-----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, UMIN8dgv8BTqZBijTzp4WPWjaCnhg8t3TkG2hlw8cDcfaHQ/lOjAb/KLBhKRreke Mey7tVZQIGwKkvTBPrWEgg== 0001021408-01-000006.txt : 20010122 0001021408-01-000006.hdr.sgml : 20010122 ACCESSION NUMBER: 0001021408-01-000006 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001215 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFLINK CORP CENTRAL INDEX KEY: 0000847555 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 954346070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-20270 FILM NUMBER: 1500756 BUSINESS ADDRESS: STREET 1: 18650 N E 67TH COURT STREET 2: SUITE 210 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 8136360099 MAIL ADDRESS: STREET 1: 18650 N E 67TH COURT SUITE 210 CITY: REDMOND STATE: WA ZIP: 98052 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL REGISTRY INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: TOPSEARCH INC DATE OF NAME CHANGE: 19920401 8-K 1 0001.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Date of report (Date of earliest event reported): December 15, 2000 SAFLINK CORPORATION ------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 0-2027 95-4346070 - ------------------------- ------------------ -------------------- (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 18650 N.E. 67th Court, Suite 210, Redmond, Washington 98052 ------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (425) 881-6766 ITEM 1. CHANGE IN CONTROL OF REGISTRANT Not applicable ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On December 15, 2000 (the "Closing Date"), SAFLINK Corporation (the "Company") acquired substantially all of the intellectual property and fixed assets (the "Assets") of Jotter Technologies Inc., a Delaware corporation ("Jotter"), pursuant to an Asset Purchase Agreement, by and between the Company and Jotter (the "Asset Purchase Agreement"). The Assets were acquired in consideration for an agreement to issue 5,100,000 shares of SAFLINK Common Stock, par value $0.01 per share, (the "Shares") and an unsecured promissory note in the principal amount of $1,700,000 with a two year term (the "Note", collectively with the Shares, the "Purchase Price"). The Purchase Price was determined based upon negotiations between the Company and Jotter, and, among other factors, (i) the financial and operating performance and prospects of the Company after giving effect to the purchase of the Assets; (ii) values of comparable companies; (iii) the value and composition of the Assets; and (iv) the cost and time anticipated by the Company in developing technology with comparable functionality to Jotter's Personal Internet Assistant toolbar. Pursuant to the Asset Purchase Agreement and an escrow agreement, executed on the Closing Date (the "Escrow Agreement"), the Shares will be deposited into escrow within 45 days of the Closing Date and shall be held in escrow in the event of any breach of the Asset Purchase Agreement, and to secure certain indemnification rights under the Asset Purchase Agreement. Shares held in escrow shall be distributed to Jotter as follows: (i) 350,000 Shares 90 days after the Closing Date, and (ii) 250,000 Shares per month beginning one month after the first share distribution. In the event that Jotter does not satisfy certain Canadian tax obligations arising as a result of the transaction ("Tax Obligations"), the Company will be obliged to pay such Tax Obligations and will be entitled to reduce the Purchase Price in an equal amount by reducing the number of Shares to be placed in escrow as valued on the closing date of the Asset Purchase Agreement or the principal amount of the Note or both. The Company has also agreed to use commercially reasonable efforts to register the Shares with the Securities and Exhange Commission by filing a Form S-3 registration statement within 60 days after the Closing Date. On the Closing Date, the Company also entered into non-competition agreements with Jotter and certain of its affiliates which prohibit such persons from competing with the Company in the development and sale of toolbars and internet utility applications and products and services utilizing biometrics. The Company also agreed to offer employment to substantially all of the Jotter employees. A copy of the Asset Purchase Agreement and Escrow Agreement are filed hereto as Exhibit 2.1 and Exhibit 10.1, respectively, and are incorporated by reference herein. The Asset Purchase Agreement and the transactions contemplated thereby have been approved by the board of directors of both the Company and Jotter. Jotter has also received the written consent of a majority of its shareholders approving the Asset Purchase Agreement and the transactions contemplated thereby. The Company's press release dated December 18, 2000, is attached as Exhibit 99.1 hereto and incorporated by reference herein. ITEM 3. BANKRUPTCY OR RECEIVERSHIP Not applicable. ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT Not applicable. ITEM 5. OTHER EVENTS Not applicable. ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS Not applicable. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired Jotter Technologies Inc. and Subsidiary and Predecessor Consolidated Financial Statements (audited) (b) Pro Forma Financial Information Pro Forma Condensed Combined Financial Statements (unaudited) (c) Exhibits. The exhibits listed on the Exhibit Index are filed as part of this Report. ITEM 8. CHANGE IN FISCAL YEAR Not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SAFLINK Corporation Date: January 2, 2001 By: /s/ JAMES W. SHEPPERD ------------------------ James W. Shepperd Chief Financial Officer JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Financial Statements December 31, 1998 and 1999 (With Independent Auditors' Report Thereon) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Table of Contents
Page Independent Auditors' Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Stockholders' Deficit and Comprehensive Loss 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6
Independent Auditors' Report The Board of Directors Jotter Technologies, Inc. We have audited the accompanying consolidated balance sheets of Jotter Technologies, Inc. and subsidiary, and Predecessor, (a development stage enterprise) (collectively, the Company) as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' deficit and comprehensive loss, and cash flows for the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and 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 financial position of Jotter Technologies, Inc. and subsidiary, and Predecessor as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Seattle, Washington December 15, 2000 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Balance Sheets
(unaudited) December 31, September 30, ------------------------ Assets 1998 1999 2000 ---------- ----------- ----------- Current assets: Cash $ 71,065 -- -- Non-trade receivables -- 40,520 -- Prepaid expenses and other current assets 4,456 18,958 24,564 ---------- ----------- ----------- Total current assets 75,521 59,478 24,564 Property and equipment, net 35,667 214,674 290,575 Debt issuance costs -- 14,677 -- Deferred preferred stock offering costs -- 24,292 -- Other -- 35,172 24,000 ---------- ----------- ----------- Total assets $ 111,188 348,293 339,139 ========== =========== =========== Liabilities, Minority Interest and Stockholders' Deficit Current liabilities: Bank overdraft $ -- 81,576 10,963 Accounts payable 151,183 471,401 370,996 Accrued expenses 2,351 241,704 382,481 Current portion of capital lease obligations -- -- 9,441 Promissory notes payable -- -- 200,000 Due to related parties 236,992 161,225 -- ---------- ----------- ----------- Total current liabilities 390,526 955,906 973,881 Capital lease obligations, net of current portion -- -- 5,888 Convertible promissory notes payable -- 416,642 360,778 Convertible promissory notes payable to related parties -- 81,701 -- ---------- ----------- ----------- Total liabilities 390,526 1,454,249 1,340,547 ---------- ----------- ----------- Minority interest 40,363 -- -- ---------- ----------- ----------- Stockholders' equity (deficit): Convertible preferred stock, Series A, $0.01 par value Authorized 400,000 shares; no shares issued and outstanding at December 31, 1998 and 1999, and 206,200 shares issued and outstanding at September 30, 2000 -- -- 2,062 Common stock, $0.01 par value. Authorized 50,000,000 shares; issued 9,843,621, 10,827,224 and 12,348,512 shares at December 31, 1998 and 1999 and September 30, 2000, respectively; outstanding 9,843,621, 9,827,224 and 11,348,512 shares at December 31, 1998 and 1999 and September 30, 2000, respectively 98,436 108,271 123,484 Treasury stock -- (1) (1) Additional paid-in capital 426,783 2,438,449 6,394,735 Accumulated other comprehensive income 30,106 16,466 16,466 Deficit accumulated during the development stage (875,026) (3,669,141) (7,538,154) ---------- ----------- ----------- Total stockholders' deficit (319,701) (1,105,956) (1,001,408) Commitments, contingencies and subsequent events ---------- ----------- ----------- Total liabilities, minority interest and stockholders' deficit $ 111,188 348,293 339,139 ========== =========== ===========
See accompanying notes to consolidated financial statements. 2 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Operations
(unaudited) Period from Period from June 1, 1998 June 1, 1998 (inception) (unaudited) (inception) through Year ended Nine months ended through December 31, December 31, September 30, September 30, ------------------------- 1998 1999 1999 2000 2000 ------------------------------- ----------- ----------- --------------- Revenue $ -- -- -- 52,027 52,027 Operating expenses: General and administrative 334,388 953,670 857,310 1,662,412 2,950,470 Sales and marketing 110,169 503,269 456,278 1,287,708 1,901,146 Product development 456,107 1,337,958 1,005,580 811,040 2,605,105 -------------- ------------- ----------- ----------- --------------- Total operating expenses 900,664 2,794,897 2,319,168 3,761,160 7,456,721 -------------- ------------- ----------- ----------- --------------- Operating loss (900,664) (2,794,897) (2,319,168) (3,709,133) (7,404,694) Interest expense -- (37,403) (19,902) (159,880) (197,283) -------------- ------------- ----------- ----------- --------------- Loss before minority interest (900,664) (2,832,300) (2,339,070) (3,869,013) (7,601,977) Minority interest in loss 25,638 38,185 38,185 -- 63,823 -------------- ------------- ----------- ----------- --------------- Net loss (875,026) (2,794,115) (2,300,885) (3,869,013) (7,538,154) Beneficial conversion feature -- -- -- (435,810) (435,810) -------------- ------------- ----------- ----------- --------------- Net loss available to common stockholders $ (875,026) (2,794,115) (2,300,885) (4,304,823) (7,973,964) ============== ============= =========== =========== ===============
See accompanying notes to consolidated financial statements. 3 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Stockholders' Deficit and Comprehensive Loss
Convertible preferred stock Common stock Treasury stock ----------------------------- --------------------- ---------------------- Shares Amount Shares Amount Shares Amount -------- -------- -------- -------- ----------- -------- Balances at inception -- $ -- -- -- -- -- Issuance of common stock to founders for cash (7/98) -- -- 8,250,000 6 -- -- Issuance of restricted common stock to employees for cash (7/98) -- -- 350,000 1 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share (11/98 - 12/98) -- -- 1,243,621 98,429 -- -- Comprehensive loss: Net loss -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- Total comprehensive loss -------- -------- ---------- -------- ---------- ------ Balances at December 31, 1998 -- -- 9,843,621 98,436 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share, net of cash offering costs of $17,649 (1/99 - 5/99) -- -- 429,044 4,290 -- -- Repurchase of common stock (6/99) -- -- -- -- (1,000,000) (1) Forfeiture of restricted common stock issued to employees (6/99) -- -- (350,000) (3,500) -- -- Issuance of common stock to acquire minority interest (6/99) -- -- 53,333 533 -- -- Issuance of common stock at prices ranging from $0.33 to $1.96 per share, including 79,041 shares issued in payment of commissions and net of cash offering costs of $12,790 (6/99) -- -- 615,925 6,159 -- -- Issuance of common stock at prices ranging from $2.00 to $2.50 per share, including 6,500 shares issued in payment of commissions and net of cash offering costs of $74,348 (6/99 - 9/99) -- -- 159,000 1,590 -- -- Stock compensation related to stock option grants (7/99) -- -- -- -- -- -- Common shares issued for services at $2.50 per share (9/99) -- -- 62,472 625 -- -- Issuance of common stock at $1.26 per share for services performed related to the issuance of convertible promissory notes (11/99) -- -- 13,829 138 -- -- Stock compensation related to the issuance of warrants (11/99) -- -- -- -- -- -- Comprehensive loss: Net loss -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- Total comprehensive loss -------- -------- ---------- -------- ---------- ------ Balances at December 31, 1999 -- -- 10,827,224 108,271 (1,000,000) (1) Issuance of Series A convertible preferred stock at $10.00 per share, including 18,750 shares issued in payment of commissions and net of cash offering costs of $24,607 (1/00) (unaudited) 206,200 2,062 -- -- -- -- Beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- -- Recognition of beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- --
Issuance of common stock warrants attached to Series A convertible preferred stock (1/00) (unaudited) -- -- -- -- -- -- Stock compensation related to stock options (1/00) (unaudited) -- -- -- -- -- -- Issuance of common stock in settlement of litigation at $1.26 per share (3/00) (unaudited) -- -- 29,646 297 -- -- Issuance of common stock warrants attached to convertible promissory note (4/00) (unaudited) -- -- -- -- -- -- Recognition of beneficial conversion feature on convertible promissory note (4/00) (unaudited) -- -- -- -- -- -- Conversion of promissory notes into common stock at $1.26 per share, net of unamortized debt issuance costs of $14,363 (1/00) (unaudited) -- -- 397,817 3,978 -- -- Issuance of common stock at prices ranging from $0.61 to $0.80 per share, net of cash offering costs of $9,764 (7/00-9/00) (unaudited) -- -- 489,437 4,894 -- -- Issuance of common stock attached to promissory notes at $1.26 per share (7/00-8/00) (unaudited) -- -- 66,667 667 -- -- Issuance of common stock for services at $1.26 per share (1/00-7/00)(unaudited) -- -- 350,221 3,502 -- -- Issuance of common stock for cash and services at $1.26 per share (7/00) (unaudited) -- -- 187,500 1,875 -- -- Comprehensive loss- net loss (unaudited) -- -- -- -- -- -- -------- -------- ---------- -------- ---------- ------ Balances at June 30, 2000 (unaudited) 206,200 $ 2,062 12,348,512 123,484 (1,000,000) (1) ======== ======== ========== ======== ========== ======
Deficit Accumulated accumulated Additional other during the Total paid-in comprehensive development stockholders' capital income (loss) stage deficit ---------- ------------- ----------- ------------- Balances at inception $ -- $ -- $ -- $ -- Issuance of common stock to founders for cash (7/98) -- -- -- 6 Issuance of restricted common stock to employees for cash (7/98) -- -- -- 1 Issuance of common stock at prices ranging from $0.33 to $1.96 per share (11/98 - 12/98) 426,783 -- -- 525,212 Comprehensive loss: Net loss -- -- (875,026) (875,026) Foreign currency translation adjustment -- 30,106 -- 30,106 -------- Total comprehensive loss (844,920) ---------- ----------- ----------- ---------- Balances at December 31, 1998 426,783 30,106 (875,026) (319,701) Issuance of common stock at prices ranging from $0.33 to $1.96 per share, net of cash offering costs of $17,649 (1/99 - 5/99) 505,481 -- -- 509,771 Repurchase of common stock (6/99) -- -- -- (1) Forfeiture of restricted common stock issued to employees (6/99) 3,500 -- -- -- Issuance of common stock to acquire minority interest (6/99) 17,067 -- -- 17,600 Issuance of common stock at prices ranging from $0.33 to $1.96 per share, including 79,041 shares issued in payment of commissions and net of cash offering costs of $12,790 (6/99) 884,940 -- -- 891,099 Issuance of common stock at prices ranging from $2.00 to $2.50 per share, including 6,500 shares issued in payment of commissions and net of cash offering costs of $74,348 (6/99 - 9/99) 299,062 -- -- 300,652 Stock compensation related to stock option grants (7/99) 68,250 -- -- 68,250 Common shares issued for services at $2.50 per share (9/99) 155,556 -- -- 156,181 Issuance of common stock at $1.26 per share
for services performed related to the issuance of convertible promissory notes (11/99) 17,286 -- -- 17,424 Stock compensation related to the issuance of warrants (11/99) 60,524 -- -- 60,524 Comprehensive loss: Net loss -- -- (2,794,115) (2,794,115) Foreign currency translation adjustment -- (13,640) -- (13,640) ---------- Total comprehensive loss (2,807,755) ---------- ----------- ----------- ---------- Balances at December 31, 1999 2,438,449 16,466 (3,669,141) (1,105,956) Issuance of Series A convertible preferred stock at $10.00 per share, including 18,750 shares issued in payment of commissions and net of cash offering costs of $24,607 (1/00) (unaudited) 1,412,021 -- -- 1,414,083 Beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) 435,810 -- -- 435,810 Recognition of beneficial conversion feature of Series A convertible preferred stock (1/00) (unaudited) (435,810) -- -- (435,810) Issuance of common stock warrants attached to Series A convertible preferred stock (1/00) (unaudited) 435,810 -- -- 435,810 Stock compensation related to stock options (1/00) (unaudited) 31,694 -- -- 31,694 Issuance of common stock in settlement of litigation at $1.26 per share (3/00) (unaudited) 37,057 -- -- 37,354 Issuance of common stock warrants attached to convertible promissory note (4/00) (unaudited) 250,984 -- -- 250,984 Recognition of beneficial conversion feature on convertible promissory note (4/00) (unaudited) 250,984 -- -- 250,984 Conversion of promissory notes into common stock at $1.26 per share, net of unamortized debt issuance costs of $14,363 (1/00) (unaudited) 482,909 -- -- 486,887 Issuance of common stock at prices ranging from $0.61 to $0.80 per share, net of cash offering costs of $9,764 (7/00-9/00) (unaudited) 299,342 -- -- 304,236 Issuance of common stock attached to promissory notes at $1.26 per share (7/00-8/00) (unaudited) 83,333 -- -- 84,000 Issuance of common stock for services at $1.26 per share (1/00-7/00)(unaudited) 437,777 -- -- 441,279 Issuance of common stock for cash and services at $1.26 per share (7/00) (unaudited) 234,375 -- -- 236,250 Comprehensive loss- net loss (unaudited) -- -- (3,869,013) (3,869,013) ---------- ----------- ----------- ---------- Balances at September 30, 2000 (unaudited) $6,394,735 $ 16,466 $(7,538,154) (1,001,408) ========== =========== =========== ==========
See accompanying notes to consolidated financial statements. 4 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Consolidated Statements of Cash Flows
(unaudited) Period from Period from June 1, 1998 June 1, 1998 (inception) (unaudited) (inception) through Year ended Nine months ended through December 31, December 31, September 30, September 30, ------------------------ 1998 1999 1999 2000 2000 ------------ ----------- ---------- ---------- ------------ Cash flows from operating activities: Net loss $(875,026) (2,794,115) (2,300,885) (3,869,013) (7,538,154) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,388 40,872 23,056 59,237 105,497 Non-cash interest expense -- -- -- 149,652 149,652 Stock-based compensation -- 274,676 317,431 559,223 833,899 Minority interest in loss (25,638) (38,185) (38,185) -- (63,823) Changes in certain assets and liabilities: Current and noncurrent assets (4,614) (97,050) (26,374) 63,520 (38,144) Accounts payable and other accrued expenses 159,005 559,569 433,970 77,727 796,301 --------- ---------- ---------- ---------- ---------- Net cash used in operating activities (740,885) (2,054,233) (1,590,987) (2,959,654) (5,754,772) --------- ---------- ---------- ---------- ---------- Cash used in investing activities - purchases of property and equipment (42,326) (206,496) (138,437) (108,076) (356,898) --------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Bank overdraft, net -- 81,576 -- (70,613) 10,963 Payments of capital lease obligations -- -- -- (4,561) (4,561) Investments from limited partner 67,439 -- -- -- 67,439 Increase (decrease) in due to related parties 245,435 5,935 90,028 (161,225) 90,145 Repurchases of common stock -- (1) -- -- (1) Proceeds from issuance of convertible promissory notes -- 416,642 -- 800,000 1,216,642 Proceeds from issuance or promissory notes -- -- -- 200,000 200,000 Proceeds from issuances of preferred stock, net of issuance costs -- -- -- 1,849,893 1,849,893 Proceeds from issuances of common stock, net of issuance costs 543,933 1,701,522 1,638,816 454,236 2,699,691 --------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 856,807 2,205,674 1,728,844 3,067,730 6,130,211 --------- ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash (2,531) (16,010) 2,504 -- (18,541) --------- ---------- ---------- ---------- ---------- Net decrease (increase) in cash 71,065 (71,065) 1,924 -- -- Cash at beginning of period -- 71,065 71,065 -- -- --------- ---------- ---------- ---------- ---------- Cash at end of period $ 71,065 -- 72,989 -- -- ========= ========== ========== ========== ========== Supplemental disclosures of cash flow information - cash paid during the period for interest $ -- 8,329 -- 29,074 37,403 ========= ========== ========== ========== ========== Supplemental schedule of non-cash investing and financing activities: Conversion of promissory notes and accrued interest thereon into common stock, net of unamortized debt issuance costs $ -- -- -- 486,887 486,887 Debt issuance costs paid through the issuance of common stock -- 17,424 -- -- 17,424 Stock issued in prepayment of expenses to be incurred -- 17,361 -- -- 17,361 Stock issued to acquire minority interest -- 17,600 17,600 -- 17,600 Conversion of related party payables to convertible promissory notes -- 81,701 -- -- 81,701 Equipment acquired through capital leases -- -- -- 19,890 19,890
