-----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, E5LYgq/9G/dsDmSntXEDGE9E7INSPT9OrUMXsYgQMvEGCQyc1ZUlVaQDQk0ER7HT e63TqJ/3vEXCA4pa6BSrvQ== 0001145443-02-000231.txt : 20020701 0001145443-02-000231.hdr.sgml : 20020701 20020628202636 ACCESSION NUMBER: 0001145443-02-000231 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15569 FILM NUMBER: 02692466 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-K 1 d11138.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 2002 Commission file number: 1-15569 SEMOTUS SOLUTIONS, INC. ---------------------------------------------- (Exact name or Registrant as specified in its Charter) Nevada 36-3574355 - ---------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1735 Technology Drive, Suite 790, San Jose, California 95110 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (408) 367-1700 --------------------------- (Registrant's telephone number) Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, $0.01 Par Value Securities Registered Pursuant to Section 12(g) of the Act: None. 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 [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The Registrant's revenues for its most recent fiscal year were $6,107,095. As of June 20, 2002, 17,243,723 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the shares held by non-affiliates was approximately $5,680,000. DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for Annual Meeting of Shareholders to be held on September 17, 2002. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] SEMOTUS SOLUTIONS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2002 INDEX PAGE ---- PART I Item 1 Business.................................................... 2 Item 2 Properties.................................................. 15 Item 3 Legal Proceedings........................................... 16 Item 4 Submission of Matters to a Vote of Security Holders......... 16 PART II Item 5 Market for the Company's Common Equity and Related Security Holder Matters.............................................. 16 Item 6 Selected Financial Data..................................... 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 30 Item 8 Financial Statements and Supplementary Data................. 31 Item 9 Change In and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 31 PART III Item 10 Directors and Executive Officers of the Registrant.......... 31 Item 11 Executive Compensation...................................... 31 Item 12 Security Ownership of Certain Beneficial Owners and Management.................................................. 31 Item 13 Certain Relationships and Related Transactions.............. 31 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 31 THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS ANTICIPATE, BELIEVE, ESTIMATE, INTEND, MAY, WILL, AND EXPECT AND SIMILAR EXPRESSIONS AS THEY RELATE TO SEMOTUS SOLUTIONS, INC. (SEMOTUS OR COMPANY) OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND BUSINESS. SEMOTUS UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. PART 1 ITEM 1. DESCRIPTION OF BUSINESS. 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. As a part of the transaction, the Company also acquired a Canadian corporation, DSC Datalink Systems Corporation, incorporated in Vancouver, British Columbia, now named Semotus Systems Corp. Semotus is a leading provider of enterprise application software connecting employees to critical business systems, information, and processes. Semotus helps mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. The Company's products serve such vertical markets as workforce automation and financial services. Semotus' enterprise application software provides mobility, convenience, efficiency and improves profitability. For more information please go to our website at http://www.semotus.com. RECENT DEVELOPMENTS Centralization and Consolidation Plan At the end of this fiscal year 2002, Semotus determined that the economy would continue in a weak recovery and that the market for technology products would stay anemic. Accordingly, the Company has centralized and consolidated its organization and its operations. The headcount has been reduced 51% from March 31, 2001 and as a result, engineering, sales and marketing and administrative costs have been reduced and centralized. The overall Semotus organization has eliminated redundant positions and functions while improving the sales effort through utilizing existing customer relationships to shorten the sales cycle. Semotus has organized its operations around two core lines of business, while maintaining but de-emphasizing its other operations: i) financial services with the Global Market Pro and Equity Market Pro products and services and ii) workforce automation with the HiplinkXS family of products and services. These products maintain high gross and operating margins and form the core of the enterprise software marketing strategy with wireless and mobile features available in the software. Logistic systems, largely Application Design Associates, Inc.'s (ADA's) products and services, continue as part of Semotus' wireless and mobile strategy. ADA develops and licenses proprietary software that gives enterprises a total solution for automation of customer call centers, dispatching, equipment deployment, servicing and invoicing while interfacing with existing corporate business functions and ERP solutions. This field force automation software provides Semotus with a unique platform for its wireless productivity enhancement tools such as Hiplink. In January 2002, Global Beverage Group (GBG), a Canadian-based direct store delivery consortium, completed a strategic investment in ADA and is now a 49% shareholder in ADA (see "Significant Events"). As for Semotus' other segments, professional services and the enterprise and commerce segment, certain of the operations have been further consolidated and reduced through the elimination of unprofitable contracts and services. In professional services, Simkin's Kinetidex 2.0 product was sold to the joint developer and exclusive distributor of the product, Micromedex, Inc. Wireless medical software products have been slow to penetrate the market and therefore have been eliminated by Semotus. Simkin maintains modest amounts of business through continuing software training and some replacement software sales. Unprofitable professional service contracts at Wares On the Web have also been eliminated. However, Wares continues one significant contract with a sports product distributor that emphasizes web site development and online sales. M-commerce initiatives have been reduced. The e-commerce economy has contracted and m-commerce is not expected to make a significant contribution in the market in the near future. Consequently, Semotus has reduced its e-commerce and m-commerce business with the reduction of unprofitable products and services in that segment. At Wares on the Web, one e-commerce customer remains and at WizShop, while there is still some small monthly sponsorship and advertising revenue, the operations have been largely consolidated into Semotus' other divisions and subsidiaries. At the end of June, FiveStar's operations will be closed as the market for e-fulfillment is currently unprofitable. So while Semotus maintains a reduced m-commerce and e-commerce presence, it has de-emphasized the e-fulfillment portion of that business. (See "Significant Events".) SIGNIFICANT EVENTS Semotus acquired WizShop.com, Inc. on May 7, 2001. WizShop builds and maintains outsourced e-commerce environments, as well as creates online sales and merchandising programs for its clients through its sales and marketing initiatives. As of the end of this fiscal year, the e-commerce market had declined significantly and most of WizShop's operations have been absorbed and consolidated. Semotus has decided to de-emphasize the e-commerce and m-commerce business. 3 On May 15, 2001, Semotus completed the acquisition of Application Design Associates, Inc. (ADA). On January 18, 2002, GBG became a 49% investor in ADA. In April 2003, GBG has the option to purchase Semotus' 51% ownership of ADA. (See Note 25 to the Financial Statements, "Strategic Investment in ADA"). Global Beverage Group's suite of products is designed to streamline the entire order-to-cash cycle for wholesalers that provide direct delivery of products to stores, offices and homes. GBG's solutions are designed to handle complex order management, customer service and distribution logistics such as direct-store-delivery, direct-home-delivery, mobile workforce and vendor managed inventory. In May 2002, the Board of Directors of Semotus determined that the Company needed to focus its operations on its core enterprise software products. (See "Centralization and Consolidation Plan"). Given the continued economic recession and limited capital spending, as well as the reduced access to capital, the Company must economically utilize its limited resources towards those products with the best margins and cash flow generation. As part of that effort, Semotus has decided to reduce its e-commerce operations and to close the FiveStar business as of the end of June 2002. While maintaining a reduced m-commerce and e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that business as the e-fulfillment markets have declined dramatically over the past year and are not expected to recover significantly in the near future. Accordingly, Semotus is redirecting its human and capital resources towards more profitable products and services. DESCRIPTION OF BUSINESS Except for the historical information contained herein, this report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section under "Description of Business", "Recent Acquisitions" and "Risk Factors" as well as in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW Semotus focuses its enterprise application software strategy in target markets where there are significant growth opportunities and an existing strong customer base that is adopting mobile and wireless technology. Customer penetration and product acceptance are paramount to the Semotus formula. While the Company continues to improve and maintain its market leading technology, Semotus molds its products for market acceptance. Through strong customer relationships and market knowledge, Semotus blends its technology into readily identifiable and sellable products and services. TARGET MARKETS Enterprises are adopting mobile and wireless software solutions in order to increase their employees' productivity and customer satisfaction. Semotus' technology can service any enterprise in any market segment; however, the Company has chosen to focus in two areas that the Company believes project the greatest amount of growth potential and the strongest need for mobile and wireless solutions. Those segments are: field and automation services and financial services. FIELD AND AUTOMATION SERVICES (WORKFORCE AUTOMATION): Semotus addresses the needs of enterprises with large numbers of employees in the field by providing complete solutions that assist field service organizations with routing and dispatching, communications, order status, access to corporate databases and customer billing. By having remote access to technical information, inventory status and corporate databases, the field service worker's productivity increases. Therefore mobile and wireless software solutions are becoming a critical component of many enterprises today. FINANCIAL SERVICES: Mobile and wireless software services, handheld devices, and financial management applications are now standard on the floors of stock exchanges. Wireless data delivery can put the individual traders one step ahead of the market, increasing their transaction time and giving them a competitive advantage. It is for this reason that Semotus developed Global Market Pro(TM) with J.P. Morgan Chase. Global Market Pro is an advanced wireless application 4 designed specifically for traders and financial professionals in the global capital, derivative and foreign exchange markets. A new product, the Equity Market Pro, was developed from the GMP platform and is designed for equity traders and salesmen who have a real-time need for equity market information. The Equity Market Pro is marketed to the same financial institutions as the Global Market Pro. SERVICES AND PRODUCTS In fiscal year 2002, Semotus offered its services and products through its four major lines of business: (i)enterprise application software, (ii) enterprise and commerce sales (iii) professional and related services and (iv) logistic systems. At the end of the fiscal year, Semotus determined to centralize and consolidate its operations into the enterprise application software and logistic systems businesses (See "Centralization and Consolidation Plan"). Enterprise Application Software Enterprise application software connects employees to critical business systems, information, and processes. It helps mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles through the immediate access to mission critical information in a mobile environment. The Company creates mobile and 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-based, 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. Global Market Pro Global Market Pro(TM), is a wireless application designed for traders and financial professionals in the global capital, derivative and foreign exchange markets. Semotus developed Global Market Pro in cooperation with J.P. Morgan Chase Manhattan Bank's Global Markets Data Division. The application is being marketed to the trading and professional finance industry, where it is highly adaptable to a variety of wireless platforms. In addition, Global Market Pro is capable of advanced customization based on the unique preferences of each individual. Global Market Pro provides real-time financial data from leading news and information sources, including Reuters, Market News International and GovPX. This product has been engineered for all device platforms including, RIM Interactive 957, two-way pagers, WAP phones and the Palm VII. The application features a portfolio customization Web site interface, allowing users to set event or time driven push alerts based on specific criteria or establish custom portfolios for real-time on-demand data requests. Semotus is continuing to expand the product's features and capabilities. Equity Market Pro Equity Market Pro is an enterprise application built for the institutional equity trader using the Global Market Pro financial platform; Semotus developed EMPro with the same customization capability and is deploying EMPro using its new over-the-air-programming technology (OTAP). Equity Market Pro is designed for the secure delivery of real-time financial information and news. EMPro features Dow Jones News ServiceSM as its premier news source. Market data for EMPro is sourced from Reuters and GovPX. Equity Market Pro is targeted to the over 400,000 Institutional professionals who use real-time equity data at a workstation and will be sold to institutions for their employees. All data provided through EMPro is completely customizable providing information specific to each trader's needs. Features included the ability to create and track an unlimited number of watch lists for either push or pull delivery, snap quotes, charts and graphs, corporate profiles, symbol lookup, indices, and world composite data. EMPro monitors any security or market indicator in real-time and sends out a wireless alert when pre-set values have been reached. 5 Hiplink As part of its expanding enterprise application technology and product offerings, Semotus launched a newly upgraded Hiplink product called HiplinkXS in July of 2001. HiplinkXS is an enterprise messaging software solution that enables delivery of critical message delivery to and from the field with the customer's choice of carriers and devices. This innovative software solution enables employees and customers to remain connected and capable of receiving mission-critical business notifications, while improving employee accuracy and reliability. Users can send messages and request a response back from the receiver, with the ability to trigger server processes based on the response from the two-way device. HipLinkXS supports virtually any wireless device for secure, reliable, two-way communications via a single integration point, providing turnkey access to wireless carriers around the world. The HipLink solution supports both UNIX and NT and is scalable and configurable to the specific requirements of the enterprise customer. The software functions in the mission critical environment of enterprise messaging including wireless applications for network management messaging and monitoring, field work force communications, help desk operations and Internet messaging and monitoring. Legacy Financial Consumer Products Semotus continues to offer a suite of wireless financial consumer products. These products allow customers to retrieve customized information from real-time data feeds, receive and send messages and other information, as well as set their own parameters for real-time data they wish to receive. Semotus' current line of financial consumer products is mostly comprised of QuoteXpress(R), and SplitXpress(TM) Enterprise and Commerce Sales Semotus' enterprise and commerce line of business provides online transactional information and sales of products and services. The online services include web site development and maintenance, sales, marketing, customer retention programs and services, logistics, distribution, and tracking and reporting. In essence, Semotus can take care of all of a customer's online requirements from building a web presence to sales of products to collections and cash management. 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. In May 2002, the Board of Directors of Semotus determined that the Company needed to focus its operations on its core enterprise software products. (See "Centralization and Consolidation Plan"). Given the continued economic recession and limited capital spending, as well as the reduced access to capital, the Company must economically utilize its limited resources towards those products with the best margins and cash flow generation. As part of that effort, Semotus has decided to reduce its e-commerce operations and to close the FiveStar business as of the end of June 2002. While maintaining a reduced m-commerce and e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that business as the e-fulfillment markets have declined dramatically over the past year and are not expected to recover significantly in the near future. Accordingly, Semotus is redirecting its human and capital resources towards more profitable products and services. Professional and Related Services Semotus' professional service 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. Certain professional service contracts at Wares have been discontinued that were becoming unprofitable. As well, Semotus sold Simkin's Kinetidex 2.0 product to the joint developer and exclusive distributor of the product, Micromedex, Inc. Wireless medical software products have been slow to penetrate the market and therefore have been eliminated by Semotus. Simkin maintains modest amounts of business through continuing software training and some replacement software sales. Unprofitable professional service contracts at Wares On the Web have also been eliminated. However, Wares continues one significant contract with a sports product distributor that emphasizes web site development and online sales. 6 Profitable services and applications are being continued through the two core lines of business of financial services and workforce automation. Logistic Systems Through Semotus' ADA subsidiary, the Company creates proprietary software and integrates it with other hardware and software products to produce 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. As part of the system integration function, ADA resells Hiplink software and services among other mobile products. ADA's largest customers are in the soft drink beverage industry. STRATEGIC RELATIONSHIPS Semotus maintains strategic relationships with wireless and technology companies in order to further develop its services and product offerings. Maintaining market leading technology is a difficult task; however, Semotus believes that it continues to produce new software and engineered products that are leading the mobile and wireless market. The key relationships for Semotus are with carriers, device manufacturers, software companies, computer companies, and content providers. The carriers include: BellSouth, AT&T, MCI WorldCom, Sprint PCS, Nextel, Cable & Wireless, Arch Communications Pagenet and Skytel. The device manufacturers include: Nokia, Ericsson, Motorola, RIM, Palm Computing, and Handspring. The software companies include: SAP America, Microsoft and Checkpoint. The computer companies include: IBM, Hewlett Packard, Unisys and Sun Microsystems. The content providers include: Reuters, Dow Jones and GovPX. CUSTOMERS Semotus has a very diversified customer list. Although Semotus has many customers utilizing its mobile and wireless services, the broadly diversified base means there is no significant concentration in any industry. In the fiscal year ended March 31, 2002, there were three customers accounting for over 5% of the Company's revenues. One customer in the wireless services segment accounted for 6% of revenues, one customer in the logistic systems segment accounted for 8% of revenues and one customer in the enterprise and commerce segment accounted for 17% of revenues. None of these customers accounts for any significant accounts receivable at March 31, 2002. VENDORS Semotus maintains strong relationships with all of the major telecommunications carriers, content providers and hardware manufacturers for its wireless and e-commerce products and services. The Company is not dependent upon any one carrier, content provider or hardware manufacturer for its business, nor is its business affected by any of the current financial problems experienced by certain telecommunication equipment and service providers. COMPETITION Semotus is participating in the highly competitive businesses of enterprise application software, mobile and wireless telecommunications, systems integration and professional services. The competition is from a broad range of both large and small domestic and international corporations. Some of the Company's competitors have far greater financial, technical and marketing resources than the Company. The competitive factors important to Semotus are its technology, its engineering expertise and its customer relationships. Business segment and industry competitive factors include, but are not limited to, technology, engineering capability, breadth and depth of strategic relationships, financial condition, 7 and marketing initiatives. The Company leverages the quality of its engineering team, the depth and breadth of its customer relationships, and its ability to respond quickly to change in order to be competitive and successful. RESEARCH AND DEVELOPMENT Semotus maintains its research and development operations in Vancouver, B.C. and has engineering and development personnel in Englewood, Colorado at its ADA subsidiary. As of March 31, 2002, Semotus employed 20 personnel in research and development and engineering. The Company finds it advantageous to have its research and development activities in Vancouver due to the abundance of available, affordable and talented software engineers. Total costs incurred in research and development amounted to $1,475,063, $1,228,139 and $600,957 respectively, in the years ended March 31, 2002, 2001 and 2000. INTELLECTUAL PROPERTY Semotus protects its significant intellectual property holdings with patents related to its business, creating an entry barrier to any potential competition. Additionally, Semotus relies on contractual restrictions, copyright, trademark, and trade secret laws to protect its intellectual properties. Most competing technologies lack the strong patent protection that Semotus has. The Company has a total of eight issued patents as of March 31 2002, as follows: Interactive Two-Way Pager System #5,838,252 Divisional Case #6,049,291 Pager Enhanced Keyboard and system #5,964,833 Divisional Case #6,085,232 System and Method for a Real-Time Data Stream Analyzer and Alert System #5,872,921 Virtual Transcription System #5,875,436 Mail Alert System #6,035,104 Alphanumeric Paging System Operating on the Internet #6,040,784 Semotus also has 7 patents pending. Semotus has had its intellectual property reviewed by an outside consultant firm, and the Company believes that it has additional significant intellectual property, giving it the ability to file for at least another 15 patents. EMPLOYEES At March 31, 2002, the Company had 48 full-time employees and 3 part-time employees, approximately 15 of who were engaged in sales and marketing, 16 in finance and administration, and 20 in engineering. No employees of the Company are covered by a collective bargaining agreement. RISK FACTORS Our business and the results of our operations are affected by a variety of risk factors, including those described below. RISKS PARTICULAR TO SEMOTUS WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES ARE EXPECTED TO CONTINUE IN THE FUTURE. We recorded a net loss for each year since our current business started in 1996 through our fiscal year ended March 31, 2002. As of March 31, 2002, we had an accumulated deficit of approximately $59,429,439 million. Because we expect to continue to incur significant sales and marketing, systems development and administrative expenses, we will need to generate significant revenue to become profitable and sustain profitability on a quarterly or annual basis. We may not achieve or sustain our revenue or profit goals and our losses may continue or grow in the future. As a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis. 8 OUR FUTURE REVENUES AND OPERATING RESULTS ARE DEPENDENT TO A LARGE EXTENT UPON GENERAL ECONOMIC CONDITIONS, CONDITIONS IN THE WIRELESS SERVICES MARKET AND CONDITIONS IN OUR PRIMARY TARGET MARKETS. Our future revenues and operating results are dependent to a large extent upon general economic conditions, conditions in the wireless market and within that market, our primary target markets of financial services and field and automation services. As economic activity slowed in these markets during 2001, our sales cycle began to lengthen significantly as existing and potential customers began to reduce their spending commitments, deferring wireless projects and reducing their willingness to make investments in new wireless services. Moreover, adoption of wireless services has not proceeded as rapidly as previously anticipated. As a result of these factors, our revenues began to decline in 2001. If general economic conditions continue to be adverse, if the economies in which our target customers are located suffer from a recession, or if demand for our solutions does not expand, our ability to increase our customer base may be limited, and our revenue may decrease. OUR ACQUISITIONS MAY NOT DELIVER THE VALUE WE PAID OR WILL PAY FOR THEM. Excessive expenses may result if we do not successfully integrate our acquisitions, or if the costs and management resources we expend in connection with the integrations exceed our expectations. We expect that our acquisitions and any acquisitions we may pursue in the future will have a continuing, significant impact on our business, financial condition and operating results. Additionally, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain by acquiring these companies. The value of the companies that we acquired may be less than the amount we paid if there is: - a decline of their position in the respective markets they serve; or - a decline in general of the markets they serve. Our financial results may be adversely affected if: - we fail to assimilate the acquired assets with our pre-existing business; - we lose key employees of these companies or of Semotus as a result of the acquisitions; - our management's attention is diverted by other business concerns; or - we assume unanticipated liabilities related to the acquired assets. WE MAY NOT BE ABLE TO RECOVER ANY OF THE VALUE OF GOODWILL RECORDED ON SOME OF OUR ACQUISITIONS AND INVESTMENTS. During 2002, 2001 and 2000, we recorded approximately $9,695,199 million in goodwill and other intangibles related to our acquisitions. Consideration for most of our acquisitions was partially or fully funded through the issuance of shares of our common stock at a time when our stock price was at historically high prices. Most of these companies were privately held and their fair values are highly subjective and not readily determinable. Our policy is to review the value of all our acquisitions for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. At the time of our acquisitions and investments, market valuations and the availability of capital for such companies were at historically high levels. During the year ended March 31, 2002, stock prices and market valuations in our industry and in our vertical markets 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. The market valuations of those companies in which we have invested and of other companies similar to those we acquired have declined substantially. For the year ended March 31, 2002, we recorded impairment charges aggregating $4,773,870 million on these acquisitions. If similar adverse market conditions develop in the future, we may be required to take additional impairment charges. WE MAY NOT ACHIEVE PROFITABILITY IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND DEVELOP THE WIRELESS DATA SERVICES WE OFFER. 