue Service or United States Department of Labor. No payment or benefit which will or may be made by the Company to any Employee will be characterized as an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. (d) With respect to each Employee Plan, the Company has complied with (i) the applicable health care continuation and notice provisions of COBRA and the regulations (including proposed regulations) thereunder, (ii) the applicable requirements of the Family Medical and Leave Act of 1993 and the regulations thereunder, and (iii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996 and the regulations (including proposed regulations) thereunder. (e) Except as disclosed in Schedule 3.46, there has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any ERISA Affiliate relating to, or change in participation or coverage under, any Employee Plan which would materially increase the expense of maintaining such Employee Plan above the level of expense incurred with respect to that Employee Plan for the most recent fiscal year included in the Company's financial statements. (f) The Company does not currently maintain, sponsor, participate in or contribute to, nor has it ever maintained, established, sponsored, participated in, or contributed to, any pension plan (within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (g) Neither the Company nor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA. (h) Each compensation and benefit plan required to be maintained or contributed to by the law or applicable custom or rule of the relevant jurisdiction outside of the United States is listed in Schedule 3.46. 3.47 INSURANCE - Schedule 3.47 sets forth a complete list of all policies of insurance which the Company maintains, including the name of the insurer, the risk insured against, the amount of coverage and the amount of any deductible. All such policies of insurance are in full force and effect and the Company is not in material default, as to the payment of premium or otherwise, under the terms of any such policy. There is no threat by any insurer to cancel said policies of insurance and/or refuse coverage on a claim. There is no event, situation or circumstance which would render any such contract of insurance void or would give reason to any such insurer to cancel any policy. Neither the Company has committed any act or failed to do anything which could invalidate the coverage under any insurance policy. The Company has not failed to present any claim under any such insurance policy in a due and timely fashion and has not received notice from any of the insurers denying any claim. 3.48 MATERIAL CONTRACTS - Except for the: - Customer Contracts listed in Schedule 3.31, - Government contracts/grants listed in Schedule 3.32, - Contracts with respect to Intellectual Property listed in Schedule 3.38, - Equipment Contracts listed in Schedule 3.40, - Employment contracts listed in Schedule 3.44, - Pension/Benefit Plans listed in Schedule 3.46, - Insurance policies listed in Schedule 3.47, and - Material Contracts listed in Schedule 3.48 the Company is not a party to or bound by any ongoing Material Contract. The Material Contracts listed in Schedule 3.48 are all in full force and effect unamended and no default exists under such Material Contracts on the part of any of the parties to such Contracts. The Company has the capacity, including the personnel, equipment and supplies, to perform all its obligations under the Material Contracts listed in Schedule 3.48. 3.49 CONSENTS - Other than as outlined on Schedule 3.49, no consents, approvals, authorizations or waivers are required to be obtained from any Person in connection with the completion of any of the transactions contemplated by, or any of the representations and warranties contained in this Agreement. 3.50 NO ORDERS OR CLAIMS - There is no injunction or restraining order issued preventing, and no pending or threatened claim, action, litigation or proceeding, judicial or administrative investigation against the Company by any Governmental Authority, that could reasonably prevent the consummation of the transactions contemplated in this Agreement or otherwise claim that this Agreement or the consummation thereof is improper or would give rise to proceedings under any statute or rule of law. 3.51 NEGOTIATIONS, ETC. - The Company has not entered into any negotiations, understandings, letters of intent (whether binding or otherwise) or implied contracts with any Person other than in the ordinary course of business and consistent with past practice or as listed on Schedule 3.51 pursuant to which such Person may assert or claim the existence of an obligation, contract or agreement on the part of or with the Company. 3.52 COPIES OF AGREEMENTS, ETC. - Current and complete copies of the: - Permitted Encumbrances listed in Schedule 3.14, - Conflicting Agreements listed in Schedule 3.18, - Government Grants listed in Schedule 3.32, - Equipment Contracts listed in Schedule 3.40 - Employment contracts listed in Schedule 3.44, - Pension/ Benefit Plans listed in Schedule 3.46, - Policies of insurance referred to in Section 3.47, and - Material Contracts listed in Schedule 3.48, have been delivered to the Purchaser and there are no current or pending negotiations with respect to the renewal, repudiation or amendment of any such agreement, plan or policy except as disclosed on said Schedules. 3.53 LITIGATION -There is no suit, action, litigation, investigation, claim, complaint, grievance or proceeding, including appeals and applications for review, in progress, or pending or threatened against the Company or any member of the Board of Directors of the Company before any court, Governmental Authority, commission, board, bureau, agency or arbitration panel which, if determined adversely to the Company, would: (a) adversely affect the Business or the properties or financial condition of the Company, (b) enjoin, restrict or prohibit the sale of the Purchased Shares as contemplated by this Agreement, or (c) prevent the Company from fulfilling any or all of its obligations set out in this Agreement or arising from this Agreement, and there are no grounds on which any such action, suit, litigation or proceeding might be commenced with any reasonable likelihood of success. There is not presently outstanding against the Company any judgment, decree, injunction, rule or order of any court, Governmental Authority, commission, board, bureau, agency or arbitrator. The Company has not filed and does not currently intend to file, any suit, action, litigation, claim, complaint, grievance or proceeding against any person or entity. 3.54 TAX MATTERS - (a) The Company has timely filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects with the appropriate Governmental Authority. The Company has timely paid all taxes and other assessments due, except those contested by it in good faith that are listed in the Schedule of Exceptions. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as or a collapsible corporation pursuant to Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a Material Adverse Effect. In the past six years, the Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. In the past six years, none of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since December 31, 2000, the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. The Company is not required to include in income any adjustment pursuant to Section 481(a) of the Code, by reason of any voluntary or involuntary change in accounting method (nor has any taxing authority proposed any such adjustment or change of accounting method). The Company has no liability for the Taxes of any Person, including without limitation itself, and including without limitation under Section 1374 of the Code or under Treasury Regulations Section1.1502-6 (or any similar provision of any state, local or foreign law), as a transferee or successor, by contract or otherwise. The Company is not a party to any agreement, plan, contract or arrangement that could result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. (b) The Company has not requested, or entered into any agreement or other arrangement or executed any waiver providing for, any extension of time within which (i) to file any Tax Return covering any Taxes for which it is or may be liable; (ii) to file any elections, designations or similar items relating to Taxes for which it is or may be liable; (iii) it is required to pay or remit any Taxes or amounts on account of Taxes; or (iv) any Governmental Authority may assess or collect Taxes for which it is or may be liable. (c) There are no Encumbrances for Taxes upon any assets of the Company, except Encumbrances for Taxes not yet due. (d) No deficiency for any Taxes has been proposed, asserted or assessed against the Company that has not been resolved and paid in full. There has been no audit of Taxes or other administrative proceeding or court proceeding with regard to any Taxes or Tax Returns of the Company, nor is any such audit of Taxes or other proceeding pending, nor has there been any written notice to the Company by any Governmental Authority regarding any such audit or other proceeding. 3.55 BANK ACCOUNTS, ETC. - Schedule 3.55 sets forth a complete list of every financial institution in which the Company maintains any depository account, trust account or safety deposit box and the names of all persons authorized to draw on or who have access to such accounts or safety deposit box. 3.56 NO BROKER - The Company has not employed any investment banker, broker, or finder in connection with the transactions contemplated in this Agreement. 3.57 FOREIGN CORRUPT PRACTICES ACT OF 1977 - The Company has not taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules and regulations thereunder. There is not now and there has never been any employment by the Company of, or beneficial ownership in the Company by, any governmental or political official in any country in the world. 3.58 FULL DISCLOSURE - The Company has made available to the Purchaser all information, including the financial, marketing, sales and operational information on a historical basis relating to the Company which would be material to a purchaser of the Company. No information which has been provided to the Purchaser contains any untrue statement of a material fact and no material fact or facts have been omitted therefrom which would make such information misleading. SECTION 4: REPRESENTATIONS AND WARRANTIES OF SEMOTUS Semotus hereby represents and warrants to the Purchaser as follows, and acknowledges that the Purchaser is relying upon these representations and warranties in connection with the entering into of this Agreement and the completion of the transactions contemplated hereby: 4.1 CORPORATE ORGANIZATION AND AUTHORITY. Semotus is a company duly organized and existing under and is in good standing under the laws of the State of Nevada. Semotus has the corporate power and corporate authority to own and operate its properties and to carry on its business as now conducted. 