Stock issued in settlement of a liability -- -- -- 37,354 37,354 Recognition of beneficial conversion feature on Series A convertible preferred stock -- -- -- 435,810 435,810 Recognition of beneficial conversion feature on convertible promissory note -- -- -- 250,984 250,984 Issuance of warrants attached to convertible promissory notes -- -- -- 250,984 250,984 ========= ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 5 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (1) Description of Business and Summary of Significant Accounting Policies (a) Description of Business Jotter Technologies, Inc. and its predecessor (collectively, the Company) is a development stage enterprise whose principal activities since inception have been performing research and development and raising capital for the development and marketing of an Internet microportal that gives consumers increased personalization and control over information they give and receive on the Internet. The microportal allows users the ability to designate advertising preferences, provides customized ticker information on news, sports, investments and other topics, and affords users sophisticated search and electronic commerce tools. The Company is subject to the risks and challenges associated with other companies at a similar stage of development including its limited operating history, the limited history of commerce on the Internet, dependence on key individuals, successful development and marketing of its technology, and competition from substitute services and larger companies with greater financial, technical management and marketing resources. The Company's success depends in part upon the emergence of the Internet as a commerce medium, the acceptance of the Company's technology by the marketplace and its ability to generate revenues from the use of its technology. (b) Basis of Presentation The consolidated financial statements include the accounts of Jotter Technologies, Inc. and its subsidiary, MindQuake Interactive, Inc., and its predecessor. All significant intercompany transactions and accounts have been eliminated in consolidation. Jotter Technologies, Inc. (Jotter) was incorporated in June 1999 in Delaware and is headquartered in San Francisco, CA. The Company also has operations located in Edmonton, Alberta, Canada and Mesa, Arizona. The Company's primary business in all periods presented consists of developing and marketing an Internet microportal. Prior to the formation of Jotter in June 1999, the Company operated as MindQuake Limited Partnership (MQ LP), a Canadian limited partnership formed on June 1, 1998 and based in Edmonton, Alberta, and its 100% owner, MindQuake Interactive Inc. (MQI), a Canadian corporation. The predecessor entity presented in the accompanying consolidated financial statements represents the consolidated accounts of MQI and MQ LP. In December 1998, MQ LP granted an 11% limited partnership interest to an individual in exchange for a cash investment of approximately $65,000. The limited partner's investment has been reflected as a minority interest in the accompanying consolidated financial statements and has been reduced by the limited partner's share of the losses of MQ LP, which is limited to 95% of the original investment, according to the limited partnership agreement. (Continued) 6 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) In June 1999, the Company acquired the minority interest in MQI, consisting of the limited partnership interest in MQ LP, in exchange for the issuance of 53,333 shares of the Company's common stock. MQ LP was then dissolved. Concurrently, Jotter completed a merger with MQI. Prior to the merger, Jotter did not have any assets or operations and therefore the merger transaction has been accounted for as a re-capitalization of MQI. Under a recapitalization, the historical cost basis amounts of MQI carryforward to the accounts of Jotter while the stockholders' deficit details for capital stock are those of Jotter, as adjusted for the recapitalization. Jotter issued one share of common stock for each share of MQI common stock. A total of 8,430,259 shares of Jotter's common stock were issued in exchange for the same number of MQI common shares representing approximately 95% of MQI's common stock outstanding at such date. In addition, Jotter entered into an agreement with the stockholders owning the remaining 492,406 outstanding common shares of MQI in June 1999 whereby the stockholders could exchange their shares of MQI common stock for shares of Jotter common stock. This agreement grants Jotter the right to purchase the shares from the stockholders, and the MQI stockholders the right to put the shares to Jotter on the same terms as the original exchange and is exercisable by either party until June 17, 2004. These remaining 492,406 shares have been included as issued and outstanding stock of the Company as of December 31, 1999, and September 30, 2000 as the shares are exchangeable at Jotter's option. Subsequent to the merger, Jotter entered into an asset transfer agreement with MQI which resulted in all of the assets of MQI being transferred to Jotter. As a result, all of the operations of the Company, subsequent to the transfer, are those of Jotter and its subsidiary, MQI. The equity of the Company presented for the period prior to the merger has been reflected as if it were the equity of Jotter. References to 1998 and 1999 in the accompanying notes to the consolidated financial statements refer to the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999, respectively. The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, the Company has incurred net losses and negative operating cash flows since inception. These factors, among others, raise doubt whether the Company will be able to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include adjustments relating to the recoverability of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuance as a going concern is dependent on its ability to raise capital and ultimately to generate revenue and achieve profitability. (Continued) 7 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) Management is presently evaluating capital sources to sustain the company through the development stage. No assurances can be given that the Company will be successful in raising additional capital or that the Company will achieve profitability or positive cash flows. If the Company is unable to raise adequate additional capital and achieve profitability and positive cash flows, there can be no assurance that the Company will continue as a going concern. (c) Interim Consolidated Financial Statements The consolidated financial information as of September 30, 2000 and for the nine months ended September 30, 1999 and 2000 is unaudited. These interim consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the consolidated financial information set forth herein. (d) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: Estimated useful life ------------------------------- Computer equipment and software 3-5 years Furniture and fixtures 3-7 years Leasehold improvements Lesser of lease term or 7 years (e) Long Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by such asset. If the carrying amount is in excess of the future undiscounted net cash flows of such asset, an impairment is recognized and is measured by the amount by which the carrying value of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of their carrying value or fair value less cost to sell. (Continued) 8 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (f) Revenue Recognition Revenues are derived from advertisements appearing on the Company's Internet microportal. The Company is a participant in a network whereby it makes advertising space on its Internet microportal available for sale. The Company is then remitted 60% of the revenues generated from the sale of the advertising space, its impressions, net of any commissions or other fees. As the amount that will be ultimately remitted to the Company is not determinable, revenue is recognized upon the receipt of payment. (g) Advertising Expenses The Company expenses the cost of advertising and promoting its product as incurred. Such costs are included in sales and marketing expenses and totaled approximately $18,000 and $257,000 for 1998 and 1999, respectively, and $210,000 and $716,000 for the nine months ended September 30, 1999 and 2000, respectively. (h) Product Development Product development expenditures are charged to operations as incurred. Capitalization of certain software development costs is required subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between completion of a working model and the point at which the product is ready for general release have been insignificant. (i) Income Taxes The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the future tax consequences attributable to differences between the financial statement carrying amounts of the Company's assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce any deferred tax assets to the amounts which are more likely than not to be realized. (Continued) 9 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) Under certain provisions of the Internal Revenue Code of 1986, as amended, the availability of the Company's net operating loss and the tax credit carryforwards may be subject to limitations if it should be determined there has been a change in ownership of more than 50% of the value of the Company's stock. Such determination could limit the utilization of net operating loss and the tax credit carryforward. (j) Stock-Based Compensation The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if, on the date of grant, the fair value of the underlying stock exceeded the exercise price. The Company adopted the disclosure-only requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net income disclosures as if the Company had recognized compensation expense based on the fair value of the options at the grant date as prescribed by SFAS No. 123. (k) Foreign Currency The functional currency of the predecessor company through June 30, 1999 was the Canadian dollar, which represents the local currency of the country in which the predecessor company operated. As the functional currency of the predecessor company is different from the reporting currency, the accounts of the predecessor company have been translated into the reporting currency and the net gain or loss resulting from the foreign currency translation is included in accumulated other comprehensive income in stockholders' deficit. Assets and liabilities of the predecessor company have been translated into U.S. dollars using rates of exchange in effect at the end of the reporting periods. Income and expense accounts are translated into U.S. dollars using average rates of exchange for the reporting periods. As of July 1, 1999, the functional currency of the Company changed from the Canadian dollar to the U.S. dollar due to a change in economic facts and circumstances. The translated amounts for non-monetary assets as of June 30, 1999 became the accounting basis for these assets as of July 1, 1999. (l) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. (Continued) 10 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (m) Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company has assessed the impact of this new statement and does not expect the adoption of SFAS No. 133 to have a material effect on its consolidated financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB Opinion No. 25. Among other issues, this interpretation clarifies: the definition of employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as non-compensatory, the accounting consequences of various modifications to the terms of a previously fixed stock option award, and the accounting for an exchange of stock compensation in a business combination. This interpretation became effective July 1, 2000. Adoption of this interpretation has not had a material impact on the Company's financial position or results of operations. (2) Property and Equipment Property and equipment consist of the following:
December 31, -------------------------------------- September 30, 1998 1999 2000 ----------------- ----------------- ------------------- Computer equipment and software $ 22,393 210,411 286,939 Furniture and fixtures 18,476 36,355 65,850 Equipment under capital lease -- -- 19,890 Leasehold improvements -- 3,749 5,802 ----------------- ----------------- ------------------- 40,869 250,515 378,481 Less accumulated depreciation and amortization 5,202 35,841 87,906 ----------------- ----------------- ------------------- $ 35,667 214,674 290,575 ================= ================= ===================
(Continued) 11 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) At September 30, 2000, accumulated amortization of equipment under capital lease was $3,570. (3) Convertible Promissory Notes At December 31, 1999, the Company had convertible promissory notes outstanding with aggregate principal balances of $498,343 that bear interest at 7% per annum and mature on November 1, 2000. The principal balance and all accrued interest are due and payable on the maturity date. Included in the balance of promissory notes are notes issued to certain related parties for amounts due to them for services and expenses totaling $81,701. Upon closing of an equity financing round by the Company that raises gross proceeds of at least $1 million, the notes will automatically convert into the common stock of the Company at a conversion price equal to the price of the common stock sold in the equity financing or, if the equity round is preferred stock, the conversion price of the Company's convertible preferred stock. In connection with the issuance of these notes, the Company issued 13,829 shares of its common stock as payment for services provided related to the note issuance. Based on the fair value of the common shares, the Company recorded debt issuance costs of approximately $17,000 which are being amortized to interest expense over the term of the underlying notes. For the year ended December 31, 1999, amortization of debt issuance costs was approximately $3,000. On January 12, 2000, all of the notes and related accrued interest totaling $501,250 were converted into 397,817 shares of the Company's common stock at a conversion rate of $1.26 per share. The remaining unamortized debt issuance costs of approximately $14,000 were recorded in additional paid-in capital in conjunction with this conversion. In April 2000, the Company issued an $800,000 convertible note to an entity affiliated with an officer of the Company. Under the terms of the note, the principal balance will accrue interest at 7% per annum and principal and all accrued interest are due on April 1, 2004. Additionally, the principal balance and all accrued interest are convertible into common stock of the Company only upon the closing of one of the following: (1) an equity financing by the Company that raises gross proceeds of at least $10,000,000, or (2) the acquisition of the Company by another entity. The conversion price will be $1.26 per common share. In addition, upon payment or conversion of this note, the note holder will receive warrants to purchase common stock of the Company at an exercise price of $1.26 per share. The number of warrants to be issued is based upon: (1) 30% of the amount due upon repayment if it is repaid in cash, or (2) 50% of the amount due upon conversion if it is converted into common stock. The fair value of the warrants at the grant date was approximately $251,000 determined using the Black-Scholes option pricing model and based on the probability that the note will be ultimately repaid or converted. The following assumptions were used in the Black-Scholes calculation: expected dividend yield of 0%, risk free interest rate of 6.2%, volatility of 80%, and an expected life of 5 years. The fair value of the warrants was accounted for as a discount on the note and is being recognized as interest expense over the stated term of the notes. As a result of the value assigned to the warrants, the $800,000 convertible promissory note was issued with a beneficial conversion feature which was valued at approximately $251,000 based on the intrinsic value and calculated as the difference between the conversion price and the fair value of the common stock into (Continued) 12 JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) which the note was convertible. The beneficial conversion feature is accounted for as an increase in additional paid-in capital and a note discount, with the discount amortized to interest expense over the stated term of the note using the effective interest method. Approximately $63,000 was charged to interest expense for the nine months ended September 30, 2000 related to the amortization of the fair value of the warrants and the beneficial conversion feature. In July and August 2000, the Company issued two promissory notes with aggregate principal balances of $200,000 that bear interest at 10% per annum and were due and payable on September 29 and October 1, 2000, respectively. Subsequent to September 30, 2000, the Lender verbally extended the maturity of the notes. No final due date has been determined. In connection with the notes, the Company issued a total of 66,667 shares of its common stock to the noteholders. Based on the fair value of the shares issued, the Company recognized $84,000 of additional interest expense on the notes through September 30, 2000. (4) Income Taxes The components of loss before income taxes are:
Period from June 1, 1998 (inception) through Year ended Nine months ended December 31, December 31, September 30, ------------------------------- 1998 1999 1999 2000 ------------ ------------ ------------ ------------ United States $ -- (1,375,856) (882,626) (3,869,013) Canadian (875,026) (1,418,259) (1,418,259) -- ---------- ---------- ---------- --------- $ (875,026) (2,794,115) (2,300,885) (3,869,013) ========== ========== ========== ==========
The Company's expected income tax benefit determined by applying the Canadian statutory income tax rate of 43% for the periods prior to July 1, 1999 and the U.S. federal statutory income tax rate of 34% for subsequent periods to net loss before income taxes differs from actual income tax benefit primarily as a result of the increases in the valuation allowance for deferred tax assets. 13 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) The tax effects of temporary differences and tax loss and credit carryforwards that give rise to significant portions of deferred tax assets and liabilities are as follows:
December 31, September 30, -------------------------- 1998 1999 2000 ---------- ---------- ------------ Deferred tax assets: Loss carryforwards $ 387,286 1,330,849 2,635,257 Stock compensation -- 43,783 54,559 Other -- 12,969 20,811 ---------- ---------- ---------- Gross deferred tax assets 387,286 1,387,601 2,710,627 Less valuation allowance (387,286) (1,387,601) (2,710,627) ---------- ---------- ---------- Net deferred tax assets $ -- -- -- ========== ========== ==========
The Company did not provide any current or deferred income tax provision or benefit for any of the years presented because it has experienced operating losses since its inception. The Company provided a full valuation allowance on net deferred tax assets, consisting primarily of loss carryforwards, because of the uncertainty regarding their realizability. The valuation allowance for deferred tax assets increased approximately $387,000, $1,000,000, $416,000 and $1,323,000 during the years ended December 31, 1998 and 1999 and the nine months ended September 30, 1999 and 2000, respectively. As of September 30, 2000, the Company has loss carryforwards of approximately $6,600,000 which are available to offset future U.S. federal taxable income and income taxes, respectively, if any, and expire beginning in 2018. (5) Stockholders' Deficit (a) Convertible Preferred Stock In January 2000, the Board of Directors approved the designation of 400,000 of the authorized preferred shares as Series A convertible preferred stock. The price paid for each share of Series A convertible preferred stock plus any accrued and unpaid dividends are convertible into shares of common stock at $1.26 per share, subject to certain anti-dilution provisions. Outstanding Series A convertible preferred shares automatically convert into common stock on December 31, 2001 or upon closing of an initial public offering of the Company's common stock with a price of at least $10.00 per share. The Series A convertible preferred shares are entitled to cumulative non-cash dividends at a rate of $0.70 per share per annum if and when declared by the Board of Directors and in preference to dividends paid to common shareholders. No dividends have been declared. The Company may not pay cash dividends to any class of stock prior to conversion of the Series A convertible preferred 14 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) shares. In the event of voluntary liquidation, dissolution or termination of the Company, holders of Series A convertible preferred shares shall be entitled to receive $10.00 for each share held plus declared but unpaid dividends. The Series A convertible preferred shareholders have been granted certain registration rights and the Company may not amend the Articles of Incorporation without prior approval of two-thirds of the outstanding Series A shareholders. The Series A shareholders have no other voting rights. On January 12, 2000, the Company completed the sale of 187,450 shares of its Series A convertible preferred stock at a price of $10.00 per share. For each Series A convertible preferred share purchased, investors received warrants to purchase 3.9684 shares of the Company's common stock resulting in the issuance of 743,703 warrants. The warrants are exercisable through December 31, 2001 at an exercise price of $1.26 per share. The fair value of the warrants at the grant date was approximately $436,000 determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk free interest rate of 6.51%, volatility of 80%, and a contractual life of 2 years. As a result of the value assigned to the warrants, the shares of Series A convertible preferred stock were issued with a beneficial conversion feature which was valued at approximately $436,000 based on the intrinsic value and calculated as the difference between the conversion price and the fair value of the common stock into which the preferred stock is convertible. The beneficial conversion feature was recognized at the time of issuance as the Series A convertible preferred stock is convertible immediately. The beneficial conversion feature has been accounted for as an increase in additional paid-in capital and an in substance dividend to the preferred stockholders in 2000. Accordingly, the beneficial conversion feature increases the loss applicable to common stockholders for the nine months ended September 30, 2000 by approximately $436,000. As payment for services provided in connection with the sale of preferred shares, the Company issued 18,750 shares of Series A convertible preferred stock and attached warrants to purchase 18,750 shares of common stock to certain advisors. The warrants are exercisable through December 31, 2001 at an exercise price of $1.26 per share. As additional payment for services provided in connection with the sale of preferred shares, the Company issued warrants to purchase 137,055 shares of common stock to advisors. The warrants are exercisable through December 31, 2004 at an exercise price of $1.26 per share. All of the common stock warrants issued in conjunction with the Series A convertible preferred stock offering, including the warrants issued to advisors, were outstanding at September 30, 2000. 15 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (b) Common Stock During the nine months ended September 30, 2000, the Company sold 187,500 shares of its common stock to a consultant at a price per share of $0.80. The sale price of the common stock represented a discount from the fair value of the Company's common stock on the date of sale. As a result, an expense of $86,250 was recognized. (c) Stock Option Plans In January 2000, the Company adopted its 1999 and 2000 Stock Option Plans and reserved an aggregate of 2,000,000 shares of its common stock for future stock option grants. Options may be granted under both plans to employees, directors and consultants and be designated as incentive or non- qualified stock options at the discretion of the Board of Directors. Generally, options granted under both plans have five-year terms and vest over three years with the initial 1/6 of the options cliff vesting after six months and the remainder monthly over the subsequent two and one-half years. During the year ended December 31, 1999, the Company granted 75,000 stock options under its stock option plans at exercise prices less than the fair value of the underlying common stock on the date of grant. Additionally, the Company granted stock options under its plans prior to approval by the Board of Directors. As such, the measurement date of these option grants is the date of approval of the plans by the Board of Directors. As a result, the Company recorded compensation expense of $68,250 during the year ended December 31, 1999. During the nine months ended September 30, 2000, the Company granted options to a nonemployee to purchase 45,000 shares of its common stock under its stock option plans at an exercise price of $1.26 per share. In lieu of this option grant, the Company cancelled a warrant to purchase 15,000 shares of common stock with an exercise price of $2.50 per share that had been previously granted in 1999 (as discussed in note 5d). The options have a three-year term and vest immediately. Based on the fair value of the options, the Company recognized compensation expense of approximately $31,700 during the nine months ended September 30, 2000 in relation to the grant of these options. The fair value of the options on the date of grant was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk free interest rate of 6.64%, volatility of 80%, and a contractual life of 3 years. 16 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) A summary of stock option activity is as follows:
