As filed with the Securities and Exchange Commission on February 12, 2003
SEC Registration No. _________
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DELAWARE NEOMEDIA 36-3680347
(State or other TECHNOLOGIES, INC. (I.R.S. Employer
jurisdiction of (Name of issuer Identification No.)
incorporation or in its charter)
organization)
2201 SECOND STREET, 7373 CHARLES T. JENSEN
SUITE 402 (Primary Standard 2201 SECOND STREET,
FORT MYERS, FLORIDA 33901 Industrial SUITE 402
(239) 337-3434 Classification FORT MYERS, FLORIDA 33901-3083
(Address and telephone Code Number) (239) 337-3434
number of Registrant's TELECOPIER NO.: (239) 337-3434
principal executive offices) (Name, address, and telephone
number of agent for service)
With copies to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 S. Biscayne Blvd., Suite 2000
Miami, FL 33131
Telephone No. (305) 539-3305
Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
======================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
------------------------------------------------------------------------------------------------------
Common stock, par value $0.01 per
share 113,408,376 shares $0.01 $1,134,083.76 $104.34
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TOTAL 113,408,376 shares $0.01 $1,134,083.76 $104.34
======================================================================================================
(1) In accordance with Rule 457(c), the price represents the average of the high and low sale
prices of the registrant's common stock on February 10, 2003, on the Over-the-Counter Bulletin
Board.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO
DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Subject to Completion, dated February 12, 2003
PROSPECTUS
NEOMEDIA TECHNOLOGIES, INC.
113,408,376 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 113,408,376 shares of
NeoMedia's common stock by persons who are, or will become, stockholders of
NeoMedia. Please refer to "Selling Shareholders" beginning on page 16. NeoMedia
will receive proceeds from the sale of common stock under the Equity Line of
Credit and from the proceeds from the exercise of the warrants for 1,904,900
shares of common stock. All costs associated with this registration will be
borne by NeoMedia.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over the Counter Bulletin Board. The
prices will fluctuate based on the demand for the shares of common stock. Our
common stock trades on the OTC Bulletin Board under the symbol "NEOM." On
December 3, 2002, the last reported sale price of our common stock on the OTC
Bulletin Board was $0.04 per share.
The selling stockholders consist of:
o Cornell Capital Partners, L.P., which intends to sell up to
102,000,000 shares of common stock.
o Other selling stockholders, who intend to sell up to 11,408,376
shares of common stock.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit Agreement. Cornell Capital Partners will pay NeoMedia 98%
of the market price of our common stock. NeoMedia has paid Cornell Capital
Partners a one-time commitment fee of 2,000,000 shares of common stock. In
addition, Cornell Capital Partners is entitled to retain 5% of each advance
under the Equity Line of Credit. The 2% discount, the one-time commitment fee
and the 5% retention are underwriting discounts.
NeoMedia has engaged Westrock Advisors, Inc., an unaffiliated registered
broker-dealer, to advise us in connection with the Equity Line of Credit.
Westrock Advisors, Inc. was paid a fee of 62,500 shares of NeoMedia's common
stock.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under applicable state law or that an exemption
from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
BEGINNING ON PAGE 3, WE HAVE LISTED SEVERAL RISK FACTORS WHICH YOU SHOULD
CONSIDER. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE YOU MAKE YOUR
INVESTMENT DECISION.
With the exception of Cornell Capital Partners which is an "underwriter"
within the meaning of the Securities Act of 1933, no other underwriter or person
has been engaged to facilitate the sale of shares of common stock in this
offering. This offering will terminate 24 months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is February __, 2003.
TABLE OF CONTENTS
PAGE NO.
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................3
FORWARD-LOOKING STATEMENTS..................................................14
SELLING STOCKHOLDERS........................................................15
USE OF PROCEEDS.............................................................17
DILUTION....................................................................18
DIVIDEND POLICY.............................................................19
SELECTED CONSOLIDATED FINANCIAL DATA........................................20
SUPPLEMENTARY QUARTERLY FINANCIAL DATA......................................21
CAPITALIZATION..............................................................22
EQUITY LINE OF CREDIT.......................................................23
PLAN OF DISTRIBUTION........................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................26
DESCRIPTION OF BUSINESS.....................................................37
MANAGEMENT..................................................................43
AUDIT COMMITTEE REPORT......................................................46
EXECUTIVE COMPENSATION......................................................47
OPTION GRANTS IN LAST FISCAL YEAR...........................................48
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTIONS VALUES....................................................48
LEGAL PROCEEDINGS...........................................................51
PRINCIPAL STOCKHOLDERS......................................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................56
COMPARATIVE STOCK PERFORMANCE...............................................57
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS.......................................58
DESCRIPTION OF SECURITIES...................................................64
LEGAL MATTERS...............................................................68
EXPERTS.....................................................................68
HOW TO GET MORE INFORMATION.................................................69
INDEX OF FINANCIAL STATEMENTS................................................1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS...............................1
We intend to distribute to our shareholders annual reports containing audit
financial statements. Our audited financial statements for the fiscal year
December 31, 2001, were contained in our Annual Report on Form 10-K.
i
PROSPECTUS SUMMARY
OVERVIEW
NeoMedia develops proprietary technologies that link physical
information and objects to the Internet marketed under its "PaperClickTM" brand
name and automate print production operations.
NeoMedia is structured as two distinct business units: Internet
Switching Service and Consulting and Integration Services.
NeoMedia Internet Switching Service (NISS), our physical
world-to-Internet offerings, is our core business and is based in the United
States, with development and operating facilities in Fort Myers, Florida.
Application services develops and supports all of our physical world to Internet
technology, including our linking "switch" and our application platforms, and
manages our patent portfolio surrounding our technology. NISS also provides the
systems integration resources needed to design and build custom customer
solutions predicated on our infrastructure technology.
NeoMedia Consulting and Integration Services (NCIS) is the original
business line upon which we were organized. This unit resells client-server
equipment and related software. The unit also provides general and specialized
consulting services targeted at software driven print applications, and
especially at process automation of production print facilities through its
integrated document factory solution. NCIS also identifies prospects for custom
applications based on our products and services. The operations are based in
Lisle, Illinois.