4.2 NO INSOLVENCY OF COMPANY. Semotus has not taken any steps to file bankruptcy, nor have any steps been taken by any other person with respect to the bankruptcy, insolvency, winding up, liquidation or dissolution of Semotus, nor has Semotus defaulted on any of its obligations which would allow any Person to take any action against Semotus for non-payment of an obligation that would have a Material Adverse Effect. 4.3 CAPITALIZATION OF COMPANY. As of immediately prior to the Closing Date, Semotus is the registered and beneficial owner of all of the issued and outstanding shares of the Company, being the Purchased Shares and the Option Shares, free and clear of all Encumbrances. The Purchased Shares and the Option Shares have been duly authorized and validly issued and are fully paid and non-assessable shares of capital stock of the Company, and are not subject to any pre-emptive rights or rights of first refusal created by any agreement to which Semotus is a party or by which it is bound. There are no other options, warrants, calls, rights, commitments or agreements of any character to which Semotus is a party or by which it is bound obligating Semotus to deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any of the Purchased Shares or the Option Shares, or obligating Semotus to enter into any such option, warrant, call, right, commitment or agreement. Except for the agreements contemplated by this Agreement, there are no contracts, commitments or agreements relating to voting, purchase or sale of the Purchased Shares or the Option Shares. 4.4 CAPITALIZATION OF SEMOTUS. As of December 31, 2001, the authorized and issued capital stock of Semotus and the ownership of the issued capital stock of Semotus, is as set forth in Schedule 4.4. All outstanding shares of capital stock of Semotus have been duly authorized and validly issued and are fully paid and non-assessable shares of capital stock of Semotus, and are not subject to any pre-emptive rights or rights of first refusal created by the certificate of incorporation of Semotus (the "Semotus' Certificate") or Semotus' by-laws (the "Semotus' By- Laws") or any agreement to which Semotus is a party or by which it is bound. Other than the Warrant and obligations with respect to the Additional Hibben Shares, there are no other options, warrants, calls, rights, commitments or agreements of any character to which Semotus is a party or by which it is bound obligating Semotus to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of Semotus or obligating Semotus to enter into any such option, warrant, call, right, commitment or agreement. Except for the agreements contemplated by this Agreement, there are no contracts, commitments or agreements relating to voting, purchase or sale of Semotus' capital stock (i) between or among Semotus and any of its security holders and (ii) between or among any of Semotus' security holders. All outstanding shares of capital stock of Semotus were issued in compliance with all applicable federal and state securities laws. No holder of any of the issued capital stock of Semotus has granted options or other rights to purchase any such shares from such holder. Semotus has no obligation to declare or pay any dividend or make any other distribution in respect of any of the issued capital stock of Semotus. 4.5 AUTHORIZATION. All corporate action on the part of Semotus, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of all obligations under this Agreement and for the sale and delivery of the Purchased Shares and the Option Shares has been taken or will be taken prior to the Closing Date and the Option Closing Date, as applicable. This Agreement, and all ancillary agreements, when executed and delivered by Semotus, will constitute legally binding and valid obligations of Semotus, enforceable in accordance with their terms. 4.6 VALIDITY OF SHARES. The Purchased Shares and the Option Shares, when sold and delivered in accordance with the terms and for the consideration expressed in this Agreement, shall be duly and validly issued (including, without limitation, issued in compliance with applicable federal and state securities laws), fully-paid and non-assessable, and free and clear of all Encumbrances. 4.7 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and performance by Semotus of this Agreement will not result in any violation of or constitute a default under, with or without the passage of time or the giving of notice, (i) any provision of the Certificate of Incorporation or the by-laws of Semotus; (ii) any provision of any judgment, decree or Order to which Semotus is a party or by which it is bound; (iii) any material contract, obligation or commitment to which Semotus is a party or by which it is bound; or (iv) any statute, rule or governmental regulation applicable to Semotus. 4.8 NO DEFAULTS OR VIOLATIONS. Semotus is not in violation of any term or provision of its articles or bylaws, each as currently in effect, or any material term or provision of any indebtedness, mortgage, indenture, contract, agreement, judgment, statute, rule or regulation, decree or order. 4.9 REGULATORY APPROVALS. No Governmental Authorization, approval, order, consent or filing is required on the part of Semotus, in connection with the execution, delivery and performance of this Agreement or any other documents and agreements to be delivered under this Agreement, or the performance of Semotus' obligations under this Agreement. SECTION 5: REPRESENTATIONS AND WARRANTIES OF PURCHASER The Purchaser hereby represents and warrants to Semotus, the Company as follows, and acknowledges that the Company is relying upon these representations and warranties in connection with the entering into of this Agreement and the completion of the transactions contemplated hereby: 5.1 EXPERIENCE. Purchaser has substantial experience in evaluating and investing in private placement transactions so that Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company. Purchaser, by reason of its business or financial experience or the business or financial experience of its professional advisors who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect its own interests in connection with the purchase of the Purchased Shares under this Agreement. 5.2 INVESTMENT. Purchaser is acquiring the Purchased Shares for investment for Purchaser's own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Purchased Shares have not been, and will not be, registered under the Securities Act by reason of a specific exemption therefrom, and that any such exemption would depend, among other things, upon the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed in this Agreement. 5.3 RULE 144. Purchaser acknowledges that the Purchased Shares must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring following the period of time prescribed by Rule 144, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. 5.4 NO PUBLIC MARKET. Purchaser understands that no public market now exists for any of the securities issued by the Company, that the Company has made no assurances that a public market will ever exist for the Purchased Shares and that even if such a public market exists at some future time, the Company may not then be satisfying the current public information requirements of Rule 144. 5.5 ACCESS TO DATA. Purchaser and its representatives have met with representatives of the Company and have had the opportunity to ask questions of, and receive answers from, said representatives concerning the Company and the terms and conditions of this transaction as well as to obtain any information requested by Purchaser. Assuming the truth and accuracy of the representations and warranties of Semotus and the Company, any questions raised by Purchaser or its representatives concerning the transaction have been answered to the satisfaction of Purchaser and its representatives. Purchaser's decision to purchase the Purchased Shares is based in part on the answers to such questions as Purchaser and its representatives have raised concerning the transaction and on its own evaluation of the risks and merits of the purchase and the Company's proposed business activities. Nothing in this Section 5.5 shall modify the representations and warranties of the Company and Semotus contained in Sections 3 and 4 of this Agreement, or the right of the Purchaser to rely on such representations and warranties. 5.6 AUTHORIZATION. All corporate action on the part of Purchaser, its officers, directors and stockholders necessary for authorization, execution, delivery and performance of all obligations under the Agreements have been taken or will be taken prior to Closing. This Agreement, when executed and delivered by Purchaser, will constitute legally binding and valid obligations of Purchaser, enforceable in accordance with their respective terms. 5.7 TAX LIABILITY. Purchaser has reviewed with its own tax advisers the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser has relied solely on such advisers and not on any statements or representations of the Company or its agents. Purchaser understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this Agreement. SECTION 6: CONDITIONS TO CLOSING OF PURCHASER The Purchaser's obligation to complete the purchase of the Purchased Shares at the Closing shall be subject to the satisfaction of, or compliance with, at or before the Closing Date, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of the Purchaser and may be waived by the Purchaser only in whole or in part). 6.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 and by Semotus in Section 4 of this Agreement shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date. 6.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company and Semotus on or prior to the Closing Date shall have been performed or complied with in all material respects. 6.3 COMPLIANCE CERTIFICATE. The Company and Semotus shall each have delivered to Purchaser a certificate, executed by the President of the Company and Semotus respectively, dated the Closing Date, and certifying to the fulfillment of the conditions specified in Sections 6.1 and 6.2 of this Agreement. 6.4 LEGAL MATTERS. All material matters of a legal nature which pertain to this Agreement, and the transactions contemplated hereby and thereby, shall have been reasonably approved by counsel to Purchaser. 6.5 COMPLETION OF DUE DILIGENCE. The Purchaser shall have completed its due diligence and received complete responses to all of its reasonable inquiries and requests for further information, all of which shall be to the satisfaction of the Purchaser in its sole discretion. 