Options outstanding ----------------------------------------- Weighted Number of average shares exercise price ------------- ------------------ Balance at December 31, 1998 -- $ -- Granted 316,838 1.05 --------- ----------- Balance at December 31, 1999 316,838 1.05 Granted 1,306,500 1.26 Forfeited (47,501) 1.26 --------- ----------- Balance at September 30, 2000 1,575,837 $ 1.22 ========= ===========
At September 30, 2000, 424,163 shares remain available for grant under the Company's stock option plans. Total exercisable options to purchase common shares and their weighted average exercise prices per share at December 31, 1999 and September 30, 2000 were 85,746 shares and 1,228,710 shares and $0.46 and $1.20, respectively. Additional information regarding stock options outstanding and exercisable at December 31, 1999 is as follows:
Options outstanding Options exercisable ----------------------------------------------------------- ------------------------------------- Weighted- average remaining Weighted- Weighted- Number contractual average Number average Exercise prices outstanding life (years) exercise price exercisable exercise price ----------------- --------------- ------------------ ------------------ --------------- ------------------- $ 0.35 75,000 1.50 $ 0.35 75,000 $ 0.35 1.26 241,838 4.92 1.26 10,746 1.26 -------------- ------- ---- ------ ------ ------ $ 0.35 to 1.26 316,838 4.11 $ 1.05 85,746 $ 1.47 ============== ======= ==== ======= ====== ======
(d) Stock Purchase Warrants During 1999, the Company issued warrants to purchase 150,000 shares of its common stock to an officer. The warrants are exercisable through December 1, 2004 at an exercise price of $1.26 per share and were all outstanding at September 30, 2000. 17 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) During 1999, the Company issued to the previous employer of one of its officers warrants to purchase 103,419 shares of its common stock as compensation for their loss of the officer's services. The warrants are exercisable through August 1, 2000 at an exercise price of $1.26 per share and were all outstanding at September 30, 2000. Based on the fair value of the warrants, the Company recognized compensation expense during 1999 of $43,260. The fair value of the warrants was determined using the Black- Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 6.17%, volatility of 80%, and an expected life of one year. During 1999, the Company issued warrants to purchase 15,000 shares of its common stock to a non-employee. The warrants were exercisable through October 1, 2001 at an exercise price of $2.50 per share and were all outstanding at December 31, 1999. These warrants were canceled in March 2000 and common stock options were issued in their place as discussed in note 5c. The fair value of the warrants was approximately $17,264 which was recorded as compensation expense. The fair value of the warrants was determined using the Black-Scholes pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 5.66%, volatility of 80%, and a contractual life of 2 years. A summary of common stock warrant activity is as follows: Number of Weighted- warrants to average purchase exercise common shares price --------------- ----------- Outstanding at December 31, 1998 -- $ -- Issued 268,419 1.33 --------------- ----------- Outstanding at December 31, 1999 268,419 1.33 Issued 899,508 1.26 --------------- ----------- Outstanding at September 30, 2000 1,167,927 $ 1.28 =============== =========== The weighted average remaining contractual life of common stock warrants outstanding at September 30, 2000 is 1.88 years. All of the common stock purchase warrants outstanding at September 30, 2000 are exercisable. 18 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (e) Stock Compensation Had the Company determined compensation cost of employee and officer stock options and warrants based on the fair value of the options and warrants at the date of grant as prescribed by SFAS No. 123, the Company's net loss would have been adjusted to the pro forma amounts indicated below: 1999 ---------- Net loss: As reported $ 2,794,115 Pro forma 2,926,503 On the date of grant, the per share weighted average fair values of stock options and warrants granted to employees and officers during 1999 and the nine months ended September 30, 2000 were as follows: Nine months ended September 30, 1999 2000 -------- ------------- Options granted at: Prices less than market $ 0.16 -- Prices equal to market 0.50 0.29 Prices greater than market -- -- The per share weighted average fair value of stock options and warrants granted to employees and officers during 1999 and the nine months ended September 30, 1999 on the date of grant was determined using the minimum value method with the following assumptions: expected dividend yield of 0%, risk-free interest rates ranging from 6.3% to 6.7%, and an expected life of four years. (6) Related Party Transactions The Company has an agreement with Financial Analysts Consultants, Inc. (FAC), a corporation owned by the Chairman of the Company's Board of Directors. Under the terms of this agreement, FAC is to provide the Company with various management services, including staffing of the Arizona office, rent, etc. The Company paid FAC approximately $307,000 and $222,000 for these services during 1999 and 2000, respectively. The amounts due to related parties are generally non-interest bearing, unsecured, and have no fixed terms of repayment. 19 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (7) Commitments and Contingencies (a) Operating Leases The Company currently leases office space under a noncancelable operating lease which expires in 2002 and leases which are on a month- to-month basis. As of December 31, 1999, future minimum payments under noncancelable operating leases are as follows: 2000 $ 65,700 2001 65,700 2002 60,225 ---------- Future minimum lease payments $ 191,625 ========== Rent expense totaled approximately $6,000, $58,000, $48,000 and $77,000 for 1998 and 1999 and the nine months ended September 30, 1999 and 2000, respectively. (b) Litigation In 1999, the Company was named as a defendant in two suits claiming the non-payment of software development services and license fees, wrongful distribution of software in violation of copyright laws, and that the Company solicited and hired an employee in violation of a written agreement. The Company subsequently entered into settlement agreements in connection with both of these suits. In connection with the settlements, the Company was required to pay the parties involved a total of $225,000 and issue 29,646 shares of its common stock. The Company accrued for the full settlement amount in 1999 as the services were performed by the plaintiffs in 1999. At December 31, 1999, the Company had a remaining accrual for a total of approximately $131,000 relating to the settlement of the suits representing cash payments to be made and the value of 29,646 common shares to be issued based on the fair value of the stock on the settlement date. The cash was paid and the shares were issued in full during the nine months ended September 30, 2000. 20 (Continued) JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY AND PREDECESSOR (A Development Stage Enterprise) Notes to Consolidated Financial Statements December 31, 1998 and 1999 (Information as to September 30, 2000 and the nine months ended September 30, 1999 and 2000 is unaudited) (8) Subsequent Events On December 15, 2000, the Company entered into an agreement with SAFLINK Corporation (SAFLINK) to sell all of its intellectual property and fixed assets to SAFLINK in exchange for 5,100,000 shares of SAFLINK common stock and a $1.7 million unsecured promissory note that bears interest at 7% per annum. All principal and accrued interest on the note is due December 15, 2002. 21 PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements give effect to the purchase business combination between SAFLINK Corporation ("SAFLINK" or the "Company") and Jotter Technologies Inc. and predecessor companies, Mindquake Interactive Inc. and Mindquake Interactive L.P. ("Jotter"). Under the terms of the acquisition, SAFLINK will acquire certain assets of Jotter in exchange for 5,100,000 shares of SAFLINK common stock valued at approximately $3.2 million and a $1.7 million unsecured promissory note. The note accrues interest at a rate of 7% per annum and any unpaid principal and interest are due on December 15, 2002. The acquisition will be accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Under the purchase method of accounting, the purchase price is allocated to the assets acquired based on their estimated fair values. The estimated fair values included herein are preliminary in nature and may not be indicative of the final allocation of the purchase price consideration. Such preliminary estimates of the fair values of the assets of Jotter have been combined with the recorded values of the assets and liabilities of SAFLINK in the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements are based on, and should be read in conjunction with, the historical financial statements of SAFLINK included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 22, 2000 and the historical financial statements of Jotter included herein. The unaudited pro forma condensed combined balance sheet has been prepared to reflect the purchase of Jotter as if it occurred on September 30, 2000. The unaudited pro forma condensed combined statements of operations reflect the combined results of operations of SAFLINK and Jotter as if the acquisition occurred on January 1, 1999. The unaudited pro forma condensed combined balance sheet and statements of operations are provided for illustrative purposes only and should be read in conjunction with the accompanying notes thereto, the audited financial statements and notes thereto for the year ended December 31, 1999 of SAFLINK included in its Annual Report on Form 10-K filed on March 22, 2000, the unaudited financial statements and notes thereto for the nine months ended September 30, 2000 included in SAFLINK's Quarterly Report on Form 10-Q filed on November 14, 2000 and the audited financial statements and notes thereto of Jotter included herein. The unaudited pro forma condensed combined balance sheet and statements of operations are not necessarily indicative of the operating results or financial position that would have been achieved had the purchase been consummated at the dates indicated, nor is it necessarily indicative of future operating results and financial condition. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS)
September 30, 2000 ---------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined ------------ ------------ ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 759 $ -- $ (750) (a) $ 9 Accounts receivable, net 232 -- -- 232 Inventory 16 -- -- 16 Investments 299 -- -- 299 Prepaid expenses and other current assets 537 24 (24) (b) 537 ------------ ------------ ------------- ------------- Total current assets 1,843 24 (774) 1,093 Furniture and equipment, net: 409 291 -- 700 Intangibles -- -- 5,179 (a) 5,179 Other assets 625 24 (24) (b) 625 ------------ ------------ ------------- ------------- Total assets $ 2,877 $ 339 $ 4,381 $ 7,597 ============ ============ ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,429 $ 774 $ (774) (b) 1,429 Deferred revenue 455 -- -- 455 Promissory note -- 200 (200) (b) -- ------------ ------------ ------------- ------------- Total current liabilities 1,884 974 (974) 1,884 Other long-term liabilities -- 6 (6) (b) -- Convertible notes payable -- 360 (360) (b) -- Promissory note -- -- 1,700 (a) 1,700 Stockholders' equity (deficit): Preferred stock -- 2 (2) (b) -- Common Stock 261 124 (73) (a,b) 312 Additional paid-in capital 56,419 6,395 (3,218) (a,b) 59,596 Accumulated other comprehensive income (loss) (65) 16 (16) (b) (65) Accumulated deficit (55,622) (7,538) 7,330 (a,b) (55,830) ------------ ------------ ------------- ------------- Total stockholders' equity (deficit) 993 (1,001) 4,021 4,013 ------------ ------------ ------------- ------------- Total liabilities and stockholders' equity $ 2,877 $ 339 $ 4,381 $ 7,597 ============ ============ ================ ==============
See notes to unaudited pro forma condensed combined financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1999 ------------------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined Revenues $ 1,303 $ -- $ -- $ 1,303 Cost of revenues 359 -- -- 359 --------------- ---------------- --------------- ---------------- Gross profit 944 -- -- 944 Operating expenses: Product development 1,375 1,338 -- 2,713 Sales and marketing 1,332 503 -- 1,835 Minimum royalty payment 375 -- -- 375 Amortization of intangible assets -- -- 1,726 (c) 1,726 General and administrative 1,815 954 -- 2,769 --------------- ---------------- --------------- ---------------- Total operating expenses 4,897 2,795 1,726 9,418 --------------- ---------------- --------------- ---------------- Loss from operations (3,953) (2,795) (1,726) (8,474) Interest and other income (expense) 26 (37) (119) (d) (130) --------------- ---------------- --------------- ---------------- Net loss before minority interest (3,927) (2,832) (1,845) (8,604) Minority interest in loss -- 38 -- 38 --------------- ---------------- --------------- ---------------- Net loss (3,927) (2,794) (1,845) (8,566) Preferred stock dividend 104 -- -- 104 --------------- ---------------- --------------- ---------------- Net loss attributable to common stockholders $ (4,031) $ (2,794) $ (1,845) $ (8,670) =============== ================ =============== ================ Basic and diluted loss per common share $ (0.23) $ (0.38) Weighted average number of basic and diluted common shares 17,541 22,641
See notes to unaudited pro forma condensed combined financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended September 30, 2000 ------------------------------------- SAFLINK Jotter Pro Forma Pro Forma Historical Historical Adjustments Combined Revenues $ 1,156 $ 52 $ -- $ 1,208 Cost of revenues 371 -- -- 371 --------------- ---------------- --------------- ---------------- Gross profit 785 52 -- 837 Operating expenses: Product development 3,193 811 -- 4,004 Sales and marketing 1,224 1,288 -- 2,512 Relocation 216 -- -- 216 Amortization of intangible assets -- -- 1,295 (c) 1,295 General and administrative 2,132 1,662 -- 3,794 --------------- ---------------- --------------- ---------------- Total operating expenses 6,765 3,761 1,295 11,821 --------------- ---------------- --------------- ---------------- Loss from operations (5,980) (3,709) (1,295) (10,984) Interest and other income (expense) 74 (160) (89) (d) (175) --------------- ---------------- --------------- ---------------- Net loss (5,906) (3,869) (1,384) (11,159) Preferred stock dividend 348 -- -- 348 Beneficial conversion feature -- 436 -- 436 --------------- ---------------- --------------- ---------------- Net loss attributable to common stockholders $ (6,254) $ (4,305) $ (1,384) $ (11,943) =============== ================ =============== ================ Basic and diluted loss per common share $ (0.32) $ (0.48) Weighted average number of basic and diluted common shares 19,784 24,884
See notes to unaudited pro forma condensed combined financial statements. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. PERIODS COMBINED The unaudited pro forma condensed combined balance sheet has been prepared to reflect the purchase of Jotter as if it occurred on September 30, 2000. The unaudited pro forma condensed combined statements of operations reflect the combined results of operations of SAFLINK and Jotter for the year ended December 31, 1999 and the nine months ended September 30, 2000 as if the purchase occurred on January 1, 1999. 2. BASIS OF PRESENTATION The unaudited pro forma condensed combined financial statements reflect the issuance of 5,100,000 shares of SAFLINK common stock valued at approximately $3.2 million and a $1.7 million unsecured promissory note in connection with the purchase of certain assets of Jotter. The note accrues interest at a rate of 7% per annum and any unpaid principal and interest are due on December 15, 2002. The acquisition is expected to be accounted for under the purchase method of accounting in accordance with APB Opinion No. 16. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Estimates of the fair values of the assets of Jotter have been combined with the recorded values of the assets and liabilities of SAFLINK in the unaudited pro forma condensed combined financial statements. 3. PURCHASE TRANSACTION COSTS SAFLINK expects to incur direct transaction costs of approximately $750,000 associated with the acquisition, primarily for legal, investment banking and accounting fees. These costs will be included as part of the total acquisition cost of Jotter. There can be no assurance that SAFLINK will not incur additional charges in subsequent quarters to reflect costs associated with the acquisition or that management will be successful in its efforts to integrate the operations of the two companies. 4. PRO FORMA LOSS PER COMMON SHARE The pro forma combined basic and diluted net loss per common share are based on the combined actual weighted average number of common shares of SAFLINK common stock outstanding during the periods presented plus the 5,100,000 shares of SAFLINK common stock expected to be issued in the acquisition. All stock options and warrants have been excluded from the computation of pro forma combined basic and diluted net loss per common share because all such securities are anti- dilutive for the periods presented. The following table reconciles shares used to compute historical basic and diluted net loss per share to shares used to compute pro forma basic and diluted net loss per share (rounded):
Nine months Year ended ended December 31, September 30, 1999 2000 ------------------ ------------------ Shares used to compute historical basic and diluted net loss per share 17,541 19,784 Impact of shares issued in acquisition assumed outstanding from January 1, 1999 5,100 5,100 ------------------ ------------------ Shares used to compute pro forma basic and diluted net income per share 22,641 24,884 ================== ==================