ABOUT US
Our principal executive offices are located at 2201 Second Street, Suite
402, Fort Myers, Florida 33901. Our general telephone number is (239) 337-3434.
Our Web site is located at WWW.NEOM.COM. Information contained on our Web site
is not part of this prospectus.
1
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners, which intends to sell up to 102,000,000
shares of common stock.
o Other selling stockholders, who intend to sell up to 11,408,376
shares of common stock.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners shares of common stock
for a total purchase price of $10 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital Partners will pay 98%
of the lowest closing bid price of our common stock on the Over the Counter
Bulletin Board for the five trading days immediately following the notice date.
The amount of each advance is subject to a maximum of $150,000 per advance, with
a minimum of six trading days between advances. In addition, Cornell Capital
Partners will retain 5% of each advance under the Equity Line of Credit. Cornell
Capital Partners received 2,000,000 shares of common stock as a one-time
commitment fee in connection with the Equity Line of Credit. Cornell Capital
Partners intends to sell any shares purchased under the Equity Line of Credit at
the then prevailing market price. This prospectus relates to the shares of our
common stock to be issued under the Equity Line of Credit, as well as shares of
common stock issued as a commitment fee pursuant to the Equity Line of Credit,
shares of common stock to be acquired pursuant to the exercise of warrants
previously issued by NeoMedia and shares of common stock previously issued by
NeoMedia.
We have engaged Westrock Advisors, Inc., an unaffiliated registered
broker-dealer, to advise us in connection with the Equity Line of Credit.
Westrock Advisors, Inc. was paid a fee of 62,500 shares of our common stock.
COMMON STOCK OFFERED 113,408,376 shares
OFFERING PRICE Market Price
COMMON STOCK OUTSTANDING 25,391,298 shares
PRIOR TO THIS OFFERING(1)
USE OF PROCEEDS The shares of common stock offered
pursuant to this prospectus are offered
by the Selling Stockholders listed on
page 16. We will not receive any
proceeds from the sale of the shares
offered hereby, except the exercise
price of warrants being registered
hereunder. We will also receive
proceeds from the sale of common stock
to Cornell Capital Partners under the
Equity Line of Credit, which will be
used for general working capital. See
"Use of Proceeds."
RISK FACTORS An investment in our common stock is
highly speculative and involves a high
degree of risk and immediate
substantial dilution. You should read
the "Risk Factors" and "Dilution"
sections.
OTC BULLETIN BOARD SYMBOL NEOM
----------
(1) This table excludes options and warrants to purchase 8,755,219 and
7,705,090 shares of common stock, respectively, and up to 100,000,000
shares of common stock to be issued under the Equity Line of Credit.
Outstanding shares of common stock excludes 53,620,023 shares issued
into escrow on December 2, 2002, as collateral for a note payable by
NeoMedia to an unrelated investor. The shares are restricted, and the
note holder does not have title to the securities unless NeoMedia
defaults on the note, which matures on May 1, 2003. The shares are
therefore not deemed to be outstanding.
2
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS WHICH MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. BEFORE PURCHASING OUR SHARES OF
COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, AND
RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THAT CASE,
THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS SPECIFIC TO NEOMEDIA
WE HAVE CURRENTLY PENDING LEGAL ACTIONS WHICH THREATEN TO DIVEST US OF CRITICAL
INTELLECTUAL PROPERTY
On September 6, 2001, AirClic filed suit against NeoMedia in the Court
of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things,
the accelerated repayment of a $500,000 loan it advanced to NeoMedia under the
terms of a letter of intent entered into between AirClic and NeoMedia. The
letter of intent was subsequently abandoned on the basis of NeoMedia's alleged
breach of certain representations in the promissory note issued to AirClic in
respect of such advance. The note issued by NeoMedia in respect of AirClic's
$500,000 advance is secured by substantially all of NeoMedia's property,
including our core physical world-to-Internet technologies. If we are deemed to
have defaulted under such note, and do not pay the judgment, AirClic, which is
one of our key competitors, could acquire NeoMedia's core intellectual property
and other assets, which could force us to reduce or cease operations. We are
vigorously defending this claim and have interposed counterclaims against
AirClic. As of the date of this filing, pleadings were closed and the parties
have engaged in written discovery. Whether or not AirClic is successful in
asserting its claims that we breached certain representations made by us in the
note, the note became due and payable in accordance with its terms on January
11, 2002. Based on the cash currently available to NeoMedia, payment of the note
and related interest would have a material adverse effect on NeoMedia's
financial condition. If we fail to pay such note, AirClic could proceed against
our intellectual property and other assets securing the note which could force
us to reduce or cease operations.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE
We have incurred substantial losses since our inception, and anticipate
incurring substantial losses for the foreseeable future. We incurred a loss of
$6,502,000 in the nine months ended September 30, 2002, $25,469,000 in the year
ended December 31, 2001, $5,409,000 in the year ended December 31, 2000 and
$10,472,000 in the year ended December 31, 1999. Our accumulated losses were
approximately $69,845,000 as of September 30, 2002, $63,344,000 as of December
31, 2001 and $37,875,000 as of December 31, 2000. We had a working capital
(deficit) of approximately $(8,208,000) as September 30, 2002, $(5,163,000) as
of December 31, 2001 and $8,426,000 as of December 31, 2000. We had
stockholders' equity of $(5,183,000), $(263,000) and $19,110,000 at September
30, 2002, December 31, 2001 and December 2000, respectively. We generated
revenues of $8,452,000 for the nine months ended September 30, 2002, $8,142,000
for the year ended December 31, 2001 and $27,565,000 for the year ended December
31, 2000. In addition, we recorded negative cash flows from operations of
($669,000) during the nine months ended September 30, 2002, ($5,202,000) for the
year ended December 31, 2001 and ($6,775,000) for the year ended December 31,
2000, respectively. To succeed, we must develop new client and customer
relationships and substantially increase our revenue derived from improved
products and additional value-added services. To the extent we have available
financing, we intend to expend substantial resources to develop and improve our
products, increase our valued-added services and to market our products and
services. These development and marketing expenses must be incurred well in
advance of the recognition of revenue. As a result, we may not be able to
achieve or sustain profitability.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
On February 11, 2003, we entered into an Equity Line of Credit Agreement
with Cornell Capital Partners L.P. Under the terms of the agreement, Cornell has
agreed to purchase up to $10.0 million of NeoMedia common stock over the next
two years at NeoMedia's discretion. The maximum amount of each purchase is
$150,000, with a minimum of seven days between purchases. For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital will pay
98% of the lowest closing bid price on the Over-the-Counter Bulletin Board
during the five-day period following the delivery of a notice of purchase by
NeoMedia. We will pay 5% of the gross proceeds of each purchase to Cornell
Capital as a commission. According to the terms of the revised agreement,
NeoMedia cannot draw on the Equity Line of Credit until the shares underlying
3
the agreement are registered for with Securities and Exchange Commission. We
have not secured any other financing as of the date of this filing to fund
operations.