6.6 RECEIPT OF CLOSING DOCUMENTATION. All documents required for Closing including receipt of all necessary consents under this Agreement and all actions and proceedings taken on or prior to the Closing in connection with the performance by the Company of its obligations under this Agreement shall be satisfactory to the Purchaser. 6.7 TERMINATION OF EMPLOYMENT AGREEMENT. The Employment Agreement dated as of May 1, 2001 between the Company and Hibben (the "Employment Agreement"), and any and all other agreements between Hibben and/or the Company or Semotus containing non-competition or non-solicitation provisions shall have been terminated as of the Closing Date, and shall be of no further force and effect, and the Company shall have provided a written release to Hibben with respect to all such provisions and agreements in effect as of the Closing Date. 6.8 EMPLOYMENT AGREEMENT. Hibben shall execute an employment agreement with the Company (the "New Employment Agreement") immediately after Closing in a form satisfactory to the Purchaser and Hibben, which shall include the provision that Hibben shall remain employed by the Company at least until the Option Closing Date. 6.9 HIBBEN SHARES. The Purchaser shall have received from Arapahoe a letter in a form satisfactory to the Purchaser confirming (i) that it holds the share certificate representing the Hibben Shares (Certificate #4436) as security for the Acquisition Loan pursuant to a Third Party Pledge Agreement dated May 25, 2001, and that (ii) it will release the Hibben Shares to the Purchaser forthwith upon receipt from the Purchaser of a letter of credit from the Purchaser's bank in an amount representing the outstanding balance of the Acquisition Loan as of the date of such letter of credit less collateralized equity in Hibben's Deed of Trust dated December 31, 2001. The Purchaser shall also have received a copy of an assignment and direction from Hibben to Arapahoe with respect to the release of the Hibben Shares to the Purchaser on the terms contained herein. The Purchaser shall be satisfied in its sole discretion that the transfer of the Hibben Shares is in compliance with all applicable US securities laws. The Purchaser shall also have received a copy of a direction from Hibben to Semotus with respect to the issuance of Additional Hibben Shares to the Purchaser. 6.10 CONFIRMATION OF ARAPAHOE BANK & TRUST. Hibben shall have delivered to the Purchaser evidence (satisfactory to the Purchaser in its sole discretion) that the loan (the "Acquisition Loan") currently being paid by the Company to Arapahoe pursuant to a share purchase agreement between Hibben and Greg Margheim dated September 15, 2000, and as provided in a Merger Agreement (the "Merger Agreement") dated April 30, 2001 by and among the Company, Hibben, ADA Acquisition, Inc. and Semotus is in good standing, and a statement of the amounts owing under the Acquisition Loan as of the Closing Date. 6.11 RELEASE FROM SEMOTUS. Semotus shall have provided to Hibben a release from all obligations of Hibben to repay to Semotus any principal amounts paid by Semotus with respect to the Acquisition Loan as provided in s.10 of the Merger Agreement. Semotus shall provide to the Purchaser evidence that its financial records do not include any amounts receivable from Hibben or any other party pursuant to the Merger Agreement with respect to the Acquisition Loan 6.12 ACCOUNT PAYABLE TO SEMOTUS FROM THE COMPANY. Semotus shall have delivered to the Purchaser evidence, satisfactory to the Purchaser in its sole discretion, that the amount of $154,219 reflected in the Unaudited Financial Statements of the Company as an account payable to Semotus is no longer due and payable, and there are no obligations for any amounts owing between the Company and Semotus. 6.13 STOCK OPTION TO JOHN HIBBEN. Semotus shall have amended the stock option agreement with Hibben provided in the Employment Agreement to (a) reduce the exercise price of such options to $0.75 per common share, and (b) provide an acceleration of the vesting of such stock options so that all stock options vest on or before the Option Closing Date, as may be accelerated pursuant to Section 1.3. 6.14 OPTION SHARES AND WARRANT. Semotus shall have delivered to the Purchaser share certificates representing the Option Shares, and a duly executed copy of the Warrant and the Pledge. 6.15 BOARD OF DIRECTORS OF COMPANY. Semotus shall have increased the Board of Directors of the Company from 3 to 5, and shall have appointed Ted Hastings and Mark Lee as directors of the Company, effective as and from the Closing Date. 6.16 SHAREHOLDERS' AGREEMENT. Semotus and the Purchaser shall have executed a Shareholders' Agreement in substantially the form attached as Schedule 6.16 hereof, which shall be held in escrow from the Closing Date, and shall become effective from and after the Option Closing Date only if the Purchaser does not have the right to exercise the Option as a result of it not complying with the covenants outlined in Sections 8.1 and 8.2 hereof. 6.17 INVESTOR RIGHTS AGREEMENT. Semotus shall have executed a Registration Rights Agreement with respect to the Warrant in substantially the form attached as Schedule 6.17 hereof. 6.18 OPINION. The Purchaser shall have received a legal opinion from Semtous' counsel, satisfactory to the Purchaser in its sole discretion, in substantially the form attached as Schedule 6.18 hereof. 6.19 AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION OF ADA. The Purchaser shall have received a certified copy of the Amended and Restated Certificate of Incorporation of ADA filed with the appropriate Governmental Authorities, reducing the authorized shares of ADA from 1,500 to 100, and providing a directors' indemnity, as approved by the Purchaser. If any of the foregoing conditions in this Section has not been fulfilled by the Closing Date, the Purchaser may terminate this Agreement, in which event the Purchaser shall be released from all obligations under this Agreement. However, the Purchaser may waive compliance with any condition in whole or in part, if in its sole and absolute discretion it sees fit to do so, without any prejudice to its rights of termination in the event of non-fulfilment of any other condition, or to its rights to recover damages or seek other remedies (whether available at law or in equity) for breach of any covenant contained in this Agreement. SECTION 7: CONDITIONS TO CLOSING OF SEMOTUS Semotus' obligation to sell the Purchased Shares at the Closing is, at the option of Semotus , subject to the fulfillment or waiver of the following conditions: 7.1 REPRESENTATIONS. The representations made by the Purchaser in Section 5 of this Agreement shall be true and correct when made, and shall be true and correct on the Closing Date. 7.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by Purchaser on or prior to the Closing Date shall have been performed or complied with in all material respects. 7.3 COMPLIANCE CERTIFICATE. The Purchaser shall have delivered to Semotus a certificate, executed by the President of the Company and Semotus respectively, dated the Closing Date, and certifying to the fulfillment of the conditions specified in Sections 7.1 and 7.2 of this Agreement. 7.4 LEGAL MATTERS. All material matters of a legal nature which pertain to this Agreement and the transactions contemplated hereby and thereby, shall have been reasonably approved by counsel to the Company. If any of the foregoing conditions in this Section has not been fulfilled by the Closing Date, Semotus may terminate this Agreement, in which event Semotus shall be released from all obligations under this Agreement. However, Semotus may waive compliance with any condition in whole or in part, if in its sole and absolute discretion it sees fit to do so, without any prejudice to its rights of termination in the event of non-fulfilment of any other condition, or to its rights to recover damages or seek other remedies (whether available at law or in equity) for breach of any covenant contained in this Agreement. SECTION 8: COVENANTS OF THE PURCHASER 8.1 PURCHASER'S COMMITMENT FOLLOWING CLOSING. Subject to the material compliance by the Company and Semotus with all obligations pursuant to this Agreement and all other related agreements, the Purchaser hereby agrees to invest up to $1,000,000 (the "Operating Commitment"), directly or indirectly, at such times and in such amounts as the Purchaser may determine in its sole and absolute discretion, into the Company or any Affiliate of the Purchaser for purposes of furthering the Company's business objectives (as outlined in Schedule 8.1) during the 15 months immediately following Closing prior to the Option Closing Date. The Purchaser shall assume the Accounts Receivable and Accounts Payable (including employee payroll obligations) which are as disclosed in the Unaudited Financial Statements which shall be the only Accounts Payables for which the Purchaser shall have any responsibility. The Operating Commitment shall be paid to the extent necessary to cover any shortfall of the Company if the Company is at any time cash flow negative. The Purchaser shall be entitled to reimbursement from time to time of the amounts of Operating Commitment paid if and to the extent the Company becomes cash flow positive. 8.2 NET PROFIT. The Purchaser shall manage and operate the Company during the 15 months immediately following Closing but shall have no liability to any person for the results of any measures or actions taken by it in good faith in such management or operation. The Purchaser shall provide to Semotus quarterly financial statements of the Company prepared by management of the Company, throughout the Option Period in a manner consistent with past practices of the Company. If such quarterly financial statements of the Company have indicated a Net Profit (EBITDA positive) in each quarter of the Option Period (within $25,000 of EBITDA positive) the Purchaser shall have the right to exercise the Option as outlined in Section 1.2. 