5. CONFORMING AND RECLASSIFICATION ADJUSTMENTS There were no adjustments required to conform the accounting policies or financial statement presentation of SAFLINK and Jotter. 6. PRO FORMA ADJUSTMENTS a) To allocate the purchase price, including approximately $750,000 of expected transaction costs, to certain assets of Jotter. The excess of the purchase price over the fair value of net identifiable assets acquired is reflected as goodwill and is amortized using the straight- line method over three years. The estimated fair values of assets acquired are based upon preliminary estimates and may not be indicative of the final allocation of purchase price consideration. A summary of the purchase price for the acquisition is as follows: Stock issued $ 3,228 Direct acquisition costs 750 Promissory note 1,700 ---------- Total $ 5,678 ========== Furniture and equipment $ 291 Identifiable intangible assets 5,174 Goodwill 5 In-process research and development 208 ---------- Total $ 5,678 ========== The purchase price allocation includes the purchase of in-process research and development. The immediate write-off of this item has been excluded from the pro forma results of operations as it is not expected to have a continuing impact on SAFLINK's results of operations. The purchase of in-process research and development represents a one-time charge incurred by the Company upon the acquisition of Jotter. The Company believes that the in-process technology obtained in this acquisition requires significant enhancements so that it may be successfully integrated with the existing SAFLINK products and so that it may successfully compete in the market, and has no future alternative uses. As such, $208,000 of the purchase price was recorded as in-process research and development and expensed on the date of acquisition. b) To eliminate the historical shareholders' equity, certain assets and all liability accounts of Jotter not assumed in the acquisition. c) To reflect the amortization of goodwill and other identifiable intangibles associated with the Company's acquisition of Jotter which are amortized over their useful lives of three years. d) To reflect interest expense incurred on $1.7 million unsecured promissory note associated with the Company's acquisition of Jotter, which is incurred at a 7% interest rate per annum. EXHIBIT INDEX EXHIBIT - ------- 2.1 Asset Purchase Agreement, dated as of December 15, 2000, by and between SAFLINK Corporation and Jotter Technologies Inc. 10.1 Escrow Agreement, dated as of December 15, 2000, by and among SAFLINK Corporation, Chase Manhattan Bank and Jotter Technologies Inc. 23.1 Consent of Independent Auditors' 99.1 Press Release dated December 18, 2000 EX-2.1 2 0002.txt ASSET PURCHASE AGREEMENT Exhibit 2.1 ASSET PURCHASE AGREEMENT BY AND BETWEEN SAFLINK CORPORATION AND JOTTER TECHNOLOGIES INC. DATED DECEMBER 15, 2000 THIS ASSET PURCHASE AGREEMENT ("Agreement"), dated this 15th day of December, 2000 (the "Closing Date"), is made by and between SAFLINK Corporation, a Delaware corporation ("Purchaser") and Jotter Technologies Inc., a Delaware Corporation ("Jotter"). Jotter, including any and all subsidiaries, predecessors and affiliated entities (including Mindquake Interactive, Inc., an Alberta corporation) under its control is referred to herein as "Seller", and Seller and Purchaser are collectively referred to as the "Parties," and each separately, a "Party." WITNESSETH: WHEREAS, Purchaser develops, markets and sells biometric enabled software products; and WHEREAS, Seller develops and markets toolbar utilities; and WHEREAS, Purchaser wishes to acquire, and Seller wishes to sell, certain assets of Seller on the terms and conditions specified herein; and NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto intending to be legally bound hereby agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Definitions. The terms defined in this Section 1.1 shall, for ------------------- all purposes of this Agreement, have the meanings herein specified: "Blue Sky" shall mean any applicable state securities laws and regulations. -------- "Governmental Entity" shall mean any court, administrative agency or commission ------------------- or other governmental body, authority or instrumentality and shall include securities commissions or regulatory authorities of each province or territory of Canada. "Hazardous Substances" shall mean any pollutant, contaminant, material, -------------------- substance or waste regulated, restricted or prohibited by any Legal Requirements to be hazardous, toxic, radioactive, biohazardous or otherwise a danger to health or the environment, including but not limited to "hazardous substances" as defined under the Federal Comprehensive Environmental Responsibility, Cleanup and Liability Act of 1980 or any "hazardous wastes" as defined under the Federal Resource Conservation Recovery Act of 1976. "Legal Requirements" shall mean any law, statute, constitution, principle of ------------------ common law, ordinance, code, decree, rule, regulation, guideline, by-law, direction, order, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any court or other Governmental Entity. The term "patent" shall mean any and all patents and patent applications, ------ including any divisions, substitutions, continuations, continuations-in-part, reissues, reexaminations, or extensions thereof, and all corresponding foreign patents and patent applications filed or issued in any country which are based upon or derived from such patents or patent applications. 1 "Person" or "person" shall mean any natural person, corporation, trust, limited ------ ------ liability company, partnership, Governmental Entity or other entity. "SEC" shall mean the U.S. Securities and Exchange Commission. --- "Signing Date" shall be the same as the "Closing Date", as defined in the ------------ Recitals. "Subsidiary" of a specified entity means a corporation whose voting securities ---------- are owned directly or indirectly by the specified entity in such amounts as are sufficient to elect at least a majority of the Board of Directors. The terms "contract" and "obligation" include every contract, agreement, commitment, understanding and promise, whether written or oral. 1.2. Other Definitions. In addition to the terms defined in Section 1.1, ----------------- certain other terms are defined elsewhere in this Agreement, and, whenever such terms are used in this Agreement, they shall have their respective defined meanings, unless the context expressly or by necessary implication otherwise requires. ARTICLE II PURCHASE AND SALE OF ASSETS 2.1. Assets Being Sold. Upon the terms and subject to the conditions set ----------------- forth in this Agreement, Seller shall sell, assign, and transfer to Purchaser, and Purchaser shall purchase and accept the assignment, transfer and delivery from Seller of, all of the right, title and interest of Seller in and to the assets, properties, and rights of Seller used in or relating to the operation of the business of Seller as heretofore conducted (the "Business") and which are identified in Schedule 4.4 as well as all rights of Seller in and to the Proprietary Rights as such term is hereinafter defined, all as the same shall exist on the Closing Date (such assets collectively referred to herein as the "Assets"), other than those assets identified on Schedule 2.3 (the "Excluded Assets"). 2.2. Disclaimed Liabilities. Except for obligations of Seller under ---------------------- contracts specifically agreed by Purchaser to be assigned by Seller to Purchaser, and arising after the Closing Date, Purchaser shall assume no liabilities or obligations of Seller and hereby disclaims the assumption of any debts or obligations, contractual or otherwise, known or unknown, contingent or inchoate liabilities ("the Liabilities") of Seller. 2.3. Excluded Assets. The parties agree that the Assets shall specifically --------------- not include the Excluded Assets set forth on Schedule 2.3, all of the Seller' right, title and interest in and to which, as the same exist as of the date hereof or as of the Closing Date, shall be retained by Seller. Purchaser shall not assume and shall exclude from the Assets purchased any cash, accounts receivable, prepaid expenses, deposits, and customer lists as of the Closing Date, and any other assets listed as Excluded Assets. As a further point of clarification and not in limitation of the foregoing, the parties agree that Purchaser is purchasing only assets and not capital stock, partnership interests or other equity or ownership interests or intercompany notes receivable or payable held by any party hereto other than listed on Schedule 4.4. 2.4. Non-delivered Assets. Notwithstanding anything else contained in this -------------------- Agreement, in the event that an Asset is not delivered by Seller to Purchaser on the Closing Date 2 (a "Non-delivered Asset"), Seller shall deliver such Asset to Purchaser as soon as Seller has actual knowledge of the existence of such Non-delivered Asset. 2.5. Assignment. Notwithstanding anything contained in this Agreement to ----------- the contrary, this Agreement shall not constitute an agreement to assign any of the Assets, if the attempted assignment of the same, as a result of the absence of the consent or authorization of a third party, would constitute a breach or default under any lease, agreement, encumbrance or commitment or would in any way adversely affect the rights, or increase the obligations, of any party or any subsidiary with respect thereto or would otherwise affect the ability of Purchaser to receive the benefit of the Assets. If any such consent or authorization is not obtained, or if an attempted assignment would be ineffective or would adversely affect the rights or benefits or increase the obligations of Purchaser with respect to any such Assets, then the Parties shall enter into such reasonable cooperative arrangements (including without limitation, sublease, agency, partial closing, management, indemnity or payment arrangements and enforcement at the cost and for the benefit of Purchaser of any and all rights of Seller against an involved third party) to provide for Purchaser the benefit of such Assets. Any transfer or assignment to Purchaser by Seller or a subsidiary of Seller, of any such Assets which shall require such consent or authorization of a third party that is not obtained, shall be made subject to such consent or authorization being obtained. 2.6. Bill of Sale. The sale, conveyance, assignment, transfer and delivery ------------- of the Assets will be effected by delivery by Seller to Purchaser of (i) a bill of sale from Seller ("Bill of Sale"), in the form of Exhibit 2.6, and (ii) such other good and sufficient instruments of conveyance, transfer and assignment (together with the Bill of Sale, the "Instruments of Transfer") as shall be necessary to vest in Purchaser full right, title and interest in and to the Assets and Proprietary Rights, free and clear of all claims and liens whether absolute, accrued, contingent or otherwise. ARTICLE III PURCHASE PRICE AND PAYMENT 3.1 Purchase Price. In consideration of the sale, transfer, conveyance, -------------- and assignment of the Assets by Seller at the Closing and in reliance upon the representations, warranties, and covenants made herein by Seller, Purchaser agrees to pay to Seller consideration (the "Consideration") consisting of the following: (a) Five million one hundred thousand (5,100,000) shares (the "Shares") of common stock, par value $0.01 per share, of Purchaser (the "Common Stock"); and (b) An unsecured promissory note in the principal amount of one million seven hundred thousand dollars (US$1,700,000) with a term of two (2) years (the "Note Term"), in the form of Exhibit 3.1(b) (the "Promissory Note") which shall be delivered by Purchaser to Jotter on the Closing Date. 3.2. Allocation. The Consideration to be paid by Purchaser to Seller ---------- pursuant to Section 3.1 hereof, shall be allocated among the Assets in the manner provided for in Section 8.1 of this Agreement. 3 3.3. Escrow. Subject to the provisions of Section 7.3, all of the Shares ------ shall be issued to the escrow agent (the "Escrow Agent") designated by and under the terms of an escrow agreement substantially in the form attached hereto as Exhibit 3.3 (the "Escrow Agreement"). The Shares shall be delivered by Purchaser to the Escrow Agent within forty five (45) days of the Closing Date. Subject to the provisions of Sections 6.4 and 7.3, such Shares delivered to the Escrow Agent shall be delivered to Jotter as follows: (i) three hundred and fifty thousand (350,000) Shares ninety (90) days after the Closing Date (the "First Release Date"), and (ii) at a rate of two hundred and fifty thousand (250,000) Shares per month after the First Release Date, under the conditions provided in the Escrow Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER All representations and warranties contained herein shall survive the Closing Date and none shall merge into any other document. As of the Closing Date, Seller hereby represents and warrants to Purchaser the following: 4.1. Corporate Standing. Seller is duly organized, validly existing, and ------------------ in good standing under the laws of the state or jurisdiction of its incorporation. Seller has all requisite power and authority to own, lease and operate its properties and to carry on its Business as now being conducted. Seller is duly qualified as a foreign corporation to transact business, and is in good standing in, each jurisdiction in which the nature of Seller's activities make such qualification necessary, except where the failure to so qualify would not have a material adverse effect on Seller or any of its Business. 4.2. Authority. Seller has all requisite corporate power and authority to --------- enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller and approved by a majority of the shareholders of Seller in accordance with its constituent documents and applicable law. This Agreement has been duly executed and delivered by Seller, and constitutes a valid and binding obligation of Seller, enforceable in accordance with its terms subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity). The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby do not conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, any provision of the certificate of incorporation or bylaws or other constituent documents of Seller. Without limiting the generality of the foregoing, no consent, waiver, approval, order or authorization of, or registration, declaration or filing (each a "Consent") by any Person is required by or with respect to Seller in connection with the execution and delivery of this Agreement by Seller or the consummation by Seller of the transactions contemplated. 4.3. Financial Statements. In order to enable Purchaser to comply with its -------------------- reporting obligations under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), Seller has furnished to Purchaser its audited consolidated balance sheets as of December 31, 1999 and 1998, and its audited consolidated statements of operations, stockholders' equity and cash flows for the fiscal year ended December 31, 1999 and for the period from June 1, 1998 (inception) to 4 December 31, 1998, and its unaudited statements of operations, stockholders' equity and cash flows for the nine (9) months ended September 30, 2000. The balance sheet at September 30, 2000 is hereinafter referred to as the "Seller Balance Sheet," and all such financial statements are hereinafter referred to collectively as the "Seller Financial Statements." Except as set forth in Schedule 4.3, the Seller Financial Statements are complete and accurate in all material respects, have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved, are in accordance with Seller's books and records, and fairly present or will fairly present the financial position of Seller and the results of its operations as of the date and for the periods indicated thereon, subject in the case of the unaudited portion of the Seller Financial Statements to normal year-end audit adjustments which will not be material individually and in the aggregate. 4.4. Assets. ------ (a) The Assets comprise all of the assets, properties, and rights of every type and description, real, personal, and mixed used in the Business. Except as set forth in Schedule 4.4(a), Jotter has good and marketable title to all of the Assets (except for those Proprietary Rights, for which Seller has valid and enforceable licenses), free and clear of all mortgages, options, leases, covenants, conditions, agreements, liens, security interests, adverse claims, restrictions, charges, encumbrances or rights of others. There exists no restriction on the use or transfer of any of the Assets. Schedule 4.4 includes, among other things: (i) all furniture, fixtures, telecommunications and other equipment and other fixed assets of Seller located at the Leased Premises (as hereinafter defined); (ii) all hardware and software and all databases and database systems used by Seller, whether owned, leased, or licensed by Seller; (iii) all domain names and rights to their use as held by Seller; (iv) all trademarks, trademark applications, or service marks, including any existing or pending registrations or applications for registration therefor of Seller; (v) all patents and applications for patents of Seller; (vi) all copyrights owned by Seller and all rights of Seller under any copyright laws, together with any copyright registrations and applications for registration therefor; (vii) all contracts, leases, licenses, agreements, or commitments (oral or written) of Seller, whether fully performed or wholly or partially executory on the Closing Date relating to any Proprietary Rights used by Seller in the Business; (viii) all permits of Seller relating to the operations of Seller in Canada; (ix) all leasehold improvements relating to the leased property defined as the leasehold of Seller at 9119 82/nd/ Avenue, Suite 300, Edmonton, Alberta (the "Leased Premises"); 5 (x) all supplies and inventory of Seller, whether in possession of Seller, or a third party; (xi) all of the goodwill and going concern value of Seller; and (xii) all telephone numbers of Seller. (b) Except as set forth in Schedule 4.4 attached hereto, the Assets are in good operating condition and repair, ordinary wear and tear excepted, and are satisfactory for the purposes for which such assets are being used in the Business. Seller does not own, nor has it since the date of its formation owned, or have any interest in real estate, other than its leasehold interest in the Leased Premises. All contracts, whether written or oral, to be assigned to Purchaser are in good standing and in full force and effect and there has been and there is no default thereunder by any party thereto. None of the parties to such contracts other than the Seller have given Seller any reason to believe that it intends to change its business relations with Seller or the Business in any material adverse manner. To the knowledge of Seller, the operations of Seller at the Leased Premises do not violate any applicable material building code, zoning requirement or classification, or pollution control ordinance or statute relating to the property or to such operations, and such non-violation is not dependent, in any instance, on so-called non-conforming use exemptions. (c) To the knowledge of Seller, there are no Hazardous Substances in the Environment at, in, on, under or around the Leased Premises. Seller has not disposed of, handled, stored, transported or used any Hazardous Substances on or about such property except in full compliance with all Legal Requirements. Seller has not disposed of, handled, stored, transported or used any materials at any site being investigated or remediated for contamination or possible contamination of the Environment. Seller and its predecessor entities have conducted its business in accordance with all Legal Requirements relating to Hazardous Substances. To the best of Seller's knowledge, there has been no release of Hazardous Substances at, in, on, under or around the Leased Property. For the purposes of this paragraph, "Environment" shall mean the air, land, water, plant, animal and human life, safety and health and ecological systems and any part or combination of the foregoing. 4.5. Taxes. Seller has prepared in good faith and duly and timely filed ----- (taking into account any extensions of time within which to file), or will prepare and file within thirty (30) days of Closing, all Tax Returns required to be filed by it and each member of its affiliated group, and all such Filed Tax Returns are or will be true, complete and accurate. Seller has paid all Taxes that are shown as due on such filed Tax Returns, or that is required to be withheld from amounts owing to any employee, creditor or third party, other than those unpaid Taxes listed on Schedule 4.5 attached hereto. Seller has collected all Taxes required to be collected and has remitted such Taxes to the proper authorities as required. No notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of Seller or its Subsidiaries in respect of the Assets which have not been fully paid or finally settled. Neither Seller nor any of the Assets are subject to any lien for Taxes. As used in this Agreement: (i) the term "Tax" (including, with correlative meaning, the term "Taxes") includes all federal, state, provincial, local, municipal and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, capital, large corporation, severance, stamp, payroll, sales, employment, unemployment, Canada Pension, Alberta Pension, health, workers compensation, disability, use, transfer, property, withholding, excise, production, value added, goods and services, occupancy and other taxes, duties, imposts or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect to 6 such amounts and any interest in respect of such penalties and additions and any such Tax required to be collected or remitted to any Governmental Entity and any penalties for failing to collect or remit such Tax; and (ii) the term "Tax Return" includes all returns and reports (including elections, declarations, disclosures, schedules, estimates, filings, declarations, statements, and information returns) required to be supplied to any Governmental Entity relating to Taxes. 