9 We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis. Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we cannot effectively maintain, improve and develop services we may not be able to recover our fixed costs or otherwise become profitable. IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE, OUR SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES. The wireless and data communications industries are characterized by rapidly changing technologies, industry standards, customer needs and competition, as well as by frequent new product and service introductions. Our services are integrated with wireless handheld devices and the computer systems of our customers. Our services must also be compatible with the data networks of wireless carriers. We must respond to technological changes affecting both our customers and suppliers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services that respond to technological changes, evolving industry standards or changing customer requirements. Our ability to grow and achieve profitability will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner: - effectively use and integrate new wireless and data technologies; - continue to develop our technical expertise; - enhance our wireless data, engineering and system design services; - develop applications for new wireless networks; and - influence and respond to emerging industry standards and other changes. WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF WE DO NOT HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY BE UNABLE TO DELIVER SERVICES AND OUR SALES COULD DECREASE. Our ability to grow and achieve profitability partly depends on our ability to buy sufficient capacity on the networks of wireless carriers and on the reliability and security of their systems. We depend on these companies to provide uninterrupted and trouble free service and would not be able to satisfy our customers' needs if they failed to provide the required capacity or needed level of service. In addition, our expenses would increase and our profitability could be materially adversely affected if wireless carriers were to increase the prices of their services. WE MAY FAIL TO SUPPORT OUR ANTICIPATED EVENTUAL GROWTH IN OPERATIONS WHICH COULD REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE. Our business strategy is based on the assumption that the number of subscribers to our services, the amount of information they want to receive and the number of services we offer will all increase. We must continue to develop and expand our systems and operations to accommodate this growth. The expansion and adaptation of our customer service and network operations center requires substantial financial, operational and management resources. We may be unable to expand our operations for one or more of the following reasons: - we may not be able to locate or hire at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity; - we may not be able to obtain the hardware necessary to expand our capacity; - we may not be able to expand our customer service, billing and other related support systems; and 10 - we may not be able to obtain sufficient additional capacity from wireless carriers. Due to the limited deployment of our services to date, the ability of our systems and operations to connect and manage a substantially larger number of customers while maintaining superior performance is unknown. Any failure on our part to develop and maintain our wireless data services as we experience growth could significantly reduce demand for our services and materially adversely affect our revenue. Further, the Company has implemented a Centralization and Consolidation Plan which may limit growth in the short term. AS WE IMPLEMENT OUR CENTRALIZATION AND CONSOLIDATION PLAN TO REDUCE OUR OPERATING EXPENSES, WE MAY FAIL TO SUPPORT OUR OPERATIONS, WHICH COULD REDUCE DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE. Our business strategy is based on the assumption that the number of subscribers to our services, the amount of information they want to receive and the number of services we offer will all increase. We must continue to develop and expand our systems and operations to accommodate this growth. The expansion and or maintenance and adaptation of our customer service and network operations centers require substantial financial, operations and management resources. At the same time, we have implemented plans to reduce our operating expenses, which entails a reduction in operational and management resources. While we believe that our cost reductions are targeted at areas that are not necessary to maintain and develop our ability to serve customers, there can be no assurance that we will succeed in lowering costs while maintaining our ability to provide service. If we fail to maintain or improve service levels, we may lose customers and/or the opportunity to provide more services and products. WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL WITH WIRELESS DATA AND SOFTWARE EXPERIENCE AND WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED EMPLOYEES. Because of the technical nature of our products and the dynamic market in which we compete, our performance depends on attracting and retaining key employees. Competition for qualified personnel in the wireless data and software industries is intense and finding qualified personnel with experience in both industries is even more difficult. We believe there are only a limited number of individuals with the requisite skills in the field of wireless data communication, and it is becoming increasingly difficult to hire and retain these persons. We have a written employment agreement with Anthony N. LaPine, the Company's chairman, CEO and president. We do not have employment agreements with any other officer. The loss of Mr. LaPine or any other officer may have an adverse effect on our business and prospects by depriving us of the management services necessary to operate our business and achieve profitability. WE MAY NEED TO RAISE ADDITIONAL FUNDS. These funds may not be available to us. Alternatively, raising additional funds may dilute your share ownership. We have met capital needs with private sales of securities. However, we cannot assure you that we will not need additional funds, that any needed funds will be available to us at all, or that any available funds will be given on acceptable terms. If we need additional funds, and are unable to raise them, we will not be able to continue our business operations. If we raise funds by selling equity securities, those sales may dilute your share ownership. If we raise funds by forming joint ventures with other companies, we may have to give up some of our rights to certain technologies, products or marketing territories. OUR PATENTS MAY NOT PROTECT US FROM COMPETITORS. Costs of prosecuting and defending patent infringement claims could hurt our business. We currently own a number of patents related to our products, and have applied for additional patents. We are not certain whether any new patents will be granted in the future. Even if we receive additional patents, they may not provide us with protection from competitors. Our failure to obtain patent protection, or illegal use by others of any patents we have or may obtain could adversely affect our business, financial condition and operating results. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as the laws of the United States. Claims for damages resulting from any such infringement may be asserted or prosecuted against us. 11 The validity of any patents we have or obtain could also be challenged. Any such claims could be time consuming and costly to defend, diverting management's attention and our resources. OUR SALES CYCLE IS LONG, AND OUR STOCK PRICE COULD DECLINE IF SALES ARE DELAYED OR CANCELLED. Quarterly fluctuations in our operating performance are exacerbated by the length of time between our first contact with a business customer and the first revenue from sales of services to that customer or end users. Because our services represent a significant investment for our business customers, we spend a substantial amount of time educating them regarding the use and benefits of our services and they, in turn, spend a substantial amount of time performing internal reviews and obtaining capital expenditure approvals before purchasing our services. As much as a year may elapse between the time we approach a business customer and the time we begin to deliver services to a customer or end user. Any delay in sales of our services could cause our quarterly operating results to vary significantly from projected results, which could cause our stock price to decline. In addition, we may spend a significant amount of time and money on a potential customer that ultimately does not purchase our services. OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, AND OUR SALES COULD GO DOWN IF THIS INJURES OUR REPUTATION OR DELAYS SHIPMENTS OR OUR SOFTWARE. Our software products and platforms are complex and must meet the stringent technical requirements of our customers. We must develop our services quickly to keep pace with the rapidly changing software and telecommunications markets. Software as complex as ours is likely to contain undetected errors or defects, especially when first introduced or when new versions are released. Our software may not be free from errors or defects after delivery to customers has begun, which could result in the rejection of our software or services, damage to our reputation, lost revenue, diverted development resources and increased service and warranty costs. WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING INFORMATION, AND OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY. We may be subject to claims relating to information transmitted over systems we develop or operate. These claims could take the form of lawsuits for defamation, negligence, copyright or trademark infringement or other actions based on the nature and content of the materials. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY HARM OUR REPUTATION CAUSING A LOSS OF SALES AND COULD INCREASE OUR EXPENSES. A significant barrier to the growth of wireless data services or transactions on the Internet or by other electronic means has been the need for secure transmission of confidential information. Our systems could be disrupted by unauthorized access, computer viruses and other accidental or intentional actions. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third-party were able to misappropriate our users' personal or proprietary information or credit card information, we could be subject to claims, litigation or other potential liabilities that could materially adversely impact our revenue and may result in the loss of customers. ANY TYPE OF SYSTEMS FAILURE COULD REDUCE SALES, OR INCREASE COSTS OR RESULT IN CLAIMS OF LIABILITY. Our existing wireless data services are dependent on real-time, continuous feeds from outside third parties. The ability of our subscribers to obtain data or make wireless transactions through our service requires timely and uninterrupted connections with our wireless network carriers. Any significant disruption in the feeds or wireless carriers could result in delays in our subscribers' ability to receive information or execute wireless transactions. There can be no assurance that our systems will operate appropriately if we experience a hardware or software failure or if there is an earthquake, fire or other natural disaster, a power or telecommunications failure, insurrection or an act of war. 12 A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business. AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES. In designing, developing and supporting our wireless data services, we rely on wireless carriers, wireless handheld device manufacturers, content providers and software providers. These suppliers may experience difficulty in supplying us products or services sufficient to meet our needs or they may terminate or fail to renew contracts for supplying us these products or services on terms we find acceptable. Any significant interruption in the supply of any of these products or services could cause a decline in sales of our services unless and until we are able to replace the functionality provided by these products and services. We also depend on third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. In addition, we rely on the ability of our content providers to continue to provide us with uninterrupted access to the news and financial information we provide to our customers. The failure of third parties to meet these criteria, or their refusal or failure to deliver the information for whatever reason, could materially harm our business. RISK FACTORS RELATED TO OUR INDUSTRY THERE IS NO ESTABLISHED MARKET FOR WIRELESS DATA SERVICES AND WE MAY NOT BE ABLE TO SELL ENOUGH OF OUR SERVICES TO BECOME PROFITABLE. The markets for wireless data services are still emerging and continued growth in demand for and acceptance of these services remains uncertain. Current barriers to market acceptance of these services include cost, reliability, functionality and ease of use. We cannot be certain that these barriers will be overcome. Our competitors may develop alternative wireless data communications systems that gain broader market acceptance than our systems. If the market for our services does not grow or grows more slowly than we currently anticipate, we may not be able to attract customers for our services and our revenues would be adversely affected. THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE AGAINST CURRENT AND FUTURE COMPETITORS. There are a number of competitors who are larger and have much greater resources than we do. Many of our competitors have more experienced people and larger facilities and budgets than we do. These competitors could use their resources to conduct greater amounts of research and development and to offer services at lower prices than we can. These factors may adversely affect our ability to compete by decreasing the demand for our products and services. OUR ABILITY TO SELL NEW AND EXISTING SERVICES AT A PROFIT COULD BE IMPAIRED BY COMPETITORS. Intense competition could develop in the market for services we offer. We developed our software using standard industry development tools. Many of our agreements with wireless carriers, wireless handheld device manufacturers and data providers are non-exclusive. Our competitors could develop and use the same products and services in competition with us. With time and capital, it would be possible for competitors to replicate our services. Our potential competitors could include: wireless network carriers such as Verizon Wireless, Cingular Interactive, Sprint PCS, Voice Stream, Nextel and AT&T Wireless; wireless device manufacturers, such as Palm, Handspring, Motorola and RIM; software developers such as Microsoft Corporation; emerging wireless Internet service providers, such as Aether Systems, i3Mobile, Go America, Wolf Tech, Avant Go and 724 Solutions and systems integrators such as IBM. Many of our potential competitors have significantly greater resources than we do. Furthermore, competitors may develop a different approach to marketing the services we provide in which subscribers may not be required to pay for the information provided by our services. Competition could reduce our market share or force us to lower prices to unprofitable levels. THE MARKET FOR OUR SERVICES IS NEW AND HIGHLY UNCERTAIN. 13 The market for wireless data services is still emerging and continued growth in demand for and acceptance of these services remains uncertain. Current barriers to market acceptance of these services include cost, reliability, functionality and ease of use. We cannot be certain that these barriers will be overcome. If the market for our services does not grow or grows slower than we currently anticipate, our business, financial condition and operating results could be adversely affected. NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS. We are not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to businesses in general. However, in the future, we may become subject to regulation by the FCC or another regulatory agency. In addition, the wireless carriers who supply us airtime are subject to regulation by the FCC and regulations that affect them could adversely affect our business, by, for example, increasing our costs or reducing our ability to continue selling and supporting our services. Our business could suffer depending on the extent to which our activities or those of our customers or suppliers are regulated. WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM. Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have material adverse effect on our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. RISKS RELATED TO OUR STOCK PRICE OUR STOCK PRICE, LIKE THAT OF MANY TECHNOLOGY COMPANIES, HAS BEEN AND MAY CONTINUE TO BE VOLATILE. We expect that the market price or our common stock will fluctuate as a result of variations in our quarterly operating results and other factors beyond our control. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to a variety of factors, including: - announcements of technological or competitive developments; - acquisitions or strategic alliances by us or our competitors; - the gain or loss of a significant customer or order; - changes in estimates of our financial performance or changes in recommendations by securities analysts regarding us or our industry; or - general market or economic conditions. This risk may be heightened because our industry is new and evolving, characterized by rapid technological change and susceptible to the introduction of new competing technologies or competitors. In addition, equity securities of many technology companies have experienced significant price and volume fluctuations. These price and volume fluctuations often have been unrelated to the operating performance of the affected 14 companies. Volatility in the market price of our common stock could result in securities class action litigation. This type of litigation, regardless of the outcome, could result in substantial costs and a diversion of management's attention and resources. WE DO NOT PLAN TO PAY ANY DIVIDENDS. Our shares should not be purchased by investors who need income from their holdings. We intend to retain any future earnings to fund the operation and expansion of our business. We do not anticipate paying cash dividends on our shares in the future. As a result, our common stock is not a good investment for people who need income from their holdings. THE RESALES OF OUR COMMON STOCK RECENTLY REGISTERED COULD HAVE A DEPRESSIVE EFFECT ON THE MARKET PRICE OF OUR SHARES. We have recently registered 4,199,271 shares of common stock subject to resale by certain of our security holders, and we have contractual obligations to register an additional 463,131 shares. Up to 1,433,350 of those shares are issuable upon the exercise of warrants and up to 938,462 of those shares are issuable upon the conversion of Series B Convertible Preferred Stock. We are unable to predict the effect that sales of these shares may have on the then prevailing market price of our shares. It is likely that market sales of large amounts of our shares (or the potential for those sales even if they do not actually occur) will have the effect of depressing the market price of our shares. FORWARD-LOOKING STATEMENTS This report, including the sections entitled "Description of Business", "Recent Acquisitions" and "Risk Factors," contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Any statements in this report regarding Semotus' outlook for its business and their respective markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters, are forward-looking statements. These statements relate to future events or our future financial and operating performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from that expressed or implied by these forward-looking statements. These risks and other factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," "our future success depends," "seek to continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We do not intend to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results except as required by law. ITEM 2. DESCRIPTION OF PROPERTY. Our main headquarters are located in San Jose, California. The accounting and legal, as well as a portion of our marketing, sales, and customer support departments are housed at this location. The headquarters facility is approximately 8,969 square feet, which is under a lease that partially expires on August 14, 2002 and partially expires on October 21, 2002. The monthly rent is $28,293. Semotus' subsidiaries have facilities in various locations around the country. Semotus Systems Corp., which houses the Company's engineering and Research and Development group, is located in Vancouver, British Columbia, where it had 15 occupied a facility of approximately 6,036 square feet under a lease agreement that expires in October 2005 with a monthly rent of $9,054 Canadian dollars ($5,898 US dollars). In May 2002, Semotus Systems cancelled this lease with no penalty and signed a new lease for approximately 2,437 square feet with a monthly rent payment of $2,640 Canadian dollars ($1,657 US dollars). This lease expires on June 30, 2007. Application Design Associates has offices located in Englewood, Colorado, of approximately 4,600 square feet under a lease that expires on January 31, 2003 and with a monthly rent of $7,304. Five Star Advantage had a facility located in Valencia, California with approximately 8,441 square feet of space under a lease that expired in March 2002. Subsequently, FiveStar negotiated a new month-to-month lease for 6,295 square feet at $4,850 a month. This lease will be cancelled without penalty on June 30, 2002, at the time of the closing of the Five Star operations. In this fiscal year, Simkin, Wares and Cross all closed their leased facilities. The total lease obligations of $184,687 were settled for a total of 49,074 shares of restricted common stock. These securities were issued in conjunction with the respective acquisition transactions. The Company relied on Section 4(2) of the Securities Act of 1933, as amended, to issue these shares. We believe that the existing facilities will be sufficient to meet our current needs. Should we need additional space to accommodate increased activities, we believe we can secure additional space at comparable cost. ITEM 3. LEGAL PROCEEDINGS. Semotus is the defendant in one pending legal proceeding and one of Semotus' wholly owned subsidiaries, Wizshop.com, Inc., is the plaintiff in one pending legal proceeding. The suit in which Semotus is the defendant was filed by Brown Simpson Partners I, Ltd. on March 7, 2002 in the Supreme Court of the State of New York. This suit alleges four causes of action for breach of contract. The Complaint claims that Semotus triggered the anti-dilution provisions in Brown Simpson's Warrants and Series B Preferred Stock, thus obligating Semotus to issue substantial numbers of additional shares upon conversion of the Preferred Stock and exercise of the Warrants. Brown Simpson seeks an order granting specific performance, money damages in excess of $25,000, and recovery of costs and prejudgment interest. We believe the suit is without merit and intend to vigorously contest the suit. Wizshop.com, Inc., one of our wholly-owned subsidiaries, filed a lawsuit against Earthlink Network, Inc. and Earthlink Operations, Inc. (collectively "Earthlink") on April 15, 2002 in the California Superior Court. This suit alleges eight causes of action against Earthlink, including breach of written agreement, promissory fraud, fraudulent concealment, breach of fiduciary duty, constructive fraud, unfair business practices, accounting and constructive trust. The suit arises out of Earthlink's breach of the written agreement with Wizshop, and Earthlink's apparent acts of fraud in connection with Earthlink's failure and refusal to accurately account for and pay to Wizshop revenues to which Wizshop is entitled to under the agreement. We are seeking monetary damages for the above matter. We are also a party to other legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, we believe that liabilities arising from these matters will not have a material adverse effect on our consolidated results of operations or financial position. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the Company's stockholders for consideration during the fiscal quarter ended March 31, 2002. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET INFORMATION. On December 29, 1999, trading in our common stock moved to the American Stock Exchange ("AMEX"), under the symbol "DLK" from the OTC Bulletin Board. On August 14, 2000 trading in our common stock moved to the Nasdaq National Market ("Nasdaq"), under the symbol "XLNK" from the AMEX. On December 18, 2000, trading in our common stock moved back to the AMEX under the symbol "DLK" from the Nasdaq. 16 The following table sets forth the high and low closing sales prices of our common stock as reported by the AMEX for the periods indicated: High Close Low Close ---------- --------- Quarter ended June 30, 2000 $27.98 $ 8.12 September 30, 2000 (through August 11, 2000) $22.50 $13.31 The following table sets forth the high and low closing sales prices of our common stock as reported by the Nasdaq for the periods indicated: High Close Low Close ---------- --------- August 14 to September 30, 2000 $17.13 $10.03 December 31, 2000 (through December 15, 2000) $10.00 $ 3.44 The following table sets forth the high and low closing sales prices of our common stock as reported by the AMEX for the periods indicated: High Close Low Close ---------- --------- December 18 to December 31, 2000 $ 4.63 $ 2.00 Quarter ended March 31, 2001 $ 5.69 $ 1.87 Quarter ended June 30, 2001 $ 3.15 $ 1.46 Quarter ended September 30, 2001 $ 1.75 $ 0.66 Quarter ended December 31, 2001 $ 1.05 $ 0.53 Quarter ended March 31, 2002 $ 0.94 $ 0.60 A 2 for 1 forward stock split became effective on April 27, 2000. Share prices have been adjusted to reflect this split. (b) HOLDERS. As of March 31, 2002 the Company had 411 shareholders of record. The Company believes that in excess of 15,000 beneficial owners hold shares of the Company's common stock in depository or nominee form. (c) DIVIDENDS. The Company has never paid a cash dividend on its common stock and does not expect to pay a cash dividend in the foreseeable future. (d) RECENT SALES OF UNREGISTERED SECURITIES. During the Quarter ended March 31, 2002 the Company issued securities which were not registered under the Securities Act of 1933, as amended as follows: The Company issued a total of 57,307 shares of its common stock to suppliers of services to 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 concerning the Company. The appropriate restrictive legend was placed on the certificates and stop transfer instructions were issued to the transfer agent. 17 ITEM 6. SELECTED FINANCIAL DATA