8.3 LOAN PAYMENTS. Subject to the Purchaser receiving documents required under Section 6.9, as and from the Closing Date, the Purchaser will assume responsibility for the monthly loan payments being made by the Company to Arapahoe on behalf of Hibben with respect to obligations of Hibben pursuant to the Acquisition Loan. Notwithstanding the foregoing, Hibben shall remain liable for any security granted to any party with respect to the Acquisition Loan as of the Closing Date, and the Purchaser shall not assume any liability therefore. The Purchaser shall have the right, at its sole and absolute discretion, to delegate its obligation to assume the Acquisition Loan to a third party of its choice at any time following Closing, and shall, upon such delegation, have no further liability with respect thereto. SECTION 9 - COVENANTS OF THE PARTIES 9.1 CONDUCT OF BUSINESS BY COMPANY. During the period from the date of this Agreement to the Option Closing Date, the Company shall conduct its operations only according to its ordinary and usual course of business and to use its commercially reasonable efforts to preserve intact its business organization, keep available the services of the Employees and maintain satisfactory relationships with suppliers, distributors and customers. Without limiting the generality of the foregoing, pending the Option Closing Date, the Company shall: (a) refrain from making any bonus or retirement payment or arrangement to or with any persons except those that may have already been accrued; (b) refrain from entering into any contract, lease, commitment or renewal or an agreement, except contracts in the ordinary course of business or as outlined on Schedule 3.48 and if any such agreement is entered into in an amount in excess of $25,000, the Company shall immediately notify the Purchaser; (c) refrain from making any change affecting any bank, safe deposit or power of attorney arrangements of the Company; (d) continue in full force and effect all policies of insurance maintained by the Company and give all notices and present claims under all insurance policies in a timely fashion; and (e) comply with all Laws affecting the operation of the Company and the Business. During such period, the Company shall confer on a regular and frequent basis with one or more designated representatives of Purchaser to report material operational matters and to report the general status of ongoing operations. The Company shall notify the Purchaser of any unexpected emergency or other change in the normal course of its business or in the operation of its branches and of any governmental complaints, investigations or communications indicating that the same may be contemplated, adjudicatory proceedings, and to keep the Purchaser fully informed of such events and permit its representatives prompt access to all materials prepared in connection therewith. 9.2 ACTION BY SEMOTUS WITH RESPECT TO OPTION SHARES. During the period from the date of this Agreement to the Option Closing Date, Semotus shall take no action whatsoever with respect to the Option Shares, except as otherwise required by the Purchaser in writing. Without limiting the generality of the foregoing, except as may be first approved in writing by the Purchaser, Semotus and the Company shall not: (a) mortgage, pledge, subject to Encumbrance, grant a security interest in or otherwise encumber the Option Shares; (b) directly or indirectly, declare or pay any dividends or declare or make any other payments or distributions on or in respect of the Option Shares; (c) issue, sell, assign or transfer all or any portion of the Option Shares, nor grant any options or rights to any third party to so acquire all or any portion of the Option Shares. 9.3 Access for Investigation. The Company shall, so long as a 24 hour prior written notice is received, permit the Purchaser and its representatives, between the date of this Agreement and the Closing Date, to have reasonable access to the premises and to all Books and Records and to the properties and assets of the Company and to furnish to the Purchaser such financial and operating data and other information as the Purchaser shall from time to time reasonably request to enable confirmation of the accuracy and fulfillment of representations, warranties and covenants contained herein. Semotus shall, so long as a 24 hour prior written notice is received, permit the Purchaser and its representatives, between the date of this Agreement and the Option Closing Date, to have reasonable access to its relevant books and records as the Purchaser shall from time to time reasonably request to enable confirmation of the accuracy and fulfillment of representations, warranties and covenants contained herein. Without limiting the generality of the foregoing, it is agreed that the accounting and financial representatives and agents of the Purchaser shall be afforded reasonable opportunity to make a full investigation of all aspects of the financial affairs of the Company. The Company shall use its commercially reasonable efforts to arrange such meetings with all management and other personnel engaged in the business activities of the Company as the Purchaser may reasonably request, and such customer visits shall be held jointly with a representative of the Company. 9.4 Accounting Information. The Company shall cause its auditors to make available to the Purchaser or its auditors all working papers, notes and other information which may be relevant to the review of the Financial Statements. 9.5 Confidentiality. Each of the Parties shall keep confidential and shall not, other than as may be required or authorized by the terms of this Agreement, disclose to any person, firm, corporation or other entity other than the Purchaser or the Company, any Confidential Information. 9.6 Exclusivity. From the date of this Agreement until the Option Closing Date, or the termination of this Agreement by the Purchaser or the Company in accordance with its terms, the Company and Semotus shall suspend any discussions with any third parties regarding the sale of the Company or any assets of the Company or any transfer of the Option Shares, and shall not offer in any manner whatsoever or solicit, encourage or negotiate offers from third parties with respect to the sale of any shares or assets of the Company or the Option Shares. 9.7 Taxes of the Company and Semotus: Semotus shall, at its expense, prepare all income tax returns, and pay all income taxes with respect to the Company, in a manner, consistent with past practices of the Company up to the Option Closing Date. All other Tax Returns shall be prepared and filed at Purchaser's expense, and the Purchaser shall pay all Taxes, except for income taxes, with respect to the Company, in a manner consistent with past practices of the Company up to the Option Closing Date. After the Option Closin gDate, if the Option is exercised by the Purchaser, the Purchaser shall, at its expense, prepare all Tax Returns and pay all Taxes with respect to the Company. If the Option is not exercised, Semotus shall, at its expense, prepare all Tax Returns and pay all Taxes with respect to the Company. Semotus hereby covenants and agrees that it shall remain liable, and shall indemnify the Purchaser, for all income tax liabilities of the Company for all periods up to and including the Option Closing Date. ARTICLE 10 - NON WAIVER; SURVIVAL; INDEMNIFICATION 10.1 Non-Waiver. No investigations made by or on behalf of the Purchaser at any time shall have the effect of waiving, diminishing the scope or otherwise affecting any representation or warranty made by the Company or Semotus in or pursuant to this Agreement. No waiver or any condition or other provisions, in whole or in part, shall constitute a waiver of any other condition or provision (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 10.2 Nature and Survival. (a) Subject to Subsections (b), (c) and (d), all representations, warranties and covenants contained in this Agreement on the part of each of the Parties shall survive the Closing Date, the Option Closing Date, the execution and delivery under this Agreement of any share or security transfer instruments or other documents of title to any of the Purchased Shares or the Option Shares, and the payment of the Purchase Price and the Option Price. (b) Subject to Subsection (e), all representations and warranties concerning tax matters shall survive for a period of 180 days after the expiration of the period during which an assessment, reassessment or other form of recognized document assessing liability for Taxes, interest or penalties under applicable legislation in respect of any taxation year ending on or before the Option Closing Date could be issued to the Company or the Purchaser having regard for any consent, waiver, agreement or other document made or filed by or against the Company or the Purchaser. (c) Subject to Subsection (e), all other representations and warranties shall survive for a period of three years from the Option Closing Date. (d) If no Claim in writing has been made under this Agreement against a Party for any incorrectness in any representation or breach of any warranty made in this Agreement prior to the expiry of the survival periods set out in Subsections (b) and (c) above, such Party shall have no further liability under this Agreement with respect to such representation or warranty. (e) Notwithstanding the limitations set out in Subsections (b), (c) and (d) above, any Claim which is based on title to the Purchased Shares or the Option Shares, or the Intellectual Property, intentional misrepresentation or fraud may be brought at any time. 10.3 Mutual Indemnifications for Breaches of Covenants and Warranty, etc. - Semotus and the Company jointly and severally covenant and agree with the Purchaser, and the Purchaser covenants and agrees with Semotus (the Party so covenanting and agreeing to indemnify the other Party being referred to in this Section 10.3 as the "Indemnifying Party" and the Party so to be indemnified (together with all officers, directors, employees, shareholders and agents of such Party and any of its Affiliates being called the "Indemnified Party") to indemnify and save harmless the Indemnified Party, effective as and from the Closing Date, from and against all Claims which may be made or brought against the Indemnified Party or which it may suffer or incur, directly or indirectly as a result of any non-fulfillment or breach of any covenant or agreement on the part of the Indemnifying Party under this Agreement, or any incorrectness in or breach of any representation or warranty of the Indemnifying Party contained in this Agreement. The foregoing obligation of indemnification in respect of such Claims shall be subject to the limitations mentioned in Section 10.2 respecting the survival of the representations and warranties of the Parties. 10.4 Limitations on Indemnification - The aggregate dollar amount of all payments an Indemnifying Party shall be obligated to make pursuant to Section 10.3 with respect to a breach of any of its representations or warranties shall not exceed the Purchase Price (the "Liability Limit"). However, indemnification shall be made under Section 10.3 by the Indemnifying Party only when all Claims, in the aggregate, exceed $15,000 (the "Minimum Amount") and then for all Claims that exceed the Minimum Amount, up to the Liability Limit. Notwithstanding the foregoing, in the case of fraud or intentional misrepresentation, or breach by the Company or Semotus of Sections 3.3, 3.5, 4.3 or 4.5, as the case may be, there shall be no Liability Limit nor Minimum Amount applicable, and Semotus or the Company, as the case may be, shall be liable to indemnify the Purchaser for the amounts of all Claims as and when made. 10.5 Exclusive Remedy - The provisions of this Article 10 shall constitute the sole and exclusive remedy after the Closing Date for any and all Claims asserted against, resulting from, imposed upon or incurred or suffered by the Purchaser and its Indemnified Parties as a result of, or based upon or arising from, the transactions contemplated by this Agreement. 