Our cash balance as of September 30, 2002, was approximately $9,000.
Based on current cash balances and operating budgets, we believe we only have
enough operating capital to last the next 30 days. If our financial resources
are insufficient, we may be forced to seek protection from our creditors under
the United States Bankruptcy Code or analogous state statutes unless we are able
to engage in a merger or other corporate finance transaction with a better
capitalized entity. We cannot predict whether additional financing will be
available, the type of any future financing, if available, or whether we will be
successful in identifying entities with which we may consummate a merger or
other corporate finance transactions.
On December 2, 2002, we issued to a private investor a promissory note
in the principal amount of $165,000, bearing interest at a rate of 12% per
annum, with a maturity of 150 days. We will pay an administrative fee of $16,500
and legal fees of $10,000 relating to the issuance of the note, resulting in net
proceeds to us of $138,500. In the event we default on the note, the investor
will receive sufficient stock to comprise a non-dilutable 51% of our
fully-diluted common stock. In connection with the default provision of the
note, we entered into a Pledge Agreement under which we have issued 53,620,020
shares to an unrelated third party as collateral for the note. In the event of
default, the third party will issue the shares to the investor, and we would
issue additional shares as required to increase the investor's ownership to 51%
of our fully-diluted outstanding shares at the time of default.
During November 2002, NeoMedia issued Convertible Secured Promissory
Notes with an aggregate face value of $60,000 to 3 separate parties, including
Charles W. Fritz, Chairman of our Board of Directors; William E. Fritz, outside
director of NeoMedia; and James J. Keil, outside director of NeoMedia. The notes
bear interest at a rate of 15% per annum, and mature at the earlier of four
months, or that date the shares of common stock underlying the Equity Line of
Credit are registered with the Securities and Exchange Commission. The notes are
convertible, at the option of the holder, into either cash or shares of
NeoMedia's common stock at a 30% discount to the market price upon either the
closing date or the conversion date, whichever is lower. NeoMedia will also
grant to the holders an additional 192,000 shares of common stock and 60,000
warrants to purchase shares of NeoMedia's common stock at $0.03 per share, with
a term of three years. In the event NeoMedia defaults on the note, we will issue
an additional 1,404,330 shares of our common stock to the note holders. The
notes are secured by our intellectual property, which is subject to first lien
by AirClic, Inc.
Over the next two years, we anticipate that in addition to the $10
million available to us under the Equity Line of Credit, we will need to raise
additional capital to fund our anticipated operating expenses. Among other
things, external financing will be required to cover our operating costs. We
cannot assure you that financing, whether from external sources or related
parties, will be available if needed or on favorable terms. In the absence of
financing, we believe that we will have sufficient capital to sustain operations
through December 31, 2002. Our belief is based on our operating plan, which in
turn is based on assumptions that may prove to be incorrect. If capital raised
from financing efforts and our financial resources are insufficient we may
require additional financing in order to execute on our operating plan and
continue as a going concern. We may not be able to obtain the necessary
additional capital on a timely basis, on acceptable terms, or at all. In any of
these events, we may be unable to implement our current plans for expansion,
repay our debt obligations as they become due or respond to competitive
pressures, any of which circumstances could force us to reduce or cease
operations. In the event that any future financing should take the form of a
sale of equity securities, the holders of the common stock may experience
additional dilution.
OUR INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR REPORT ON
OUR FINANCIAL STATEMENTS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE
OPERATIONS
The report of Stonefield Josephson, Inc., our independent auditors, with
respect to our financial statements and the related notes for the year ended
December 31, 2001, indicates that, at the date of their report, we had suffered
recurring losses from operations and our current cash position raised
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from this
uncertainty. The report of Arthur Andersen LLP, our former independent auditors,
with respect to our financial statements and the related notes for the years
ended December 21, 2000 and 1999, indicates that, at the date of their report,
we had suffered recurring losses from operations and our current cash position
raised substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from this
uncertainty.
4
THERE IS LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE OUR BUSINESS
BECAUSE THE PHYSICAL WORLD - TO - INTERNET MARKET HAS EXISTED FOR A SHORT PERIOD
OF TIME
The physical world-to-Internet market in which we operate is a recently
developed market. Further, we have conducted operations in this market only
since March 1996. Consequently, we have a relatively limited operating history
upon which you may base an evaluation of our primary business and determine our
prospects for achieving our intended business objectives. To date, we have sold
our physical world-to-Internet products to only 12 companies. Further, Digital
Convergence, our primary customer for our physical world-to-Internet products,
has filed Chapter 7 of the United States Bankruptcy Code and is presently being
sued by us for default on a promissory note issued to us in lieu of payment. We
are prone to all of the risks inherent to the establishment of any new business
venture, including unforeseen changes in our business plan. You should consider
the likelihood of our future success to be highly speculative in light of our
limited operating history in our primary market, as well as the limited
resources, problems, expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies in new and rapidly evolving markets, such as the physical
world-to-Internet space. To address these risks, we must, among other things,
o maintain and increase our client base;
o implement and successfully execute our business and marketing
strategy;
o continue to develop and upgrade our products;
o continually update and improve our service offerings and features;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we are unable to
do so, our business, prospects, financial condition, and results of operations
would be materially and adversely affected.