4.6. Year 2000 Compliance. All computer software and hardware products -------------------- that are licensed, sold or otherwise distributed to others by Seller and, to Seller's knowledge, all computer software and hardware products that are owned by Seller, exclusively licensed to Seller or are otherwise required for the conduct of its Business, are Year 2000 Compliant. As used herein, "Year 2000 Compliant" shall mean, with respect to any such software or hardware, the ability of such software or hardware to perform the following date-related functions: (a) consistently handle date information before, during and after January 1, 2000, including, but not limited to, accepting date input, providing date output and performing calculations on dates or portions of dates; (b) function accurately in accordance with the documentation relating to the applicable software or hardware and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the century; (c) respond to two-digit date input in a way that resolves any ambiguity as to the century; (d) store and provide output of date information in ways that are unambiguous as to century; and (e) recognize the year 2000 as a leap year. 4.7. Proprietary Rights. ------------------ (a) Schedule 4.7 (the "Intellectual Property Disclosure Schedule") sets forth in paragraph (a) thereof a complete and accurate list of all patents, patent applications, copyrights, trademarks, trade names, service marks and logos owned or used by Seller or in which it has any rights or licenses, and all applications therefor and registrations and registration applications thereof, which shall be transferred to Purchaser as an Asset. Such list specifies, as applicable: (i) the title of the patent, trademark, trade name, service mark, copyright or application therefor or registration thereof; (ii) the jurisdiction by or in which such patent, trademark, trade name, service mark or copyright has been issued or registered or in which an application has been filed, including the registration or application numbers; and (iii) material licenses, sublicenses and similar agreements to which Seller is a party or pursuant to which any other party is authorized to use, exercise or receive any benefit from any Proprietary Rights of Seller. The Intellectual Property Disclosure Schedule sets forth a complete and accurate description of all agreements of Seller with each officer, employee, shareholder, director, contractor or consultant of Seller providing Seller with title and ownership to patents, patent applications, trade secrets and inventions developed or used by Seller in its Business, all of which agreements are valid, enforceable and legally binding (subject to the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies). (b) Seller owns or possesses valid and enforceable licenses or other rights to use all computer software and hardware, source code, patents, patent applications, trademarks, 7 trademark applications, trade secrets, service marks, trade names, logos, trade dress, copyrights, inventions, business and marketing plans, industrial property rights, copyrights, trademarks, trade names, logos and service marks (and all goodwill associated therewith, including, without limitation, the right to the names "Jotter" and "Jotter Technologies"), and applications therefor, and all technical information, customer lists, management information systems, drawings, designs, processes and quality control data and all similar materials recording or evidencing proprietary expertise or information, or other rights with respect thereto (collectively referred to as "Proprietary Rights"), used or currently proposed to be used in the Business, and the same are sufficient to conduct the Business as it has been and is now being conducted or as it is currently proposed to be conducted, and shall be transferred to the Purchaser pursuant to this Agreement as an Asset. Except as set forth in paragraph (b) of the Intellectual Property Disclosure Schedule, Seller is the owner of all right, title, and interest in and to each of the Proprietary Rights, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use, sell, license, sublicense, assign and dispose, in each case without payment to a third party, all of the Proprietary Rights and the products, processes and materials covered thereby. Except as set forth in paragraph (b) of the Intellectual Property Disclosure Schedule, there is no contract with Seller pursuant to which any Person has any right (whether or not currently exercisable) to use, license or otherwise exploit any Proprietary Right. (c) The operations of Seller as currently and formerly conducted and as planned to be conducted do not conflict with or infringe, and, to the knowledge of Seller, no person or entity has asserted that such operations or past operations conflict with or infringe, any Proprietary Rights, owned, possessed or used by any third party. There are no claims, disputes, actions, proceedings, suits or appeals pending against Seller or any affiliate of Seller with respect to any Proprietary Rights, and, to the knowledge of Seller, none has been threatened against Seller or any affiliate of Seller. There are no facts or facts overtly alleged to Seller which would reasonably serve as a basis for any claim that Seller does not have the right to use and to transfer the right to use, free of any rights or claims of others, all Proprietary Rights utilized in the development, manufacture, use, sale or other disposition of any or all products or services presently being used, furnished or sold in the conduct of the Business of the Seller as it has been or is now being conducted. The Proprietary Rights referred to in the preceding sentence are free of any unresolved ownership disputes with respect to any third party and there is no unauthorized use, infringement or misappropriation of any of such Proprietary Rights by any third party, including any employee or former employee of Seller or its Subsidiaries, nor is there any breach of any license, sublicense or other agreement authorizing another party to use such Proprietary Rights. Neither Seller nor any of its Subsidiaries has entered into any agreement (i) granting any third party the right to bring infringement actions with respect to, otherwise to enforce rights with respect to, any such Proprietary Rights, or (ii) agreeing to indemnify anyone or any entity for or against any interference, infringement, misappropriation or other conflict with respect to any Proprietary Right. (d) Paragraph (d) of the Intellectual Property Disclosure Schedule contains a complete and accurate list of any proceedings before any patent or trademark authority to which Seller is a party, a description of the subject matter of each proceeding, and the current status of each proceeding, including, without limitation, interferences, priority contests, opposition, and protests. Such list includes any pending applications for reissue or reexamination of a patent. Seller has the exclusive right to file, prosecute and maintain any such applications for patents, copyrights or trademarks and the patents and registrations that issue therefrom. (e) All patents and registered trademarks, service marks, and other company, product or service identifiers and registered copyrights held by Seller are valid and enforceable, 8 are currently in compliance with formal legal requirements and are not subject to any maintenance or renewal fees or taxes or actions falling due within ninety (90) days after the Closing Date. (f) Except as set forth in paragraph (f) of the Intellectual Property Disclosure Schedule, all fees to maintain the rights of Seller in the Proprietary Rights, including, without limitation, patent and trademark registration and prosecution fees and all professional fees in connection therewith, which have been presented for payment, have been paid by Seller or will be paid by Seller before the Closing Date. (g) Except as set forth in paragraph (g) of the Intellectual Property Disclosure Schedule, all disclosures of trade secrets of Seller to third parties have been pursuant to non-disclosure agreements pursuant to which the confidentiality and use of such information has been protected. Seller has taken reasonable measures and precautions to maintain the secrecy and confidentiality of the Proprietary Rights used or proposed to be used in the conduct of the Business, the value of which to Seller is contingent upon maintenance of the confidentiality thereof. (h) Seller has secured valid and binding written assignments from all persons who, in any capacity (including current and former consultants, independent contractors, directors, officers and employees) contributed to the creation or development of Seller's Proprietary Rights of all right, title and interest to such contributions that Seller or its Subsidiaries do not already own by operation of law. No current or former employee, officer, director, shareholder, consultant or independent contractor of or to Seller has any right, claim or interest in or with respect to any Proprietary Right. (i) Except as set forth in paragraph (g) of the Intellectual Property Disclosure Schedule, each current and former employee and officer of and consultant and independent contractor to Seller has executed a written confidentiality agreement and a written assignment of inventions agreement that assigns to Seller all rights to any inventions, improvements, discoveries, or information relating to the Business conducted or to be conducted by Seller, and all such agreements are in the forms provided to Purchaser with no exceptions or exclusions. To the knowledge of Seller, no employee, consultant or contractor of Seller is in violation of any term of any employment contract, proprietary information agreement, inventions agreement, non-competition agreement, consulting agreement, or any other contract or agreement relating to the relationship of any such employee with Seller or any previous or affiliated employer. To the knowledge of Seller, no employee of Seller has entered into any contract that restricts or limits in any way the scope or type of work in which the employee may be engaged to anyone other than Seller or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than Seller. (j) No internally developed product, system, program or software module designed, developed, sold, licensed or otherwise made available by Seller to any person, and to the knowledge of Seller, no third-party product, system, program or software module sold, licensed or otherwise made available by Seller to any person, contains any "back door," "time bomb," "Trojan horse," "worm," "drop dead device," "virus" or other software routine or hardware component designed to permit unauthorized access or to disable or erase software, hardware or data without the consent of the user. (k) Except as set forth in paragraph (k) of the Intellectual Property Disclosure Schedule, Seller has not disclosed or delivered to any Person, or permitted the disclosure or delivery to any escrow agent or other Person, of any Seller Source Code. No event 9 has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, result in the disclosure or delivery to any Person of any Seller Source Code. Paragraph (k) of the Intellectual Property Disclosure Schedule identifies each contract pursuant to which Seller has deposited or is required to deposit with an escrow holder or any other Person any Seller Source Code, and further describes whether the execution of this Agreement or the consummation of any of the transactions contemplated hereby could reasonably be expected to result in the release or disclosure of any Seller Source Code. "Seller Source Code" means any source code, or portion, aspect or segment of any source code, relating to any Proprietary Right owned by or licensed to Seller or otherwise used by Seller. 4.8. Information Provided By Seller. Any information furnished by or on ------------------------------ behalf of Seller to Purchaser in writing pursuant to this Agreement as of the date such information is required by this Agreement to be so furnished, and any information contained in the Schedules referred to in this Agreement, does not not contain any untrue statement of a material fact and does not omit to state any material fact necessary to make any statement, in light of the circumstances under which such statement is made, not misleading. 4.9. Investment Experience. Seller has received and read, and is familiar --------------------- with all documents provided to Seller from Purchaser, including the Purchaser SEC Documents (as defined hereinafter). Seller acknowledges that Seller has had an opportunity to ask questions of and receive answers from Purchaser's officers and representatives concerning the affairs of Purchaser. Seller is familiar with the nature of and risks attending investments in securities of technology companies and has determined that Seller can bear the economic risk associated with ownership of the Shares and can afford a complete loss in the value of such Shares. Seller, by itself or together with its purchaser representative, has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risk of its investment in the Shares, received as part of the Consideration. Seller also represents that it has not been organized for the purpose of acquiring the Shares. 4.10. Ownership of the Shares for Investment Purposes. Seller is taking ----------------------------------------------- ownership of the Shares for investment purposes only and for its own account, and not as a nominee or agent, and not with a view to, or for sale in connection with, the distribution of any part thereof. Seller has no present intention of selling, granting any participation in, or otherwise distributing the Shares except pursuant to an effective Registration Statement and in accordance with Section 7.8 and the Securities Act (defined below) and as permitted by the Escrow Agreement. 4.11. Accredited Investor. Seller is an "accredited investor" as defined in ------------------- Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). 4.12. Restricted Securities. Seller understands that the Shares are --------------------- "restricted securities" under the federal securities laws in as much as they are being acquired in a transaction not involving a public offering and that such Shares may be resold without registration under the Securities Act, only in certain limited circumstances. Seller acknowledges that the certificates evidencing the Shares shall bear a legend reflecting such restrictions, as described in Section 10.4 of this Agreement. 4.13. Residency. Jotter is a non-resident of Canada for the purposes of the --------- Income Tax Act (Canada) ("ITA"). 10 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER 5.1. Organization. Purchaser is a corporation duly incorporated, validly ------------ existing and in good standing under the laws of the State of Delaware. Purchaser is duly qualified to do business and is in good standing in the State of Delaware and in each of the other jurisdictions in which it owns or leases property or conducts business, except where the failure to be so qualified would not have a material adverse effect on the business of Purchaser. Purchaser has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and possesses all licenses, franchises, rights and privileges material to the conduct of its business. 5.2. Authority. Purchaser has all requisite corporate power and authority --------- to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has been duly executed and delivered by Purchaser, and constitutes a valid and binding obligation of Purchaser, enforceable in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity). The execution and delivery of this Agreement, and the consummation of the transactions contemplated, hereby do not conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under any provision of the certificate of incorporation or bylaws of Purchaser. Without limiting the generality of the foregoing, no Consent of any Person is required by or with respect to Purchaser in connection with the execution and delivery of this Agreement by Purchaser or the consummation by Purchaser of the transactions contemplated. 5.3. Capital Structure. The authorized capital stock of Purchaser consists ----------------- of 50,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, $0.01 par value ("Purchaser Preferred Stock"). At the close of business on September 30, 2000: (i) 26,076,680, shares of Common Stock were issued and outstanding; (ii) 3,250,717 shares of Common Stock were reserved for issuance upon exercise of options (the "Purchaser Options") under Purchaser's Stock Incentive Plan, of which options to purchase 2,465,980 shares were outstanding; (iii) 414,248 shares of Common Stock were reserved for issuance upon exercise of options outside of Purchaser's Stock Incentive Plan; and (iv) 908,604 shares were reserved for issuance upon exercise of warrants ("Purchaser Warrants"). 5.4. SEC Documents. Purchaser has made available to Seller a true and ------------- complete copy of Purchaser's Form 10-K for the year ended December 31, 1999 and any other statement, report, registration statement or definitive proxy statement filed by Purchaser with the SEC since January 1, 2000 to the Closing Date (the "Purchaser SEC Documents"). As of their respective filing dates, the Purchaser SEC Documents comply or will comply in all material respects with the requirements of the Exchange Act or the Securities Act, and none of the Purchaser SEC Documents contain or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except to the 11 extent corrected by a subsequently filed Purchaser SEC Document. Without limiting the foregoing, each of the consolidated balance sheets included in or incorporated by reference into the Purchaser SEC Documents fairly presented the consolidated financial position of Purchaser and its subsidiaries as of its date and each of the consolidated statements of operations, stockholders' equity and cash flows included in or incorporated by reference into the Purchaser SEC Documents fairly presented the results of operations, stockholders' equity and cash flows of Purchaser and its subsidiaries for the period set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which would not be material and the absence of certain footnote disclosures), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved. 5.5. No Conflict. The execution and delivery of this Agreement by ----------- Purchaser and the performance of its obligations hereunder or thereunder, (i) are not in violation or breach of, and will not conflict with or constitute a default under, any of the terms of the certificate of incorporation or bylaws of Purchaser, or any contract, agreement or commitment binding upon Purchaser or any of its assets or properties, other than violations, breaches, conflicts, or defaults which individually or in the aggregate would not have a material adverse effect on Purchaser; (ii) will not result in the creation or imposition of any lien, encumbrance, equity or restriction in favor of any third party upon any of the assets or properties of Purchaser; and (iii) will not to the actual knowledge of Purchaser conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over Purchaser or any of its assets or properties. 5.6. Shares of Common Stock. The Shares will, when issued and delivered to ---------------------- Seller in accordance with this Agreement, be duly authorized, validly issued, fully paid and nonassessable. 5.7. Information Provided. Purchaser has received and read, and is -------------------- familiar with all documents provided to Purchaser from Seller. Purchaser acknowledges that Purchaser has had an opportunity to ask questions of and receive answers from Seller's officers and representatives concerning the affairs of Seller. 5.8. False and Misleading Statements. None of the written information ------------------------------- furnished by Purchaser to Seller in connection with the transaction contemplated by this Agreement is false or misleading in any material respect or contains any misstatement of material fact, or omits to state any material facts required to be stated in order to make the statements therein not false or misleading in light of the circumstances in which they were made. ARTICLE VI CLOSING DATE DELIVERIES 6.1. Deliveries by Seller. At the Closing, Seller shall deliver to -------------------- Purchaser the following: (a) Certificate signed by the President of Seller to the effect that each of the representations and warranties made by the Seller hereunder is true and correct as of the Closing Date (or, if any such representation or warranty is untrue or incorrect, specifying the respect in which it is untrue or incorrect); 12 (b) A copy of resolutions adopted by the Board of Directors and the controlling shareholders of Seller, certified by its Secretary, authorizing or ratifying the execution and delivery of this Agreement, and the performance by Seller of its obligations hereunder and thereunder; (c) An opinion of Normand & Shaughnessy, PA, counsel for Seller, addressed to Purchaser in substantially the form attached hereto as Exhibit 6.1(c); (d) The Bill of Sale for use in the United States and Canada in substantially the form attached hereto as Exhibit 2.6, executed by Seller; (e) Any other Instruments of Transfer necessary to effect the transfer or assignment of the Assets and Proprietary Rights to Purchaser, as reasonably requested by Purchaser, executed by Seller; (f) All necessary consents, approvals, and subject to Section 7.3, clearance certificates of third parties including any Governmental Entity. (g) The Non-Compete Agreements in substantially the form attached hereto as Exhibit 6.1(g), executed by the Seller and each of its affiliates. 6.2. Deliveries by Purchaser. At the Closing, Purchaser shall deliver to ----------------------- Seller or the Escrow Agent, as applicable: (a) The Promissory Note; and (b) A certificate signed by the President of Purchaser, certifying that each of the representations and warranties made by Purchaser hereunder is true and correct as of the Closing Date (or, if any such representation or warranty is untrue or incorrect, specifying the respect in which it is untrue or incorrect). 6.3. Closing. Subject to the provisions of Section 6.1, the actual ------- consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on the Closing Date, which as defined in the Recitals, shall be on the date of signing this Agreement, at such place as may be mutually agreed upon in writing by Seller and Purchaser. 6.4. Rescission. If Seller fails to deliver the requisite certificate ---------- pursuant to Section 7.3 or if Purchaser is required to deduct, withhold or pay any amount under any other provisions of applicable Tax Legal Requirements (as defined below) pursuant to Section 7.3, Purchaser shall have the right to rescind this Agreement. If Purchaser exercises its right of rescission, (i) this Agreement shall be deemed null and void as of the Closing Date and the Instruments of Transfer shall have no force or effect, (ii) Seller shall return Promissory Note for cancellation and Purchaser will have no further liability to Seller, and (iii) the Purchaser shall cause the Escrow Agent to deliver to Purchaser all Shares held in escrow pursuant the Escrow Agreement Upon receipt of all the Shares held in escrow and the Promissory Note, Purchaser shall undertake to transfer and deliver to Jotter the Assets. 