Year Ended March 31, 2002 2001 2000 1999 1998 ------------ ------------ ----------- ----------- ----------- Consolidated Statement of Operations Data: (Unaudited) (Unaudited) Revenues Wireless $1,305,347 $1,731,948 $1,459,920 $ 2,128,438 $ 962,461 Enterprise 2,630,369 3,193,433 6,151,238 17,881,844 14,595,490 Professional Service 559,955 622,582 -- -- -- Logistics 1,611,424 -- -- -- -- ----------- ---------- ---------- ---------- ---------- Total 6,107,095 5,547,963 7,611,158 20,010,282 15,557,951 Cost of Sales Wireless 520,834 985,305 775,324 822,636 530,545 Enterprise 2,088,881 2,829,642 3,961,668 15,083,446 12,873,362 Professional Service 277,073 281,138 -- -- -- Logistics 808,644 -- -- -- -- ----------- ---------- ---------- ---------- ---------- Total 3,695,432 4,096,085 4,736,992 15,906,082 13,403,907 Gross Profit 2,411,663 1,451,878 2,874,166 4,104,200 2,154,044 Research and Development 1,475,063 1,228,139 600,957 798,549 755,080 Sales and Marketing 2,281,316 4,630,355 1,849,597 3,115,572 2,202,306 General and Administrative 4,902,982 5,330,211 4,291,085 4,995,755 4,322,784 Impairment of goodwill 4,773,870 -- -- -- -- Impairment of intangible assets 3,541,017 -- -- -- -- Depreciation and amortization 3,975,001 2,010,395 264,427 235,486 149,269 Stock, option and Warrant expense 496,181 601,932 1,060,487 -- -- Operating loss (19,033,767) (12,349,154) (5,192,387) (4,801,184) (4,572,076) Net loss $(18,444,478) $(11,293,381) $(4,756,926) $(3,984,806) $(3,704,647) Net loss per share basic and diluted $ (1.09) $ (0.74) $ (0.61) $ (1.51) $ (1.49) Weighted average shares 16,975,660 15,199,895 7,763,715 2,643,687 2,508,622 Consolidated balance sheet data: Cash and cash equivalents (including restricted cash) $ 4,869,578 $ 8,538,264 $16,360,776 $4,775,680 $ 8,178,192 Working capital 2,064,396 7,780,783 15,753,980 3,070,989 6,789,451 Total assets 10,337,063 21,769,961 18,490,480 7,582,542 12,078,327 Long-term liabilities 618,947 898,617 1,362,590 2,215,227 2,612,749 Preferred shareholders' equity 5,682,456 5,682,456 9,315,501 -- -- Common shareholders' equity 294,481 13,182,551 5,804,468 3,484,261 2,327,433
* Information related to FiveStar Advantage, Inc. for the years 1999 and 1998 is unaudited. FiveStar was acquired under the pooling method of accounting in December 2000. As such, Semotus restated its financial statements in the years 2000, 2001 and 2002, which are audited and included the Financial Statement Section of this 10K. In connection with the preparation of the Selected Financial Data above, Semotus has restated its 1998 and 1999 financial data on an unaudited basis. Management has determined that the time and cost of auditing the restated 1998 and 1999 financial data is unduly onerous. ITEM 7. 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 18 At the end of this fiscal year 2002, Semotus determined that the economy would continue in a weak recovery and that the market for technology products would stay anemic. Accordingly, the Company has centralized and consolidated its organization and its operations. The headcount has been reduced 51% since March 31, 2001 and as a result, engineering, sales and marketing and administrative costs have been reduced and centralized. The overall Semotus organization has eliminated redundant positions and functions while improving the sales effort through utilizing existing customer relationships to shorten the sales cycle. Semotus has organized its operations around two core lines of businesses, while maintaining but de-emphasizing its other operations: i) financial services with the Global Market Pro and Equity Market Pro products and services and ii) workforce automation with the HiplinkXS family of products and services. These products maintain high gross and operating margins and form the core of the enterprise software marketing strategy with wireless and mobile features available in the software. Logistic systems, largely ADA's products and services, continue as part of Semotus' wireless and mobile strategy. ADA develops and licenses proprietary software that gives enterprises a total solution for automation of customer call centers, dispatching, equipment deployment, servicing and invoicing while interfacing with existing corporate business functions and ERP solutions. This field force automation software provides Semotus with a unique platform for its wireless productivity enhancement tools such as Hiplink. In January 2002, Global Beverage Group, a Canadian-based direct store delivery consortium, completed a strategic investment in ADA and is now a 49% shareholder in ADA (see Note 25 to the Financial Statements, "Strategic Investment in ADA"). Certain professional services have been de-emphasized. In this fiscal year, Simkin's Kinetidex 2.0 product was sold to the joint developer and exclusive distributor of the product, Micromedex, Inc. Wireless medical software products have been slow to penetrate the market and therefore have been eliminated by Semotus. Other unprofitable professional service contracts at Wares On the Web have been reduced. M-commerce initiatives have been reduced. The e-commerce economy has contracted and m-commerce is not expected to make a significant contribution in the market in the near future. Consequently, Semotus has reduced its e-commerce and m-commerce presence with the elimination of unprofitable products and services in that segment. At Wares on the Web, one e-commerce customer remains and at WizShop, while there is still some small monthly sponsorship and advertising revenue, the operations have been largely consolidated into Semotus' other divisions and subsidiaries. At the end of June, FiveStar's operations will be closed as the market for e-fulfillment is currently unprofitable. (See "Significant Events".) FACTORS AFFECTING COMPARABILITY Semotus has transitioned its business from consumer driven wireless products and services to enterprise-based application software products and services with emphasis in the mobile and wireless software markets. This transition has mostly taken place since March 2000. As part of the transition, Semotus acquired six companies. Further, as the technology economy has declined since January 2001, Semotus has centralized and consolidated its operations. Strategic Repositioning In FY 2000, the Company announced a strategic repositioning as an enterprise application software company emphasizing mobile and wireless solutions that deliver end-to-end wireless data solutions to enterprises and custom data applications to their customers utilizing its patented Xpresslink(TM) application server. This repositioning involved major infrastructure changes, which continued throughout FY 2001. Semotus is concentrating on providing consulting and engineering services and turnkey applications for enterprise application software. Further, with its recently acquired subsidiaries, Semotus provides software and consulting products and services and marketing, sales, customer service and logistics management to existing customers in the targeted vertical markets. Semotus then provides additional service through wirelessly enabling those customers. Acquisitions 19 As part of the Company's growth strategy, Semotus has acquired six companies: Cross, Simkin, Wares, Five Star, WizShop and ADA. Each provides revenues and a significant customer base to allow the Company to add to its technology, expand its product offerings and penetrate targeted vertical markets. Semotus intends to continue to acquire companies that provide strategic growth for the Company through their technology, customer base or industry or vertical market presence. For specific information concerning the acquired companies see Note 3 to the Financial Statements, "Acquisitions". Centralization and Consolidation Plan In May 2002, the Board of Directors of Semotus determined that the Company needed to focus its operations on its core enterprise software products. (See "Centralization and Consolidation Plan"). Given the continued economic recession and limited capital spending, as well as the reduced access to capital, the Company must economically utilize its limited resources towards those products with the best margins and cash flow generation. As part of that effort, Semotus has decided to reduce its e-commerce operations and to close the FiveStar business as of the end of June 2002. While maintaining a reduced m-commerce and e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that business as the e-fulfillment markets have declined dramatically over the past year and are not expected to recover significantly in the near future. Accordingly, Semotus is redirecting its human and capital resources towards more profitable products and services. Impairment of Long-lived Assets and Goodwill 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 March 31, 2002 for certain amounts of goodwill related to the acquisitions of Simkin, Wares and WizShop. Also, an impairment may have arisen with the recorded asset value of the Company's Global Market Pro intellectual property. For Simkin, the analysis was to determine if a further reduction in goodwill was necessary. Semotus had previously taken a $650,000 net impairment charge in the quarter ended June 30, 2001. See Note 5, "Sale of Technology and Net Impairment of Goodwill". For Wares and WizShop, Semotus analyzed the current carrying value of the goodwill related to both acquisitions. The result of this analysis has necessitated charges to income of certain intangible assets which include goodwill, GMP intellectual property and acquired software. Those charges total approximately $8.3 million for the fiscal year ended March 31, 2002. See Notes 4 and 5 to the Financial Statements, "Impairment of Long-Lived Assets and Goodwill" and "Sale of Technology and Net Impairment of Goodwill" respectively. CRITICAL ACCOUNTING POLICIES The critical accounting policies are revenue recognition, cost allocation to revenue and valuation of intangible assets. Revenue Recognition The Company 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 from recurring monthly charges based on utilization fees, transaction fees, and maintenance and service charges. In the financial consumer 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. Enterprise and commerce sales and service: revenue is generated from online sales, advertising, sponsorships and hosting fees and other services. Revenue is recognized upon a completed sale and shipment of a product and for 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- 20 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, advertising, costs of servicing and hosting and shipping. 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. Valuation of Long-Lived Assets 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. In accordance with SFAS No. 121, the Company performs an undiscounted cash flow analysis of its acquisition to determine whether an impairment existed. When the undiscounted cash flows are less than the carrying value of the net assets, management determins a range of fair values using a combination of valuation methodologies. The methodologies include: - - 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. 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. The Company adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer amortize intangible assets with an indefinite useful life and will begin assessing potential future impairments of such intangible assets. 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. For other accounting policies see Note 2 to the Financial Statements, "Summary of Significant Accounting Policies". RESULTS OF OPERATIONS 21 All financial results for the fiscal year ended March 31, 2000 have been restated for the acquisition of FiveStar under the pooling of interests method of accounting. The acquisition was completed in December 2000. See Note 3 "Acquisitions - FiveStar Advantage, Inc. and Tech-ni-comm, Inc." and see the Datalink.net, Inc. Form 10-KSB for the fiscal year ended March 31, 2000 for information concerning the prior filing. REVENUES Revenues for the years ended March 31, 2002, 2001 and 2000 were $6,107,095, $5,547,963 and $7,611,158, respectively. The 10% increase in overall revenues for the fiscal year ended March 31, 2002 versus 2001 was due to two factors: the addition of system integration sales at ADA and increased sales in the enterprise application software business. This has occurred notwithstanding the decline in economic activity and the weakening of capital and consumer spending for technology products and services. The increase in sales has been somewhat offset by the decline in sales of financial consumer products and the decline in sales in the e-commerce segment. The overall decrease in revenues at March 31, 2001 from March 31, 2000 is due to the decline in sales at one of Semotus' subsidiaries, Five Star Advantage. FiveStar's revenue decline is due to the loss of one major customer and the large drop in sales from another customer who had decided to fulfill its on-line sales in-house. This has been offset somewhat by the increase in revenues in the enterprise application software business. These two customers accounted for 30% and 25% of the revenues of the enterprise and commerce segment in the fiscal year ended March 31, 2000. These disruptions in customer sales occurred concurrently and extended the overall length of time that Five Star has experienced declining revenues. Wireless services The 25% decline in revenues from March 31, 2001 to 2002 is the result of two opposite trends that have continued from the year ended March 31, 2000. First, there has been an approximated 14% increase in revenues in the enterprise application software business from the sales of HiplinkXS and GMP and EMP financial products. This has been more than offset by the 66% decline in the Company's financial consumer software products. For the short term future, these trends will continue. The Company has emphasized its enterprise products which continue to sell well in the economic recession. The 19% increase in revenues from March 31, 2000 to March 31, 2001 in this segment is the result of two distinct trends: (i) the addition of new enterprise application software products and services and (ii) the planned decline in the legacy consumer software products business. Semotus has added significant new customers and new products in the enterprise market, which has generated new revenues. This has been somewhat offset by the 43% decline in the consumer revenues for which the Company had planned as it transitioned into the enterprise marketplace. Enterprise and Commerce Sales The 18% decline in revenues from March 31, 2001 to March 31, 2002 is due to the declining sales in all areas of the m-commerce and e-commerce business. FiveStar's revenues continued to decline as the e-commerce economy has stagnated and has been slow to rebound. In May 2002, Semotus determined that the Company needed to focus its operations on its core enterprise software products, (see "Centralization and Consolidation Plan"). As part of that effort, Semotus has decided to reduce its e-commerce operations and to close the FiveStar business as of the end of June 2002. The 48% decline in revenues in this segment from March 31, 2000 to March 31, 2001 is due to the above mentioned customer losses at FiveStar. A portion of Wares business, its e-commerce business, is included in this category, which helped offset the overall decline in this segment's revenues. Professional and related services 22 The 10% decline in revenues from March 31, 2001 to 2002 is largely the result of completing professional service contracts at Wares and not signing new contracts with existing customers or with new customers. During this economic recession, most companies have been determined to keep engineering and consulting projects in-house. A second factor in the decline is the reduced business presence of Simkin after the sale of its Kinetidex 2.0 product in June 2001. Wireless medical software products have been slow to penetrate the market and therefore have been eliminated by Semotus. Other unprofitable professional service contracts at Wares have also been eliminated. In the fiscal year ended March 31, 2001, this was a new business segment for Semotus and therefore there is no comparison to the fiscal year ended March 31, 2000. Logistic System Sales This is a new segment for Semotus in the fiscal year ended March 31, 2002, which is made up of the revenue from ADA and focuses on the sales of system integration contracts which include 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 to a more historical level of 39% in the fiscal year ended March 31, 2002. The gross profit margin improved due to the addition of the logistics system business that had a gross profit margin of 50%. As well, the wireless services business gross profit margin improved to 60% as more of the enterprise application software was sold versus the consumer financial software, which has a lower margin. Finally, the enterprise and commerce segment did have the large inventory write-downs that occurred in the fiscal year ended March 31, 2001. The overall gross profit margin declined to 26% in March 31, 2001 from 38% in March 31, 2000 and accordingly, the cost of revenue as a percentage of overall revenue increased in percentage terms, but not in absolute dollar amount, due to the decline in revenues at Five Star and a $251,400 inventory expense for the slow sales of certain products and a price adjustment at Five Star. Again, this was caused by the loss of one major customer and a large drop in sales from another customer. The lost Five Star product sales carried significant gross profit margins and consequently the remaining revenue had lower gross profit margins and a higher cost of revenue. Wireless services The 60% gross profit margin for the wireless segment for the fiscal year ended March 31, 2002 is the result of the continuing trends in this business. Semotus is selling more of the enterprise application software, which carries higher gross margins than the consumer financial software. Further, the consumer business is continuing to decline as a percentage of wireless revenues, as fewer individuals maintain their subscriptions. The 43% gross profit margin for this segment for the fiscal year ended March 31, 2001 as compared to 47% in the prior year, is comprised of an enterprise application software business gross margin of 50% and a legacy business gross margin of 36%. The consumer business margin has declined from 47% in fiscal year 2000 to 36% in fiscal year 2001. This is a direct result of the decline in revenues since many of the direct costs for wireless products, mostly data feeds and transmission costs, have minimum charges. As the enterprise products continue to increase their percentage of the segment's services and products, the gross profit margin should increase and be maintained at higher levels than in past fiscal years. 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 or depreciation and pager airtime for those customers without their own pagers, and certain telephone, computer and other direct operational costs. Enterprise and commerce sales 23 The gross profit margin in this segment rebounded somewhat to 21% in the fiscal year ended March 31, 2002 as inventory write-downs declined and software products and services from WizShop were included which have higher gross margins. WizShop's largest contract is for customer loyalty and tracking software, which has gross profit margins of approximately 50%. The gross profit margin for this segment declined from 36% in fiscal year 2000 to 11% in fiscal year 2001, substantially due to the decline in revenues and the inventory expense at FiveStar. Professional and related services The gross profit margin declined minimally to 51% in the fiscal year ended March 31, 2002, which is largely due to the mix of contracts serviced in the year. Further, the reduction in Simkin's business from the sale of the Kinetidex product also contributed to a lower margin. The gross profit margin for this segment was 55% for the fiscal year ended March 31, 2001. The cost of revenue was principally personnel costs related to providing consulting and training services. Logistic System Sales The gross profit margin for this segment was 50% for the fiscal year ended March 31, 2002. The cost of revenue is principally personnel costs related to software programming, consultation and installation of the systems. Also included in the cost of revenue is the computer hardware costs related to each system installation. OPERATING EXPENSES Although operating expenses increased in the fiscal year ended March 31, 2002, this was substantially all the result of impairment charges to goodwill and intangible assets and to increased depreciation and amortization expense. Sales and marketing expenses and general and administrative expenses declined in the fiscal year as Semotus installed a corporate-wide cost reduction and cash management program, which has significantly reduced these expenses. Operating expenses increased during the year ended March 31, 2001 from the year ended March 31, 2000 as part of the growth plan of Semotus, which was in place through December 2000. This plan included expansion of personnel in the key categories of engineering, sales and marketing. Further, some overhead expenses increased in order to integrate and manage the four acquisitions completed in fiscal year 2001. 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. Additionally, for the fiscal year ended March 31, 2002, there are two categories of impairment charges: goodwill and intangible assets. The table below summarizes the changes in these categories of operating expenses: Year Ended March 31, Description 2002 2001 2000 - -------------- ------------ ------------- ----------- Research and development $1,475,063 $1,228,139 $ 600,957 Sales and marketing 2,281,316 4,630,355 1,849,597 General and administrative 4,902,982 5,330,211 4,291,085 Impairment of goodwill 4,773,870 -- -- Impairment of intangible Assets 3,541,017 -- -- Depreciation and amortization 3,975,001 2,010,395 264,427 24 Stock, option and warrant expense 496,181 601,932 1,060,487 ------------ ------------- ----------- Totals $ 21,445,430 $13,801,032 $8,066,553 ============ ============= =========== 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 is due principally to hiring engineering personnel, for the development of updates to existing products and new products, such as the Equity Market Pro, Global Market Pro(TM), and the new release of the Company's enterprise application product, HiplinkXS. Much of the development work for these products has been completed and currently, research and development expenses have been reduced as part of the Centralization and Consolidation Plan. 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. In the fiscal year ended March 31, 2002, these costs have declined principally due to the reduction in general advertising and non-sales supported marketing. There has been a reduction in marketing personnel as the Company has shifted to emphasizing marketing and sales support for its existing products. These costs increased in the fiscal year ended March 31, 2001 due principally to the addition of new salespeople and new marketing personnel, in addition to increased participation in wireless data forums and trade shows. New marketing programs have also been developed and are in the process of being implemented for new wireless products such as the Global Market Pro and Mobile Reach. Semotus is also updating existing marketing materials for existing products such as HipLink and Dose Assist. 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 fiscal year ended March 31, 2002 as personnel and offices were reduced and operating functions were consolidated. This trend should continue as Semotus implements its Centralization and Consolidation Plan. These costs increased in the fiscal year ended March 31, 2001 due to increases in administrative personnel, costs associated with providing investor information, as well as an expansion of office space in San Jose, Ca., Vancouver B.C., Woodbury, N.J. and Downers Grove, Ill. Additional unusual general and administrative cost increases have resulted from the acquisitions of Cross, Simkin, Wares and Five Star. 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. As a result of Semotus' review, management determined that the carrying value of goodwill and recorded asset value were not fully recoverable and an impairment charge of $4,773,870 was taken comprised of an impairment charge to Simkin's goodwill of $909,272 (of which $650,000 was recorded in the quarter ended June 30, 2001, see Note 5 "Sale of Technology and Net Impairment of Goodwill"), $1,156,587 for Wares' goodwill and $2,708,011 for WizShop's goodwill. Furthermore, Semotus took an impairment charge of $3,420,000 for GMP in the quarter ended March 31, 2002 and a $121,017 impairment charge for software development costs at Wares. See Notes 4 and 5, "Impairment of Goodwill and Long-Lived Assets" and "Sale of Technology and Net Impairment of Goodwill" respectively, to the Financial Statements in this 10K. 25 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 (GMP). 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. The decline in non-cash charges for compensation is due mainly to the termination of contracts with service providers, which called for stock or warrant compensation, as well as the decline in the stock and option grants to service providers, in the fiscal years ended March 31, 2002 and 2001. The common stock issued was valued at the fair market value of stock issued, 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 FY 2002, FY2001 or FY 2000, expense will be recognized in the future if the stock price increases above the exercise price of the options. NON-OPERATING INCOME AND EXPENSES Non-operating income and expenses are primarily made up of interest income from invested cash, interest expense from a note payable and retired bank lines of credit, 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 (expense). YEAR ENDED MARCH 31, DESCRIPTION 2002 2001 2000 - ----------- ------------ -------------- ------------- Net interest income $ 264,060 $ 639,993 $ 141,257 Owners fee sales of technology (1,569,000) (1,569,000) (1,570,000) Interest on note from sales of technology 1,569,000 1,569,000 1,570,000 Amortization of technology advances 306,908 371,052 432,021 Other Interest income 50,207 132,792 129,290 Miscellaneous Expense (77,070) (88,064) (267,107) ----------- --------------- -------------- Total non-operating income $ 544,105 $1,055,773 $ 435,461 =========== =============== =============== Non-operating income, net of expenses declined in the fiscal year ended March 31, 2002, as less cash was available for investment during the year resulting from the operating losses. Amortization of technology advances decreased somewhat due to the application of the effective interest method of amortization on the balances. Non-operating income, net of expenses, increased in the year ended March 31, 2001 from the prior year, due primarily to an increase in interest income resulting from more cash during the year that was available for investment. The two major sources of cash were the private placement of Series B Convertible Preferred Stock completed in February 2000 and the exercise of common stock warrants. Amortization of technology advances decreased somewhat, due to the application of the effective interest method of amortization on the balances. 26 Miscellaneous expenses declined due to a write-off of an investment in two new products at Five Star, which was incurred in fiscal year 2000. COMPREHENSIVE LOSS The increase in the comprehensive loss for the fiscal year ended March 31, 2002 to $18,484,302 or $(1.09) per share was due principally to a 511% increase in non-cash charges to income from impairments of goodwill and intangible assets and the amortization of intangible assets. Additionally, research and development expense increased 20% with the upgrading and launch of new and improved products. These costs were offset somewhat with a 66% increase in gross profit dollars and reductions in sales and marketing expenses and general and administrative expenses. The comprehensive loss of $11,314,517 or $(0.74) per share for the fiscal year ended March 31, 2001 compared to $4,756,324 or $(0.61) per share for the fiscal year ended March 31, 2000 was due principally to three factors: (i) a 97% increase in non-cash charges from acquisitions and amortization of intellectual property, (ii) a substantial decline in the revenues and gross margin of Semotus' FiveStar subsidiary, and (iii) an increase in engineering, sales and marketing and administrative personnel for the growth of Semotus. 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 restated the fiscal year ended March 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. See "Business Description - Services and Products" 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".