OUR SHARES HAVE BEEN DE-LISTED FROM TRADING ON THE NASDAQ SMALLCAP MARKET, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR ABILITY TO RESELL YOUR SHARES OR
OBTAIN ACCURATE PRICE QUOTATIONS
On March 11, 2002, we received a Nasdaq Staff Determination stating
that, as of December 31, 2001, we did not meet either the minimum net tangible
assets ($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for
continued listing on the Nasdaq SmallCap Market and advising that, accordingly,
our shares were subject to de-listing from such market. On May 16, 2002, we
received notification from the Nasdaq Listing Qualifications Panel that our
shares were delisted effective May 17, 2002. Our shares are now trading on the
OTC Bulletin Board. Your ability to resell shares of our stock, obtain accurate
or timely price quotations on our shares, and, potentially, our ability to sell
shares for our own account in order to raise equity financing could possibly be
materially adversely affected by this delisting.
WE ARE SUBJECT TO PRICE VOLATILITY DUE TO OUR OPERATIONS MATERIALLY FLUCTUATING
As a result of the emerging and evolving nature of the markets in which
we compete, as well as the current nature of the public markets and our current
financial condition, we believe that our operating results may fluctuate
materially, as a result of which quarter-to-quarter comparisons of our results
of operations may not be meaningful. If in some future quarter, whether as a
result of such a fluctuation or otherwise, our results of operations fall below
the expectations of securities analysts and investors, the trading price of our
common stock would likely be materially and adversely affected. You should not
rely on our results of any interim period as an indication of our future
performance. Additionally, our quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. Factors that may cause our quarterly results to
fluctuate include, among others:
o our ability to retain existing clients and customers;
o our ability to attract new clients and customers at a steady rate;
o our ability to maintain client satisfaction;
5
o our ability to motivate potential clients and customers to acquire
and implement new technologies;
o the extent to which our products gain market acceptance; o the
timing and size of client and customer purchases;
o introductions of products and services by competitors;
o price competition in the markets in which we compete;
o the pricing of hardware and software which we resell or integrate
into our products;
o the level of use of the Internet and online services and the rate
of market acceptance of physical world-to-Internet marketing;
o our ability to upgrade and develop our systems and infrastructure
in a timely and effective manner;
o our ability to attract, train, and retain skilled management,
strategic, technical, and creative professionals;
o the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations, and
infrastructure;
o unanticipated technical, legal, and regulatory difficulties with
respect to use of the Internet; and
o general economic conditions and economic conditions specific to
Internet technology usage and electronic commerce.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ listed stock must still have a price of not less
than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years)
or $10.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
WE ARE UNCERTAIN OF THE SUCCESS OF OUR INTERNET SWITCHING SERVICES BUSINESS UNIT
AND THE FAILURE OF THIS UNIT WOULD NEGATIVELY AFFECT OUR OPERATIONS
We provide products and services that provide a seamless link from
physical objects, including printed material, to the Internet. We can provide no
assurance that:
o this Internet Switching Services business unit will ever achieve
profitability;
6
o our current product offerings will not be adversely affected by the
focusing of our resources on the physical world-to-Internet space;
or
o the products we develop will obtain market acceptance.
In the event that the Internet Switching Services business unit should
never achieve profitability, that our current product offerings should so
suffer, or that our products fail to obtain market acceptance, we could be
forced to reduce or cease operations.
OUR SUCCESS IS DEPENDENT UPON THE RESALE OF SOFTWARE AND EQUIPMENT FOR REVENUE;
A REDUCTION IN THESE SALES WOULD MATERIALLY ADVERSELY AFFECT OUR OPERATIONS AND
THE PRICE OF OUR STOCK
During the three and nine months ended September 30, 2002 and the years
ended December 31, 2001 and 2000, we derived 96%, 96%, 93%, and 69%,
respectively, of our revenues from the resale of computer software and
technology equipment. A loss or a reduction of this revenue would have a
material adverse effect on our business, prospects, financial condition, and
results of operations, as well as our stock price. We can provide no assurance
that:
o the market for our products and services will continue;
o we will be successful in marketing these products due to
competition and other factors;
o we will continue to be able to obtain short-term financing for the
purchase of the products that we resell; or
o our relationship with companies whose products and services we sell
will continue, including our relationship with Sun Microsystems
Computer Company.
Further, the technology and equipment resale business is becoming a
commodity industry for products undifferentiated by value-added proprietary
elements and services. A large number of companies act as re-marketers of
another party's products, and therefore, the competition in this area is
intense. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels. In some instances, we, in acting as a
re-marketer, may compete with the original manufacturer. An inability to
effectively compete and generate revenues in this industry could force us to
reduce or cease operations.
A LARGE PERCENTAGE OF OUR ASSETS ARE INTANGIBLE ASSETS, WHICH WILL HAVE LITTLE
OR NO VALUE IF OUR OPERATIONS ARE UNSUCCESSFUL
At September 30, 2002, approximately 33% of our total assets were
intangible assets, consisting primarily of rights related to our patents and
other intellectual property. If our operations are unsuccessful, these assets
will have little or no value, which will materially adversely affect the value
of our stock and the ability of our stockholders to recoup their investments in
our capital stock.
OUR ISS BUSINESS UNIT MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT
IN SUCCESS
To date, we have conducted limited marketing efforts directly relating
to our NISS business unit. All of our marketing efforts have been largely
untested in the marketplace, and may not result in sales of our products and
services. To penetrate the markets in which we compete, we will have to exert
significant efforts to create awareness of, and demand for, our products and
services. With respect to our marketing efforts conducted directly, we intend to
expand our sales staff upon the receipt of sufficient operating capital. Our
failure to further develop our marketing capabilities and successfully market
our products and services could force us to reduce or cease operations.