13 ARTICLE VII ADDITIONAL AGREEMENTS 7.1. Employees. On or after the Closing Date, Purchaser shall make offers --------- of employment to substantially all of the full-time employees of Seller (the "Employee"), other than employees identified by Purchaser as set forth on Schedule 7.1(a). Consistent with Purchaser's employee benefit plans, all of Seller's employees who become employees of Purchaser following the Closing Date shall receive, for the period of their employment with the Purchaser, benefits that are generally made available to Purchaser's employees and, to the extent not prohibited by law, shall receive service credit (other than for benefit accrual under a defined benefit pension plan) that includes their employment by Seller prior to the Closing Date, and Purchaser shall assume any obligations to pay accrued vacation for the Employees to the extent set forth on Schedule 7.1(b). Any such employment of such former employees of Seller shall not limit any right of Purchaser to terminate any employee with or without cause following the Closing Date. Seller agrees to reimburse any employee who is hired by Purchaser, and to hold Purchaser harmless, for any accrued vacation or overtime payroll balance relating to such employee's employment with Seller through the Closing Date. 7.2. Canadian Goods & Services Tax Election. Purchaser and Seller shall -------------------------------------- jointly make the election provided for under section 167 of the ETA so that no Goods and Services Tax ("GST") will be payable in respect of the sale and transfer of the Assets. In this regard: (a) Purchaser warrants to Seller that Purchaser will be registered for purposes of Part IX of the Excise Tax Act ("ETA") and that Purchaser's GST registration number is 889216016RT0001; (b) Seller represents and warrants to Purchaser that Seller is registered for purposes of Part IX of the ETA and that Seller's GST registration number is 873100929RT0001; and (c) Seller represents and warrants to Purchaser that the Assets constitute a business or part of a business that was established or carried on by Seller and that Seller is providing to Purchaser all or substantially all of the property that can reasonably be regarded as being necessary for Purchaser to be capable of carrying on the business or part of a business. (d) Purchaser shall file the election with the Canada Customs & Revenue Agency not later than the day on or before which the return under Division V of Part IX of the ETA is required to be filed for Purchaser's first reporting period in which GST would, but for the election, have become payable in respect of the supply of any property or service made under this Agreement. 7.3. Certificate Pursuant to Section 116 of the Income Tax Act (Canada). ----------------------------------------------------------------- (a) Within thirty (30) days of the Closing Date, Jotter shall deliver to the Purchaser a certificate issued pursuant to Subsection 116(2) of the ITA, with respect to such of the Assets of Jotter as constitute "Taxable Canadian Property", as that term is defined in the ITA. Each such certificate shall have as the "certificate limit" as defined in Subsection 116(2) of the ITA, an amount no less than the cost to the Purchaser of such Taxable Canadian Property. 14 (b) In the event that Jotter fails to deliver the requisite certificate or if the Purchaser is required to deduct or withhold any amount under any other provision of applicable Tax Legal Requirements, the Purchaser shall be entitled to deduct and withhold from the Consideration such amounts as the Purchaser deems necessary to meet its obligations pursuant to section 116 of the ITA or any other provision of applicable Tax Legal Requirements (including interest and penalties payable in respect of such obligations), provided that such withheld amount shall not be remitted prior to two (2) business days prior to the date such amount is required by applicable Legal Requirements to be remitted (the "Remittance Date") and where such certificate or a certificate issued pursuant to Subsection 116(4), satisfactory to the Purchaser, is delivered prior to such Remittance Date, such withheld amount shall be released to Seller or the Escrow Agent in accordance with Section 3.3 except to the extent that amounts were withheld or deducted pursuant to another provision of applicable Tax Legal Requirements. To the extent that amounts are so withheld or deducted, such withheld or deducted amounts shall be treated for all purposes hereof as having been paid to the Seller as consideration for the Assets in accordance with this Agreement. The Purchaser, as agent for the Seller, is hereby authorized, in its sole discretion, to sell or otherwise dispose of the Consideration, or mortgage, pledge, assign or otherwise use the Consideration as security for the purpose of borrowing funds or establishing credit, or itself take title to the Consideration to provide sufficient funds to enable it to comply with its obligations under section 116 of the ITA or other provision of applicable Legal Requirements. If the Purchaser is unable to borrow sufficient funds as agent for the Seller or if the proceeds of such sale are insufficient to fund the required withholding, the Seller shall forthwith pay to the Purchaser the deficiency. The Seller shall bear all costs and expenses associated with any sale or borrowing by the Purchaser pursuant to the provisions of this Section 7.3. (c) In the event that Purchaser elects to deduct or withhold from the Consideration such amounts as Purchaser deems necessary to meet its obligations pursuant to Section 7.3(b), (i) Purchaser shall cause the Escrow Agent to deliver to Purchaser the Shares to be deducted or withheld from the Consideration, and (ii) Jotter shall return the Promissory Note to Purchaser for the issuance of a new promissory note reflecting the new principal balance upon the receipt of a written request from Purchaser. 7.4. Lease. Promptly following the Closing Date, Purchaser shall undertake ----- to negotiate the terms of a lease or sublease agreement with the owner of the Leased Premises or such owner's agent for the purpose of obtaining the right to use the Leased Premises on substantially the same economic terms as currently enjoyed by Seller. Seller agrees to use its best efforts to assist Purchaser in such negotiations and further agrees to waive any right to receive notice of termination of the current lease relating to the Leased Premises and to promptly vacate such property upon receipt of a written notice to quit or notice of termination either from Purchaser or the landlord of the Leased Premises. Seller further agrees to permit Purchaser to utilize the Leased Premises on a temporary basis pending execution of a lease or sublease agreement relating to the Leased Premises. The Consideration shall be deemed full consideration for such temporary use of the Leased Premises which in no event will exceed sixty (60) days. 7.5. Name Change. Promptly following the Closing Date, Seller shall take ----------- such action as shall be necessary to change its corporate name and any business names or trade names or marks utilized by it to exclude any reference to Jotter or any derivative thereof. Seller shall likewise discontinue any use of the name "Jotter" or any derivation thereof on any publication, forms, advertisements, websites, signs, business cards or other stationery within ten (10) days of the Closing Date. 15 7.6. Non-Compete. Seller agrees that until the later to occur of twenty- ----------- four (24) months after the Closing Date, neither Seller nor its affiliates will directly or indirectly engage in any business that relates to toolbar and internet utility applications and/or products or services utilizing biometrics. 7.7. Board Representation. Following the Closing Date, Purchaser shall -------------------- increase the size of its Board of Directors by two and will have Glenn Argenbright and Robert Smibert named to fill such vacancies. 7.8. Registration Rights. ------------------- (a) Following the Closing Date, Purchaser shall use commercially reasonable efforts to register the Shares under the Securities Act by filing with the SEC a Form S-3 registration statement relating to the public sale or transfer of the Shares in market transactions within sixty (60) days after the Closing Date (the "Registration Statement"). Seller agrees that in connection with any sale or disposition of Shares subject to such Registration Statement it shall utilize such underwriter or broker as may be selected from time to time by Purchaser in its sole discretion. (b) Purchaser shall bear and pay all expenses incurred by Purchaser in connection with any registration, filing or qualification of Shares with respect to any registration pursuant to this Section 7.8, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees relating or apportionable thereto, fees and disbursements of counsel for Purchaser, and Blue Sky filing fees, but excluding (i) the fees and disbursements of counsel for Seller, (ii) stock transfer taxes that may be payable by Seller, and (iii) all brokerage or similar commission relating to the Shares, all of which shall be borne by Seller. (c) Purchaser shall keep such Registration Statement described in paragraph (a) effective for a period of time terminating at such time as Seller shall have completed the offering and sale of the Shares described in such Registration Statement, provided, however, that if such Registration Statement is filed pursuant to Rule 415 of the Securities Act, Purchaser shall keep such Registration Statement effective as long as Purchaser is required pursuant to rights granted to parties other than Seller. (d) The rights of Seller to distribute Shares pursuant to the Registration Statement described in paragraph (a) may be suspended by Purchaser on the occurrence of the following events: (i) Purchaser has made a determination to conduct a public offering; (ii) Purchaser is about to make a normal course disclosure containing information of a material nature; (iii) there then exists material, non-public information relating to Purchaser which, in the good faith determination of its Board of Directors, would adversely affect the Purchaser by the continued compliance with this Agreement or the continued distribution of the Shares by Seller; (iv) Purchaser is engaged in any activity at any time that, in the good faith determination of its Board of Directors, would be adversely affected 16 by the continued compliance with this Agreement or the continued distribution of the Shares. (e) Purchaser shall use commercially reasonable efforts to minimize the length of any suspension: (i) under (d)(i), to a period beginning on the day that notice of a suspension is given to Seller and ending on the earlier of: (A) the date of disclosure of the public offering, or (B) the date which is 30 days after the beginning of the suspension, provided that during such suspension, Purchaser will proceed with commercially reasonable efforts to file the appropriate documentation in respect of, and otherwise complete, such public offering as expeditiously as practicable; (ii) under (d)(ii), to a period of not more than three (3) business days; (iii) under (d)(iii), if the activity is a prospective acquisition by Purchaser, to a period beginning when the notice of suspension is given to Seller and ending on the earlier of: (A) the public disclosure of the transaction and the making of all required filings under the Securities Act or Exchange Act, or (B) the date on which discussion regarding the acquisition are terminated. (iv) under (d)(iii), for any reason other than a prospective acquisition by Purchaser, to a period beginning when the notice of suspension is given to Seller and ending on the earlier of: (A) the disclosure of the activity, or (B) the reason is no longer operative; and (v) under (d)(iv), to a period beginning on the day that notice of a suspension is given to Seller and ending on the date which is 30 days after the beginning of the suspension. (f) It shall be a condition precedent to the obligations of Purchaser to take any action pursuant to this Section 7.8 that Seller shall furnish to Purchaser such information (including information regarding itself, the Shares held by it and to be disposed of by it, and the intended method of disposition of such securities) as shall be required to effect the registration of the Shares. (g) Upon the receipt by Seller of any notice from Purchaser of (i) the existence of any fact or the happening of any event as a result of which the prospectus included in a Registration Statement filed pursuant to paragraph (a), as such Registration Statement is then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, (ii) the existence of any facts or events resulting in the suspension of Purchaser's obligations to file and keep effective a Registration Statement as provided in paragraph (a) above, (iii) the issuance by the SEC of any stop order or injunction suspending or enjoining the use or the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose, or the taking of any similar action by the securities regulators of any state or other jurisdiction, or (iv) the request by the SEC or any other federal or state governmental agency for amendments or supplements to such Registration Statement or related prospectus or for additional information related thereto, Seller shall immediately discontinue 17 disposition of the Shares covered by such registration or prospectus (other than in transactions exempt from the registration requirements under the Securities Act) until receipt of the supplemental or amended prospectus or until Seller is advised in writing by Purchaser that the use of the applicable prospectus may be resumed or, in the case of a notice pursuant to clause (ii) above, until Purchaser's obligations referred to therein are no longer suspended. (h) Seller shall notify Purchaser in writing of Seller's intention to sell Shares under the Registration Statement described in paragraph (a) not less than five (5) business days prior to the expected date of such sale by faxing the "Takedown Request" attached hereto as Exhibit 7.8(h)(i) to Purchaser at the address set forth in Section 10.1. During this period, Purchaser will review the prospectus to determine if a suspension pursuant to paragraph (d) or (g) is necessary or appropriate. If Purchaser does not notify Seller of a suspension pursuant to paragraph (d) or (g), Seller may conclude the proposed sale, on the proposed date of sale, strictly in accordance with the Takedown Request. Seller will notify Purchaser of each sale under the Registration Statement in accordance with the Takedown Request within 24 hours of the sale by faxing the "Notification of Sale attached hereto as Exhibit 7.8(h)(ii) to Purchaser at the address set forth in Section 10.1. (i) In the event any shares are included in a Registration Statement under this Agreement: (A) To the extent permitted by law, Purchaser will indemnify and hold harmless Seller and each person, if any, who controls Seller within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which it may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Purchaser of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and Purchaser will reimburse Seller for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7.8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Purchaser (which consent shall not be unreasonably withheld), nor shall Purchaser be liable in any such case for any such loss, claim, damage, expense, liability or action to the extent that it arises out of or is based upon a Violation which arises out of or is based upon information furnished in writing expressly for use in connection with such registration by Seller; provided, further, that Purchaser will not be liable to Seller or any controlling person with respect to any loss, claim, 18 damage, expense or liability arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission to state a material fact in any preliminary prospectus which is corrected in an amended, supplemented or final prospectus provided to Seller if the claimant asserting such loss, claim, damage, expense or liability purchased from Seller and was not sent or given a copy of such amended, supplemented or final prospectus at or prior to the sale of Shares to such claimant. (B) To the extent permitted by law and as a condition to the registration of Shares, Seller will agree to indemnify and hold harmless Purchaser, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities (joint or several) to which Purchaser or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation arises out of or is based upon information furnished in writing by Seller expressly for use in connection with such registration; and Seller will agree to reimburse any legal or other expenses reasonably incurred by Purchaser or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 7.8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Seller, which consent shall not be unreasonably withheld. (C) Promptly after receipt by an indemnified party under this paragraph (i) or notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this paragraph (i), deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. It is understood, however, that an indemnifying party shall not, in connection with any proceeding or related proceedings, be liable for the reasonable fees and expenses of more than one separate firm for all indemnified parties. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such 19 indemnifying party of any liability to the indemnified party under this paragraph (i), but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this paragraph (i). (D) The obligations of Purchaser and Seller under this paragraph (i) shall survive the completion of any offering of the Shares pursuant to a registration statement under this Agreement and are in addition to and not in lieu of the other indemnification rights and obligations of the Parties specified elsewhere in this Agreement. (j) Purchaser's obligations pursuant to this Section 7.8 (other than paragraph (i)) shall terminate as to Seller of the Shares on the date when Seller is eligible to sell all of the Shares pursuant to Rule 144 or Rule 145 under the Securities Act during any 90-day period. (k) In the event that the Registration Statement is not declared effective by the SEC within ninety (90) days of the Closing Date, SAFLINK shall make a prepayment on the Promissory Note in the amount of twenty thousand dollars ($20,000) (the "Prepayment"). On the last day of each month subsequent to the Prepayment that the Registration Statement has not been declared effective by the SEC, SAFLINK shall make an additional prepayment in the amount of twenty thousand dollars ($20,000). SAFLINK shall not be obligated to make aggregate payments in excess of the principal balance of the Promissory Note. 7.9. Notice. After the Closing, the Parties shall cooperate, to the extent ------ practicable and reasonable, in giving joint notice of the consummated transactions to each customer, creditor, distributor, sales representative and supplier of the Business of Seller. 7.10. Workers' Compensation Act Certificate'. Seller agrees to procure and -------------------------------------- deliver to Purchaser as soon as reasonably possible after the Closing Date the certificate dated as at the Closing Date required under section 128 of the Workers' Compensation Act (Alberta). 7.11. Costs and Documentation Related to Transfer of Assets. Purchaser ----------------------------------------------------- shall pay all fees, costs, and expenses related to the transfer of all Assets from the Seller to the Purchaser, provided, however, that Seller shall pay all fees, costs, and expenses as described Sections 7.3(b) and 10.3. Seller and its authorized representatives shall provide and execute any documentation required to effect the transfer of the Assets. ARTICLE VIII TAX MATTERS 8.1. Allocation of Consideration. Purchaser and Seller shall endeavor in --------------------------- good faith to agree upon an allocation among the Assets of the Consideration consistent with Section 1060 of the Internal Revenue Code (the "Code") and the Treasury Regulations thereunder within sixty (60) days of the date of this Agreement. In the event that the Parties cannot agree on a mutually satisfactory allocation within said time period, an independent accounting firm shall, at Seller's and Purchaser's joint expense (to be shared equally), determine the appropriate allocation. The finding of such independent accounting firm shall be binding on the Parties. Upon determination of the allocation by agreement of the Parties or by binding determination of the independent 20 accounting firm, Purchaser and Seller agree to file Internal Revenue Service Form 8594, and all federal, state, local and foreign Tax Returns, in accordance with such allocation. Purchaser and Seller shall report the transactions contemplated by this Agreement for federal Tax and all other Tax purposes as a sale and purchase of the Assets and not as a tax-free reorganization and in a manner consistent with the allocation determined pursuant to this Section 8.1. Purchaser and Seller agree to provide the other promptly with any information required to complete Form 8594. Purchaser and Seller shall notify and provide the other Party with reasonable assistance in the event of an examination, audit or other proceeding regarding the agreed upon allocation of the Consideration. 8.2. Prorations. Purchaser and Seller agree that all of the Tax and other ---------- items normally prorated or adjusted (but not income taxes), such as personal property, occupancy, and business operation taxes, customer prepayments and utilities related to the business and operation of the Assets shall be prorated as of the Closing Date, with Seller liable to the extent such items relate to the Assets for any time period prior to and including the Closing Date, and Purchaser liable to the extent such items relate to the Assets for periods commencing after the Closing Date. Purchaser and Seller hereby agree to indemnify the other Party against and hold it harmless from such items for which it is responsible. 8.3. Transfer Taxes. Pursuant to Section 7.2 Purchaser and Seller have -------------- made the election provided for under Section 167 of the ETA so that no GST will be payable in respect of the sale and transfer of the Assets. Notwithstanding any other provision of this Agreement, all transfer and sales taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by Seller and Seller agrees to indemnify Purchaser against and hold it harmless from liability for all such taxes. 8.4. Tax Indemnification Generally. Except for any prorated items ----------------------------- described in Section 8.2, Seller hereby agrees to indemnify Purchaser against and hold it harmless from all liability for Taxes of Seller attributable to any period, whether before or after the Closing Date, including without limitation, any income taxes or other Taxes resulting from the transactions contemplated by this Agreement, unpaid Taxes listed on Schedule 4.5 hereto, and any liability resulting from a failure of Seller to fulfill any obligation under this Article VIII. 8.5. Survival. All rights and obligations provided for in this Article -------- VIII shall remain in force notwithstanding any other provision of this Agreement. 