Professional Logistic Wireless Enterprise and and related system Corporate Services commerce sales services sales and other Total ---------- -------------- ------------ ---------- ---------- --------- As of and for the Year Ended March 31, 2002 Revenue $ 1,305,347 2,630,368 559,956 1,611,424 -- $ 6,107,095 Gross Profit $ 784,513 541,488 282,882 802,780 -- $ 2,411,663 Operating loss* $ (837,442) (1,005,843) (563,100) (149,766) (16,477,615) $(19,033,767) Depreciation and Amortization $ 340,482 113,899 265,661 29,613 3,225,346 $ 3,975,001 Capital Expenditures $ 18,873 -- -- 5,715 -- $ 24,588 Total Assets, March 31, 2002* $ 7,133,204 1,616,479 282,808 1,056,540 248,032 $ 10,337,063 As of and for the Year Ended March 31, 2001 Revenue $ 1,731,948 3,193,433 622,582 -- -- $ 5,547,963 Gross Profit $ 746,643 363,791 341,444 -- -- $ 1,451,878 Operating loss* $(1,113,291) (974,759) (171,367) -- (10,089,737) $(12,349,154) Depreciation and Amortization $ (223,149) (37,535) (77,812) -- (1,671,899) $ (2,010,395) Capital Expenditures $ 223,231 22,490 11,747 -- 280,968 $ 538,436 Total Assets, March 31, 2001* $13,127,832 1,302,984 2,578,399 -- 4,760,746 $ 21,769,961 As of and for the Year Ended March 31, 2000 Revenues $ 1,459,920 6,151,238 -- -- -- $ 7,611,158 Gross Profit $ 684,596 2,189,570 -- -- -- $ 2,874,166 Operating loss* $ (923,460) (189,531) -- -- (4,079,396) $ (5,192,387) Depreciation and Amortization $ 244,077 20,350 -- -- -- $ 264,427 Capital Expenditure $ 96,723 1,135 -- -- 24,437 $ 122,295 Total Assets, March 31, 2000* $16,597,406 1,893,074 -- -- -- $ 18,490,480
27 * 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 $248,032 and the $4,760,476 of assets at March 31, 2002 and 2001 respectively under "Corporate and other" is comprised of the GMP Intellectual Property, Semotus' Global Market Pro wireless financial product and all allocations of certain corporate assets and liabilities not appropriately categorized in any segment. LIQUIDITY AND CAPITAL RESOURCES The overall decrease in the cash position of Semotus at March 31, 2002 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 57%. Semotus believes the cash loss will continue to be reduced through its Centralization and Consolidation Plan. The overall decrease in the cash position of Semotus at March 31, 2001 is due to the expansion of the Company to grow both internally through its new and upgraded products and services and externally through acquisitions. Cash was spent on operating resources, especially personnel, and computer and telecommunications equipment. Further, four acquisitions produced unusual charges. In the fiscal year ended March 31, 2001 warrants and options were converted to common stock, which provided some cash. In the fiscal year ended March 31, 2000, Semotus completed a private placement of Series B Convertible Preferred Stock which contributed $9,315,501 to cash, in addition to the conversion of warrant and options to common stock which produced $7,089,852 of cash. The sources and uses of cash are summarized as follows: YEAR ENDED MARCH 31, 2002 2001 2000 ------------ ------------ ------------- Cash used in operating activities $(5,141,459) $(9,219,730) $(4,271,193) Cash provided by (used in) investing activities 1,669,791 (576,766) (84,077) Cash provided by (used in) financing activities (196,082) 1,279,762 16,213,158 ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents $(3,667,750) $(8,516,734) $11,857,888 ============ ============ ============= Cash used in operating activities at March 31, 2002 consisted principally of a net loss of $18,444,478 offset somewhat by non-cash charges of $8,314,887 of impairment charges, depreciation and amortization of $3,975,001 and stock based compensation of $496,181. Other operating activities that provided cash were reductions in accounts receivable and inventory of $532,953 and $209,376 respectively, and increases in accrued liabilities and deferred revenue of $181,242 and $168,091, respectively. Cash used in operating activities at March 31, 2001 consisted principally of a net loss of $11,293,381 offset somewhat by non-cash charges of $2,010,395 of depreciation and amortization and $601,932 of stock, option and warrant based compensation. Other operating activities that contributed to the use of cash were $237,625 in the net change of current assets and current liabilities. This largely resulted from reductions in accounts payable offset by reductions in inventory and accounts receivable. Cash provided from investing activities of $1,669,791 at March 31, 2002 resulted principally from $1,096,472 of cash received, net of assets acquired from the two companies acquired in the fiscal year, $350,000 from the sale of the Kinetidex technology and $247,907 net cash received from a minority investment in the Company's ADA subsidiary. 28 Cash used in investing activities of $576,766 at March 31, 2001 resulted principally from $538,436 of purchased equipment, mainly computers and wireless equipment. Cash flows from financing activities produced a net decrease in cash of $196,082 which resulted from $207,752 of repayments on notes payable and capital leases offset slightly by $11,670 in cash received from the exercise of stock options. Cash flows provided by financing activities of $1,279,762 at March 31, 2001 resulted from $2,040,438 of proceeds from the exercise of options and warrants offset slightly by payments of $15,624 on capital leases and $50,830 on notes payable. Additionally, the Company has $694,222 in a certificate of deposit that has been used to secure a note payable. As of March 31, 2002, the Company had cash and cash equivalents of $4,176,292 a decrease of $3,667,750 from the prior year. Working capital decreased to $2,064,396 from the fiscal year ended March 31, 2001. As of March 31, 2001, the Company had cash and cash equivalents amounting to $7,844,042, a decrease of $8,516,734 from the balance at March 31,2000. Working capital decreased to $7,780,783 from $15,753,980 at the prior year-end. The continued decrease in working capital is from the resources used in the operations of Semotus as explained above, somewhat offset by cash produced by the conversion of warrants and options into common stock. 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 March 31, 2002. Primary commitments in FY2003 are repayment of notes payable ($693,286), capital lease obligations ($93,922) and operating lease obligation ($441,176). At March 31, 2002 and 2001, the Company had a deferred tax asset of approximately $11,753,500 and $9,592,500, principally arising from net operating loss carryforwards available to offset future taxable income. As management cannot determine that it is more likely than not that the Company will realize the benefit of this asset, a 100% valuation allowance has been established. 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. As such, the accounting and disclosure prescribed by SFAS No. 133 are not expected to have a material impact on the Company. In December 1999, the SEC staff released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in the financial statements. SAB 101 must be applied to the financial statements no later than the quarter ending September 30, 2000. The adoption of SAB 101 did not have a material effect on the Company's financial results in the fiscal year ended March 31, 2001. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 2, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Due to the repricing of options in December 2000, Fin 44 may have a material effect on the Company's financial position and results of operations in the future. For the fiscal years ended March 31, 2002, 2001 and 2000, 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" 29 (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 March 31, 2002, the net carrying amount of goodwill is $2,474,597 and other intangible assets is $576,958. Amortization expense for goodwill fiscal year ended March 31, 2002 was $1,855,407. Further, the Company determined that goodwill had been impaired as of March 31, 2002, and charged against income $4,773,870 of goodwill. 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 impact of adopting SFAS 144 on the Company's financial position and result of operations could be material. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have limited exposure to financial market risks, including changes in interest rates. At March 31, 2002, we had cash and cash equivalents of $4,176,292 and restricted cash of $693,286. Cash and cash equivalents consisted of demand deposits and money market accounts. Because of the cash equivalency of 30 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 $693,286, at March 31, 2002. These notes are due and payable in six months. 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 March 31, 2002. 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 March 31, 2002, the cumulative translation loss was $142,360. Given the relative stability of the Canadian and U.S. dollar exchange rate, the Company has not deemed it necessary to hedge this exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements are set forth on pages F-1 through F-39 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2002 under the caption "Directors and Executive Officers" which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended March 31, 2002, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2002 under the caption "Executive Compensation" which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended March 31, 2002, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2002 under the caption "Security Ownership of Certain Beneficial Owners and Management" which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended March 31, 2002, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on September 17, 2002 under the caption "Certain Relationships and Related Transactions" which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended March 31, 2002, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS The financial statements required by this item are submitted in a separate section beginning on page F-1 of this report. 31 (a)(2) FINANCIAL STATEMENT SCHEDULES All financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto. (a)(3) EXHIBITS. EXHIBIT NUMBER DESCRIPTION LOCATION - ------- ----------- -------- 2.1 Agreement of Merger by and among Incorporated by reference to Datalink.net, Inc., Acquisition Exhibit 2.1 to the Registrant's Wireless, Inc., Cross Form 10QSB filed September 30, Communications, Inc., and 2000. Kathleen M. Wold made effective as of July 20, 2000. 2.2 Agreement of Merger by and among Incorporated by reference to Datalink.net, Inc., Medical Exhibit 2.2 to the Registrant's Acquisition Wireless, Inc. Form 10QSB filed September 30, Simkin Inc. and J. Daniel 2000. Robinson made effective as of September 12, 2000. 2.3 Agreement of Merger by and among Incorporated by reference to Datalink.net, Inc., Wares Exhbit 2.3 to the Registrant's Acquisition, Inc., ISS, Inc. Form 10QSB filed September 30, and Stephen J. Casey made 2000. effective as of October 10, 2000. 2.4 Agreement of Merger by and among Incorporated by reference to Datalink.net, Inc., Five Star Exhibit 2.1 to the Registrant's Advantage, Inc., Five Form 8-K filed January 12, 2001 Acquisition Inc. and Jeff Gleckman dated December 8, 2000. 2.5 First Amendment to Merger Incorporated by reference to Agreement by and among Exhibit 2.2 to the Registrant's Datalink.net, Inc. Five Form 10QSB filed January 12, Acquisition, Inc., Five Star 2001. Advantage, Inc. and Jeff Gleckman, dated as of December 28, 2000. 2.6 Merger Agreement by and among Incorporated by reference to Datalink.net, Inc., Five Exhibit 2.3 to the Registrant's Acquisition, Inc., Tehc-ni-comm, Form 10QSB filed January 12, Inc., and Jeff Gleckman, dated 2001. as of December 8, 2000. 2.7 First Amendment to Merger Incorporated by reference to Agreement by and among Exhibit 2.4 to the Registrant's Datalink.net, Inc., Five Form 10QSB filed January 12, Acquisition, Inc., Tech-ni-comm, 2001. Inc., and Jeff Gleckman, dated as of December 28, 2000. 2.8 Merger Agreement by and among Incorporated by reference to Semotus Solutions, Inc., Exhibit 2.1 to the Registrant's WizShop.com, Inc. and Wiz Form 8-K filed May 17, 2001. Acquisition, Inc. 2.9 Merger Agreement by and among Incorporated by reference to Semotus Solutions, Inc., ADA Exhibit 2.1 to the Registrant's Acquisition, Inc., Application Form 8-K filed May 30, 2001. Design Associates, Inc. and John Hibben. 32 2.10 Common Stock Purchase Agreement Incorporated by reference to by and among Application Design Exhibit 2.1 to the Registrant's Associates, Inc., John Hibben Form 10Q filed February 14, 2002. and 2007978 Ontario, Inc. dated January 18, 2002. 2.11 Agreement to Amend the Merger Incorporated by reference to Agreement and Employment Exhibit 2.2 to the Registrant's Agreement by and among Semotus Form 10Q filed February 14, 2002. Solutions, Inc., Application Design Associates, Inc. and John Hibben dated January 18, 2002. **2.12 Agreement to Amend the Stock Incorporated by reference to Purchase Agreement and Terminate Exhibit 2.1 to the Registrant's the Warrant by and among Form 8-K filed February 28, 2002. Application Design Associates, Inc., Semotus Solutions, Inc. and 2007978 Ontario, Inc. dated February 15, 2002. 2.13 Joint Venture Agreement by and Filed electronically herewith. among Semotus Solutions, Inc. and Outercurve Technologies, Inc. dated February 20, 2002. 3.1 Articles of Incorporation. Incorporated by reference to Exhibit No. 2 to the Registrant's Form 8-A filed on July 22, 1996 (No. 0-21069). 3.2 Bylaws of the Company. Incorporated by reference to Exhibit No. 3 to the Registrant's Form 8-A filed on July 22, 1996 (No. 0-21069). 3.3 Amended and Restated Bylaws Incorporated by reference to of the Company dated January Exhibit 3.1 to the Registrant's 24, 2000. Form 8-K Filed on February 17, 2000. 3.4 Certificate of Amendment to Incorporated by reference to the Articles of Incorporation Exhibit 3.2 to the Registrant's dated February 17, 1998. Form 10-KSB for the year ended March 31, 1998. 3.5 Certificate of Amendment to Incorporated by reference to Articles of Incorporation Exhibit 3.4 to the Registrant's dated July 6, 1999. Form 8-A12B filed on December 21, 1999. 3.6 Certificate of Amendment to Incorporated by reference to Articles of Incorporation Exhibit 3.5 to the Registrant's Dated January 12, 2001. Form 10-KSB for the year ended March 31, 2001. 4.1 Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A-12B filed on December 21,1999. 4.2 Certificate of Designation Incorporated by reference to of the Series B Convertible Exhibit 4.1 to the Registrant's Preferred Stock. Form 8-K filed February 17, 2000. 4.3 Warrant to purchase up to Incorporated by reference to 375,000 shares of common stock Exhibit 4.2 to the Registrant's issued to Brown Simpson Strategic Form 8-K filed February 17, Fund, Ltd., dated February 9, 2000. 2000. 33 4.4 Warrant to purchase up to Incorporated by reference to 201,923 shares of common stock Exhibit 4.3 to the Registrant's issued to Brown Simpson Form 8-K filed February 17, Strategic Fund, L.P., dated 2000. February 9, 2000. 4.5 Warrant to purchase up to Incorporated by reference to 76,923 shares of common stock Exhibit 4.4 to the Registrant's issued to H.C. Wainwright & Co., Form 8-K filed February 17, Inc., dated February 14, 2000. 2000. 4.6 Warrant to purchase up to Incorporated by reference to 150,000 shares of common stock Exhibit 4.2 to the Registrant's issued to Anthony N. LaPine, Form S-3 filed on April 21, dated December 1, 1999. 2000. **4.7 Warrant to Purchase 150,000 Incorporated by reference to shares of Semotus' common stock Exhibit 4.1 to the Registrant's issued to 2007978 Ontario, Inc. Form 10Q filed February 14, 2002. Dated January 18, 2002. 10.1 Agreement Concerning the Incorporated by reference to Exchange of Common Stock Exhibit No. 10 to the Regis- Between Datalink Systems trant's Form 8-K dated June 27, Corporation and Datalink 1996. Communications Corporation. 10.2 Application Software Purchase Incorporated by reference to Agreement between Datalink Exhibit No. 10.1 to the Regis- Systems Corporation and trant's Form 8-K dated August Shalcor Investments. 26, 1996. 10.3 Management and Marketing Incorporated by reference to Agreement between Datalink Exhibit No. 10.2 to the Regis- Systems Corporation and trant's Form 8-K dated August Shalcor Investments. 26, 1996. 10.4 8% Secured Term Note. Incorporated by reference to Exhibit No. 10.3 to the Regis- trant's Form 8-K dated August 26, 1996. *10.5 Employment Agreement with Anthony Incorporated by reference to LaPine dated May 1, 1996. Exhibit 10.6 to the Regis- trant's Form 10-KSB for the year ended March 31, 1997. 10.6 Application Software Purchase Incorporated by reference to Agreement between Datalink Exhibit 10.1 to the Regis- Systems Corporation and 605285 trant's Form 8-K dated May 6, Ontario Inc. 1997. 10.7 Management and Marketing Incorporated by reference to Agreement between Datalink Exhibit 10.2 to the Regis- Systems Corporation and 605285 trant's Form 8-K dated May 6, Ontario. 1997. 10.8 6% Secured Term Note. Incorporated by reference to Exhibit No. 10.3 to the Registrant's Form 8-K dated May 6, 1997. *10.9 Loan Forgiveness Agreement with Incorporated by reference to Anthony LaPine dated January 19, Exhibit 10.20 to the Registrant's 2000. Form 10KSB filed June 29, 2000. 10.10 Secured Promissory Note with Incorporated by reference to Anthony LaPine dated Exhibit 10.19 to the Registrant's February 29, 2000. Form 10KSB filed June 29, 2000. 34 10.11 Option to Repurchase Technology Incorporated by reference to Agreement with 605285 Ontario Exhibit 10.21 to the Registrant's Inc. dated June 14, 2000. Form 10KSB filed June 29, 2000. 10.12 Termination and Sale Agreement Incorporated by reference to by and among Micromedix, Inc. Exhibit 99.1 to the Registrant's Semotus Solutions, Inc. and Form 10Q filed August 15, 2001. Simkin, Inc. dated May 31, 2001. 10.13 Loan Forgiveness Agreement with Filed electronically herewith. Anthony LaPine dated March 29, 2002. 21 Subsidiaries of the Registrant. Filed electronically herewith. 23 Consent of BDO Seidman, LLP. Filed electronically herewith. 99.1 Securities Purchase Agreement, Incorporated by reference to dated as of February 9, 2000, Exhibit 99.1 to the Regis- by and among the Company, Brown trant's 8-K Filed on February Simpson Strategic Growth Fund, 17, 2000. Ltd. and Brown Simpson Strategic Growth Fund. 99.2 Registration Rights Agreement, Incorporated by reference to dated as of February 9, 2000, Exhibit 99.2 to the Regis- by and among the Company, Brown trant's 8-K Filed on February Simpson Strategic Growth Fund, 17, 2000. Ltd. and Brown Simpson Strategic Growth Fund, L.P. 99.3 Registration Rights and Lock-Up Incorporated by reference to Agreement by and among Semotus Exhibit 2.2 to the Registrant's Solutions, Inc. and John Hibben. Form 8-K filed May 30, 2001. - ---------- * Management contract or compensatory plan or arrangement. ** This Warrant was cancelled, ab initio, and effectively replaced with 150,000 common stock options under the Company's 1996 Stock Option Plan. (b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K on February 28, 2002 with respect to the amendment entered into by and among Application Design Associates, Semotus Solutions, Inc., and 2007978 Ontario, Inc. that canceled, ab initio, the Warrant to purchase 150,000 shares of Registrant's common stock dated January 18, 2002. (c) EXHIBITS. The exhibits required by this Item are listed under Item 14(a)(3). (d) FINANCIAL STATEMENTS SCHEDULES. The financial statement schedules required by this Item are listed under Item 14(a)(2). 35 INDEX TO FINANCIAL STATEMENTS PAGE(S) Report of Independent Certified Public Accountants . . . . . F-2 Consolidated Financial Statements: Consolidated Balance Sheets, March 31, 2002 and 2001 . . F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended March 31, 2002, 2001 and 2000. . F-4 Consolidated Statements of Common Shareholders' Equity for the years ended March 31, 2002, 2001 and 2000. . . . F-5 - F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000. . . . . . . . . . . F-7 - F-8 Notes to Consolidated Financial Statements. . . . . . . F-9 - F-39 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of Semotus Solutions, Inc.: We have audited the accompanying consolidated balance sheets of Semotus Solutions, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive loss, common shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Semotus Solutions, Inc. and subsidiaries as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP San Jose, California June 3, 2002 F-2 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS March 31 March 31 2002 2001 CURRENT ASSETS: ----------- ------------ Cash and cash equivalents (including restricted cash of $693,286 in 2002 and $694,222 in 2001) (Note 9) $ 4,869,578 $ 8,538,264 Trade receivables (net of allowance for doubtful accounts of $67,000 in 2002, $62,887 in 2001) 320,566 462,368 Income and GST tax receivable 3,823 127,266 Other receivables 60,395 115,716 Inventory, (net of reserve of $40,900 in 2002 and $188,500 in 2001) (Note 2) 178,171 387,547 Prepaid expenses 170,514 155,959 ----------- ----------- Total current assets 5,603,047 9,787,120 Property and equipment, net (Note 7) 682,461 977,678 Capitalized contract, net (Note 2) 576,958 Investments -- 151,000 GMP intellectual property, net (Notes 4 and 6) 1,000,000 5,780,000 Goodwill, net (Notes 3,4 and 5) 2,474,597 4,760,746 Other assets -- 313,417 ----------- ------------ Total assets $10,337,063 $21,769,961 =========== ============ LIABILITIES Current liabilities: Accounts payable $ 799,385 $ 626,830 Accrued expenses and other current liabilities 359,091 228,340 Note payable (Note 9) 693,286 694,222 Current portion of capital lease obligation (Note 10) 93,922 38,222 Current portion of advances on technology sales (Note 8) 269,109 307,390 Deferred revenue 1,323,858 111,333 ----------- ------------ Total current liabilities 3,538,651 2,006,337 Capital lease obligation, net of current portion (Note 10) 52,405 63,447 Advances on technology sales, net of current portion (Note 8) 566,542 835,170 ----------- ------------ Total liabilities 4,157,598 2,904,954 ----------- ------------ Minority Interest (Note 25) 202,528 -- Commitments and contingencies (Notes 9,10 and 20) PREFERRED SHAREHOLDERS' EQUITY (Note 11): Convertible preferred stock, Series B: $0.001 par value; $13.00 liquidation value; authorized: 5,000,000 shares; issued and outstanding:469,231 in 2002 and 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 (Note 12): Common stock: $0.01 par value; authorized: 50,000,000 shares; issued and outstanding: 17,200,784 in 2002 and 15,903,368 in 2001 172,008 159,034 Additional paid-in capital 60,396,089 55,217,626 Accumulated other comprehensive loss (142,360) (102,536) Notes receivable - related parties (701,817) (1,106,612) Accumulated deficit (59,429,439) (40,984,961) ----------- ------------ Total common shareholders' equity 294,481 13,182,551 ----------- ------------ Total liabilities, minority interest, preferred and common shareholders' equity $10,337,063 $21,769,961 =========== ============
See accompanying notes to consolidated financial statements. F-3 SEMOTUS SOLUTIONS,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended March 31, 2002 2001 2000 ----------- ----------- ----------- Revenues: Wireless Services $ 1,305,347 $ 1,731,948 $ 1,459,920 Enterprise and commerce sales 2,630,369 3,193,433 6,151,238 Professional and related services 559,955 622,582 -- Logistics 1,611,424 -- -- ----------- ----------- ----------- Total Revenue 6,107,095 5,547,963 7,611,158 Cost of Sales: Wireless Services 520,834 985,305 775,324 Enterprise and commerce sales 2,088,881 2,829,642 3,961,668 Professional and related services 277,073 281,138 -- Logistics 808,644 -- -- ----------- ----------- ----------- Total Cost of revenue 3,695,432 4,096,085 4,736,992 ----------- ----------- ----------- Gross Profit 2,411,663 1,451,878 2,874,166 Operating Expenses: (Exclusive of depreciation and amortization and stock, option and warrant expense) Research and development 1,475,063 1,228,139 600,957 Sales and marketing 2,281,316 4,630,355 1,849,597 General and administrative 4,902,982 5,330,211 4,291,085 Impairment of goodwill 4,773,870 -- -- Impairment of intangible assets 3,541,017 -- -- Depreciation and amortization: Research and development 127,976 97,606 63,874 General and administrative 3,847,025 1,912,789 200,553 ----------- ----------- ----------- 3,975,001 2,010,395 264,427 Stock option and warrant expense: Sales and marketing 88,000 78,750 -- General and administrative 408,181 523,182 1,060,487 ----------- ----------- ----------- 496,181 601,932 1,060,487 ----------- ----------- ----------- Total Operating expenses 21,445,430 13,801,032 8,066,553 Operating loss (19,033,767) (12,349,154) (5,192,387) Net interest income 264,060 639,993 141,257 Other income (Note 12) 280,045 415,780 294,204 ----------- ----------- ----------- Total interest and other income 544,105 1,055,773 435,461 ----------- ----------- ----------- Net loss before minority interest (18,489,662) (11,293,381) (4,756,926) Minority interest (45,184) -- -- ----------- ----------- ----------- Net loss (18,444,478) (11,293,381) (4,756,926) Other comprehensive income (loss) - Translation adjustment (39,824) (21,136) 602 ----------- ----------- ----------- Comprehensive loss $(18,484,302) $(11,314,517) $(4,756,324) =========== =========== =========== Net loss per share: Basic $ (1.09) $ (0.74) $ (0.61) Diluted $ (1.09) $ (0.74) $ (0.61) Weighted average shares used in per Share calculation, basic and diluted 16,975,660 15,199,895 7,763,715 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-4 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL --------------------- PAID-IN SHARES AMOUNT CAPITAL ---------- --------- ----------- Balances at March 31, 1999 $5,378,614 $ 53,786 $28,652,544 Common stock issued for: Options exercised 223,856 2,238 246,353 Services rendered 114,296 1,144 225,343 Exercise of warrants for cash and notes receivable 2,955,664 29,556 6,881,231 Cashless exercise of warrants 282,278 2,822 (2,822) Compensation associated with stock options And warrants granted for services -- -- 834,000 Conversion of preferred, series A to common stock 4,731,080 47,312 (47,312) Translation adjustment -- -- -- Amortization of notes receivable, net of accrued interest due -- -- -- Net loss -- -- -- ----------- --------- ----------- Balances at March 31, 2000 13,685,788 136,858 36,789,337 Common stock issued for: Options exercised 133,788 1,338 187,754 Services rendered 128,808 1,288 207,367 Exercise of warrants for cash 903,282 9,033 1,842,313 Cashless exercise of warrants 39,204 392 (392) Conversion of series B preferred to common stock 600,000 6,000 3,627,045 Issuance of stock for acquisitions 412,498 4,125 5,153,925 Warrants issued for jointly developed technology-GMP -- -- 6,800,000 Warrants issued for option to repurchase technology -- -- 217,000 Compensation associated with stock options and warrants granted for services -- -- 393,277 Amortization of notes receivable, net -- -- -- Translation adjustment -- -- -- Net loss -- -- -- ----------- --------- ----------- Balances at March 31, 2001 15,903,368 159,034 55,217,626 Issuance of stock for acquisitions 964,940 9,649 4,673,937 Issuance of stock for services rendered 473,936 4,739 391,288 Issuance of stock due to exercise of options 8,540 86 11,584 Compensation associated with stock options and warrants granted for services -- -- 100,154 Redeemed stock due to contract cancellations (150,000) (1,500) 1,500 Amortization of note receivable, net -- -- -- Foreign currency translation adjustment -- -- -- Net loss -- -- -- ------------- ----------- ------------ Balances at March 31, 2002 $ 17,200,784 $ 172,008 $60,396,089 ============= =========== ============