10.6 Treatment of Payments - All payments made pursuant to this Article 10 shall be treated as adjustments to the Purchase Price. Notwithstanding anything in this Agreement to the contrary, the Purchaser shall not be indemnified or reimbursed for any tax consequences arising from the receipt or accrual of an indemnity payment hereunder, including, without limitation, any such consequences arising from adjustments to the basis of any asset resulting from an adjustment to the Purchase Price or any additional Taxes resulting from any such basis adjustment. 10.7 No Termination - Subject to Section 10.1 and 10.2, the rights of indemnity set forth in this Article 10 shall remain in full force and effect in all circumstances and shall not be terminated by any breach (fundamental, negligent or otherwise) by any Party of its representations, warranties or covenants hereunder or under any documents delivered pursuant hereto or by any termination or rescission of this Agreement or any part hereof. 10.8 Set-off - In the event that the Company or Semotus are required to indemnify the Purchaser pursuant to this Article 10 at any time at which any amount remains payable to the Company or Semotus hereunder, the Purchaser shall have the right to set off against any or all of the unpaid amount payable to the Company or Semotus (including the Option Price) the amount or amounts the Company or Semotus are required to pay to the Purchaser as indemnification pursuant to this Article 10, but shall in no way be obligated to set-off such amounts. SECTION 11 MISCELLANEOUS 11.1 GOVERNING LAW AND ARBITRATION. This Agreement shall be governed by and construed under the laws of the State of California without giving effect to the conflicts of laws principles thereof. Except with respect to any breach which adversely impacts, threatens, or infringes upon a party's proprietary information or intellectual property rights which shall not be subject to arbitration hereunder, any dispute or controversy arising out of or relating to this Agreement shall be settled by final and binding arbitration. Such arbitration shall take place at San Jose, California or any other location mutually agreeable to the parties and shall be conducted before a single arbitrator and, except as otherwise set forth herein, shall be conducted in accordance with the then-existing rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof; provided, however, that the law applicable to any such controversy shall be the law of California, regardless of its or any jurisdiction's choice of law principle. The arbitration award shall be specifically enforceable; judgment upon any arbitration award may be entered in any court with personal jurisdiction over the parties and subject matter of the disputes. By entering into this provision, it is the parties intention to expedite, and limit the costs involved in, resolution of any future dispute, and therefore pre-hearing discovery shall be limited to production of key documents and, if appropriate, subpoena of not more than two key witnesses, as determined by the arbitrator, and shall not extend to depositions of parties. Any award shall relate to all damages which are a direct consequence of a breach of this Agreement. In further limitation hereof, no arbitrator shall be empowered to award any other damages, including, but not limited to, consequential, compensatory or punitive damages. The cost of any arbitration shall be borne equally by the parties hereto. 11.2 SURVIVAL. Subject to the provisions of Article 10 hereof, the representations, warranties, covenants and agreements made in this Agreement shall survive the closing of the transactions contemplated hereby, and shall in no way be affected by any investigation of the subject matter hereof made by or on behalf of Purchaser or the Company. 11.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties to this Agreement. The Purchaser shall have the right to purchase and/or subsequently transfer the Purchased Shares, the Option Shares or the Warrant to an Affiliate without consent, but on prior notice to the Company. 11.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant to this Agreement at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and supersede all prior agreements and merge all prior discussions, negotiations, proposals and offers (written or oral) between them, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided in this Agreement, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 11.5 NOTICES, ETC. All notices and other communications required or permitted under this Agreement shall be mailed by registered or certified mail, postage prepaid, Federal Express, sent via facsimile, or otherwise delivered by hand or by messenger, addressed (a) if to Purchaser, at Purchaser's address set forth on the signature page hereto, or, at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, one copy should be sent to its offices and addressed to the attention of the President, or at such other address as the Company shall have furnished to the Purchaser. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or via facsimile, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been mailed, addressed and postage prepaid as aforesaid. 11.6 DELAYS OR OMISSIONS. Except as expressly provided in this Agreement, no delay or omission to exercise any right, power or remedy accruing to either Party, upon any breach or default of the other Party under this Agreement, shall impair any such right, power or remedy of that Party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character of any breach or default under this Agreement, or any waiver of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to the Parties, shall be cumulative and not alternative. 11.7 EXPENSES. The Company and Purchaser shall each bear their own expenses incurred on their behalf with respect to this Agreement and the transactions contemplated hereby. 11.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. A faxed copy of an executed counterpart shall be deemed to be an original. 11.9 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 11.10 FURTHER ASSURANCES. The Parties hereto shall with reasonable diligence do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated hereby, and each Party shall provide such further documents or instruments required by any other Party as may be reasonably necessary or desirable to effect the purpose of this Agreement and carry out its provisions. 11.11 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. 11.12 TIME OF THE ESSENCE. Time shall be of the essence hereof. THIS AGREEMENT is hereby executed as of the date first above written. SEMOTUS SOLUTIONS, INC. By: /s/ Anthony N. LaPine -------------------------------- Name: Anthony N. LaPine Title: President and CEO APPLICATION DESIGN ASSOCIATES, INC. By: /s/ Anthony N. LaPine -------------------------------- Name: Anthony N. LaPine Title: CEO /s/ John Hibben --------------------------------------- JOHN HIBBEN 2007978 ONTARIO INC. By: /s/ Ted Hastings -------------------------------- Name: Ted Hastings Title: COO SCHEDULE A INTERPRETATION 1. DEFINITIONS. In this Agreement, the following terms shall have the meanings set out below unless the context requires otherwise: (a) "Accounts Payable" means those amounts reflected on the Unaudited Financial Statements as of the Closing Date as accounts payable under GAAP; (b) "Accounts Receivable" means all amounts considered to be accounts receivable under GAAP including, without limitation, any and all accounts receivable, bills receivable, trade accounts, book debts and insurance claims recorded as receivable in the Books and Records and any other amount due including any refunds and rebates, and the benefit of all security (including cash deposits), guarantees and other collateral held by the Company; (c) "Accrued Liabilities" means any and all accrued liabilities of the Company incurred in the ordinary course of business, including accruals for vacation pay, customer rebates and allowances for product returns; (d) "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified; (e) "Agreement" means this Agreement, including all schedules, and all instruments supplementing or amending or confirming this Agreement; (f) "Arm's Length" means dealings by a Person that are not with (i) a spouse, descendant, parent or grandparent (any of the foregoing, a "relative") of the Person; (ii) an Affiliate of the Person; (iii) an Affiliate of a relative of the Person; (iv) an entity in which the Person has a material financial interest; or (v) an entity in which a relative of the Person has a material financial interest; (g) "Applicable Law" means, with respect to any Person, property, transaction, event or other matter, any Law relating or applicable thereto, and includes, where appropriate, any interpretation of the Law by any Person having jurisdiction over it, or charged with its administration or interpretation; (h) "Books and Records" means all books and records of the Company, including financial, corporate, operation and sales books, records, books of account, sales and purchase records, lists of suppliers and customers, formulae, business reports, plans and projections and all other documents, files, records, correspondence, and other data and information, financial or otherwise, in any tangible form whatsoever, including, without limitation, all data and information stored on computer related media; (i) "Business" means the business currently carried on by the Company, being the application development and sales of customer service and asset management software to field service industry, including server hardware, operating system software, proprietary application software, training, conversion, support, legacy system integration services and remote handheld hardware and data acquisition software, custom application development and professional services; (j) "Business Day" means any day except Saturday, Sunday or any day on which banks are generally not open for business in the States of California or Texas, USA or the Province of Ontario, Canada; (k) "Claims" means any claim, demand, action, cause of action, damage, loss, costs, liability or expense, including, without limitation, reasonable professional fees and all reasonable costs incurred in investigating or pursuing any of the foregoing or any proceeding relating to any of the foregoing, provided, however, a "Claim" shall not include any amount that is received by a Person pursuant to a valid and collectible insurance policy; (l) "Closing" means the completion of the