OUR INTERNALLY DEVELOPED SYSTEMS ARE INEFFICIENT AND MAY PUT US AT A COMPETITIVE
DISADVANTAGE
We use internally developed technologies for a portion of our systems
integration services, as well as the technologies required to interconnect our
clients' and customers' physical world-to-Internet systems and hardware with our
own. As we developed these systems in order to integrate disparate systems and
hardware on a case-by-case basis, these systems are inefficient and require a
significant amount of customization. Such client and customer specific
customization is time-consuming and costly and may place us at a competitive
disadvantage when compared to competitors with more efficient systems.
7
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our future success will depend in large part on our ability to attract,
train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other technology companies and more established organizations,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than we have. We may not be successful in
attracting and retaining qualified personnel on a timely basis, on competitive
terms, or at all. Our failure to attract and retain qualified personnel would
have a material adverse effect on our business, prospects, financial condition,
and results of operations will be materially adversely affected.
WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD PUT
US AT A COMPETITIVE DISADVANTAGE
Our success depends largely on the skills of certain key management and
technical personnel, including Charles T. Jensen, our President, Chief Executive
Officer and Chief Operating Officer. The loss of the services of Mr. Jensen
could materially harm our business because of the cost and time necessary to
replace and train a replacement. Such a loss would also divert management
attention away from operational issues. We do not presently maintain a key-man
life insurance policy on Mr. Jensen.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon our proprietary technology,
including our patents and other intellectual property, and on our ability to
protect our proprietary technology and other intellectual property rights. In
addition, we must conduct our operations without infringing on the proprietary
rights of third parties. We also intend to rely upon unpatented trade secrets
and the know-how and expertise of our employees, as well as our patents. To
protect our proprietary technology and other intellectual property, we rely
primarily on a combination of the protections provided by applicable patent,
copyright, trademark, and trade secret laws as well as on confidentiality
procedures and licensing arrangements. We have five patents for our physical
world-to-Internet technology. We also have several trademarks relating to our
proprietary products. Although we believe that we have taken appropriate steps
to protect our unpatented proprietary rights, including requiring that our
employees and third parties who are granted access to our proprietary technology
enter into confidentiality agreements with us, we can provide no assurance that
these measures will be sufficient to protect our rights against third parties.
Others may independently develop or otherwise acquire patented or unpatented
technologies or products similar or superior to ours.
We license from third parties certain software tools that we include in
our services and products. If any of these licenses were terminated, we could be
required to seek licenses for similar software from other third parties or
develop these tools internally. We may not be able to obtain such licenses or
develop such tools in a timely fashion, on acceptable terms, or at all.
Companies participating in the software and Internet technology industries are
frequently involved in disputes relating to intellectual property. We may in the
future be required to defend our intellectual property rights against
infringement, duplication, discovery, and misappropriation by third parties or
to defend against third-party claims of infringement. Likewise, disputes may
arise in the future with respect to ownership of technology developed by
employees who were previously employed by other companies. Any such litigation
or disputes could result in substantial costs to, and a diversion of effort by,
us. An adverse determination could subject us to significant liabilities to
third parties, require us to seek licenses from, or pay royalties to, third
parties, or require us to develop appropriate alternative technology. Some or
all of these licenses may not be available to us on acceptable terms or at all,
and we may be unable to develop alternate technology at an acceptable price or
at all. Any of these events could have a material adverse effect on our
business, prospects, financial condition, and results of operations.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH WE DO HAVE COVERAGE AND AN
UNINSURED CLAIM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION, AND RESULTS OF OPERATIONS, AS WELL AS THE VALUE OF OUR
STOCK
Many of our projects are critical to the operations of our clients'
businesses. Any failure in a client's information system could result in a claim
for substantial damages against us, regardless of our responsibility for such
failure. We could, therefore, be subject to claims in connection with the
products and services that we sell. We currently maintain product liability
insurance up to $1 million per occurrence. We do not currently maintain errors
and omissions insurance. There can be no assurance that: we have contractually
limited our liability for such claims adequately or at all; or we would have
sufficient resources to satisfy any liability resulting from any such claim.
8
The successful assertion of one or more large claims against us could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
WE WILL NOT PAY CASH DIVIDENDS AND INVESTORS MAY HAVE TO SELL THEIR SHARES IN
ORDER TO REALIZE THEIR INVESTMENT
We have not paid any cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future. We intend to retain
future earnings, if any, for reinvestment in the development and marketing of
our products and services. We are currently a party to a Credit Agreement with
Bank One, which restricts our ability to pay dividends. Any future credit
agreements into which we may enter with institutional lenders may similarly
restrict our ability to pay dividends. As a result, investors may have to sell
their shares of common stock to realize their investment.
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER
TAKEOVER ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO SELL
THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE
Some of the provisions of our Certificate of Incorporation and By-Laws
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders by providing them with the opportunity
to sell their shares at a premium to the then market price. On December 10,
1999, our Board of Directors adopted a stockholders rights plan and declared a
non-taxable dividend of one right to acquire Series A Preferred Stock of
NeoMedia, par value $0.01 per share, on each outstanding share of our common
stock to stockholders of record on December 10, 1999 and each share of common
stock issued thereafter until a pre-defined hostile takeover date. The
stockholder rights plan was adopted as an anti-takeover measure, commonly
referred to as a "poison pill." The stockholder rights plan was designed to
enable all stockholders not engaged in a hostile takeover attempt to receive
fair and equal treatment in any proposed takeover of NeoMedia and to guard
against partial or two-tiered tender offers, open market accumulations and other
hostile tactics to gain control of NeoMedia. The stockholders rights plan, which
is similar to plans adopted by many leading public companies, was not adopted in
response to any effort to acquire control of NeoMedia at the time of adoption.
This stockholders rights plan may have the effect of rendering more difficult,
delaying, discouraging, preventing, or rendering more costly an acquisition of
NeoMedia or a change in control of NeoMedia. Certain of our directors, officers
and principal stockholders, including Charles W. Fritz, William E. Fritz and The
Fritz Family Limited Partnership and their holdings were exempted from the
triggering provisions of our "poison pill" plan, as their holdings as of the
date of plans adoption might have otherwise triggered the "poison pill."