See accompanying notes to consolidated financial statements. F-5 SEMOTUS SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE NOTES ACCUMULATED LOSS RECEIVABLE DEFICIT TOTAL ------------ ------------ ------------ ---------- Balances at March 31, 1999 $(82,002) $(1,261,675) $(24,934,654) $2,427,999 Common stock issued for: Options exercised -- -- -- 248,591 Services rendered -- -- -- 226,487 Exercise of warrants for cash and notes receivable -- (100,000) -- 6,810,787 Cashless exercise of warrants -- -- -- 0 Compensation associated with stock options and warrants granted for services -- -- -- 834,000 Conversion of preferred, Series A to common stock -- -- -- 0 Translation adjustment 602 -- -- 602 Amortization of note receivable net of accrued interest due -- 12,928 -- 12,928 Net loss -- -- (4,756,926) (4,756,926) --------- ----------- ------------ ----------- Balances at March 31, 2000 (81,400) (1,348,747) (29,691,580) 5,804,468 Common stock issued for: Options exercised -- -- -- 189,092 Services rendered -- -- -- 208,655 Exercise of warrants for cash -- -- -- 1,851,346 Cashless exercise of warrants -- -- -- -- Conversion of series B preferred to common stock -- -- -- 3,633,045 Issuance of stock for acquisitions -- -- -- 5,158,050 Warrants issued for jointly developed technology - GMP -- -- -- 6,800,000 Warrants issued for option to repurchase technology -- -- -- 217,000 Compensation associated with stock options and warrants granted for services -- -- -- 393,277 Amortization of notes receivable, net -- 242,135 -- 242,135 Translation adjustment (21,136) -- -- (21,136) Net loss -- -- (11,293,381) (11,293,381) --------- ------------ ------------ ----------- Balances at March 31, 2001 (102,536) (1,106,612) (40,984,961) 13,182,551 Issuance of stock for acquisitions -- -- -- 4,683,586 Issuance of stock for services rendered -- -- -- 396,027 Issuance of stock due to exercise of options -- -- -- 11,670 Compensation associated with stock options and warrants granted for services -- -- -- 100,154 Redeemed stock due to contract cancellations -- -- -- -- Amortization of note receivable, net -- 404,795 -- 404,795 Foreign currency translation adjustment (39,824) -- -- (39,824) Net loss -- -- (18,444,478) (18,444,478) --------- ----------- ------------ ------------ Balances at March 31, 2002 $(142,360) $ (701,817) $(59,429,439) $ 294,481 ========= =========== ============ ============
See accompanying notes to consolidated financial statements. F-6 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 2002 2001 2000 ------------ -------------- ------------ Cash flows from operating activities: Net loss $(18,444,478) $(11,293,381) $(4,756,926) Foreign currency translation adjustment (39,824) (21,136) 602 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,975,001 2,010,395 264,427 Compensation expense related to stock issued for services 396,027 208,655 226,487 Compensation for expenses relating to options/warrants issued for services 100,154 393,277 834,000 Net amortization of contract income (606,585) -- -- Amortization of technology advances (306,908) (371,050) (432,022) Amortization of notes receivable 315,799 242,135 12,928 Impairment of goodwill 4,773,870 -- -- Impairment of intangible assets 3,541,017 -- -- Non-cash compensation received for service -- (151,000) -- Non-cash settlements of liabilities 26,230 -- -- Net loss on asset sales 29,910 -- -- Changes in assets and liabilities net of acquired assets and liabilities due to acquisitions: Accounts and other receivables 532,953 130,147 1,081,790 Inventory 209,376 223,728 (63,513) Prepaid expenses and other assets 4,003 61,433 (175,330) Accounts payable (48,018) (477,165) (1,106,577) Accrued liabilities 181,242 (85,032) (26,916) Advances on technology sales 50,681 -- -- Deferred revenue 168,091 (90,736) (130,143) ----------- ----------- ----------- Net cash used in operating activities (5,141,459) (9,219,730) (4,271,193) ----------- ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (24,588) (538,436) (122,295) Investments -- (232,789) Cash received from FY 2002 acquisitions, net 1,096,472 -- -- Cost of FY 2001 acquisitions, net of cash acquired (132,502) -- Sale of Kinetidex technology 350,000 -- -- Minority investment in subsidiary 247,907 -- -- Other assets -- 94,172 271,007 ----------- ----------- ----------- Net cash provided by (used in) investing activities 1,669,791 (576,766) (84,077) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from note payable to bank -- -- 1,000,000 Repayments of note payable to bank (154,400) (50,830) (1,000,000) Repayments of capital lease obligations (53,352) (15,624) (15,201) Proceeds from line of credit -- -- 264,049 Redemption of capital stock -- -- (441,043) Proceeds from issuance of preferred stock -- -- 9,315,501 Proceeds from exercise of options and warrants 11,670 2,040,438 7,089,852 Restricted cash for note payable -- (694,222) -- ----------- ----------- ----------- Net cash (used in) provided by financing activities (196,082) 1,279,762 16,213,158 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (3,667,750) (8,516,734) 11,857,888 Cash and cash equivalents, beginning of year 7,844,042 16,360,776 4,502,888 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 4,176,292 $ 7,844,042 $16,360,776 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-7 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended March 31, 2002 2001 2000 ------------ ------------ ----------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 68,130 $ 19,071 $ 42,400 ============ ============ =========== Cash paid for income taxes $ 9,015 $ 10,557 $ 800 ============ ============ =========== 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 $ -- ============ =========== =========== Non-cash purchase consideration for the acquisition of Wizshop, Inc. and Application Design Associates, Inc. through the issuance of common stock $4,665,500 $ -- $ -- ============ =========== =========== 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 $ -- $ -- ============ ============ =========== Common stock issued for services $ 396,027 $ 208,655 $ 226,487 ============ ============ =========== Common stock issued for liabilities $ 101,036 $ -- $ -- ============ ============ =========== Preferred stock converted to common stock $ -- $3,633,045 $ 2,366 ============ ============ =========== Cashless exercise of warrants $ -- $ 392 $ 2,822 ============ ============ =========== 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 Intellectual Property $ -- $6,800,000 $ -- =========== ========== =========== Property and equipment purchased through the issuance of capital leases $ 110,119 $ 43,539 $ -- =========== ========== ===========
See accompanying notes to consolidated financial statements. F-8 SEMOTUS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY: Semotus(TM) Solutions, Inc. ("Semotus " or the "Company"), changed its named 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, 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, incorporated in Vancouver, British Columbia, now named Semotus Systems, Corp. Semotus is a leading provider of enterprise application software connecting employees to critical business systems, information, and processes. Semotus helps mobile employees make better and faster decisions, increase customer satisfaction, and improve efficiencies in their business processes for shorter sales and service cycles. The Company's products serve such vertical markets as workforce automation and financial services. Semotus' enterprise application software provides mobility, convenience, efficiency and improves profitability. 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 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., FiveStar Advantage, Inc., WizShop, 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 the parent. All other subsidiaries generate revenues from the sales 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. F-9 CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturities of three months or less or money market funds from substantial financial institutions to be cash equivalents. The Company places substantially all of its cash and cash equivalents in interest bearing demand deposit accounts with one financial institution. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of risk consist principally of trade and other receivables. In the ordinary course of business trade receivables are with a large number of customers, dispersed across a wide North American geographic base. The Company extends credit to its customers in the ordinary course of business and periodically reviews the credit levels extended to customers. The Company does not require cash collateral or other security to support customer receivables. Provision is made for estimated losses on uncollectible accounts. INVENTORY: Inventory is stated at the lower of cost (using the weighted-average method) or market and consisted only of finished goods. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets, generally three to seven years. The carrying value of property and equipment is assessed annually or when factors indicating an impairment are present. The Company determines such impairment by measuring undiscounted future cash flows. If an impairment is present, the assets are reported at fair value. 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. The Company adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer amortize goodwill and intangible assets with an indefinite useful life and will begin assessing potential future impairments of such intangible assets. 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 over the length of the contract. F-10 FOREIGN CURRENCY TRANSLATION: Exchange adjustments resulting from foreign currency transactions are generally recognized in operations. Adjustments resulting from translation of financial statements are reflected as a separate component of shareholders' equity. Net foreign currency transaction gains or losses are not material in any of the years presented. STOCK BASED COMPENSATION: The Company 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 is 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. INCOME TAXES: Deferred income taxes have been recorded for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts using enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A 100% valuation allowance has been provided as management is unable to determine that it is more likely than not that the deferred tax assets will be realized. REVENUE RECOGNITION: The Company 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 from recurring monthly charges based on utilization fees, transaction fees, and maintenance and service charges. In the financial consumer 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 work force automation business, wireless software is delivered to the customer and revenue is recognized upon delivery, assuming no significant obligations remain. Enterprise and commerce sales and service: revenue is generated from online sales, advertising, sponsorships and hosting fees and other services. Revenue is recognized upon a completed sale and shipment of a product (e-fulfillment transaction) and for online 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. F-11 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, advertising, costs of servicing and hosting and shipping. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of cash and cash equivalents, receivables and payables are reasonable estimates of their fair value due to their short-term nature. RESEARCH AND DEVELOPMENT EXPENDITURES: Expenditures related to research, design and development of products and services are charged to product development and engineering expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. At March 31, 2002 there were no capitalized software development costs as the Company expensed the remaining amounts at year end. At March 31, 2001, there were capitalized software development costs of $313,417 relating to the development of Wares on the Web's B2Bware and B2Cware. At March 31, 2000 there were no capitalized software development costs since the period between technological feasibility and availability had coincided and products under development had not yet achieved technological feasibility. F-12 ADVERTISING EXPENDITURES: Advertising expenditures including production costs of certain marketing materials, of $258,562, $960,480 and $1,571,964 in 2002, 2001 and 2000 respectively, were charged to operations as incurred. 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. The Company adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer amortize intangible assets with an indefinite useful life and will begin assessing potential future impairments of such intangible assets. POOLING RESTATEMENT: On December 28, 2000, Semotus acquired all of the issued and outstanding stock of FiveStar Advantage, Inc. which was accounted for using the pooling of interest method. Consequently, the financial statements for the year ended March 31, 2000 are restated for the inclusion of the operations of FiveStar. (See Note 3, "Acquisitions" for the separate financial information of FiveStar for the year ended March 31, 2000). COMPREHENSIVE INCOME (LOSS): In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which was adopted by the Company in the third quarter of fiscal 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. F-13 RECENT ACCOUNTING PRONOUNCEMENTS: 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 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 fiscal years ended March 31, 2002, 2001 and 2000, 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. F-14 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 March 31, 2002, the net carrying amount of goodwill is $2,474,597 and other intangible assets is $576,958. Amortization expense for goodwill during the fiscal year ended March 31, 2002 was $1,855,407. Further, the Company determined that goodwill had been impaired as of March 31, 2002, and charged against income $4,773,870 of goodwill. 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 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 amortized on a straight line basis over the economic life of the asset. The current estimated life is five years. The Company adopted SFAS 141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets" as of April 1, 2002. Accordingly, Semotus will no longer amortize intangible assets with an indefinite useful life and will begin assessing potential future impairments of such intangible assets. See Note 2, "Summary of Significant Accounting Policies". Acquisitions in the fiscal year ended March 31, 2002 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 F-15 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 in accordance with EITF 97-15. WizShop builds and maintains outsourced e-commerce environments for Internet portal companies and also creates online sales and merchandising programs for its clients through merchandizing and marketing initiatives. (See Note 24, "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. 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 in accordance with EITF 97-15. 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. Acquisitions in the fiscal year ended March 31, 2001 Cross Communications, Inc. In July 2000, the Company acquired all of the assets and assumed selected liabilities of Cross Communications, Inc. ("Cross") for $100,000 in cash and 62,500 shares of Semotus common stock accounted for under the purchase method. The purchase price was approximately $2.0 million. Goodwill was also F-16 approximately $2.0 million, since Cross had a deminimus number of assets. The sole shareholder of Cross has a right to contingent purchase consideration based upon operating performance for which an additional 187,500 shares of Semotus common stock may be issued over the next three years should revenue targets be met. As of March 31, 2002, Semotus had issued an additional 14,947 shares of additional purchase consideration. Further, up to a maximum of 250,000 shares may be issued if by the end of the third year, the Semotus common stock price has not reached $20 per share. Cross, established in 1995, is a wireless communications company that provides a premise based messaging platform under the brand name "HipLink"(TM). The HipLink solution supports both UNIX and NT and is scalable and configurable to the specific requirements of the enterprise customer. Simkin, Inc. In September 2000, the Company acquired all of the issued and outstanding capital stock of Simkin, Inc. ("Simkin") for $160,000 in cash and 100,000 shares of Semotus common stock accounted for under the purchase method. The purchase price was approximately $1.6 million. Goodwill was approximately $1.6 million. The sole shareholder of Simkin has a right to contingent purchase consideration based upon operating performance for which an additional 212,500 shares of Semotus common stock may be issued over the next three years should revenue targets be met. Simkin, established in 1982, is a producer of pharmaceutical and medical software tools in addition to providing on-site and computer-assisted pharmaceutical training programs. Simkin's core software is a proprietary drug dosing product which also provides the foundation for a prototype wireless solution which allows healthcare professionals to improve a patient's drug therapy. ISS, Inc. dba WaresOnTheWeb.com In November 2000, the Company acquired all of the issued and outstanding capital stock of ISS, Inc. dba WaresOnTheWeb.com ("Wares") for 250,000 shares of Semotus common stock accounted for under the purchase method. The purchase price was approximately $1.7 million. Goodwill was approximately $1.6 million. The shareholders of Wares have a right to contingent purchase consideration based upon operating performance for which an additional 2,250,000 shares of Semotus common stock may be issued over the next three years should revenue targets be met. The contingent consideration requires a substantial growth in revenues. Wares is an established turnkey provider of e-commerce solutions to leading retailers, distributors and manufacturers. Wares solutions enable customers to rapidly create highly functional commerce based internet/intranet and/or extranet solutions that integrate seamlessly with legacy and ERP systems. 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 of ADA and Wizshop had been completed as of April 1, 2000: F-17 Fiscal Year Ended March 31, 2002 March 31, 2001 -------------- -------------- Revenue: $ 6,245,944 $ 8,169,631 Net loss: $(18,433,624) $(14,920,350) Net loss per share- basic and diluted $ (1.03) $ (0.92) 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 April 1, 2000, nor is it a projection of the Company's results of operations for any future period. Five Star Advantage, Inc. and Tech-ni-comm, Inc. In December 2000, the Company acquired all of the issued and outstanding stock of Five Star Advantage, Inc. and Tech-ni-comm, Inc (together, "Five Star"). Both companies were controlled by a common 100% owner and were performing a common business. Semotus issued 550,000 shares to the owner and accounted for the transaction using the pooling of interest method. Five Star is an e-marketing and e-fulfillment company that provides a start to finish turnkey operation for online sales, marketing, logistics, fulfillment and customer service for its clients. Revenue, net loss, and net loss per share of the combining companies, after giving retroactive effect to the pooling of interest transaction, are as follows: Fiscal Year Ended Description March 31, 2000 ----------------- Revenue: Semotus, as previously reported $ 1,459,920 Five Star $ 6,151,238 ----------------- Semotus, as restated $ 7,611,158 Net Loss: Semotus, as previously reported $(4,246,949) Five Star $ (509,977) ----------------- Semotus, as restated $(4,756,926) Net loss per share: As previously reported* Basic and diluted $ (0.59) As restated Basic and diluted $ (0.61) *Per share loss is adjusted for the two for one stock split that occurred on April 27, 2000. F-18 4. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL 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 March 31, 2002 for certain amounts of goodwill related to the acquisitions of Simkin, Wares and WizShop. Also, an impairment may have arisen with the recorded asset value of the Company's Global Market Pro intellectual property. For Simkin, the analysis was to determine if a further reduction in goodwill was necessary. Semotus had previously taken a $650,000 net impairment charge in the quarter ended June 30, 2001. See Note 5, "Sale of Technology and Net Impairment of Goodwill". For Wares and WizShop, Semotus analyzed the current carrying value of the goodwill related to both acquisitions. The analysis focused on the future prospects for the businesses given the current state of the economy and the technology market. Additionally, a critical factor was that the consideration paid by Semotus for those companies 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 March 31, 2002. The Company's stock price was approximately $14.375 at the time of the acquisition of Simkin, approximately $8.938 at the time of the acquisition of Wares and approximately $2.15 at the time of the acquisition of WizShop. At March 31, 2002, the Company's stock price was $0.67. Finally, all of these companies were privately held at the time of the acquisition and their fair value was and is subjective and not readily determinable. At the time of the acquisition, market valuations for such companies were at substantially higher levels. Since the end of the calendar year 2001, stock prices and market valuations in Simkin's, Wares' and WizShop'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. For the asset value related to the Global Market Pro intellectual property, the future prospects for the business derived from the Global Market Pro and Equity Market Pro products and the financial services division was examined. As well, the analysis focused on the consideration paid for the intellectual property in the form of 800,000 warrants of Semotus common stock. The exercise price of those warrants, $30.00 per common share, is significantly higher than the market price of the stock, $0.67, at March 31, 2002. See Note 6, "GMP Intellectual Property and J.P. Morgan Chase Manhattan Warrants". Further, the financial services industry has declined dramatically in response to the general economic recession and to the terrorist events of September 11, 2001. Based on the factors described above, the Company determined that the goodwill in its Simkin, Wares and WizShop subsidiaries and the asset value of the GMP Intellectual Property 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: F-19 - - 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 and asset value were determined. The Company's best estimate of the fair value of Simkin, Wares, WizShop and the GMP Intellectual Property was determined from the range of possible values after considering the relative performance, future prospects and risk profile of those companies and GMP. As a result of Semotus' review, management determined that the carrying value of goodwill and recorded asset value were not fully recoverable and an impairment charge of $4,773,870 was taken for goodwill comprised of an impairment charge to Simkin's goodwill of $909,272 (of which $650,000 was recorded in the quarter ended June 30, 2001, see Note 5 "Sale of Technology and Net Impairment of Goodwill"), $1,156,587 for Wares' goodwill and $2,708,011 for WizShop's goodwill. Furthermore, Semotus took an impairment charge of $3,420,000 for GMP in the quarter ended March 31, 2002 and a $121,017 impairment charge for solftware development costs at Wares. At March 31, 2002, the Company determined that the carrying value of its remaining 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. 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. F-20 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. 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. 6. 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-Scholes pricing model amounted to $6,800,000 and is being amortized to expense over a five year period. This F-21 amount was recorded in intellectual property with a corresponding increase to additional paid-in capital. For the fiscal years ended March 31, 2002 and 2001, amortization amounted to $1,360,000 and $1,020,000. Further, Semotus determined that an impairment charge to GMP was necessary as of March 31, 2002, which amounted to $3,420,000 and has brought the current recorded value to $1,000,000. 7. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: MARCH 31, 2002 2001 ----------- ---------- Furniture and fixtures $ 355,818 $ 349,058 Computers, and other office equipment 1,296,104 1,176,246 Capitalized equipment leases 110,119 125,179 Leasehold improvements 99,806 102,001 Purchased software 363,840 278,525 ---------- ---------- 2,225,687 2,031,009 Less accumulated depreciation And amortization (1,543,226) (1,053,331) ---------- ---------- $ 682,461 $ 977,678 ========== ========== 8. ADVANCES ON TECHNOLOGY SALES: During fiscal year 1997, the Company entered into two separate transactions involving the sale of rights to its technologies underlying two products, QuoteXpress and MailXpress. The transactions occurred with two separate Canadian companies and were nearly identical in nature in that they involved the receipt of cash and notes receivable from the buyers, with the notes receivable being collateralized by the intellectual properties being sold. Concurrent with the sales, Semotus and the buyers entered into "Management and Marketing Agreements" with the buyers giving the Company exclusive worldwide rights to use, modify and sub license the source code for the technologies and providing for fees to be paid to the buyers under certain conditions. Any payments between parties are contingent upon each other, and are structured in such a way to minimize the possibility that either party will ever make payments to the other. At this time, no money has been paid to the buyers and based upon current projections, it is anticipated that no moneys will be paid under the remainder of the terms. The cash payments received up front, amounting to $2,190,000 and $2,900,000 respectively, have been accounted for under the provisions of the "Emerging Issues Task Force 88-18: Sales of Future Revenues" (EITF 88-18) and as such, were deferred and are reflected under the balance sheet caption "Advances on technology sales", and are being amortized to income using the interest method over the terms of the agreements. The notes receivable due to the Company resulting from the sales have not been recorded, as it is expected that any fees or revenue share that otherwise might accrue to the buyers of the technologies as a result of the management and marketing agreements would not be sufficient to service the note receivable principle and interest payments due Semotus. If the notes receivable due to the Company are not repaid, as presently projected, F-22 the ownership of the intellectual properties will revert back to the Company at the end of the agreements. On June 14, 2000, the Company entered into an agreement with the buyers for an option to repurchase the QuoteXpress product for $4 million. As consideration, Semotus extended the term of existing warrants issued to the buyers for another two years, until June 2002 and issued 10,000 new options with an exercise price of $11.50 which expire in June 2002. The Company recorded the value of these warrants as a reduction of the technology advances. Interest income on the notes has been recognized to the extent of the amounts due to buyers under the "Owners fee" provisions of the sales agreements, with both the interest income and the "Owners fee" reflected in other income, along with the amortization of the technology advances. 