share purchase on the Closing Date; (m) "Closing Date" means January ___, 2002 or such other date as the Parties may agree in writing as the date upon which the Closing shall take place; (n) "Computer Hardware" means all computer equipment and machinery owned or used by the Company; (o) "Computer System" means any combination of Computer Hardware and Software used by the Company; (p) "Contracts" means all contracts, licenses, leases, agreements, commitments, entitlements and engagements and includes all quotations, orders or tenders for contracts which remain open for acceptance and any manufacturers' or suppliers' warranty, guarantee or commitment; (q) "Employees" means all persons employed or retained by the Company, including, for greater certainty, those employees on long term disability leave, maternity leave or other absence; (r) "Employment Agreements" means the employment agreements to be entered into between the Company and each of the Employees, effective immediately following the Closing, in a form to be provided by the Purchaser,; (s) "Encumbrance" means any pledge, lien, charge, security agreement, lease, title retention agreement, mortgage, encumbrance, option or adverse claim, of any kind or character whatsoever; (t) "Environment" means the environment or natural environment as defined in any Environmental Law and includes, without limitation, air, surface, water, ground water, land surface, soil, natural resources, subsurface strata, and the environment in the workplace; (u) "Environmental Approvals" means all permits, certificates, licenses, authorizations, consents, instructions, registrations, directions or approvals issued or required by any Governmental Authority pursuant to Environmental Laws with respect to the operation of the Business; (v) "Environmental Claim" includes, without limitation, any claim, notice, administrative order, citation, complaint, summons, writ, proceeding or demand relating to remediation, investigation, monitoring, emergency response, decontamination, restoration or other action under any Environmental Law or notice, claim, demand or other communication alleging or asserting liability, either direct or indirect, and either in whole or by way of contribution or indemnity, for investigatory, monitoring or cleanup costs, Governmental Authority response costs, damages, personal injuries, fines, penalties or for other relief, and arising out of, based on or resulting from, i) the presence, or Release into the Environment, of any Hazardous Substance, or ii) any non compliance or alleged non compliance with any Environmental Law; (w) "Environmental Law" means any Law or Order relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes; (x) "Equipment Contracts" means all motor vehicle leases, equipment leases, conditional sales contracts, title retention agreements and other similar agreements relating to equipment used by the Company; (y) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder; (z) "ERISA Affiliates" means each trade, business or other entity (whether or not incorporated) which is treated as a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of the Code; (aa) "Facilities" shall mean all buildings and improvements on the Leased Real Property; (bb) "Financial Statements" means the audited financial statements of the Company for the fiscal year ended December 31, 2000, consisting of the balance sheet and the statements of earnings and retained earnings and changes in financial position and all notes thereto, copies of which are attached hereto as Schedule 3.21; (cc) "Fixed Assets" means the fixed assets, equipment, fixtures, furniture, furnishings, vehicles, implements, parts, discs, and spare parts owned or used or held by the Company, including, without limitation, any which are in storage or in transit, and other tangible property and facilities used by the Company wherever located, including the assets listed and described in Schedule 3.16; (dd) "GAAP" means generally accepted accounting principles in effect in the USA from time to time, consistently applied; (ee) "Governmental Authorities" means any government, regulatory authority, governmental department, agency, commission, board, tribunal or court or other law, rule or regulation making entity having or purporting to have jurisdiction on behalf of any nation, province or state or other subdivision thereof or any municipality, district or other subdivision thereof; (ff) "Governmental Authorization" means all authorizations, approvals, Including Environmental Approvals, licenses or permits issued by any Governmental Authorities; (gg) "Hazardous Substance" means: (i) any petroleum or petroleum products, flammable explosives, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (ii) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants" or words of similar import under any Environmental Law; and (iii) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated by any Governmental Authority under any Environmental Law; (hh) "Intellectual Property" means all intellectual property of the Company used or currently being developed for use by the Business, and all rights of the Company therein worldwide, whether registered or unregistered, including, without limitation, (i) "Copyrights", which means all registered and unregistered copyrights used in the Business, including, without limitation, all copyrights in and to the Owned Software and all applications and registrations of such copyrights; (ii) "Patents", which means all patents, patent applications and other patent rights used in the Business, including divisional and continuation patents, (iii) "Technology", which means all technology created, developed or acquired by the Company, whether or not patented or patentable and whether or not fixed in any medium whatsoever, including, without limitation, all inventions, know how, techniques, processes, procedures, methods, trade secrets, research and technical data, records, specifications, equipment and parts lists, descriptions, samples, reports, studies, findings, algorithms, instructions, guides, manuals and plans with respect to products or services; and (iv) "Trade-marks", which means all trade-marks, trade names, service marks, brand names, logos or the like used in the Business, whether used in association with wares or with services, and all applications, registrations, renewals, modifications and extensions of such trade-marks. (ii) "Laws" means all applicable laws, statutes, rules, regulations, orders, ordinances, protocols, codes, guidelines, policies, notices, directions, consent decrees and judgments or other requirements of any Governmental Authority; (jj) "Leased Real Property" means those properties leased by the Company (or any of its Affiliates), as outlined in Schedule 3.42; (kk) "Material Adverse Change" means any change by the Company with respect to the Business that would have a Material Adverse Effect; (ll) "Material Adverse Effect" means any effect that would have a material adverse effect on the condition (financial or otherwise), business, assets, liabilities, prospects or results of operations of the Company, taken as a whole; (mm) "Material Contract" means: (i) any Contract involving aggregate payments to or by the Company in excess of $5,000, or (ii) any commitment to or by the Company that may reasonably extend beyond one year, or (iii) any commitment to or by the Company which is outside the ordinary course of business (nn) "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions are or have been made by a corporation or any ERISA Affiliate or as to which a corporation or any ERISA Affiliate may have liability and that is covered by Title IV of ERISA; (oo) "Order" means any writ, judgment, decree, injunction or similar order of any Governmental Authority (in each such case whether preliminary or final); (pp) "Owned Software" has the meaning given to it in Section 3.39; (qq) "Parties" means the Company and the Purchaser collectively, and "Party" means either one of them; (rr) "Pension/Benefit Plans" means all plans, arrangements, agreements, programs, policies or practices, whether oral or written, formal or informal, funded or unfunded, which the Company or any ERISA Affiliate is a party to or bound by or under which has any liability or contingent liability, relating to: i) retirement savings or pensions, including, without limitation, any defined benefit pension plan, defined contribution pension plan, group registered retirement savings plan, or supplemental pension or retirement plan, or ii) any bonus, profit sharing, stock option, stock purchase, deferred compensation, incentive compensation, hospitalization, health, dental, disability, unemployment insurance, vacation pay, severance pay or other benefit plan with respect to any of its respective Employees or former employees, directors, individuals working on contract with it or other individuals providing services to it of a kind normally provided by employees, and all statutory plans which require compliance with, including, without limitation, plans whose administration is governed by ERISA and all applicable federal, state, and local workers compensation and unemployment insurance legislation; (ss) "Permitted Encumbrances" means Encumbrances for Taxes not yet due or matters otherwise set forth on Schedule 3.14; (tt) "Person" means any individual, sole proprietorship, partnership, unincorporated association, limited liability company, unincorporated syndicate, unincorporated organization, trust, body corporate, Governmental Authority, and a natural person in such person's capacity as trustee, executor, administrator or other legal representative; (uu) "Products" means all products, goods, devices and services sold, licensed, leased or otherwise provided by the Company; (vv) "Purchase Price" means the amount outlined in Section 1.1 to be paid by the Purchaser to the Company in consideration for the Purchased Shares, the Option and the Warrant; (ww) "Purchased Shares" means the 49 common shares of the Company to be sold to the Purchaser pursuant to this transaction, which comprise 49% of the issued and outstanding shares of the Company; (xx) "Purchaser's Solicitors" means Gowling Lafleur Henderson LLP; (yy) "Release" has the meaning prescribed in any Environmental Law and includes, without limitation, any release, spill, leak, pumping, pouring, emission, emptying, discharge, injection, escape, leaching, disposal, dumping, deposit, spraying, burial, abandonment, incineration, seepage, or placement; (zz) "Remedial Order" means any administrative complaint, direction, order or sanction issued, filed or imposed by any Governmental Authority pursuant to any Environmental Laws and includes, without limitation, any order requiring any remediation or clean up or other response to of any Hazardous Substance, or requiring that any Release or any other activity be reduced, modified