8.6. Priority of Article. In the event of a conflict between the ------------------- provisions of this Article VIII and any other provision of this Agreement, the provisions of this Article VIII shall control. ARTICLE IX INDEMNIFICATION 9.1. Indemnification from Seller. From and after the Closing Date, Seller --------------------------- shall indemnify and hold harmless Purchaser and its officers, directors, employees, Subsidiaries, shareholders, affiliates, successors and permitted assigns ("Purchaser Indemnitees") from all Losses (as hereinafter defined) resulting from (i) a breach or inaccuracy of any representation, warranty, covenant or agreement by Seller under this Agreement, (ii) any liabilities or obligations of Seller not expressly assumed by Purchaser, or any events occurring at or prior to the Closing Date giving rise to liability (whether such liabilities or events were known, unknown or could not 21 be known by Seller at or prior to the Closing Date), relating to Seller or the Business or the Assets, (iii) any liabilities arising at, prior to or subsequent to the Closing Date (whether such liabilities or events were known, unknown or could not be known by or prior to the Closing Date), relating to any products manufactured, any services rendered, or the conduct of any other business by Seller at or prior to the Closing Date; (iv) any liabilities, arising under any applicable Bulk Sales Act or the Uniform Commercial Code, or statutes of similar import; (v) unpaid fees listed on Schedule 4.7 hereto; (vi) any liabilities of Seller relating to the conduct of its operations following the Closing, including liabilities relating to Excluded Assets and the Liabilities; or (vii) any taxes, interest or penalties arising under Section 116 of the ITA. 9.2. Indemnification from Purchaser. From and after the Closing Date, ------------------------------ Purchaser shall indemnify and hold harmless Seller from all Losses resulting from (i) a breach or inaccuracy of any representation, warranty, covenant or agreement by Purchaser under this Agreement, or (ii) any liabilities and obligations arising after the Closing Date and expressly assumed by Purchaser. 9.3. Notice. The Indemnified Party (as hereinafter defined) shall give ------ prompt written notice to the Indemnifying Party of any claim or event known to it which does or may give rise to a claim by the Indemnified Party against the Indemnifying Party based on this Agreement, stating the nature and basis of said claims or events and the amounts thereof, to the extent known. Such notice shall be given in accordance with Section 10.1 hereof. Such notice shall be a condition precedent to any liability of the Indemnifying Party hereunder. Notwithstanding the foregoing, the failure to give reasonably prompt written notice by the Indemnified Party shall not defeat a claim made pursuant hereto except to the extent that the Indemnifying Party can establish that it has been injured by such delay. 9.4. Defense of Claims. In the event of any claim, action, suit or ----------------- proceeding made or brought by third parties against the Indemnified Party, the Indemnified Party shall give written notice of such claim, action, suit or proceeding as described in Section 9.3 above, with a copy of the claim, process and all legal pleadings with respect thereto. After notification, the Indemnifying Party shall participate in and, jointly with any other Indemnifying Party similarly notified, assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Party at the time of such assumption. The Indemnified Party shall have the right to employ its own counsel and such counsel may participate in such action, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party, when and as incurred, unless (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying Party, or (ii) the Indemnifying Party shall not in fact have employed counsel to assume the defense of such action reasonably satisfactory to the Indemnified Party at the time of the Indemnifying Party's assumption of the defense. If clause (ii) of the preceding sentence shall be applicable, then counsel for the Indemnified Party shall have the right to direct the defense of such claim, action, suit or proceeding on behalf of the Indemnified Party. The Indemnified Party and the Indemnifying Party, as the case may be, shall be kept fully informed of such claim, action, suit or proceeding at all stages thereof whether or not such party is represented by its own counsel. 9.5. Offset. Notwithstanding the generality of the foregoing, the full ------ amount of the Shares delivered to the Escrow Agent pursuant to Section 3.3 (the "Escrow Fund") shall be available as security for the satisfaction of all of the indemnifiable Losses which Purchaser Indemnitees may suffer or incur. In the event that the Escrow Fund is insufficient to satisfy all of the indemnifiable Losses which Purchaser Indemnitees may suffer or incur, the Purchaser shall be enititled to offset such unsatisfied Losses against the principal and interest owed under the Promissory Note. 22 9.6. Definitions. ----------- (a) As used herein, the term "Losses" means any and all claims, demands, actions, costs, losses, damages and liabilities, including without limitation reasonable attorneys' fees and costs incurred in the investigation and defense of a claim, demand, cost, loss or liability. (b) As used herein, the term "Indemnifying Party" shall mean the person or persons against whom a party (the "Indemnified Party") makes a claim for indemnification hereunder. ARTICLE X GENERAL 10.1. Notice. All notices required to be given under the terms of this ------ Agreement or which any of the Parties may desire to give hereunder (the "Notices") shall be in writing and delivered personally or sent by express delivery, or by facsimile, or by registered or certified mail, with proof of receipt, postage and expenses prepaid, return receipt requested, addressed as follows: If to Purchaser: SAFLINK Corporation 18650 N.E. 67th Court Suite 210 Redmond, WA 98052 Attention: Chief Financial Officer Fax: 425-497-1778 with a copy to: Baker & McKenzie 815 Connecticut Avenue, NW Washington, DC 20006-4078 Attention: Thomas J. Egan, Jr., Esq. Fax: 202-452-7074 and if to Seller: Jotter Technologies Inc. 8880 Cal Center Drive, # 190 Sacramento, CA 95826 Attention: Glenn Argenbright Fax: 916-361-1354 with a copy to: Normand & Shaughnessy, PA, 15 High Street Manchester, NH 03103 Attention: Jason M. Craven 23 Fax: 603-647-0333 or to such other persons as may be designated in writing by the parties, by a notice given as aforesaid. 10.2. Receipt of Notice. Any notice given in accordance with Section 10.1 ----------------- shall be deemed to have been given: if delivered personally, when received; if sent via express delivery or registered or certified mail, postage prepaid and return receipt requested, when received; or, if delivered by facsimile, 24 hours after transmission confirmation by the transmitting machine unless, within those 24 hours the intended recipient has informed the sender that the transmission was received in an incomplete or garbled form, or the transmission report of the sender indicates a faulty or incomplete transmission. If such receipt is on a day that is not a business day or is later than 5 p.m. (local time) on a business day, the notice shall be deemed to have been given and served on the next business day. 10.3. Headings; Construction. The descriptive headings of the several ---------------------- sections of this Agreement are inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. 10.4. Legend. It is understood that the certificates evidencing the Shares ------ may bear the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT UNDER SUCH ACT IN EFFECT WITH RESPECT TO THE SHARES OR AN OPINION OF COUNSEL SATISFACTORY TO PURCHASER THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT." (b) Any legend required by applicable state securities laws. 10.5. Counterparts. This Agreement may be executed in counterparts, and ------------ when so executed each counterpart shall be deemed to be an original, and said counterparts together shall constitute one and the same instrument. 10.6. Schedules and Exhibits. All Exhibits and Schedules attached hereto ---------------------- are by this reference incorporated herein and made a part hereof for all purposes as if fully set forth herein, and each disclosure in any Schedule shall be deemed to be a representation and warranty made by the disclosing party. The disclosures in any Schedule must relate only to the representations and warranties in the Section of this Agreement to which they expressly relate and not to any other representation or warranty in this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules hereto (other than an exception expressly set forth as such in the Schedules with respect to a specifically identified representation or warranty), the statement in the body of this Agreement will control. 10.7. Applicable Law; Venue; Waiver of Jury Trial. This Agreement shall be ------------------------------------------- governed by, construed and enforced in accordance with the laws of the State of Delaware as applied to contracts entered into solely between residents of, and to be performed entirely in, such state. The parties hereto do hereby irrevocably submit to the jurisdiction of any state or federal 24 court located in the State of Delaware, solely in respect of the interpretation and enforcement of the provisions of this Agreement and in respect of the transactions contemplated hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof, that is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a state or federal court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.1 hereof, or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY UNDERSTANDS AND WITH THE ADVICE OF COUNSEL HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 10.8. Severability. If, for any reason whatsoever, any one or more of the ------------ provisions of this Agreement shall be held or deemed to be unenforceable or invalid as applied to any particular case or in all cases, such circumstances shall not have the effect of rendering such provision invalid in any other case or of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid. Furthermore, upon the request of any party hereto, the Parties to this Agreement shall add, in lieu of such invalid or unenforceable provisions, provisions as similar in terms to such invalid or unenforceable provisions as may be possible and legal, valid and enforceable. 10.9. Remedies Cumulative. The rights and remedies of the parties to this ------------------- Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power or privilege under this Agreement or any document referred to herein will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of any other right, power or privilege. Without limiting the generality of the foregoing, neither the Purchaser Indemnitees' exercise nor their failure to exercise their right to make a claim against the Escrow Fund shall constitute an election of remedies or limit the Purchaser Indemnitees in any manner in the enforcement of any remedies that may be available to them under this Agreement or otherwise. 10.10. Specific Performance. The parties hereto agree and acknowledge that, -------------------- in the event of a breach of any provision of this Agreement, the aggrieved party may be without an 25 adequate remedy at law. The parties therefore agree that in the event of a breach of any provision of this Agreement the aggrieved party may elect to institute and prosecute proceedings in any court of competent jurisdiction to obtain specific performance or to enjoin the continuing breach of such provision, as well as to obtain damages for breach of this Agreement and to obtain reasonable attorneys' fees. By seeking or obtaining any such relief, the aggrieved party will not be precluded from seeking or obtaining any other relief to which it may be entitled. 10.11. Further Assurances. Subject to the terms and conditions of this ------------------ Agreement, the parties hereto shall do and perform or cause to be done and performed all such further actions and things and shall execute and deliver all such other agreements, certificates, instruments or documents as any other party hereby may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. 10.13. Expenses with Respect to Transaction. Seller and Purchaser agree ------------------------------------ that each will pay all fees, costs, and expenses incurred by it in connection with the negotiation and consummation of this transaction, including, without limitation, the fees and expenses of its attorneys, accountants, and other persons. 10.14. Brokers. Each of Seller and Purchaser hereby agrees to indemnify ------- and save and hold harmless the other party from and against any and all claims, losses, damages, costs or expenses of any kind or character (including attorneys' fees) arising out of or resulting from any agreement, arrangement or understanding alleged to have been made by such party with any broker or finder in connection with this Agreement or the transactions contemplated hereby. [Signatures On Following Page] 26 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the day and year first above written. SAFLINK CORPORATION /s/ Jeffrey P. Anthony ---------------------------- By: Jeffrey P. Anthony Its: Chief Executive Officer JOTTER TECHNOLOGIES, INC. /s/ Glenn Argenbright --------------------------- By: Glenn Argenbright Its: President 27 TABLE OF CONTENTS -----------------
Page ---- ARTICLE I - DEFINITIONS................................................... 1 1.1 Certain Definitions................................................. 1 1.2 Other Definitions................................................... 2 ARTICLE II - PURCHASE AND SALE OF ASSETS.................................. 2 2.1 Assets Being Sold................................................... 2 2.2 Disclaimed Liabilities.............................................. 2 2.3 Excluded Assets..................................................... 2 2.4 Non-delivered Assets................................................ 2 2.5 Assignment.......................................................... 3 2.6 Bill of Sale........................................................ 3 ARTICLE III - PURCHASE PRICE AND PAYMENT.................................. 3 3.1 Purchase Price...................................................... 3 3.2 Allocation.......................................................... 3 3.3 Escrow.............................................................. 4 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SELLER..................... 4 4.1 Corporate Standing.................................................. 4 4.2 Authority........................................................... 4 4.3 Financial Statements................................................ 4 4.4 Assets.............................................................. 5 4.5 Taxes............................................................... 6 4.6 Year 2000 Compliance................................................ 7 4.7 Proprietary Rights.................................................. 7 4.8 Information Provided By Seller...................................... 10 4.9 Investment Experience............................................... 10 4.10 Ownership of the Shares for Investment Purposes..................... 10 4.11 Accredited Investor................................................. 10 4.12 Restricted Securities............................................... 10 4.13 Residency........................................................... 10 ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PURCHASER................... 11 5.1 Organization........................................................ 11
28 5.2 Authority........................................................... 11 5.3 Capital Structure................................................... 11 5.4 SEC Documents....................................................... 11 5.5 No Conflict......................................................... 12 5.6 Shares of Common Stock.............................................. 12 5.7 Information Provided................................................ 12 5.8 False and Misleading Statements..................................... 12 ARTICLE VI - CLOSING DATE DELIVERIES...................................... 12 6.1 Deliveries by Seller................................................ 12 6.2 Deliveries by Purchaser............................................. 13 6.3 Closing............................................................. 13 ARTICLE VII - ADDITIONAL AGREEMENTS....................................... 14 7.1 Employees........................................................... 14 7.2 Canadian Goods & Services Tax Election.............................. 14 7.3 Certificate Pursuant to Section 116 of the Income Tax Act (Canada).. 14 7.4 Lease............................................................... 15 7.5 Name Change......................................................... 15 7.6 Non-Compete......................................................... 16 7.7 Board Representation................................................ 16 7.8 Registration Rights................................................. 16 7.9 Notice.............................................................. 20 7.10 Workers' Compensation Act Certificate............................... 20 ARTICLE VIII - TAX MATTERS................................................ 20 8.1 Allocation of Consideration......................................... 20 8.2 Prorations.......................................................... 21 8.3 Transfer Taxes...................................................... 21 8.4 Tax Indemnification Generally....................................... 21 8.5 Survival............................................................ 21 8.6 Priority of Article................................................. 21 ARTICLE IX - INDEMNIFICATION.............................................. 21 9.1 Indemnification from Seller......................................... 21 9.2 Indemnification from Purchaser...................................... 22 9.3 Notice.............................................................. 22 9.4 Defense of Claims................................................... 22
29 9.5 Escrow Offset....................................................... 22 9.6 Definitions......................................................... 23 ARTICLE XV - GENERAL...................................................... 23 10.1 Notice............................................................. 23 10.2 Receipt of Notice.................................................. 24 10.3 Headings; Construction............................................. 24 10.4 Legend............................................................. 24 10.5 Counterparts....................................................... 24 10.6 Schedules and Exhibits............................................. 24 10.7 Applicable Law; Venue; Waiver of Jury Trial........................ 24 10.8 Severability....................................................... 25 10.9 Remedies Cumulative................................................ 25 10.10 Specific Performance............................................... 25 10.11 Further Assurances................................................. 26 10.12 Expenses with Respect to Transaction............................... 26 10.13 Brokers............................................................ 26