9. NOTE PAYABLE Semotus entered into a one-year note payable with its primary banking institution in March 2001. The note was extended for six months in March 2002 and becomes due September 2002. The note replaced three notes payable at Simkin, Wares and FiveStar. The transaction occurred as part of the acquisition agreements to remove the Presidents of those subsidiaries from personal guaranties. There is not any net additional debt incurred. The note payable has an interest rate of 7.2% currently, which is the same as in the past year. The interest is payable monthly, with the principal due and payable at maturity in September 2002. The note is secured by cash in the form of a certificate of deposit in the amount of $693,286 and $694,222 for the fiscal years ended March 31, 2002 and 2001 respectively. The certificate of deposit mirrors the note payable in term and carries a current interest rate of 2.0% and 5.2% in the past year. 10. CAPITAL LEASE: In the fiscal year ended March 31, 2002, the Company and its subsidiaries signed leases amounting to $110,119. Also, in the fiscal year ended March 31, 2002, Semotus settled 4 leases at its Wares and WizShop subsidiaries for $9,625. In the fiscal year ended March 31, 2001, Semotus through its Cross Communications and Wares subsidiaries, signed three new capital leases for equipment in fiscal year 2001. Two of the assets will be amortized over approximately three years and the principal of the leases totals $32,043. The other asset is amortized over five years and the lease principal totals $11,496. For the fiscal year ended March 31, 2001, the amortization is immaterial since these leases were signed in February and March of 2001. The Company assumed computer leases amounting to $21,357, as part of its acquisition of Wares. These leases are being amortized over two years. Accumulated depreciation on capitalized lease assets was $33,267 and $55,787 at March 31, 2002 and at March 31, 2001 respectively. Effective October 1997, the Company entered into a leasing agreement for certain equipment used in the operation of the Company. The lease has been classified as a capital lease, and is for a five year term, with payments due monthly with interest at 10.45% per annum. Payments, in the initial three years of the lease are approximately $2,000 per month. During the last two years of the lease the payments are reduced to approximately $1,300 per month. The lease is F-23 collateralized by the underlying equipment included in property and equipment with an original capitalized value of $81,640. The combined principal and interest portions being recognized under the capital lease for the next five years are as follows: Year ended March 31, 2003 $ 93,922 2004 40,472 2005 21,267 2006 6,924 2007 -- --------- 162,585 Less imputed interest (16,258) --------- Total $146,327 ========= 11. CONVERTIBLE PREFERRED STOCK: Under the Company's Articles of Incorporation, as amended in February 1998, the Company is authorized to issue 5,000,000 shares of preferred stock. 2,740,000 has been designated as Series A preferred stock, of which, no shares are outstanding, and 769,231 has been designated as Series B preferred stock, of which 469,231 shares are outstanding. As of February 14, 2000, Semotus consummated a private placement to two investment funds of (i) 769,231 shares of Series B Convertible preferred stock (post split each share of Series B preferred stock is convertible into two shares of common stock) and (ii) five-year warrants to purchase up to an aggregate of 1,153,846 shares of common stock at an exercise price of $8.75 per share. The Company also issued to H.C. Wainwright & Co., Inc. a warrant to purchase up to 153,846 shares of common stock, at an exercise price of $6.50 per share, for its services as placement agent with respect to the private placement. For further information on the warrants, see Note 12, "Common Shareholders' Equity". The Company received $9,315,501 in cash, net of expenses and commissions of $684,499. On April 26, 2000, 300,000 shares of Series B convertible preferred stock were converted into 600,000 shares of common stock. As of March 31, 2002, 469,231 shares of Series B convertible preferred remain outstanding. Series B Convertible Preferred Stock Provisions DIVIDENDS: The holders of shares of Series B preferred stock shall be entitled to receive dividends, out of any assets legally available therefor, ratably with any declaration or payment of any dividend with holders of the common stock or other junior securities of this Corporation, when as and if declared by the Board of Directors, based on the number of shares of common stock into which each share of its Series B Convertible preferred stock is then convertible. As of March 31, 2002, no dividends have been declared. LIQUIDATION: In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of record of the shares F-24 of the Series B preferred stock shall be entitled to receive, before and in preference to any distribution or payment of assets of the Company or the proceeds thereof may be made or set apart for the holders of common stock or any other security junior to the Series B preferred stock in respect of distributions upon liquidation out of the assets of the Corporation legally available for distribution to its stockholders, in an amount in cash equal to $13.00 per share. If, upon such liquidation, the assets of the Corporation available for distribution to the holders of the Series B preferred stock and any other series of preferred stock then outstanding ranking on parity with the Series B preferred stock upon liquidation ("Parity stock") shall be insufficient to permit payment in full to the holders of the Series B preferred stock and parity stock, then the entire assets and funds of the Company legally available for distribution to such holders and the holders of the parity stock then outstanding shall be distributed ratably among the holders of the Series B preferred stock and parity stock based upon the proportion which the total amount distributable on each share upon liquidation bears to the aggregate amount available for distribution on all shares of the Series B preferred stock and such parity stock, if any. CHANGE IN OWNERSHIP: In the event of a sale, conveyance, lease, transfer or disposition of all or substantially all of the assets of the Company, or the consummation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies, the holders of record of the shares of the Series B preferred stock shall have the right to convert the shares of Series B Preferred for shares of stock and other securities, cash and property following such Event, and the Holders shall be entitled upon such Event to receive such amount of shares of stock and other securities, cash or property as the shares of the Common Stock of the Company into which the shares of Series B Preferred could have been converted immediately prior to such Event would have been entitled; or such an event may be deemed to be a Liquidation of the Company entitling such Holder to receive the Liquidation Value with respect to such Holder's shares of Series B Preferred. CONVERSION: Each share of preferred stock, at the option of the holder, is convertible into two fully paid and non-assessable shares of common stock. REDEMPTION: The Series B preferred stock is not redeemable, unless there is a change in ownership, see Note 11, "Change in Ownership". VOTING RIGHTS: The holders of Series B preferred stock are not entitled to voting rights. ANTI-DILUTION: The holders of shares of Series B preferred stock have certain anti-dilution protection upon the happening of certain events. 12. COMMON SHAREHOLDERS' EQUITY: Under the Company's Articles of Incorporation, as amended in June 1999, Semotus is authorized to issue 50,000,000 shares of common stock, of which 17,200,784 and 15,903,368 was issued and outstanding as of March 31, 2002 and 2001 respectively. During the fiscal year ended March 31, 2002, in connection with the acquisition of Cross, the Company issued 14,947 common shares as additional purchase consideration (see Note 3, "Acquisitions - Cross Communications, Inc."). In May, 2001, in connection with the acquisition of WizShop, the Company issued 699,993 common shares (see Note 3, "Acquisitions - WizShop.com, Inc."). Also in May, 2001, in connection with the acquisition of ADA, the Company issued 250,000 common shares (see Note 3, "Acquisitions - F-25 Application Design Associates, Inc."). In addition, during the fiscal year ended March 31, 2002, the Company issued a total of 198,093 shares to various suppliers of services, and a total of 75,073 shares to settle certain liabilities of the Company or the Company's subsidiaries. In December 2000, in connection with the acquisition of Five Star, the Company issued 550,000 shares of common stock (see Note 3, "Acquisitions - Five Star Advantage, Inc. and Tech-ni-comm, Inc.") In November 2000, in connection with the acquisition of Wares, the Company issued 249,998 shares of common stock (see Note 3, "Acquisitions - ISS, Inc. dba WaresOnTheWeb.com"). On October 9, 2000, the Board of Directors approved a buy back program, whereby up to one million shares of the Company's outstanding stock may be bought in the open market over the next year. As of October 9, 2001, when the buy back program terminated, the Company had not bought back any shares of its common stock. In addition, during the fiscal year ended March 31, 2001, the Company issued a total of 29,345 shares to various suppliers of services, and a total of 87,420 shares to settle certain liabilities of the Company or the Company's subsidiaries. In August 2000, in connection with the acquisition of Simkin, the Company issued 100,000 shares of common stock (see Note 3, "Acquisitions - Simkin, Inc.") On August 15, 2000, 54,342 H.C. Wainwright warrants were cashless exercised and 33,865 shares of common stock were issued. As of March 31, 2002, 99,504 H.C. Wainwright warrants to purchase up to 99,504 shares of common stock remain outstanding. In July, 2000, the Company issued a warrant to purchase 800,000 shares of common stock at an exercise price of $30.00 per share to an affiliate of J.P. Morgan Chase & Co. in exchange for all royalty and intellectual property rights associated with the GMP product (see Note 6, "GMP Intellectual Property and J.P. Morgan Chase Warrants"). In July, 2000 the Company also issued 62,500 shares of common stock in connection with the acquisition of Cross (See Note 3, "Acquisitions - Cross Communications, Inc."). In addition, during the fiscal year ended March 31, 2000, the Company issued a total of 9,484 shares of common stock to various suppliers of services. On March 13, 2000 the Board of Directors of the Company approved a 2 for 1 stock split. The 2 for 1 stock split was effected on April 27, 2000 and applied to all holders of common stock of record. As a result of the split the number of shares of common stock into which the preferred stock could be converted was increased to 1,538,462 from 769,231. All financial data and share data in this Form 10- K give retroactive effect to this split, unless otherwise indicated. As of March 1, 2000, the remaining 772,060 Series A convertible preferred shares were automatically converted into 1,544,120 shares of common stock. On March 2, 2000, the holders of the remaining $2.50 common stock purchase warrants issued in conjunction with the Series A convertible preferred shares were provided a notice of redemption. Of the 1,059,946 warrants outstanding on March 2, 2000, 894,600 had been exercised by March 31, 2000, and the remaining 165,346 were exercised by April 3, 2000. As of February 14, 2000, Semotus consummated a private placement to two investment funds of (i) 769,231 shares of Series B Convertible preferred stock (post split each share of Series B preferred stock is convertible into two shares of common stock) and (ii) five-year warrants to purchase up to an aggregate of 1,153,846 shares of common stock at an exercise price of $8.75 per share. The Company also issued to H.C. Wainwright & Co., Inc. a warrant to purchase up to 153,846 shares of common stock, at an exercise price of $6.50 per share, for its services as placement agent with respect to the private placement. The Company received $9,315,501 in cash, net of expenses and commissions of $684,499. On April 26, 2000, 300,000 shares of Series B F-26 convertible preferred stock were converted into 600,000 shares of common stock. As of March 31, 2002, 469,231 shares of Series B convertible preferred remain outstanding. (See Note 11, "Convertible Preferred Stock"). STOCK OPTION PLAN: In June 1996, the Company adopted the 1996 Stock Option Incentive Plan (the "Plan"). The "Plan" provides for the granting of stock options to acquire common stock and/or the granting of stock appreciation rights to obtain, in cash or shares of common stock, the benefit of the appreciation of the value of shares of common stock after the grant date. The Company is currently authorized to issue up to 4,345,000 shares of common stock under the Plan, and intends to seek Shareholder approval to issue additional shares. The Plan expires ten years after its adoption. Under the Plan, the Board of Directors may grant incentive stock options to purchase shares of the Company's common stock only to employees, and the Board of Directors may grant non-qualified stock options to purchase shares of the Company's common stock to directors, officers, consultants and advisers of the Company. The Board of Directors may grant options to purchase shares of the Company's common stock at prices not less than fair market value, as defined under the Plan, at the date of grant for all stock options. The Board of Directors also has the authority to set exercise dates (no longer than ten years from the date of grant), payment terms and other provisions for each grant. In addition, incentive options may be granted to persons owning more than 10% of the voting power of all classes of stock, at a price no lower than 110% of the fair market value at the date of grant, as determined by the Board of Directors. Options granted under the Plan generally vest over four years at a rate of 25% after year one and then equally on a monthly basis over the next three years from the date of grant. As of March 31, 2002, no stock appreciation rights have been granted under the Plan. Effective November 6, 2001 the Board of Directors of the Company approved the repricing of most of the options with exercise prices ranging from $0.78 to $20.00 per share held by most of the employees (including executive officers) of the Company. The Board of Directors determined such a reprice to be appropriate in order to sustain the incentivization of its employees. Employees' existing option grants were repriced to an exercise price of $0.76 per share (the current fair market value of the Company's common stock as of the reprice date) and an exercise price of $0.84 per share (110% of the fair market value at the date of reprice) for those persons owning more than 10% of the voting power of all classes of stock. All grants maintained their existing vesting schedule. This is deemed to be a repricing under FIN 44 and will result in variable plan accounting. Due to the decrease in the Company's stock price there has been no additional compensation expense in fiscal year ended March 31, 2002. Activity for stock options under the 1996 Stock Option Incentive Plan through March 31, 2002 is as follows: F-27 WEIGHTED SHARES NUMBER AVERAGE AVAILABLE OF PRICE PER EXERCISE FOR GRANT OPTIONS SHARE PRICE ----------- --------- ------------- -------- Balances, March 31, 1999 392 951,060 $ 0.38-$10.00 $ 1.61 Authorized -- -- -- -- Granted (1,634,756) 1,634,756 $ 1.25-$20.00 4.66 Canceled 765,230 (765,230) $ 0.38-$15.31 2.00 Exercised -- (223,856) $ 0.50-$ 2.35 1.11 ----------- ---------- ------------- ------- Balances, March 31, 2000 (869,134) 1,596,730 $ 0.50-$20.00 $ 4.61 Authorized 2,500,000 -- -- -- Granted (3,509,000) 3,509,000 $ 0.50-$28.77 $ 5.76 Canceled 1,947,733 (1,947,733) $ 0.50-$28.77 $ 9.22 Exercised -- (133,788) $ 0.50-$ 2.53 $ 1.33 =========== ========== ============= ======= Balances, March 31, 2001* 47,591 3,048,717 $ 0.56-$20.00 $ 3.02 Authorized 845,000 -- -- -- Granted (4,502,021) 4,502,021 $ 0.67-$ 7.00 $ 1.03 Canceled 3,958,322 (3,958,084) $ 0.56-$20.00 $ 2.70 Exercised -- (8,540) $ 1.28-$ 1.63 $ 1.40 =========== =========== ============= ======= Balances, March 31, 2002 348,892 3,584,114 $ 0.67-$ 2.01 $ 0.88 *The Balances as of March 31, 2001 reported in this 10K differ slightly from the Balances as of March 31, 2001 as reported in the Company's 10KSB filed last year; this is due to a small number of stock option activities, such as grants, cancellations and exercises, not having been reported by the time this table was drafted last year. We do not feel that these numbers are significant, as the difference between these numbers is only approximately 25,000 shares, or less than 1% of the total outstanding. On September 13, 2001 the Company's shareholders approved an increase in the number of shares of Common Stock issuable upon the exercise of options, from 3,500,000 to 4,345,000. The Company plans to request shareholder approval for an increase in the number of shares of Common Stock issuable upon the exercise of options at its next meeting of shareholders to be held during the second quarter of FY 2003. The weighted average fair value of those options granted during the years ended March 31, 2002, 2001 and 2000 was $1.09, $1.98 and $3.18, respectively. The weighted average fair value of those options that were repriced on November 6, 2001 was $0.53. Options to purchase 1,268,477, 568,570 and 287,796 shares were exercisable with a weighted average exercise price of $0.80, $3.06 and $2.25 at March 31, 2002, 2001 and 2000 respectively. F-28 PRO FORMA STOCK-BASED COMPENSATION: The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock Based Compensation. Accordingly, no compensation expense has been recognized for these plans. Had compensation expense been determined on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, the Company's net loss in 2002, 2001 and 2000 would have been adjusted to the pro forma amounts indicated below: 2002 2001 2000 Net loss available to ------------- ------------- ------------ common shareholders As reported $(18,444,478) $(11,293,381) $(4,756,926) Pro forma (20,093,894) (11,815,677) (5,375,583) Net loss per share As reported, basic and diluted (1.09) (0.74) (0.61) Pro forma net loss, basic and diluted (1.18) (0.78) (0.69) The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants under the Plan in 2002, 2001 and 2000: 2002 2001 2000 ----------- ---------- ----------- Expected dividend $ -- $ -- $ -- Expected life of option 4 years 4 years 1-4 years Risk-free interest rate 3.71%-4.63% 5.0%-6.5% 4.61%-5.75% Expected volatility 87%-108% 70%-295% 244.3% The above pro forma disclosures are not likely to be representative of the effects on reported net income for future years. The following table summarizes the stock options outstanding at March 31, 2002: OPTIONS OUTSTANDING CURRENTLY EXERCISABLE - ----------------------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------- ----------- ------------- --------- ------------ -------- MARCH 31, 2002 $ 0.00-$ 0.76 1,879,614 8.4 $ 0.76 593,343 $ 0.75 $ 0.77-$ 1.00 1,456,000 8.2 $ 0.84 675,134 $ 0.84 $ 1.01-$ 2.01 248,500 9.1 $ 2.01 0 $ 0.00 --------- --- ------ ---------- ------- 3,584,114 8.4 $ 0.88 1,268,477 $ 0.80 ========= === ====== ========== ======= F-29 13. REVENUE The Company derives revenue from its customers as discussed in Note 2, "Summary of Significant Accounting Policies: Revenue Recognition". From Semotus' wireless services segment, one customer accounted for 6% of the Company's revenues for the fiscal year ended March 31, 2002. From the enterprise and commerce segment one customer accounted for 17% of the Company's revenues in the fiscal year ended March 31, 2002. From the logistic systems segment, one customer accounted for 8% of the Company's revenue for the fiscal year ended March 31, 2002. None of these customers accounts for significant accounts receivable at March 31, 2002. From Semotus' enterprise and commerce segment revenues, one customer accounted for approximately 28% of the Company's revenues for the fiscal year ended March 31, 2001. For Semotus' enterprise and commerce segment subsidiary revenues in the fiscal year ended March 31, 2000, two customers accounted for approximately 30% and 25% of the Company's revenues. Since then, both customers' contribution as a percentage of total revenues has declined in actual contribution and as more enterprise customers have been added. 14. STOCK, OPTION AND WARRANT EXPENSE The stock, option and warrant expense is a non-cash expense related to the issuance of equity and equity-related securities for services performed for the company by outside third party contractors. The accounting for the expense is in accordance with SFAS 123, "Accounting for Stock-Based Compensation". Stock issued for services and as payment for liabilities is priced using the closing price of the Company's stock on the date the shares are issued. The expense is recognized over the term of the agreement or when the services have been performed. The fair value of options and warrants issued for services is estimated using the Black Scholes option pricing model. The pricing model's variables are measured on the date of grant, or if there are contingencies related to the services and vesting, the variables are measured on the date the contingencies are satisfied. The exercise price is set equal to the closing price of the stock on the measurement date. The term of the options and warrants ranges from one to five years. For the fiscal year ended March 31, 2002, interest rates used are the appropriate Treasury rates ranging from 3.71% to 4.63%. The expected volatility ranged from 87% to 108%. (See Note 12, "Common Shareholders Equity"). The expense has been recognized over the term of the agreement or when the services have been performed. 15. OTHER INCOME: Other income (expense) consists of the following items: YEAR ENDED DESCRIPTION 2002 2001 2000 --------------------- ------------ ----------- ------------ Owners fee sales of technology $(1,569,000) $(1,569,000) (1,570,000) Interest on note from sales of technology 1,569,000 1,569,000 1,570,000 F-30 Amortization of technology advances 306,908 371,052 432,021 Other interest income 50,207 132,792 129,290 Miscellaneous (77,070) (88,064) (267,107) ------------- ------------ ----------- Total other income $ 280,045 $ 415,780 $ 294,204 ============= ============ =========== 16. INCOME TAXES: Deferred tax benefits arising from net operating loss carryforwards were determined using the applicable statutory rates. The net operating loss carryforward balances vary from the applicable percentages of net loss due to expenses recognized under generally accepted accounting principles, but not deductible for tax purposes. Net operating loss carryforwards available for the Company for U.S. tax purposes are as follows: FEDERAL STATE -------------------------- ------------------------- BALANCE EXPIRATION BALANCE EXPIRATION ----------- ---------- ----------- ---------- $ 2,729,703 2012 $ 2,632,479 2003 3,219,423 2013 1,960,131 2004 4,443,579 2019 1,598,148 2005 3,684,281 2020 4,474,624 2011 9,313,338 2021 2,262,734 2012 3,895,301 2022 ----------- ----------- $27,285,625 $12,928,116 =========== =========== At March 31, 2002, the Company has approximately $1,748,000 in Canadian net operating loss carryforwards that expire from 2003 through 2007. The utilization of the net operating losses to offset future taxable income may be limited under U.S. tax laws. For federal and state tax purposes, at March 31, 2002 and 2001, the Company had net deferred tax assets of approximately $11,753,500 and $9,592,500, respectively, which were fully offset by valuation allowances. These net deferred tax assets principally arise due to the Company's net operating loss carryforwards. In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. The Company has established a valuation allowance to the extent of its deferred tax assets since it is more likely than not that the benefit cannot be realized in the future. 17. EARNINGS PER SHARE (EPS) DISCLOSURES: NET LOSS PER SHARE: The Company has adopted Financial Accounting Standards Board No. 128 "Earnings Per Share " (EPS) and accordingly all prior periods have been restated. Basic F-31 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. The following is a reconciliation of the numerator (net loss) and denominator (number of shares) used in the basic and diluted EPS calculation: MARCH 31, 2002 2001 2000 ------------- ------------- ------------- Basic EPS: Net loss $(18,444,478) $(11,293,381) $ (4,756,926) ============= ============= ============= Average common shares outstanding 16,975,660 15,199,895 7,763,715 ============= ============= ============= Basic EPS $ (1.09) $ (0.74) $ (0.61) ============= ============= ============= Diluted EPS: Net loss $(18,444,478) $(11,293,381) $ (4,756,926) ============ ============= ============= Average common shares outstanding 16,975,660 15,199,895 7,763,715 Convertible preferred -- -- -- Warrants -- -- -- Stock options -- -- -- ------------ ------------- ------------- Total shares 16,975,660 15,199,895 7,763,715 ------------ ------------- ------------- Diluted EPS $ (1.09) $ (0.74) $ (0.61) ============ ============= ============= In 2002, 2001 and 2000, 7,557,135 potential shares, 7,053,854 potential shares and 6,467,088 potential shares respectively were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. 