or eliminated; (aaa) "Software" means all computer programs, libraries, tools and databases used by the Company in the Business, including all versions thereof, and all related documentation, manuals, program files, data files in whatever form and on whatever medium those programs, libraries, tools or databases are expressed, fixed, embodied or stored from time to time, all as they exist at the Closing Date; (bbb) "Taxes" includes, without limitation, all taxes, duties, fees, premiums, assessments, imposts, levies and other charges of any kind whatsoever imposed by any Governmental Authority, together with all interest, penalties, fines, additions to tax or other additional amounts imposed in respect thereof, including, without limitation, those levied on, or measured by, or referred to as income, gross receipts, profits, capital, transfer, land transfer, sales, commodity goods and services, use, value added, excise, stamp, withholding, business, franchising, property, payroll, employment, unemployment, health, social services, education and social security taxes, all surtaxes, all customs duties and import and export taxes, all license, franchise and registration fees of any kind, and withholding at source and remittance amounts required to be withheld in respect of payments to any Persons; (ccc) "Tax Returns" includes, without limitation, all returns, reports, declarations, elections, notices, filings, information returns and statements and other documentation (including any additional or supporting material) filed or maintained, or required to be filed or maintained, in connection with the calculation, determination, assessment or collection of any Tax.; (ddd) "Unaudited Financial Statements" means the unaudited balance sheet of the Company for the period ended December 31, 2001 and the unaudited income statement for the period of May 1, 2001 through December 31, 2001, copies of which are attached hereto as Schedule 3.22; 2. Certain Rules of Interpretation - In this Agreement and the Schedules: (a) Time - time is of the essence in the performance of the Parties' respective obligations; (b) Currency - unless otherwise specified, all references to money amounts are to U.S. currency; (c) Headings - the descriptive headings of Articles and Sections are inserted solely for convenience of reference and are not intended as complete or accurate descriptions of the content of such Articles or Sections; (d) Singular, etc. - the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits, and the word "including" means "including without limitation"; (e) Business Day - whenever any payment is to be made or action to be taken under this Agreement is required to be made or taken on a day other than a Business Day, such payment shall be made or action taken on the next Business Day following such day. (f) Statute References - Any reference in this Agreement to any statute or any section thereof shall, unless otherwise expressly stated, be deemed to be a reference to such statute or section as amended, restated or re-enacted from time to time. (g) Knowledge - Any reference to "the knowledge of the Company" or "the knowledge of Semotus" shall mean to the actual knowledge, information and belief of each of the directors of the Company or Semotus, respectively, after having reasonably reviewed all relevant records and having made reasonable inquiries regarding the relevant matter. EX-2.2 4 dex22.txt MERGER AGREEMENT Exhibit 2.2 AGREEMENT TO AMEND THE AGREEMENT OF MERGER AND TERMINATE THE EMPLOYMENT AGREEMENT This is an Agreement, effective as of January 18, 2002, by and among Semotus Solutions, Inc. ("Semotus") and John Hibben, to amend the Agreement of Merger dated as of April 30, 2001, between Semotus, ADA Acquisition, Inc., a Delaware corporation ("Sub"), Application Design Associates, Inc., a Colorado corporation, (the "Company"), and John Hibben (the "Shareholder"), and to terminate the Employment Agreement by and among John Hibben and ADA Acquisition Inc. (now named Application Design Associates, Inc.). WHEREAS, the Company was merged with Sub, and the Shareholder received a certain number of Parent Shares on the Closing Date, and has the right to potentially receive a certain additional number of Parent Shares as part of an earn-out, in accordance with the terms and conditions of the Agreement of Merger; and WHEREAS, the parties desire to sell a portion of the Company's stock to a third party, 2007978 Ontario Inc (the "Purchaser"), and concurrently with the execution of this Agreement, the parties will execute a Stock Purchase Agreement and other ancillary agreements (the "Stock Purchase Transaction"). WHEREAS, the parties desire to amend the Agreement of Merger and terminate the Employment Agreement, so as to be consistent with the purpose of the Stock Purchase Transaction and the terms and conditions of the Stock Purchase Agreement. NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. The parties agree that upon the Closing Date of the Stock Purchase Agreement, the Shareholder shall transfer and assign the 250,000 Parent Shares in the name of the Shareholder that are currently held by Arapahoe Bank as security for the Acquisition Loan, and such shares shall be released at the time replacement security is provided by the Purchaser pursuant to Section 6.8 of the Stock Purchase Agreement. 2. The parties agree that upon the Closing Date of the Stock Purchase Agreement, Sections 3.3 and 3.4 of the Agreement of Merger shall be terminated in their entirety and be of no further force or effect. 3. Amendment of Article III, Sections 3.1 and 3.2 of the Agreement of Merger. Article III, Sections 3.1 and 3.2 of the Agreement of Merger are hereby amended such that the Shareholder hereby agrees that any Additional Parent Shares earned and issued pursuant to the Merger Agreement after the date hereof, up to and including the Option Closing Date, are hereby transferred and assigned to the Purchaser, and such Additional Parent Shares shall be issued to the Purchaser instead of to the Shareholder, and held by the Purchaser until the Option Closing Date, at which time the shares shall be released per the terms of the Stock Purchase Agreement. Thereafter, Sections 3.1 and 3.2 of Article III to the Agreement of Merger shall be terminated and deleted in their entirety and be of no further force or effect as of the Option Closing Date. 4. Section 10.1 of the Agreement of Merger is hereby terminated and of no further force or effect. Both parties are hereby released of any and all obligations or responsibilities, past, present or future, in connection with the terms and conditions of Section 10.1 of the Merger Agreement. 5. The Employment Agreement is hereby terminated and of no further force or effect. Both parties are hereby released of any and all obligations or responsibilities, past, present or future, in connection with any and all of the terms or conditions of the Employment Agreement, including all provisions related to termination of the Employment Agreement. Shareholder, or `Executive', as defined in the Employment Agreement, is also released from any and all other non-compete provisions with the Company or Semotus. 6. The Executive shall continue to be employed by the Company as President of the Company and continue to serve as a member of the Company's board of directors through the Option Closing Date, and as part of Executive's compensation, Executive's stock options pursuant to Semotus' 1996 Stock Option Plan shall continue to vest and be in full force and effect. However, the total number of Executive's stock options shall be reduced by 100,000, for a total of 75,000 options. Additionally, all of Executive's outstanding stock options as of the Effective Date of this Agreement shall be repriced and have an exercise price of $0.76 per share. If the Option is exercised by the Purchaser pursuant to the Stock Purchase Agreement, all of Executive's 75,000 stock options shall accelerate and be fully vested as of the Option Closing Date; Executive shall then have 90 days to exercise any part or the whole of these stock options in accordance with Semotus' Stock Option Plan. 7. Mr. Hibben shall use his best efforts to obtain discharges to the following seven Colorado UCC Filings against the Company: Report Nos. 902045169; 952038087; 962054769; 19972066893; 19972081718, A8198288, 20002005813. 8. Miscellaneous. All other terms and conditions of the Agreement of Merger shall remain in full force and effect. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 9. Fax Signatures. The parties hereby agree that signatures transmitted and received via facsimile or other electronic means shall be treated for all purposes of this Agreement as original signatures and shall be deemed valid, binding and enforceable by and against both parties. 10. Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to them in the Agreement of Merger, the Employment Agreement and/or the Stock Purchase Agreement, as applicable. 2 11. This Agreement is contingent upon the simultaneous execution of The Stock Purchase Agreement and all other ancillary agreements necessary to finalize the Stock Purchase Transaction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SEMOTUS SOLUTIONS, INC. By: /s/ Anthony N. LaPine ----------------------------- Name: Anthony N. LaPine Title: President and CEO APPLICATION DESIGN ASSOCIATES, INC. (formerly ADA Acquisition, Inc.) By: /s/ Anthony N. LaPine ----------------------------- Name: Anthony N. LaPine Title: CEO SHAREHOLDER By: /s/ John Hibben ----------------------------- Name: John Hibben 3 EX-4.1 5 dex41.txt WARRANT TO PURCHASE Exhibit 4.1 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT To Purchase 150,000 Shares of Common Stock of Semotus Solutions, Inc. Dated as of January 18, 2002 (the "Effective Date") WHEREAS, Semotus Solutions, Inc., a Nevada corporation (the "Company"), and 2007978 Ontario, Inc., an Ontario corporation (the "Warrantholder"), desire to enter into that certain Stock Purchase Agreement (the "Purchase Agreement"), dated of even date herewith, by and among the Company, Warrantholder and John Hibben, pursuant to which, among other things, Warrantholder will purchase stock in Application Design Associates, Inc., a subsidiary of the Company. WHEREAS, a condition to Warrantholder's obligations under the Purchase Agreement is that the Company issue Warrantholder a warrant to purchase up to 150,000 shares of Common Stock of the Company. WHEREAS, in consideration for Warrantholder agreeing to enter into the Purchase Agreement, the Company has agreed to grant Warrantholder the right to purchase 150,000 shares of Common Stock of the Company upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt sufficiency of which is hereby acknowledged, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE COMMON STOCK. The Company hereby grants to Warrantholder, upon the terms and subject to the conditions set forth herein, the right to purchase from the Company, 150,000 fully paid and non-assessable shares of Common Stock of the Company ("Common Stock"), at an exercise price of $0.75 per share (the "Exercise Price"). The Exercise Price and the number of shares of Warrant Stock exercisable under this Warrant are subject to adjustment as provided in Section 6 hereof. 