In addition, our Certificate of Incorporation authorizes the issuance of
blank-check preferred stock (that is, preferred stock which our Board of
Directors can create and issue without prior stockholder approval) with rights
senior to those of our common stock. This provision may have the effect of
delaying or preventing changes of control or management of NeoMedia, even if
such transactions would have significant benefits to our stockholders. As a
result, this could limit the price some investors might be willing to pay in the
future for shares of our common stock.
9
RISKS RELATING TO OUR INDUSTRY
WE WILL ONLY BE ABLE TO EXECUTE OUR PHYSICAL WORLD-TO-INTERNET BUSINESS PLAN IF
INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW
Our future revenues and any future profits are substantially dependent
upon the widespread acceptance and use of the Internet and other online services
as an effective medium of information and commerce. If use of the Internet and
other online services does not continue to grow or grows more slowly than we
expect, if the infrastructure for the Internet and other online services does
not effectively support the growth that may occur, or if the Internet and other
online services do not become a viable commercial marketplace, our physical
world-to-Internet business, and therefore our business, prospects, financial
condition, and results of operations, could be materially adversely affected.
Rapid growth in the use of, and interest in, the Internet, the Web, and online
services is a recent phenomenon, and may not continue on a lasting basis.
Concerns over the security of the Internet and other electronic transactions and
the privacy of consumers and merchants may inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. In addition, new consumers may not adopt, and existing
consumers may not continue to use, the Internet and other online services as a
medium of information retrieval or commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and few services and products have generated profits.
For us to be successful, consumers and businesses must be willing to accept and
use new ways of conducting business and exchanging information.
In addition, the public in general may not accept the Internet and other
online services as a viable commercial or information marketplace for a number
of reasons, including, but not limited to, potentially inadequate development of
the necessary network infrastructure and delayed development of enabling
technologies and performance improvements. To the extent that the Internet and
other online networks continue to experience significant growth in the number of
users, their frequency of use, and in their bandwidth requirements, the
infrastructure for the Internet and online networks may be unable to support the
demands placed upon them. In addition, the Internet and other online networks
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet activity
and increased governmental regulation. Significant issues concerning the
commercial and informational use of the Internet and online networks
technologies, including security, reliability, cost, ease of use, and quality of
service, remain unresolved and may inhibit the growth of Internet business
solutions that utilize these technologies. Changes in, or insufficient
availability of, telecommunications services to support the Internet or other
online services also could result in slower response times and adversely affect
usage of the Internet and other online networks generally and our physical
world-to-Internet product and networks in particular. In the event that we are
unable to successfully execute our physical world-to-Internet business plan, we
could be forced to reduce or cease operations.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, PHYSICAL WORLD-TO-INTERNET,
EQUIPMENT RESALES AND SYSTEMS INTEGRATIONS MARKETS, AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
We may not be able to adapt as the Internet, physical world-to-Internet,
equipment resales and systems integration markets, and consumer demands continue
to evolve. Our failure to respond in a timely manner to changing market
conditions or client requirements could force us to reduce or cease operations.
The Internet, physical world-to-Internet, equipment resales, and systems
integration markets are characterized by:
o rapid technological change;
o changes in user and customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices that could
render proprietary technology and hardware and software
infrastructure obsolete.
Our success will depend, in part, on our ability to:
o enhance and improve the responsiveness and functionality of our
products and services;
10
o license or develop technologies useful in our business on a timely
basis;
o enhance our existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of our prospective or current customers; and
o respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN MARKETS WHERE OUR COMPETITORS HAVE
MORE RESOURCES
While the market for physical world-to-Internet technology is relatively
new, it is already highly competitive and characterized by an increasing number
of entrants that have introduced or developed products and services similar to
those offered by us. We believe that competition will intensify and increase in
the future. Our target market is rapidly evolving and is subject to continuous
technological change. As a result, our competitors may be better positioned to
address these developments or may react more favorably to these changes, which
could force us to reduce or cease operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. We compete in these industries on the basis of a
number of factors, including the attractiveness of the services offered, the
breadth and quality of these services, creative design and systems engineering
expertise, pricing, technological innovation, and response to clients' needs. A
number of these factors are beyond our control. Our competitors may develop or
offer products or services that provide significant technological, creative,
performance, price, or other advantages over the products and services offered
by us.
Many of our competitors have longer operating histories, larger customer
bases, longer relationships with clients, and significantly greater financial,
technical, marketing, and public relations resources than NeoMedia. Based on
total assets and annual revenues, we are significantly smaller than our two
largest competitors in the physical world-to-Internet industry, which is the
primary focus of our business. Similarly, we compete against significantly
larger and better-financed companies in our systems integration and resales
businesses, including the manufacturers of the equipment and technologies that
we integrate and resell. If we compete with our primary competitors for the same
geographical or institutional markets, their financial strength could prevent us
from capturing those markets. We may not successfully compete in any market in
which we conduct currently or in the future. In addition, based on the
increasing consolidation, price competition and participation of equipment
manufacturers in the systems integration and equipment resales markets, we
believe that we will no longer be able to compete effectively in these markets
in the future. It is for this reason, that we have increasingly focused our
business plan on competing in the emerging market for physical world-to-Internet
products. In the event that we do not successfully execute our physical
world-to-Internet business plan, we could be forced to reduce or cease
operations.
IN THE FUTURE THERE COULD BE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
WHICH COULD HARM OUR BUSINESS
We are not currently subject to direct regulation by any government
agency other than laws or regulations applicable generally to electronic
commerce. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services, could have a material adverse effect on our business,
prospects, financial condition, and results of operations. Due to the increasing
popularity and use of the Internet and other online services, federal, state,
and local governments may adopt laws and regulations, or amend existing laws and
regulations, with respect to the Internet or other online services covering
issues such as taxation, user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and services. The
growth and development of the market for electronic commerce may prompt calls
for more stringent consumer protection laws to impose additional burdens on
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our services and increase our cost
of doing business, or otherwise force us to reduce or cease operations.