18. OPERATING LEASES: In the fiscal year ended March 31, 2002, Semotus closed offices in Downer's Grove, Illinois, Gainesville, Florida and Woodbury, N.J. Semotus also subleased its office space in Sherman Oaks, California, where WizShop resided and those operations have been absorbed into the rest of the Company. Semotus added one new office in Englewood, Colorado with its acquisition of ADA. The terms and conditions of this lease are normal and customary. Rental expense for all of these facilities was $548,354 in fiscal 2002. The Company leases space for its operations in San Jose and Valencia, California; Vancouver, British Columbia; Downer's Grove, Illinois; Gainesville, Florida, and Woodbury, N.J. The leases expire starting in March 2002 through October 2005. The terms and conditions of the leases are normal and customary. Rental expense for these leases totaled approximately $613,456 in 2001 and $279,909 in 2000. In fiscal 2000, the Company leased office space only in San Jose, California and Vancouver, British Columbia. F-32 Future minimum lease payments due under these agreements are as follows for the years ending March 31: 2003 $441,176 2004 19,859 2005 21,004 2006 21,385 2007 22,532 ---------- $525,956 ========== 19. RELATED PARTY TRANSACTIONS: Effective May 1, 1996, the Company entered into a three year employment agreement with the Company's Chief Executive Officer. This agreement was extended to May 1, 2004. The agreement automatically renews for one year terms unless notice is provided by either party. On December 1, 1999, the Board of Directors granted the Chief Executive Officer a warrant to purchase 150,000 shares of common stock at $4.75 per share (300,000 @ $2.375 post split), as part of his compensation package. In conjunction with the private placement dated November 5, 1997 the Chief Executive Officer of the Company entered into a stock purchase agreement. Under the terms of the agreement, the Chief Executive Officer received 280,000 shares of preferred stock with detachable warrants to purchase 280,000 shares of the Company's common stock at $2.50 per share, in exchange for a note receivable in the amount of $1,050,000. The note is collateralized by certain assets of the officer and bears interest at a rate of 7%. This note was for the purchase of stock and did not result in the Company lending cash to Mr. LaPine. Mr. LaPine has not sold any of the stock purchased with this note and has not received any cash income related to this transaction. On January 15, 2000, the Company entered into a Loan Forgiveness Agreement with the Chief Executive Officer which provided that the $1,050,000 promissory note would be forgiven if he continues to serve as the Company's Chief Executive Officer through May 1, 2004, and there are no uncured defaults by him under his Employment Agreement on May 1, 2004. The note, together with interest accrued thereon has been presented as contra-equity in the balance sheet. The note plus interest is being amortized over the period of the contract of employment. Consequently, in the year ended March 31, 2002 expense of $404,795 has been recorded as employment compensation. On February 29, 2000, the Company entered into a secured recourse promissory note with the Chief Executive Officer, in the amount of $100,000 to cover the cost of the Chief Executive Officer's exercise of 40,000 warrants, that would otherwise be redeemed by the corporation on April 3, 2000, pursuant to the Company's automatic redemption rights against all holders of the Company's $2.50 warrants. On March 29, 2002, the Company entered into a Loan Forgiveness Agreement with the Chief Executive Officer, which provided that the $100,000 promissory note be forgiven as of March 29, 2002. This note was for the purchase of stock and did not result in the Company lending cash to Mr. LaPine. Mr. LaPine has not sold any of the stock purchased with this note and has not received any cash income related to this transaction. F-33 In 2001, the Company's subsidiaries, Wares on the Web, Wizshop, and ADA entered into employment agreements with Stephen J. Casey, Steve McAllister and John Hibben, respectively, providing, among other things, an annual salary of $150,000 each, as well as annual bonuses from $37,500 to $75,000, contingent upon the applicable subsidiary companies reaching certain revenue targets. As of June 19, 2001, Mr. Casey resigned and the employment agreement by and among Mr. Casey and Wares on the Web was terminated. On January 18, 2002, the employment agreement by and among ADA and John Hibben was terminated and a new but substantially similar agreement was signed by and among ADA, John Hibben and 2007978 Ontario, Inc. 20. COMMITMENTS AND CONTINGENCIES: Semotus is the defendant in one pending legal proceeding and one of Semotus' wholly owned subsidiaries, Wizshop.com, Inc., is the plaintiff in one pending legal proceeding. The suit in which Semotus is the defendant was filed by Brown Simpson Partners I, Ltd. on March 7, 2002 in the Supreme Court of the State of New York. This suit alleges four causes of action for breach of contract. The Complaint claims that Semotus triggered the anti-dilution provisions in Brown Simpson's Warrants and Series B Preferred Stock, thus obligating Semotus to issue substantial numbers of additional shares upon conversion of the Preferred Stock and exercise of the Warrants. Brown Simpson seeks an order granting specific performance, money damages in excess of $25,000, and recovery of costs and prejudgment interest. We believe the suit is without merit and intend to vigorously contest the suit. Wizshop.com, Inc., one of our wholly-owned subsidiaries, filed a lawsuit against Earthlink Network, Inc. and Earthlink Operations, Inc. (collectively "Earthlink") on April 2, 2002 in the California Superior Court. This suit alleges eight causes of action against Earthlink, including breach of written agreement, promissory fraud, fraudulent concealment, breach of fiduciary duty, constructive fraud, unfair business practices, accounting and constructive trust. The suit arises out of Earthlink's breach of the written agreement with Wizshop and Earthlink's apparent acts of fraud in connection with Earthlink's failure and refusal to accurately account for and pay to Wizshop revenues to which Wizshop is entitled to under the agreement. We are seeking monetary damages for the above matter. We are also a party to other legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, we believe that liabilities arising from these matters will not have a material adverse effect on our consolidated results of operations or financial position. F-34 21. EMPLOYEE BENEFIT PLAN: During 1998, the Company established a plan (the "Plan") which is qualified under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may make voluntary contributions to the Plan of up to 20% of their annual compensation, not to exceed the statutory amount, and the Company may make matching contributions. The Company made no contributions in 2001 or 2000. 22. 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 restated the fiscal year ended March 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 focuses in three areas: Company hosted solutions, client hosted (premise-based) solutions, and financial consumer 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) Company-hosted 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 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. 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 service 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. F-35
Professional Logistic Wireless Enterprise and and related system Corporate services commerce sales services sales and other Total ---------- -------------- ------------ ---------- ---------- --------- As of and for the year ended March 31, 2002 Revenue $ 1,305,347 2,630,368 559,956 1,611,424 -- $ 6,107,095 Gross profit $ 784,513 541,488 282,882 802,780 -- $ 2,411,663 Operating loss* $ (837,442) (1,005,843) (563,100) (149,766) (16,477,615) $(19,033,767) Depreciation and amortization $ 340,482 113,899 265,661 29,613 3,225,346 $ 3,975,001 Capital expenditures $ 18,873 -- -- 5,715 -- $ 24,588 Total assets, March 31, 2002* $ 7,133,204 1,616,479 282,808 1,056,540 248,032 $ 10,337,063 As of and for the year ended March 31, 2001 Revenue $ 1,731,948 3,193,433 622,582 -- -- $ 5,547,963 Gross profit $ 746,643 363,791 341,444 -- -- $ 1,451,878 Operating loss* $(1,113,291) (974,759) (171,367) -- (10,089,737) $(12,349,154) Depreciation and amortization $ (223,149) (37,535) (77,812) -- (1,671,899) $ (2,010,395) Capital expenditures $ 223,231 22,490 11,747 -- 280,968 $ 538,436 Total assets, March 31, 2001* $13,127,832 1,302,984 2,578,399 -- 4,760,746 $ 21,769,961 As of and for the year ended March 31, 2000 Revenues $ 1,459,920 6,151,238 -- -- -- $ 7,611,158 Gross profit $ 684,596 2,189,570 -- -- -- $ 2,874,166 Operating loss* $ (923,460) (189,531) -- -- (4,079,396) $ (5,192,387) Depreciation and amortization $ 244,077 20,350 -- -- -- $ 264,427 Capital expenditure $ 96,723 1,135 -- -- 24,437 $ 122,295 Total assets, March 31, 2000* $16,597,406 1,893,074 -- -- -- $ 18,490,480
* 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 $248,032 and the $4,760,476 of assets at March 31, 2002 and 2001 respectively under "Corporate and other" is comprised of the GMP Intellectual Property, Semotus' Global Market Pro wireless financial product and allocations of certain corporate assets and liabilities not appropriately categorized in any segment. 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31, 2001 2001 2001 2002 2002 ------------- ------------- ------------- ------------- ------------- Revenue $ 1,594,285 $ 1,851,045 $ 1,423,593 $ 1,238,172 $ 6,107,095 Gross profit (loss) 591,897 661,550 689,801 468,415 2,411,663 Net loss (3,929,818) (2,676,913) (1,970,399) (9,867,348) (18,444,478) Net loss per common share basic and diluted (0.24) (0.16) (0.11) (0.58) (1.09)
F-36
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, DECEMBER 31, March 31, MARCH 31, 2000 2000 2000 2001 2001 ------------- ------------- ------------- ------------- ------------- Revenue $ 1,217,273 $ 1,747,085 $ 1,374,693 $ 1,208,912 $ 5,547,963 Gross profit 364,034 723,633 652,318 (288,107) 1,451,878 Net loss (1,845,765) (2,476,417) (3,390,972) (3,580,227) (11,293,381) Net loss per common share-- basic and diluted (0.13) (0.16) (0.22) (0.23) (0.74)
24. 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. The contract was valued at $1 million. 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. Semotus recognized $350,000 of revenues for the engineering work performed 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. 25. 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 Semotus $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 common stock options exercisable into 150,000 shares of Semotus stock at $0.75 per share. 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 Note 3, "Acquisitions - Application Design Associates, Inc.") F-37 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. 26. VALUATION AND QUALIFYING ACCOUNTS
Reduction Charged to Against Balance at Acquired Charged to cost Operating Balance Balance at March 31, 2000 Balances of Goods Sold Expenses Sheet Account March 31, 2001 -------------- -------- --------------- ------------- -------------- --------------- Allowance for doubtful accounts $ 21,337 $ 26,906 $ -- $ 92,989 $(78,345) $ 62,887 Allowance for iventory reserve -- -- 251,400 -- (62,900) 188,500 Reduction Charged to Against Balance at Acquired Charged to cost Operating Balance Balance at March 31, 2001 Balances of Goods Sold Expenses Sheet Account March 31, 2002 -------------- -------- --------------- ------------ -------------- --------------- Allowance for doubtful accounts $ 62,887 $ -- $ -- $284,660 $(280,547) $ 67,000 Allowance for inventory reserve 188,500 -- 194,180 -- (341,780) 40,900
27. SUBSEQUENT EVENTS On May 1, 2002, all employees with a fifty thousand dollar annual salary or greater took a ten percent salary reduction. In exchange, on May 16, 2002, the Board of Directors approved the repricing of all of these employees' outstanding stock options under the Company's 1996 Stock Option Plan to $0.43 per share, and $0.47 per share for Tony and Pamela LaPine (which equals 110% of the amended exercise price). Additionally, each employee received an additional grant equal to 10% of their total options granted under the Stock Option Plan to date. In May 2002, the Board of Directors of Semotus determined that the Company needed to focus its operations on its core enterprise software products. (See "Centralization and Consolidation Plan"). Given the continued economic recession and limited capital spending, as well as the reduced access to capital, the Company must economically utilize its limited resources towards those products with the best margins and cash flow generation. As part of that effort, Semotus has decided to reduce its e-commerce operations and to close the FiveStar business as of the end of June 2002. While maintaining a reduced m-commerce and F-38 e-commerce presence, Semotus has de-emphasized the e-fulfillment portion of that business as the e-fulfillment markets have declined dramatically over the past year and are not expected to recover significantly in the near future. Accordingly, Semotus is redirecting its human and capital resources towards more profitable products and services. Management has not quantified the effect of these actions on the financial results of the Company for the first quarter of fiscal 2003. However, management does not expect that the effect of these actions will be material. F-39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: June 28, 2002 Semotus Solutions, Inc. By: /S/ ANTHONY N. LAPINE ----------------------------- Anthony N. LaPine Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /S/ ANTHONY N. LAPINE - ------------------------ Chief Executive Officer June 28, 2002 Anthony N. LaPine and Chairman of the Board /S/ CHARLES K. DARGAN II - ------------------------ Chief Financial Officer, June 28, 2002 Charles K. Dargan II Treasurer and Director /S/ FREDERICK M. HOAR - ------------------------ Director June 28, 2002 Frederick M. Hoar /S/ JASON PAVONA - ------------------------ Director June 28, 2002 Jason Pavona /S/ ROBERT LANZ - ------------------------ Director and Chairman June 28, 2002 Robert Lanz of the Audit Committee CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Sec File No. 333-15399) and the Registration Statements on Form S-3 (SEC File Nos. 333-67490, 333-63938, and 333-57772) of our report dated June 3, 2002, relating to the consolidated financial statements of Semotus Solutions, Inc. and Subsidiaries, which appears in this Annual Report on Form 10K. /S/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California June 28, 2002 EX-2 2 ex2-13.txt Exhibit 2.13 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT is made as of February 20, 2002 by and between Semotus Solutions, Inc. ("Semotus"), a corporation organized under the laws of the State of Nevada, and Outercurve Technologies, Inc., a company organized under the laws of the State of Delaware ("Outercurve"). RECITALS A. Outercurve currently provides a wireless service. Outercurve has exclusive worldwide rights to certain technology and knowhow used in providing such service. Outercurve is interested in continuing, maintaining and growing its business, but in a more operationally efficient and better supported way, through a joint venture with Semotus. B. Semotus is interested in participating with Outercurve in the joint venture, and has various knowledge, experience and resources which would be of benefit to the joint venture. NOW, THEREFORE, the parties to this Agreement hereby agree as follows: 1. INCORPORATION OF Semotus/Outercurve Joint Venture, Inc. As promptly as possible after the execution of this Agreement, the parties shall cause a company to be incorporated under the laws of the State of Delaware (the "Company") as follows: 1.1 NAME. The name of the Company shall be "Semotus/Outercurve Joint Venture, Inc.". 1.2 AUTHORIZED CAPITAL. The authorized capital of the Company shall be [***] consisting of one common class of shares, and the Company shall be authorized to issue 100 shares of $0.01 par value per share (collectively, the "Stock") at the time of establishment. 1.3 SUBSCRIPTION. At the time of establishment of the Company, Semotus shall subscribe for 60 shares of Stock having an aggregate par value of [***], and Outercurve shall subscribe for 40 shares of Stock having an aggregate par value of [***], for a total subscription of 100 shares of Stock having an aggregate par value of [***]. 1.4 LEGENDS ON SHARE CERTIFICATES. Any share certificate issued by the Company to evidence any shares of stock of the Company issued to Semotus or Outercurve shall bear the following legend: "TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE JOINT VENTURE AGREEMENT BETWEEN SEMOTUS SOLUTIONS, INC. AND OUTERCURVE TECHNOLOGIES, INC. DATED February 20, 2002, AND TO THE SHAREHOLDERS AGREEMENT BETWEEN SEMOTUS SOLUTIONS, INC. AND OUTERCURVE TECHNOLOGIES, INC. DATED February 20, 2002, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY IN ISELIN, N.J." 1.5 INITIAL DIRECTORS AND OFFICERS. The initial directors and officers of the Company shall be as follows: (a) Directors: Anthony N. LaPine Charles K. Dargan, II Tali Durant Larry Rubin Derek Roga (b) Officers: CEO: Anthony N. LaPine CFO: Charles K. Dargan, II President: Larry Rubin Corp. Sec.: Tali Durant COO: Derek Roga 1.6 ADDRESS OF REGISTERED OFFICE. The address of the registered office of the Company shall be initially as follows: 100 Wood Ave. South Suite 405 Iselin, N. J. 07760 1.7 FISCAL YEAR. The fiscal year of the Company shall end on March 31st, and the initial fiscal year shall be the stub period from the date of incorporation of the Company through March 31, 2002. 1.8 ACCOUNTING AND BOOKS AND RECORDS. The Company shall keep accurate books of account and financial and related records in accordance with generally accepted accounting principles, standards and procedures, consistently applied. Upon reasonable prior notice and during normal business hours, the Company shall make available at its principal office for inspection by Semotus and Outercurve, and their designated representatives, the books of account and records of the Company. 1.9 ARTICLES. The Articles of Incorporation of the Company shall be in the form of the attached EXHIBIT A. 1.10 COSTS AND EXPENSES. The Company shall bear all costs and expenses directly relating to the incorporation of the Company, including without limitation registration fees, notary fees, stamp duties and the like, and, to the extent permitted by law, attorneys' fees. Outercurve shall advance any such expenses when and as required. 1.11 ASSISTANCE. Semotus shall provide such reasonable assistance in connection with the incorporation of the Company as may be required, including without limitation assistance in connection with the preparation or filing of any reports, notices or other filings required to be made in the State of Delaware by the Company to or with any governmental authority. 2. TECHNOLOGY LICENSES. 2.1 LICENSING AGREEMENTS. As promptly as possible after the incorporation of the Company, Outercurve shall enter into license agreements with the Company in the forms attached as EXHIBITS B-1 AND B-2 (the "License Agreements"). The rights of the Company under the License Agreements shall continue in accordance with the terms thereof notwithstanding any change in the ownership of Outercurve, any transfer of the assets or business of Outercurve, or any merger, consolidation, reorganization or recapitalization affecting Outercurve. 2.2 ADDITIONAL TECHNOLOGIES. Outercurve shall from time to time enter into good faith negotiations with the Company regarding the licensing by Outercurve to the Company of additional technologies used by Outercurve and not covered by the License Agreements, to the extent such additional technologies are required to maintain the services offered by the Company. The licensing of any such additional technologies by Outercurve to the Company shall be subject to the execution of a definitive agreement on mutually acceptable terms and conditions, which may include provision for reasonable compensation to Outercurve. 3. SHAREHOLDER AGREEMENT. In connection with the issuance of Stock to Semotus and Outercurve, Semotus and Outercurve shall enter into a shareholder agreement in the form of the attached EXHIBIT C (the "Shareholder Agreement"). 4. IN-KIND CONTRIBUTIONS. 4.1 In addition to the Technology Licenses, as described in Section 2 of this Agreement, Outercurve shall contribute to the Company, free and clear of all liens, security interests, mortgages or other encumbrances, certain tangible and intangible assets necessary to the conduct of the Business, including the following: (a) certain customers, as set forth on Schedule 4.1(a) (the "Customers"), (b) certain employees (the "Employees"), and (c) the underlying subscriptions and/or licenses necessary to provide the services to the Customers, as set forth on Schedule 4.1(c). 4.2 Semotus shall contribute to the Company, certain tangible and intangible assets, as follows: (a) use of Semotus' National Operations Center ("NOC"), located in Vancouver, Canada, in order to support the Services, (b) use of a commercially reasonable number of man hours from Semotus' employees located in Vancouver, Canada, for consulting services necessary to support the Services being provided to the Customers, (c) certain data feed and other services from third parties necessary to provide the Services to the Customers, as set forth in Schedule 4.2(c), and (d) a potential contingent employee bonus compensation pool to be given to certain employees of the Company. 4.3 Each Shareholder shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") incurred in connection with their respective in-kind capital contributions to the Company and shall be responsible for filing all necessary documentation and tax returns with respect to such Transfer Taxes. 5. CAPITAL CONTRIBUTIONS; LOANS and ENCUMBRANCES. 5.1 CAPITAL CONTRIBUTIONS. Neither party to this Agreement shall have any obligation to make capital contributions to the Company other than the [***] to be contributed as capital by Semotus and the [***] contributed as capital by Outercurve (for a total aggregate capital contribution of [***]) in connection with the incorporation of the Company. 5.2 LOANS. Neither party to this Agreement shall have any obligation to make loans to the Company. 5.3 No Encumbrances on the Company or a Joint Venture Interest. Neither Party shall pledge, mortgage, charge or otherwise encumber the Company or its Joint Venture Interest, including the Shares held by such Shareholder, without the prior written consent of the other Shareholder. 6. MANAGEMENT. 6.1 DIRECTORS. The Company shall have five directors. Semotus shall have three individuals on the board of directors of the Company, and Outercurve shall have two individuals on the board of directors. The parties shall cooperate in the election of directors, as more specifically provided in the Shareholder Agreement. 6.2 REPRESENTATIVE DIRECTOR. There shall be one representative director, who shall be Larry Rubin. 6.3 MEETINGS OF DIRECTORS. The Company shall bear all reasonable expenses of directors in connection with their attendance at meetings of directors, including without limitation travel, lodging and meals. 7. BUSINESS OBJECTIVES AND BUSINESS GOALS. 7.1 BUSINESS OBJECTIVES. The business objectives of the Company shall include, without limitation, the following: (a) provide wireless services (the "Service"); (b) generate revenue from the Service; (c) engage in all business activities relating to the development, maintenance, support, enhancement and promotion of the Service, including without limitation the development and acquisition of new customers and the development and expansion of distribution channels for the Service; and (d) engage in all business activities ancillary or incidental to the foregoing. 7.2 BUSINESS GOALS. Set forth on the attached EXHIBIT D are specific business goals for the Company for the period from the date of this Agreement through _________, 2005. Not less than three (3) months prior to the end of such period and each consecutive three (3) year period thereafter, the parties shall agree on specific business goals for the three (3) year period immediately following the current period. Such business goals, as from time to time in effect, are referred to as the "Business Goals." 7.3 BUDGET. Set forth on the attached EXHIBIT E is the budget for the Company for the period from the date of this Agreement through ________, 2003. Each twelve-month period, the Board of Directors and Shareholders shall approve the Company's operating and capital expenditure budget with respect to the projected expenditures for the following 12 month period (the "Budget") and the Company (including its officer, directors or agents) shall not without the prior written approval of the Board of Directors and Shareholders, make or approve an expenditure which would change, alter or modify the Budget or make or approve an expenditure which would result in: (i) an increase of greater than 5% of the total amount of the Budget; or (ii) an increase of greater than 5% of the amount of a respective line item described in the Budget. The Company shall provide the Board and the Shareholders with a proposed operating and capital expenditure budget no later than 30 days prior to the first day of the 12 month period related thereto. The Board and Shareholders shall review the Budget on a monthly basis thereafter, to determine whether any modifications to the Budget are required or desired. The Budget must be structured such that the Company will maintain cash flow neutrality. In other words, the Company must maintain its operations such that its cash balance in the bank is either positive or, at a minimum, zero. This requirement must be delineated in the Budget, and this requirement will also be in force for the Company's actual operations. 8. START UP, OPERATION AND ADDITIONAL TECHNOLOGIES. 8.1 START UP. Initially, the sales and engineering work for the Service shall be operated and maintained at 100 Wood Ave. South, Iselin, New Jersey 07760. The technical support for the Service shall be done out of the Operations Center of Semotus located in Vancouver, Canada. The corporate and accounting work for the Service shall be operated and maintained at the headquarters of Semotus, located in San Jose, CA. 8.2 PERSONNEL. Outercurve shall be responsible for assuring that the Company is adequately staffed with properly skilled personnel as required to enable the Company to meet its business objectives and the applicable Business Goals. The Company shall require each of its employees to sign written undertakings with the Company not to disclose any Confidential Information. 8.3 OPERATION. Both Outercurve and Semotus shall be responsible for assuring that the Service is operated in a way that is satisfactory to the Customers. 8.4 COOPERATION. The parties shall in good faith cooperate with each other to enable the Company to maximize the success of the Company's business. 8.5 DURATION. The term of this Joint Venture Agreement shall commence on the full execution of this Agreement and shall continue in effect until terminated upon: (a) The mutual agreement of all Shareholders; or all directors in the event that Semotus is the only shareholder (b) The election of a non-breaching party to terminate the Agreement within the terms of Section 12: Material Defaults; or (c) The election of Semotus to terminate the Agreement due to the Company not maintaining its Budget, as set forth in Section 7.3. 9. REPRESENTATIONS AND WARRANTIES OF SEMOTUS. Semotus hereby represents and warrants to Outercurve as follows: 9.1 ORGANIZATION, POWER AND AUTHORITY. Semotus is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Semotus has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. 9.2 AUTHORIZATION AND BINDING OBLIGATIONS. Semotus has taken all requisite corporate action to authorize and approve the execution, delivery and performance of this Agreement by Semotus. This Agreement has been duly executed and delivered by Semotus, and constitutes the legal, valid and binding obligations of Semotus, enforceable against Semotus in accordance with its terms. 9.3 NO CONFLICTS. The execution, delivery and performance of this Agreement by Semotus, and the consummation of the transactions contemplated hereby, will not (a) violate any provision of the Certificate of Incorporation or Bylaws of Semotus, (b) violate, conflict with or result in (or with notice or lapse of time or both result in) a breach of or default under any term or provision of any contract or agreement to which Semotus is a party or by which Semotus or any of its assets or properties is or may be bound, or (c) violate any order, judgment, injunction, award or decree of any court or arbitration body, or any governmental, administrative or regulatory authority, by which Semotus or any of its assets or properties is or may be bound. 9.4 NO PENDING LITIGATION. No action, suit or proceeding which seeks to prevent the consummation of the transactions contemplated by this Agreement, or would impair the ability of Semotus to consummate the transactions contemplated by this Agreement, is pending against Semotus, its properties or any of its officers, directors or employees, and no such action, suit or proceeding has been threatened. 