2. TERM OF THE WARRANT. The term of this Warrant and the right to purchase the Common Stock hereunder shall expire (the "Termination Date") five years from the Effective Date. 3. EXERCISE OF THE PURCHASE RIGHTS. The Warrantholder may exercise its purchase rights under this Warrant, in whole or in part, at any time or from time to time prior to the Termination Date by tendering to the Company a notice of exercise in the form attached hereto as Exhibit A (the "Notice of Exercise"), duly completed and executed, together with payment for purchase price. Warrantholder may pay the Exercise Price by cash, check or cancellation of debt. Promptly upon receipt of the Notice of Exercise (but in no event later than ten business days) the Company shall issue to Warrantholder a certificate for the number of shares of Common Stock purchased pursuant to the Notice of Exercise and send to Warrantholder an Acknowledgment of Exercise in the form attached hereto as Exhibit B that indicates the number of shares of Common Stock which remain subject to future purchases, if any. In the event of a partial exercise, the Company shall promptly issue Warrantholder an amended warrant representing the remaining number of shares of Common Stock purchasable hereunder. All other terms and conditions of such amended warrant shall be identical to those contained herein, including, but not limited to, the Termination Date. 4. RESERVATION OF SHARES. (a) From and after the Effective Date for the remainder of the term of this Warrant, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to be issued upon the exercise of this Warrant. (b) If any shares of Common Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or state law (other than any registration under the Act), or listing on any domestic securities exchange, before such shares may be issued upon exercise of this Warrant, the Company will, at its expense and as expeditiously as possible, use its reasonable best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO RIGHTS AS SHAREHOLDER. This Warrant does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 6. ADJUSTMENT RIGHTS. The exercise prices and the number of shares of Common Stock purchasable hereunder are subject to adjustment, as follows: (a) Reclassification of Common Stock. If the Company at any time shall by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such 2 change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such combination, reclassification, exchange, subdivision or other change. (b) Adjustments for Stock Dividends. The Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be proportionally adjusted to reflect any stock dividend or other similar event altering the number of outstanding shares of the Common Stock. (c) Subdivision or Combination of Common Stock. If the Company at any time shall combine or subdivide its Common Stock, the Exercise Price shall proportionately be decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Merger and Sale of Assets. If at any time there shall be a merger or consolidation of the Company with or into another entity, whether or not the Company is the surviving corporation, or the sale, lease or other disposition of all or substantially all of the Company's assets to any other person (collectively referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of stock or other securities of the entity surviving or resulting from such Merger Event equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant (including adjustments of the Exercise Price and number of shares of Common Stock purchasable hereunder) shall be applicable to the greatest extent possible. (e) Notice of Adjustment. The Company shall notify Warrantholder in writing at least 20 days prior to the effective date of a transaction that would result in an adjustment under this Section 6. Such notice shall include a description of the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, the new Exercise Price and the number of shares of Common Stock subject to purchase hereunder. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Common Stock, when issued in accordance with the provisions of this Warrant, will be duly authorized, validly issued, fully paid and non-assessable shares of capital stock of the Company, and will be free of any taxes, liens, charges or encumbrances whatsoever. The issuance of certificates for shares of Common Stock upon exercise of the Warrant shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Common Stock. (b) The execution and delivery by the Company of this Warrant and the performance of all obligations of the Company hereunder, including the issuance of the Warrant 3 and the right to purchase Common Stock have been duly authorized by all necessary corporate action on the part of the Company, and this Warrant is not inconsistent with the Company's Certificate of Incorporation or Bylaws, does not contravene any law or governmental rule, regulation or order applicable to it, does not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which the Company is a party or by which it is bound, and this Warrant constitutes the legal, valid and binding agreement of the Company, enforceable in accordance with its terms. (c) No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant, except for any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) Subject to the accuracy of Warrantholder's representations herein, the issuance of the Warrant Stock upon exercise of this Warrant will constitute a transaction exempt from the registration requirements of Section 5 of the Act. 8. REPRESENTATIONS AND WARRANTIES OF THE WARRANTHOLDER. (a) This Warrant is being issued to Warrantholder in reliance upon Warrantholder's representation to the Company, which by Warrantholder's execution of this Warrant, Warrantholder hereby confirms, that this Warrant and the Common Stock (collectively, the "Securities") will be acquired for investment for Warrantholder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Warrantholder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Warrant, Warrantholder further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. (b) Warrantholder is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself in transactions such as the one contemplated by this Warrant, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. If other than an individual, Warrantholder represents it has not been organized for the purpose of acquiring the Securities. (c) Warrantholder is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. Warrantholder understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed 9. TRANSFERS. This Warrant and all rights hereunder are transferable. 4 10. MISCELLANEOUS. (a) Successors and Assigns. This Warrant shall be binding upon any successors or assigns of the Company. (b) Governing Law. This Warrant shall be governed by and construed for all purposes under and in accordance with the laws of the State of Nevada, without regard to principles of conflict of laws. (c) Counterparts; Entire Agreement. This Warrant may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Warrant constitutes the entire agreement between the parties with respect to the subject matter contained herein. (d) No Impairment of Rights. The Company will not, by amendment of its Certificate of Incorporation, or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in carrying out all such terms and taking all such actions as may be necessary or appropriate in order to protect the rights of Warrantholder against impairment. (e) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided the original is sent by personal delivery or mail as hereinafter set forth) or after deposit in the United States mail by registered or certified mail, addressed (i) in the case of Warrantholder, to Endgame Systems, Inc., 120 Randall Drive, Waterloo, ON N2V 1C6, Attn: Ted Hastings and (ii) 1739 Technology Drive, Suite 790, San Jose, CA 95110, Attn: Tony LaPine in the case of the Company, to or at such other address as any such party may subsequently designate by written notice to the other party. (f) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall survive the execution and delivery of this Warrant. (g) Severability. In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (h) Amendments. Any provision of this Warrant may be amended only by a written instrument signed by both the Company and the Warrantholder. 5 IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be executed by its officers thereunto duly authorized as of the date first written above. SEMOTUS SOLUTIONS, INC. By: /s/ Anthony N. LaPine ------------------------------ Name: Anthony N. LaPine Title: President and CEO 2007978 Ontario, Inc. By: /s/ Ted Hastings ------------------------------ Name: Ted Hastings Title: COO [SIGNATURE PAGE TO SEMOTUS WARRANT] EXHIBIT A NOTICE OF EXERCISE To: Semotus Solutions, Inc. (the "Company") The undersigned hereby elects to purchase ___________________ shares of Common Stock at an exercise price per share as set forth in the Warrant issued to Warrantholder by the Company, dated January __, 2002. The undersigned hereby tenders payment in the amount of $_________ by way of cash, check and/or by cancellation of debt, which constitutes the aggregate exercise price for such shares of Common Stock. The undersigned requests that the Company issue a certificate or certificates representing said shares of the Common Stock in the name of the undersigned or in such other name as is specified below and hereby confirms and acknowledges the investment representations and warranties made in Section 8 of the Warrant: ------------------------------------ (Print Name) Please issue a new Warrant for the unexercised portion of the Warrant in the name of the undersigned or in such other name as is specified below: ------------------------------------------ [Name] - ----------------- ------------------------------------------ [Date] [Signature] EXHIBIT B ACKNOWLEDGMENT OF EXERCISE The undersigned, Semotus Solutions, Inc., hereby acknowledges receipt of the Notice of Exercise from ______________ to purchase ______ shares of the Common Stock of Semotus Solutions, Inc., pursuant to the terms of the Warrant, and further acknowledges that _________ shares remain subject to purchase under the terms of the Warrant. SEMOTUS SOLUTIONS, INC. By: _____________________________ Name: _____________________________ Title: _____________________________ Date: _____________________________ -----END PRIVACY-ENHANCED MESSAGE-----