Moreover, the relevant governmental authorities have not resolved the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership and personal
privacy and it may take time to resolve these issues definitively.
Certain of our proprietary technology allow for the storage of
demographic data from our users. In 2000, the European Union adopted a directive
addressing data privacy that may limit the collection and use of certain
information regarding Internet users. This directive may limit our ability to
collect and use information collected by our technology in certain European
countries. In addition, the Federal Trade Commission and several state
governments have investigated the use by certain Internet companies of personal
11
information. We could incur significant additional expenses if new regulations
regarding the use of personal information are introduced or if our privacy
practices are investigated.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT AND THE SALE OF CONVERTIBLE DEBENTURES
The sale of shares pursuant to the conversion of debentures and pursuant
to the Equity Line of Credit will have a dilutive impact on our stockholders. As
a result, our net income per share could decrease in future periods, and the
market price of our common stock could decline. In addition, the lower our stock
price is the more shares of common stock we will have to issue under the Equity
Line of Credit to draw down the full amount. If our stock price is lower, then
our existing stockholders would experience greater dilution. For example, if we
assume that we will issue 100,000,000 shares of common stock under the Equity
Line of Credit at an assumed offering price of $0.04 (approximately 91% of our
lowest closing bid price for the five trading days before December 3, 2002),
then new shareholders would experience dilution of $0.0717 per share.
RISKS SPECIFIC TO THIS OFFERING
In addition, as of December 1, 2002, we have outstanding options and
warrants to purchase up to an aggregate 16,460,309 shares of common stock. Up to
an additional 100,000,000 shares of common stock may be issued under the Equity
Line of Credit.
THE INVESTOR UNDER THE EQUITY LINE OF CREDIT WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at a 2% discount to the lowest closing bid price for the 5 trading days
immediately following the notice date of an advance. These discounted sales
could cause the price of our common stock to decline.
THE SALE OF OUR STOCK UNDER OUR EQUITY LINE OF CREDIT COULD ENCOURAGE SHORT
SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FURTHER DECLINE OF OUR
STOCK PRICE
The significant downward pressure on the price of our common stock
caused by the sale of significant amounts of common stock under the Equity Line
of Credit could encourage short sales by third parties. Up to 100,000,000 shares
of our common stock may be issued under the Equity Line of Credit. Such an event
could place further downward pressure on the price of our common stock.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the OTC Bulletin Board. Accordingly, the price you
pay in this offering may be higher or lower than the prices paid by other people
participating in this offering.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell the shares of common stock being
registered in this offering in the public market. That means that up to
113,408,376 shares of common stock, the number of shares being registered in
this offering may be sold. Such sales may cause our stock price to decline.
OUR COMMON STOCK TRADES SPORADICALLY; THE MARKET PRICE OF OUR SECURITIES MAY BE
VOLATILE
Our common stock currently trades sporadically on the OTC Bulletin
Board. The market for our common stock may continue to be an inactive market.
Accordingly, unless and until an active public market develops, you may have
difficulty selling your shares of common stock at a price that is attractive to
you.
Our common stock has traded as low as $0.02 and as high as $6.75 between
September 30, 2000 and October 29, 2002. From time to time after this offering,
the market price of our common stock may experience significant volatility. Our
12
quarterly results, failure to meet analysts expectations, announcements by us or
our competitors regarding acquisitions or dispositions, loss of existing
clients, new procedures or technology, changes in general conditions in the
economy, and general market conditions could cause the market price of the
common stock to fluctuate substantially. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the trading prices of equity securities of many technology companies.
These price and volume fluctuations often have been unrelated to the operating
performance of the affected companies.
YOU MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS AND
WARRANTS ARE EXERCISED
As of December 1, 2002, we had outstanding stock options to purchase
approximately 8.8 million shares of common stock and warrants to purchase
approximately 7.7 million shares of common stock, some of which may in the
future, but do not currently, have exercise prices at or below the price of our
common shares on the public market. To the extent such options or warrants are
exercised, there will be further dilution. In addition, in the event that any
future financing should be in the form of, be convertible into, or exchangeable
for, equity securities, and upon the exercise of options and warrants, investors
may experience additional dilution.
EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT
The sale of shares of common stock pursuant to the Equity Line of Credit
will have a dilutive impact on our stockholders. As a result, our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, for a given advance, we will need to issue a greater
number of shares of common stock under the Equity Line of Credit as our stock
price declines. If our stock price is lower, then our existing stockholders
would experience greater dilution.
FUTURE SALES OF COMMON STOCK BY OUR STOCKHOLDERS COULD ADVERSELY AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market as a result of
this offering, or the perception that these sales could occur. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. Immediately following this
offering, we will have outstanding 140,799,674 shares of common stock. Up to
100,000,000 of the shares being registered in this offering underlie our Equity
Line of Credit Agreement with Cornell Capital Partners. Under the terms of the
agreement, in our discussion, Cornell Capital Partners is obligated to buy up to
$150,000 worth of our common stock every seven days at a price equal to 98% of
the lowest closing bid price during the five-day period subsequent to delivery
by us of an advance notice. Assuming the market price is $0.04 (closing price on
December 3, 2002) on the day this registration statement becomes effective, and
that we deliver an advance notice of purchase of $150,000 worth of our common
stock, we would issue 3,750,000 shares of our common stock. Remaining shares
would become outstanding as we continue to sell them under the agreement, with
the number of shares dependent on the market price of our common stock at the
time of the put. The number of shares to be issued upon each put is dependent on
the stock price and cannot be determined exactly at this time.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 25,391,298 shares of common stock outstanding as of December 1, 2002,
22,239,248 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 3,152,050 shares of common stock held by
existing stockholders are "restricted securities" and may be resold in the
public market only if registered or pursuant to an exemption from registration.