9.5 OTHER APPROVALS. Semotus represents and warrants that it will use all commercially reasonable efforts to obtain all other consents and/or approvals of any third parties necessary for Semotus to enter into this Joint Venture Agreement and for the Company to conduct its Business as contemplated hereby; provided, that if, notwithstanding all commercially reasonable efforts of Semotus hereto, any of such consents and/or approvals are not granted, with the result that the purposes of this Joint Venture Agreement are substantially frustrated, the Parties shall enter into good faith negotiations with the objective of restructuring the relationship between them such that the effects of such nonoccurrence shall be minimized. 9.6 COMPLIANCE WITH APPLICABLE LAW. Semotus shall comply with all applicable laws, regulations, rules and orders of governmental authorities the non-compliance with which could have a material adverse effect on the business affairs or financial condition of the Company. 9.7 NO RESTRICTIVE COVENANTS. Semotus shall not enter into or become subject to any contract, agreement, restriction or covenant which would apply to the Company so as to impair or inhibit the Company's ability to conduct its business as contemplated herein or otherwise frustrate the Business of the Joint Venture. 9.8 DISCLOSURE. Semotus has fully provided Outercurve with all the information that has been requested for deciding whether to enter into this transaction and all information that Semotus believes is reasonably necessary to enable Outercurve to make such a decision. No representation or warranty of Semotus contained in this Agreement and the Schedules attached hereto, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 10. REPRESENTATIONS AND WARRANTIES OF OUTERCURVE. Outercurve hereby represents and warrants to Semotus as follows: 10.1 ORGANIZATION, POWER AND AUTHORITY. Outercurve is a corporation duly organized and validly existing under the laws of the State of Delaware. Outercurve has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. 10.2 AUTHORIZATION AND BINDING OBLIGATIONS. Outercurve has taken all requisite corporate action to authorize and approve the execution, delivery and performance of this Agreement by Outercurve. This Agreement has been duly executed and delivered by Outercurve, and constitutes the legal, valid and binding obligations of Outercurve, enforceable against Outercurve in accordance with its terms. 10.3 NO CONFLICTS. The execution, delivery and performance of this Agreement by Outercurve, and the consummation of the transactions contemplated hereby, will not (a) violate any provision of the charter documents of Outercurve, (b) violate, conflict with or result in (or with notice or lapse of time or both result in) a breach of or default under any term or provision of any contract or agreement to which Outercurve is a party or by which Outercurve or any of its assets or properties is or may be bound, or (c) violate any order, judgment, injunction, award or decree of any court or arbitration body, or any governmental, administrative or regulatory authority, by which Outercurve or any of its assets or properties is or may be bound. 10.4 NO PENDING LITIGATION. No action, suit or proceeding which seeks to prevent the consummation of the transactions contemplated by this Agreement, or would impair the ability of Outercurve to consummate the transactions contemplated by this Agreement, is pending against Outercurve, its properties or any of its officers, directors or employees, and no such action, suit or proceeding has been threatened. Not withstanding the foregoing, Semotus recognizes that Outercurve is presently seeking to restructure its debts which may include filing a petition for relief under the United States Bankruptcy code. 10.5 OTHER APPROVALS. Outercurve represents and warrants that it will use all commercially reasonable efforts to obtain all other consents and/or approvals of any third parties necessary for Outercurve to enter into this Joint Venture Agreement and for the Company to conduct its Business as contemplated hereby; provided, that if, notwithstanding all commercially reasonable efforts of Outercurve hereto, any of such consents and/or approvals are not granted, with the result that the purposes of this Joint Venture Agreement are substantially frustrated, the Parties shall enter into good faith negotiations with the objective of restructuring the relationship between them such that the effects of such nonoccurrence shall be minimized. 10.6 COMPLIANCE WITH APPLICABLE LAW. Outercurve shall comply with all applicable laws, regulations, rules and orders of governmental authorities the non-compliance with which could have a material adverse effect on the business affairs or financial condition of the Company. 10.7 NO RESTRICTIVE COVENANTS. Outercurve shall not enter into or become subject to any contract, agreement, restriction or covenant which would apply to the Company so as to impair or inhibit the Company's ability to conduct its business as contemplated herein or otherwise frustrate the Business of the Joint Venture. 10.8 DISCLOSURE. Outercurve has fully provided Semotus with all the information that has been requested for deciding whether to enter into this transaction and all information that Outercurve believes is reasonably necessary to enable Semotus to make such a decision, including Outercurve's projections regarding the Services. No representation or warranty of Outercurve contained in this Agreement and the Schedules attached hereto, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 10.9 CUSTOMERS, DISTRIBUTORS AND SUPPLIERS. Schedule 4.1(a) sets forth a complete and accurate list of the names and addresses of all of the customers of Outercurve's services. To the knowledge of Outercurve, after thorough inquiry of all sales people and other relevant personnel since February 15, 2002, there has been no material adverse change in the business relationship with any customer named on Schedule 4.1(a). Outercurve has not received any communication from any customer of any intention to terminate or materially reduce the services currently being provided to the customer. 11. CONFIDENTIALITY. For so long as this Agreement remains in effect and for a period of three (3) years after any termination of this Agreement, each party shall keep strictly confidential, and shall not disclose, use, divulge, publish or otherwise reveal, directly or through any third party (including without limitation the Company), any confidential or proprietary information of the other party which was disclosed by or received pursuant to this Agreement, or in connection with the preparation and negotiation of this Agreement, or by reason of the performance by the parties of their obligations hereunder or their involvement in activities of the Company, including, but not limited to, documents and/or information regarding customers, costs, profits, markets, sales, products, product development, key personnel, pricing policies, operational methods, technology, know-how, technical processes, formulae or plans for future development (collectively, "Confidential Information"), except as may be necessary in connection with filings with governmental agencies as required under applicable law, including the rules and regulations promulgated under the Securities Exchange Act of 1934, provided, however, that neither party shall make any disclosure required under applicable law before providing the other party with a reasonable opportunity to seek a protective order. Upon termination of this Agreement, each party shall either destroy or return to the other all memoranda, notes, records, reports and other documents (including all copies thereof) relating to the Confidential Information of the other party which such party may then possess or have under its control. Notwithstanding the foregoing, Confidential Information of a party shall not include (a) information which was already known to the recipient at the time of its receipt, (b) information which is or becomes freely and generally available to the public through no wrongful act of the recipient, (c) information which is rightfully received by the recipient from a third party legally entitled to disclose such information free of confidentiality restrictions, or (d) information disclosed in connection with legal action initiated by a party to enforce rights under this Agreement, or any agreement executed pursuant to this Agreement, PROVIDED that adequate safeguards (such as protective orders) are maintained. 12. MATERIAL DEFAULTS. In the event that (a) Outercurve materially breaches or defaults in the performance of its obligations under this Agreement, the License Agreements or the Shareholder Agreement, or (b) Semotus materially breaches or defaults in the performance of its obligations under this Agreement, the Shareholder Agreement, and any such breach or default is not cured within ninety (90) days after written notice of such default is given to the breaching party by the other party, then such other party shall have the right, at its option and without prejudice to any other rights and remedies it may have, to: 12.1 elect to dissolve the Company by giving written notice thereof to the breaching party, in which case the breaching party agrees to cooperate with the other party to take all such steps as may be necessary to dissolve the Company, it being agreed between Outercurve and Semotus that such other party shall have the right to vote the shares of the breaching party in favor of dissolution if the breaching party fails to take action as required under this paragraph (a); and/or 12.2 elect to terminate this Agreement by written notice thereof to the breaching party and the Company, in which case this Agreement, the License Agreements, and the Shareholder Agreement shall automatically terminate notwithstanding any provision to the contrary in this Agreement, the License Agreements, or the Shareholder Agreement. 13. INDEMNIFICATION. 13.1 From and after the Closing, each Shareholder shall indemnify and hold harmless, the Company and each other Shareholder(the "Indemnitees") from and against any and all costs, losses (including without limitation diminution in value), liabilities, obligations, damages, lawsuits, deficiencies, claims, demands, and expenses (whether or not arising out of third-party claims), reasonable attorneys' fees and all amounts paid in investigation, defense or settlement of any of the foregoing, incurred in connection with, arising out of, resulting from or incident to (a) any Tax (i) of such Shareholder or any Subsidiary of such Shareholder (other than the Company and its Subsidiaries for any period beginning after the Closing date) or (ii) relating to the income, business, assets, property or operation of the Contributed Assets of such Shareholder, prior to and on the date of Closing and with respect to any Contributed Assets, the date on which the contribution of such Contributed Asset is effected to the Company. (b) any and all Losses incurred or suffered by an Indemnitee arising out of, based on or resulting from the ownership and operation of the Contributed Assets prior to and on the date which the contribution of such Contributed Asset is effected to the Company. (c) any material breach of any representation or warranty or the inaccuracy of any representation made by a Shareholder in or pursuant to this Agreement, or any material breach of any covenant or agreement made by a Shareholder in or pursuant to this Agreement 13.2 An Indemnitee shall notify the indemnifying Shareholder of any claim in writing, and in reasonable detail, as promptly as reasonably possible after receipt by such Indemnitee of notice of such claim; provided, however, that failure to give such notification on a timely basis shall not affect the indemnification provided hereunder except to the extent that such Indemnifying Shareholder shall have been actually materially prejudiced as a result of such failure. Thereafter, the Indemnitee shall promptly deliver to the Indemnifying Shareholder copies of all notices and documents received by the Indemnitee relating to such claim. 13.3 If a Tax Indemnitee receives a refund or credit of Taxes for which it has been indemnified pursuant to this Section 9.1 such Tax Indemnitee agrees to pay the indemnifying Shareholder the amount of such refund or credit (including any interest received thereon). 14. LIMITATION ON DAMAGES. 14.1 No Shareholder shall be liable for any indirect, special, incidental or consequential loss or damage (including, without limitation, loss of profits or loss of use) suffered by any other Shareholder arising from or relating to a Shareholder's performance, non-performance, breach of or default under a covenant, warranty, representation, term or condition hereof; each Shareholder, other than with respect to a claim arising from such other Shareholder's gross negligence, willful misconduct or fraudulent actions, waives and relinquishes claims for indirect, special, incidental or consequential damages. 14.2 The limitations on liability and damages set out in Section 14.1 apply to all causes of action that may be asserted hereunder, other than a cause of action resulting from indemnification, or a Shareholder's grossly negligent, willful misconduct or fraudulent actions, whether sounding in breach of contract, breach of warranty, tort, product liability, negligence or otherwise. 15. MISCELLANEOUS. 15.1 BROKERS. Each party shall hold the other party harmless from any claims, liabilities or damages relating to any commissions or fees claimed by any broker or finder by reason of any engagement or relationship of such broker or finder by or with such party. 15.2 NOTICES. Any notice, request, demand, approval or consent required or permitted under this Agreement shall be in writing and shall be effective upon actual receipt when delivered by (a) registered mail, postage prepaid, return receipt requested, (b) personal delivery, (c) an overnight courier of recognized reputation (such as DHL or Federal Express), or (d) transmission by facsimile (with confirmation by mail), in each case addressed as follows: If to Semotus: Semotus Solutions, Inc. 1735 Technology Drive, Suite 790 San Jose, CA 95110 Attention: General Counsel Telephone: (408) 367-1700 Facsimile: (408) 367-1701 If to Outercurve: Outercurve Technologies, Inc. 100 Wood Ave., Suite 405 Iselin, N. J. 07760 Attention: Larry Rubin Telephone: 732-906-6638 Facsimile: 732-906-7839 Either party may change its address or facsimile number for notice purposes by notice given to the other party in accordance with this Section 19.2. 15.3 ASSIGNMENT. Neither party's rights, duties or responsibilities under this Agreement may be assigned, delegated or otherwise transferred in any manner, without the prior written consent of the other party. 15.4 ENTIRE AGREEMENT. This Agreement, including the exhibits referred to herein, which are hereby incorporated in and made a part of this Agreement, constitutes the entire contract between the parties with respect to the subject matter covered by this Agreement. This Agreement supersedes all previous letters of intent, agreements and understandings, if any, by and between the parties with respect to the subject matter covered by this Agreement. This Agreement may not be amended, changed or modified except by a writing duly executed by the parties hereto. 15.5 SEVERABILITY AND SURVIVAL. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable, invalid or void in any respect, no other provision of this Agreement shall be affected thereby, all other provisions of this Agreement shall nevertheless be carried into effect and the parties shall amend this Agreement to modify the unenforceable, invalid or void provision to give effect to the intentions of the parties to the extent possible in a manner which is valid and enforceable. All representations and warranties herein shall survive until the dissolution of the Company, except to the extent that a specific provision provides otherwise. In addition, Sections 14( Confidentiality), 18 (Indemnification and Limitation of Damages), and 19 (Miscellaneous) shall survive the expiration or earlier termination of this Agreement. 15.6 REMEDIES AND WAIVERS. All rights and remedies of the parties are separate and cumulative, and no one of them, whether exercised or not, shall be deemed to be to the exclusion of or to limit or prejudice any other rights or remedies which the parties may have. The parties shall not be deemed to waive any of their rights or remedies under this Agreement, unless such waiver is in writing and signed by the party to be bound. No delay or omission on the part of either party in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. 15.7 MEDIATION AND ARBITRATION. No party to this Agreement may initiate arbitration with regard to any dispute with respect to this Agreement until after all remedies set forth in this Section have been exhausted. In the event of any dispute arising over this Agreement, any party shall have the right by giving written notice to the other parties hereto (the "Mediation Notice") to initiate non-binding mediation to be conducted by a mediator mutually agreed to by the parties or, in the event the parties are unable to reach such agreement within thirty (30) days following the delivery of the Mediation Notice, by a mediator appointed by the American Arbitration Association ("Arbitration Association") in accordance with the rules and regulations of the Arbitration Association, or by any other body mutually agreed upon by the parties. Mediation shall take place at San Jose, California or any other location mutually agreeable to the parties. In the event the parties resolve their dispute in mediation, they shall enter into a written agreement, which shall be binding on all parties thereto. In the event such dispute has not been resolved within ninety (90) days after the selection of the mediator pursuant to this Section, then, any dispute or controversy arising out of or relating to this Agreement shall be settled by final and binding arbitration. Such arbitration 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 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. No arbitrator shall be empowered to award any other damages, including, but not limited to, consequential, compensatory, or punitive damages. 15.8 CHOICE OF LAW. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of California (without reference to the choice of law provisions of California law), except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. 15.9 ATTORNEYS' FEES. In the event any action or proceeding is initiated for any breach of or default in any of the terms or conditions of this Agreement, then the party or parties in whose favor judgment shall be entered or an arbitration award shall be made, shall be entitled to have and recover from the other parties all costs and expenses (including reasonable attorneys' fees) incurred in such action or proceeding and any appeal therefrom. 15.10 HEADINGS. The headings contained in this Agreement are for convenience only and are not a part of this Agreement, and do not in any way interpret, limit or amplify the scope, extent or intent of this Agreement, or any of the provisions of this Agreement. 15.11 COUNTERPARTS AND FACSIMILE. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same agreement. Transmission of facsimile copies of signed original signature pages of this Agreement shall have the same effect as delivery of the signed originals. 15.13 PRESS RELEASES. Neither party shall issue any press releases or publicity statements relating to this Agreement, the transactions contemplated by this Agreement or the business of the Company without the prior written approval of the other party, which approval shall not be unreasonably withheld or delayed, except that each party shall be permitted to issue any press releases or publicity statements (whether or not approved by the other party) to the extent required by any securities laws or regulations applicable to such party. 15.14 THIRD PARTY BENEFICIARY. The Company is a third party beneficiary under this Agreement. Except as to the Company, this Agreement is not intended to and does not confer any rights on any third party, and no such third party shall be a third party beneficiary under or in respect of this Agreement. 15.15 BINDING EFFECT. Subject to Section 19.3, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. 15.16 ENFORCEMENT OF RIGHTS UNDER RELATED AGREEMENTS. The Company shall enforce its rights under each of the Related Agreements as though each such agreement were a comparable arm's length transaction with an unrelated Person. 15.17 NO AGENCY. Nothing in this Joint Venture Agreement or the Schedules hereto shall be deemed to create any partnership or agency relationship between the Parties. The Shareholders and the Company are each independent companies who shall operate with each other in arm's length transactions. Outercurve, Semotus nor the Company shall be entitled to act on behalf of and/or bind any one or more of the others without prior written authorization establishing its authority to do so. 15.18 FURTHER DOCUMENTS. The Shareholders hereto agree to execute and deliver to each other and/or to the Company, as the case may be, all such additional instruments, to provide all such information, and to do or refrain from doing all such further acts and things as may be necessary or as my be reasonably requested by any Shareholder hereto, more fully to vest in, and to assure each Shareholder of, all rights, powers, privileges, and remedies, herein intended to be granted or conferred upon such Shareholder or the Company. 15.19 SEVERAL LIABILITY. The obligations of each of the Shareholders under this Joint Venture Agreement are several and not joint. 15.20 FEES AND EXPENSES. Each party will pay its own fees and expenses in connection with the formation of the Company and the preparation and negotiation of this Joint Venture Agreement and the Related Agreements. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SEMOTUS SOLUTIONS, INC., BY: /s/ Anthony N. LaPine ---------------------------- By: Anthony N. LaPine Its: President and CEO OUTERCURVE TECHNOLOGIES, INC BY: /s/ Lawrence Rubin ---------------------------- By: Lawrence Rubin Its: CEO EX-10 3 ex10-13.txt Exhibit 10.13 LOAN FORGIVENESS AGREEMENT This Loan Forgiveness Agreement, dated March 29, 2002, is by and between Semotus Solutions, Inc., a Nevada Corporation ("Semotus") and Anthony LaPine. A. WHEREAS, on February 29, 2000, Semotus and Anthony LaPine executed and entered into a Secured Recourse Promissory Note in the original principal amount of one hundred thousand dollars ($100,000) (the "Note"). Except as otherwise set forth herein, capitalized terms shall have the meanings ascribed to them in the Note. B. Subject to the terms and conditions set forth herein, Mr. LaPine and Semotus desire to provide for the loan forgiveness of the principal and interest due under the Note. NOW, THEREFORE in consideration of the mutual covenants set forth herein and for other good and valuable consideration, the parties hereby agree as follows: 1. Loan Forgiveness. At the close of business on March 29, 2002, all principal and interest due under the Note shall be automatically and immediately forgiven and cancelled, as and in consideration for Mr. LaPine's previous six years of dedicated performance as CEO of the corporation, and continued commitment to the Company, which is exemplified by the following two examples: (i) there has not been any existing or uncured default by Mr. LaPine of any material obligation under his Employment Agreement, and (ii) Mr. LaPine has not sold a share of his stock in the Company over the past six years of his employment with the Company. As consideration for the foregoing performance and committment of Mr. LaPine, at the close of business on the 29th of March 2002, Semotus shall cancel the Note, record such cancellation on the books and records of Semotus and deliver the original Note, mark cancelled, to Mr. LaPine, provided however, that Semotus's failure to perform any of the foregoing acts shall not in any way affect the automatic cancellation of the debts and obligations of Mr. LaPine under the Note. Concurrently, Mr. LaPine shall be forever and unconditionally released from all obligations and liabilities whatsoever under the Note. 2. Jurisdiction, Venue and Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California (regardless of that jurisdiction or any other jurisdiction's choice of law principles). To the extent permitted by law, the parties hereto agree that all actions or proceedings arising in connection herewith, shall be litigated in the state and federal courts located in the State of California, and each party hereby waives any right it may have to assert the doctrine of Forum Non Conveniens or to abject to venue. The parties each hereby stipulate that the state and federal courts located in the County of Santa Clara, State of California, shall have personal jurisdiction and venue over each party for the purpose of litigating any such dispute, controversy or proceeding arising out of or related to this Agreement. To the extent permitted by law, service of process sufficient for personal jurisdiction in any action against either party may be made by registered or certified mail, return receipt requested, to its address indicated on the first page hereof. 3. Validity. If any one or more of the provisions ( or any part thereof) of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. 4. Attorneys' Fees. The prevailing party shall be entitled to recover from the loosing party its attorneys' fees and cost incurred in any action or proceeding, including arbitration, brought to interpret this Agreement or to enforce any right arising out of this agreement. 5. No Waiver of Rights. The delay or failure of either party to enforce at any time any provision of this Agreement shall in no way be considered a waiver of any such provision, or any other provision, of this Agreement. No waiver of, or delay or failure to enforce any provision of this Agreement shall in any way be considered a continuing waiver of any such provision, or any other provision of this Agreement. IN WITNESS WHEREOF, the undersigned have executed this Loan Forgiveness Agreement as of the date first set forth above. SEMOTUS: SEMOTUS SOLUTIONS, INC. By: /s/ Tali Durant Tali Durant, Secretary MR. LAPINE: /s/ Anthony LaPine Anthony LaPine EX-21 4 ex21.txt Exhibit 21 Subsidiaries of the Registrant
- ----------------------------------------------------------------------------------------------------------------------- Name of Company State of Incorporation Names under which the Company does Business - ----------------------------------------------------------------------------------------------------------------------- Semotus Systems, Corp. British Columbia, Canada - ----------------------------------------------------------------------------------------------------------------------- Cross Communications, Inc. Delaware - ----------------------------------------------------------------------------------------------------------------------- Simkin, Inc. Delaware - ----------------------------------------------------------------------------------------------------------------------- Wares On The Web, Inc. Delaware - ----------------------------------------------------------------------------------------------------------------------- Five Star Advantage, Inc. Delaware Tech-ni-comm, Inc. - ----------------------------------------------------------------------------------------------------------------------- WizShop.com, Inc. Delaware - ----------------------------------------------------------------------------------------------------------------------- Application Design Associates, Inc. Delaware - -----------------------------------------------------------------------------------------------------------------------
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