List of Schedules - ----------------- Schedule 2.3...................................................Excluded Assets Schedule 4.3.................Incomplete Items on Seller's Financial Statements Schedule 4.4............................................................Assets Schedule 4.4(a).....................................Assets Not Owned By Seller Schedule 4.4(b)...................................Assets Not In Good Condition Schedule 4.5......................................................Unpaid Taxes Schedule 4.7..........................IntellectualProperty Disclosure Schedule Schedule 7.1(a)......................................................Employees Schedule 7.1(b)................................Employees with Accrued Vacation List of Exhibits - ---------------- Exhibit 2.6............................Bill of Sale (United States and Canada) Exhibit 3.1....................................................Promissory Note Exhibit 3.3...................................................Escrow Agreement Exhibit 6.1(c)...........................Opinion of Normand & Shaughnessy, PA. Exhibit 6.1(g)...........................................Non-Compete Agreement Exhibit 7.8(h)(i).............................................Takedown Request Exhibit 7.8(h)(ii)........................................Notification of Sale 30 EX-10.1 3 0003.txt ESCROW AGREEMENT EXHIBIT 10.1 ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "Agreement"), made as of December 15, 2000, by and among SAFLINK CORPORATION, a Delaware corporation or its affiliated designee ------------------- ("SAFLINK"); CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION, (the "Escrow --------------------------------------------------- Agent"); and JOTTER TECHNOLOGIES INC., a Delaware corporation ("Jotter"). ------------------------ W I T N E S S E T H: WHEREAS, SAFLINK and Jotter have entered into an Asset Purchase Agreement dated as of December 15, 2000 (the "Purchase Agreement"), a copy of which has been delivered to the Escrow Agent (all capitalized terms not otherwise defined in this Agreement having the meanings set forth in the Purchase Agreement); and WHEREAS, Section 3.3 of the Purchase Agreement provides that SAFLINK will issue the Shares in the name of Jotter and deliver them to the Escrow Agent to be held in escrow for the purpose of securing Jotter's obligation to reimburse the SAFLINK Indemnitees for the indemnifiable Losses enumerated in Section 9.6(a) of the Purchase Agreement; and WHEREAS, the Escrow Agent is willing to act as escrow agent for SAFLINK and Jotter on the terms and conditions hereinafter set forth: NOW, THEREFORE, in consideration of the mutual covenants, agreements and conditions set forth herein, the parties agree as follows: 1. Establishment of Escrow; Share Certificates. Promptly after the ------------------------------------------- Closing, SAFLINK will issue the Shares in the name of Jotter as set forth and cause such shares to be delivered (together with assignments in blank to be executed by Jotter, with each assignment to include a signature guarantee containing an affixed medallion certifying the authenticity of the signature) to the Escrow Agent. The Shares shall be held by the Escrow Agent in escrow subject to the terms and conditions set forth herein. SAFLINK will cooperate with the Escrow Agent, including making any written instructions required by its stock transfer agent, to permit the Escrow Agent to make any necessary exchanges of SAFLINK stock certificates so as to facilitate any distribution of Shares pursuant to this Agreement. Jotter hereby authorizes SAFLINK to deliver to SAFLINK's stock transfer agent at or shortly after the Closing a letter, substantially in the form of Exhibit A hereto, instructing the transfer agent to distribute all distributions - --------- in respect of the Shares, other than taxable dividends, to the Escrow Agent pursuant to Section 3 of this Agreement. 2. Claims Against Escrow Fund. The parties hereto agree that the SAFLINK -------------------------- Indemnitees shall be entitled to make claims against the Escrow Fund for indemnifiable Losses pursuant to this Agreement and Article IX of the Purchase Agreement. The SAFLINK Indemnitees shall be entitled to make claims against the Escrow Fund for such purpose at any time prior to 11:59 p.m., Pacific time, on December 15, 2002 (the "Escrow Period"), unless this Agreement is terminated at an earlier date pursuant to Section 5 hereof. Any claim by the SAFLINK Indemnitees against the Escrow Fund for indemnifiable Losses during the above time period shall be presented to the Escrow Agent as follows: (a) The SAFLINK Indemnitees shall notify the Escrow Agent and Jotter in writing of any indemnifiable Losses which the applicable SAFLINK Indemnitees claim are subject to indemnification under Article IX of the Purchase Agreement. The notice shall describe the claim and specify the amount thereof. (b) Jotter may contest such claim by giving the Escrow Agent and the applicable SAFLINK Indemnitees written notice of such contest within twenty (20) business days after receipt of such claim for indemnification. If such indemnification claim remains in dispute and unresolved for thirty (30) days following receipt of the written notice of contest by the applicable SAFLINK Indemnitees, the disputed claim shall be submitted to arbitration in accordance with Section 9 below. (c) If Jotter does not contest such indemnification claim pursuant to Section 2(b) above, then the Escrow Agent shall deliver to SAFLINK that number of Shares from the Escrow Fund with a value equal to the dollar amount of the indemnifiable Losses claimed by such indemnitees in its or their written notice. For this purpose, Shares so delivered shall be valued at the Indemnity Closing Price (as defined in Section 2(e) below) as of the date of delivery to the applicable SAFLINK Indemnitees. Other property in the Escrow Fund, if any, shall be valued as determined by the mutual agreement of SAFLINK and Jotter. (d) If Jotter contests such indemnification claim pursuant to Section 2(b) above, the Escrow Agent shall deliver an amount from the Escrow Fund to the applicable SAFLINK Indemnitees upon receipt of either: (i) a copy of a written settlement agreement (authorizing the delivery of the amount from the Escrow Fund) signed by the SAFLINK Indemnitees making such claim and Jotter, or (ii) a copy of a final and nonappealable arbitration award (authorizing the delivery of the amount from the Escrow Fund) pursuant to the arbitration procedure in Section 9 below. The number of Shares to be delivered to SAFLINK by the Escrow Agent under this Section 2(d) shall be equal in value based upon the Indemnity Closing Price to the dollar amount of such indemnitees' indemnifiable Losses, as set forth in the settlement agreement or the arbitration award, as applicable, and shall be delivered in the manner set forth in Section 2(c). (e) In this Agreement, the "Indemnity Closing Price" shall mean the closing price of the SAFLINK Common Stock on the Nasdaq SmallCap Market on the Closing Date. In the event that the Indemnity Closing Price is not set forth in any notice or certificate delivered to the Escrow Agent with respect to a distribution of Shares to SAFLINK under this Section 2, the Escrow Agent shall accept a certificate from an executive of SAFLINK certifying as to the Indemnity Closing Price for the date of such distribution (a copy of such certificate shall be sent to Indemnifying Holder's Representative within three business days of the date such certificate is delivered to the Escrow Agent), unless such certificate is contested by Jotter. 3. Dividends, Stock Splits and Other Distributions. Other than taxable ----------------------------------------------- dividends (which shall be distributed to Jotter and shall not be made part of the Escrow Fund), distributions declared in respect of the Shares (including, without limitation, stock splits and non-taxable stock dividends) during the term of this Agreement shall be made part of the Escrow Fund. If the Shares are reclassified or changed into other securities or property pursuant to a reclassification of all shares of SAFLINK Common Stock or a merger of SAFLINK, then such reclassified shares or other securities or property, as the case may be, shall be made part of the Escrow Fund. 4. Voting Rights of Shares. Jotter shall have the right to vote its ----------------------- Shares in the Escrow Fund (as set forth in Schedule 1 of this Agreement) on any issues that come for a vote before the stockholders of SAFLINK. Prior to any vote of SAFLINK stockholders during the term of this Agreement, SAFLINK shall cause to be delivered to Jotter appropriate voting and proxy materials in the same manner as provided to other stockholders of SAFLINK so as to permit Jotter to exercise their voting rights with respect to the Shares. 5. Termination. This Agreement shall terminate and the Escrow Agent shall ----------- have no further responsibilities hereunder upon the earliest to occur (the "Termination Date") of (a) the expiration of the Escrow Period set forth in Section 2 above, and (b) SAFLINK's delivery to the Escrow Agent of written notice that SAFLINK has elected to terminate this Agreement (which election shall be at SAFLINK's sole option and in its sole discretion). Upon the occurrence of such an event, the Escrow Agent shall reserve from the Escrow Fund an amount sufficient to pay any claims that have been made pursuant to Section 2(a) above and remain unpaid on or prior to the Termination Date ("Reserve Claims") of the SAFLINK Indemnitees against the Escrow Fund on that date. For purposes of establishing the reserve, any Shares so reserved shall be valued at the Indemnity Closing Price and any other property shall be valued by mutual agreement of SAFLINK and Jotter. This Agreement shall continue in force as to the amount so reserved until the resolution of such Reserve Claims in accordance with the terms hereof. The Escrow Agent shall distribute to Jotter all amounts (if any) in the Escrow Fund not so reserved, and the Escrow Agent shall thereafter have no responsibilities with respect to such distributed amounts. Upon the final resolution of each Reserve Claim, on a claim-by-claim basis, the Escrow Agent shall distribute to SAFLINK the amount that SAFLINK is entitled to receive with respect to such Reserve Claim. Shares so delivered shall be valued at the Indemnity Closing Price, and any other property shall be valued by mutual agreement of SAFLINK and Jotter. Upon the final resolution of all Reserve Claims and the distribution to the SAFLINK Indemnitees of all reserved amounts to which such indemnitees are entitled pursuant to such claims, all remaining reserved amounts shall be promptly distributed to Jotter. 6. Release of Shares. ----------------- (a) With respect to the Shares held on behalf of Jotter, the Escrow Agent shall release the Shares to Jotter as follows: (i) three hundred and fifty thousand (350,000) Shares ninety days after the Closing Date (the "First Release Date"), and (ii) at a rate of two hundred and fifty thousand (250,000) Shares on the last day of each calendar month following the First Release Date. (b) At any time, and in such amounts as it shall determine in its sole discretion, SAFLINK may accelerate the release of all or any portion of the Shares set forth in Section 6(a). 7. Offset and Recissison. --------------------- (a) In the event that SAFLINK elects to deduct, withhold, or pay from the Consideration such amounts as SAFLINK deems appropriate pursuant to Section 7.3(b) of the Purchase Agreement, Escrow Agent shall deliver that number of the Shares to SAFLINK as may be requested in writing by SAFLINK to offset such amounts paid to Canadian tax authorities under section 116 of the ITA or any other applicable Tax Legal Requirement (including interest and penalties payable in respect of such obligations). (b) In the event that SAFLINK exercises its right of rescission pursuant to Section 6.4 of the Purchase Agreement, SAFLINK shall give notice to the Escrow Agent of such exercise and instruct the Escrow Agent to deliver to SAFLINK all of the Shares in the Escrow Fund and Escrow Agent shall promptly deliver such Shares as directed by SAFLINK. 8. The Escrow Agent. ---------------- (a) SAFLINK shall pay the Escrow Agent's fee for its ordinary services under this Agreement in accordance with the fee schedule set forth on Exhibit C --------- attached hereto. (b) In performing any duties under this Agreement, the Escrow Agent shall not be liable for damages, losses, or expenses, except for negligence or willful misconduct on the part of the Escrow Agent. The Escrow Agent shall not incur any such liability for (i) any act or failure to act made or omitted in good faith, or (ii) any action taken or omitted in reliance upon any instrument, including any written statement or affidavit provided for in this Agreement that such agent shall in good faith believe to be genuine, nor will the Escrow Agent be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent may consult with legal counsel in connection with its duties under this Agreement and shall be fully protected in any act taken, suffered, or permitted by it in good faith in accordance with the advice of counsel. The Escrow Agent is not responsible for determining and verifying the authority of any such person acting or purporting to act on behalf of any party to this Agreement. (c) If any controversy arises between the parties to this Agreement, or with any other party, concerning the subject matter of this Agreement, its terms or conditions, the Escrow Agent will not be required to determine the controversy or to take any action regarding it. The Escrow Agent may hold the Escrow Fund and may wait for settlement of any such controversy by final appropriate legal proceedings or other means as, in the Escrow Agent's discretion, may be required, despite what may be set forth elsewhere in this Agreement. In such event, the Escrow Agent will not be liable for interest or damage. Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answer and litigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerk of the court the entire Escrow Fund, except for such part of the Escrow Fund as shall reimburse the Escrow Agent for all costs, expenses, charges and reasonable attorney fees incurred by the Escrow Agent due to the interpleader action and which the parties hereby jointly and severally agree to pay. Upon initiating such action, the Escrow Agent shall be fully released and discharged of and from all obligations and liabilities imposed by the terms of this Agreement, except for obligations or liabilities arising by reason of the prior negligence or willful misconduct on the part of the Escrow Agent. (d) Jotter and SAFLINK shall jointly and severally indemnify the Escrow Agent for, and to hold it harmless against any loss, liability or expense arising out of or in connection with this Agreement and carrying out its duties hereunder, including the costs and expenses of defending itself against any claim of liability, except in those cases where the Escrow Agent has been guilty of gross negligence or willful misconduct. Anything in this agreement to the contrary notwithstanding, in no event shall the Escrow Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. (e) The Escrow Agent may resign at any time upon giving at least thirty (30) days' written notice to the parties; provided, however, that no such -------- resignation shall become effective until the appointment of a successor escrow agent which shall be accomplished as follows: The parties shall use their best efforts to mutually agree on a successor escrow agent within thirty (30) days after receiving such notice. If the parties fail to agree upon a successor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrow agent authorized to do business in the State of Washington and having at least $50,000,000 in assets. The successor escrow agent shall execute and deliver an instrument accepting such appointment, and it shall, without further acts, be vested with all the estates, properties, rights, powers and duties of the predecessor Escrow Agent as if originally named as the Escrow Agent. Upon such appointment, the predecessor Escrow Agent shall be discharged from any further duties and liability under this Agreement, except for obligations or liabilities arising by reason of the prior negligence or willful misconduct on the part of the Escrow Agent. (f) Any company into which the Escrow Agent may be merged or with which it may be consolidated, or any company to which the Escrow Agent may transfer all or substantially all of its escrow business, shall be the successor to the Escrow Agent and shall be vested with all the rights, powers and duties of the predecessor Escrow Agent as if originally named as the Escrow Agent, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding, so long as such successor is authorized to do business in the State of Washington and has at least $50,000,000 in assets. 9. Arbitration. All disputes or controversies arising under or in ----------- connection with this Agreement shall be settled exclusively by final and binding arbitration in Seattle, Washington which arbitration, including, but not limited to the selection of arbitrators, shall be in accordance with the rules of the American Arbitration Association ("AAA"), except as modified herein, and as such rules shall be in effect on the date of delivery of demand for arbitration (as described below). The arbitration of such issues, including the determination of the amount of any damages suffered by any party, shall be to the exclusion of any court of law. The decision of the arbitrator shall be final and binding upon the parties and their respective personal representatives, heirs, devisees, successors and assigns. A party wishing to submit a dispute or controversy to arbitration must submit a written demand for arbitration to the other party to this Agreement (and deliver a copy of such demand to the Escrow Agent) not less than thirty (30) days after the transaction, occurrence or event giving rise to such dispute or controversy. Such written demand for arbitration shall be provided to the arbitrator and shall contain a statement of the matter in dispute and a statement of the facts the party demanding arbitration is relying on to support his or its position. Judgment may be entered on the arbitrator's award in any court having proper jurisdiction. The costs of arbitration shall be paid by the losing party in the arbitration. 10. Tax Reporting. SAFLINK shall prepare and file all tax reports on ------------- Internal Revenue Service Form 1099-B that are required to be filed periodically with respect to the issuance of Shares, and the Escrow Agent shall have no obligation to prepare any such tax report. 11. [Intentionally Omitted]. 12. Indemnification of SAFLINK. Jotter agrees to jointly and severally -------------------------- indemnify SAFLINK on the basis of the indemnification provisions set forth in Article IX of the Purchase Agreement. 13. Governing Law. This Agreement shall be governed by the laws of the ------------- State of Washington without regard to principles of conflicts of laws. 14. Amendments; Modifications. This Agreement may not be amended or ------------------------- modified except pursuant to a written agreement signed by each of the parties hereto. 15. Notices. All notices and other communications hereunder shall be in ------- writing and shall be deemed given on the same day if delivered personally, or by facsimile transmission with voice confirmation of receipt, or shall be deemed given on the date receipt is confirmed if mailed by registered or certified mail or commercial overnight courier (e.g., Federal Express, DHL, Network Courier, Sonic, etc.), return receipt or confirmation of delivery requested, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to SAFLINK: SAFLINK Corporation 18650 N.E. 67/th/ Court Suite 210 Redmond, WA 98052 Attention: Chief Financial Officer Fax: (425) 497-1778 with a copy to: Baker & McKenzie 815 Connecticut Avenue, N.W. Washington, D.C. 20006 Attention: Thomas J. Egan, Jr., Esq. Fax: (202) 452-7074 If to Jotter: Jotter Technologies Inc. 8880 Cal Center Drive, #190 Sacramento, CA 95826 Attention: Glenn Argenbright Fax: (916) 361-1354 with a copy to: Normand & Shaughnessy, P.A. 15 High Street Manchester, NH 03103 Attention: Jason M. Craven Fax: (603) 647-0333 If to the Escrow Agent: Chase Manhattan Trust Company. National Association Attention: Roy H. Davis/Kathleen L. Graves 1301 Fifth Avenue, Suite 3410 Seattle, WA 98101 Fax: (206) 624-3867 15. Effect on Successors in Interest, Assignees. This Agreement shall ------------------------------------------- inure to the benefit of and be binding upon the heirs, administrators, executors, assignees and successors of each of the parties hereto. 16. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SAFLINK CORPORATION By: /s/ Jeffrey P. Anthony . ----------------------------- Title: CEO/ President ESCROW AGENT: Chase Manhattan Trust Company, National Association By: /s/ Roy H. Davis . --------------------------------- Title: Vice President JOTTER TECHNOLOGIES, INC. By: /s/ Glenn Argenbright . ------------------------------------ Name: Glenn Argenbright Its CEO [SIGNATURE PAGE TO ESCROW AGREEMENT] EXHIBIT A --------- U.S. Stock Transfer Corporation 1745 Gardena Ave. Glendale, CA 91204 Att: Richard Brown Re: SAFLINK Corporation ("SAFLINK") - Shares Ladies and Gentlemen: The following shares of Common Stock of SAFLINK are currently being held by ______________________ ("Agent") as Escrow Agent pursuant to that certain Escrow Agreement, dated as of ________________, 2000, by and among SAFLINK, the undersigned and Agent (the "Escrow Agreement"): Share certificate no. No. of SAFLINK shares represented --------------------- --------------------------------- [insert certif. numbers] [insert number of shares] We hereby instruct you to pay and deliver any certificates representing stock splits or non-taxable stock dividends, or any other form of distribution made by SAFLINK in respect of the shares identified above (except for taxable dividends), to Chase Manhattan Trust Company, National Association, as Escrow Agent pursuant to the terms of the Escrow Agreement. Print Name: _____________________________________ EX-23.1 4 0004.txt CONSENT OF KPMG Exhibit 23.1 Consent of KPMG LLP, Independent Auditors The Board of Directors Jotter Technologies, Inc.: We consent to the incorporation by reference in the registration statement (No. 333-75789) on Form S-3 and the registration statement (No. 333-74253) on Form S-8 of SAFLINK Corporation of our report dated December 15, 2000, with respect to the consolidated balance sheets of Jotter Technologies, Inc. and subsidiary, and Predecessor, as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' deficit and comprehensive loss, and cash flows for the period from June 1, 1998 (inception) through December 31, 1998 and the year ended December 31, 1999, which report appears in the Form 8-K of SAFLINK Corporation dated December 29, 2000. Our report dated December 15, 2000 contains an explanatory paragraph that states that Jotter Technologies, Inc. and subsidiary and Predecessor has suffered recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. Seattle, Washington December 29, 2000 EX-99.1 5 0005.txt PRESS RELEASE EXHIBIT 99.1 FOR IMMEDIATE RELEASE PRESS CONTACTS: James W. Shepperd Chief Financial Officer SAFLINK Corporation (425) 881-6766 SAFLINK Corporation and Jotter.com Complete Transaction REDMOND, WA (December 18, 2000) - SAFLINK Corporation (NASDAQ: ESAF), announced today that it purchased all of the intellectual property and fixed assets of Jotter Technologies Inc. after terminating a merger agreement previously executed by the parties. As consideration for the sale of the assets, Jotter will receive 5.1 million shares of SAFLINK common stock, $.01 par value, and a two-year, unsecured note for $1.7 million. SAFLINK did not assume any material liabilities of Jotter. Under the asset purchase agreement, in the event Jotter does not satisfy certain Canadian tax obligations, SAFLINK will be entitled to pay the tax and reduce the purchase price or rescind the transaction. In addition, the SAFLINK common stock to be issued to Jotter will be held in escrow on behalf of Jotter and released in monthly distributions beginning ninety days after the closing of the transaction. Jotter and certain of its affiliates have also entered into non-compete agreements with SAFLINK and SAFLINK has granted registration rights for the resale of the shares of SAFLINK common stock to be issued to Jotter. SAFLINK expects that substantially all of Jotter's technical and marketing personnel will accept employment at SAFLINK. The securities offered have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent a registration or an applicable exemption from registration requirements. Further information is available through the company's web site (www.saflink.com). --------------- All brands and products referenced herein are acknowledged to be trademarks, registered trademarks or service marks of their respective holders. The aforementioned remarks contain forward-looking statements that involve risks and uncertainties including without limitation those related to the ability of SAFLINK to integrate Jotter's assets into its operations and to complete and market new products. The Company's actual results could differ materially from those discussed above. -----END PRIVACY-ENHANCED MESSAGE-----