<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Consolidated Financial Statements
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30,
------------------------
Assets 1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
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
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(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
------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
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)
============== ============= =========== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Deficit and Comprehensive Loss
<TABLE>
<CAPTION>
Convertible preferred stock Common stock Treasury stock
----------------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
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) -- -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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)
======== ======== ========== ======== ========== ======
<CAPTION>
Deficit
Accumulated accumulated
Additional other during the Total
paid-in comprehensive development stockholders'
capital income (loss) stage deficit
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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)
========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
JOTTER TECHNOLOGIES, INC. AND SUBSIDIARY
AND PREDECESSOR
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(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
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
-------------------------------------- September 30,
1998 1999 2000
----------------- ----------------- -------------------
<S> <C> <C> <C>
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
================= ================= ===================
</TABLE>
(Continued)
11
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Period from
June 1, 1998
(inception)
through Year ended Nine months ended
December 31, December 31, September 30,
-------------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
========== ========== ========== ==========
</TABLE>
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)
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------
1998 1999 2000
---------- ---------- ------------
<S> <C> <C> <C>
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 $ -- -- --
========== ========== ==========
</TABLE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------
Weighted
Number of average
shares exercise price
------------- ------------------
<S> <C> <C>
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
========= ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------------- -------------------------------------
Weighted-
average
remaining Weighted- Weighted-
Number contractual average Number average
Exercise prices outstanding life (years) exercise price exercisable exercise price
----------------- --------------- ------------------ ------------------ --------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 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
============== ======= ==== ======= ====== ======
</TABLE>
(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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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)
<PAGE>
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
<PAGE>
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.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 2000
----------------------------
SAFLINK Jotter Pro Forma Pro Forma
Historical Historical Adjustments Combined
------------ ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
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
============ ============ ================ ==============
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-------------------------------------
SAFLINK Jotter Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000
-------------------------------------
SAFLINK Jotter Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
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):
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1999 2000
------------------ ------------------
<S> <C> <C>
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
================== ==================
</TABLE>
<PAGE>
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.
<PAGE>
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