Some of these shares may be resold under Rule 144. The amount of outstanding
shares excludes 53,620,023 shares issued into escrow on December 2, 2002, as
collateral for a note payable by NeoMedia to an unrelated investor. The shares
are restricted, and the noteholder does not have title to the securities unless
NeoMedia defaults on the note, which matures on May 1, 2003. The shares are
therefore not deemed to be outstanding.
13
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
14
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The table identifies the selling stockholders. None of the selling
stockholders have held a position or office, or had any other material
relationship, with NeoMedia, except as follows:
o Cornell Capital Partners, L.P. is the investor under the Equity
Line of Credit. All investment decisions of Cornell Capital
Partners are made by its general partner, Yorkville Advisors, LLC.
Mark Angelo, the managing member of Yorkville Advisors, makes the
investment decisions on behalf of Yorkville Advisors.
o Westrock Advisors, Inc. is an unaffiliated registered broker/dealer
that has been retained by us. It has provided advice to us in
connection with the Equity Line of Credit. Greg Martino makes the
investment decisions for Westrock Advisors, Inc. For its services,
Westrock Advisors, Inc. received 62,500 shares of NeoMedia's common
stock.
o Ronald Breckner makes the investment decisions for Data Sales
Corporation.
o Alan Refkin makes the investment decisions for Thornhill Capital
LLC.
o Thomas S. Rogers makes the investment decisions for About.com, Inc.
o Qode.com, Inc. is currently proceeding under Chapter 7 of the
United States Bankruptcy Code. The trustee, Soneet Kapila, makes
the investment decisions for Qode.com, Inc.
o Michael Pritchett makes the investment decisions for 2150 Western
Court LLC.
o Greg Wharton makes the investment decisions for Ripfire, Inc.
The table follows:
PERCENTAGE
PERCENTAGE OF
OF OUTSTANDING
OUTSTANDING SHARES TO SHARES TO PERCENTAGE
SHARES SHARES BE ACQUIRED BE ACQUIRED OF SHARES
BENEFICIALLY BENEFICIALLY UNDER THE UNDER THE SHARES TO BENEFICIALLY
OWNED BEFORE OWNED BEFORE EQUITY LINE EQUITY LINE BE SOLD IN OWNED AFTER
SELLING STOCKHOLDERS OFFERING OFFERING(1) OF CREDIT OF CREDIT THE OFFERING OFFERING(1)
---------------------- ------------ ------------ ----------- ----------- ------------ -----------
Cornell Capital
Partners, L.P. 2,000,000(2) 7.9% 100,000,000 80% 102,000,000 0.00%
Westrock Advisors,
Inc. 62,500(3) * -- -- 62,500 0.00%
Data Sales
Corporation 1,624,501(4) 6.4% -- -- 1,624,501 0.00%
Thornhill Capital LLC 3,320,955(5) 13.1% -- -- 1,904,900 6.97%
About.com, Inc. 452,489(6) 1.8% -- -- 452,489 0.00%
Qode.com, Inc. 1,676,500(7) 6.6% -- -- 1,676,500 0.00%
David Kaminer 32,486(8) * -- -- 32,486 0.00%
David Swain 55,000(9) * -- -- 55,000 0.00%
2150 Western Court
LLC 900,000(10) 3.5% -- -- 900,000 0.00%
15
PERCENTAGE
PERCENTAGE OF
OF OUTSTANDING
OUTSTANDING SHARES TO SHARES TO PERCENTAGE
SHARES SHARES BE ACQUIRED BE ACQUIRED OF SHARES
BENEFICIALLY BENEFICIALLY UNDER THE UNDER THE SHARES TO BENEFICIALL
OWNED BEFORE OWNED BEFORE EQUITY LINE EQUITY LINE BE SOLD IN OWNED AFTER
SELLING STOCKHOLDERS OFFERING OFFERING(1) OF CREDIT OF CREDIT THE OFFERING OFFERING(1)
---------------------- ------------ ------------ ----------- ----------- ------------ -----------
Robert Koch 2,000,000(11) 7.9% -- -- 2,000,000 0.00%
Ripfire, Inc. 2,700,000(12) 10.6% -- -- 2,700,000 0.00%
TOTAL 14,824,431 58.38% 100,000,000 79.75% 113,408,376 6.97%
============= ====== =========== ====== =========== =====
----------
* Less than 1%.
(1) Applicable percentage of ownership is based on 25,391,298 shares of common stock outstanding as of
December 1, 2002, together with securities exercisable or convertible into shares of common stock
within 60 days of December 1, 2002, for each stockholder. Outstanding shares excludes 53,620,023 shares
issued into escrow on December 2, 2002, as collateral for a note payable by NeoMedia to an unrelated
investor. The shares are restricted, and the note holder does not have title to the securities unless
NeoMedia defaults on the note, which matures on May 1, 2003. The shares are therefore not deemed to be
outstanding. Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible into shares of common stock
that are currently exercisable or exercisable within 60 days of December 1, 2002, are deemed to be
beneficially owned by the person holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. The common stock is the only outstanding class of equity
securities of NeoMedia.
(2) Represents 2,000,000 shares of common stock issued as a commitment fee in connection with the Equity
Line of Credit.
(3) The address of the referenced holder(s) is 230 Park Avenue, Floor 9, New York, NY, 10169.
(4) Dispositive control of the referenced shares lies with Ronald Breckner, President of Data Sales
Corporation, Inc., 3450 West Burnsville Parkway, Burnsville, MN 55337.
(5) Beneficial ownership is comprised of 1,416,055 shares issuable upon exercise of stock options granted
under our 2002 and 1998 stock option plans, and 1,904,900 shares issuable upon exercise of stock
warrants. The address of the referenced holder(s) is c/o Alan Refkin, 3709 Fielding Drive, Springfield,
IL, 62707.
(6) The address of the referenced holder(s) is c/o Tom Rogers, PRIMEDIA, Inc. (parent company of About.com,
Inc.) 745 Fifth Avenue, New York, NY, 10151. These shares are subject to a right of first refusal in
favor of us, sale volume restrictions and sale price restrictions pursuant to a certain Agreement for
Payment in Stock, with us. These restrictions are only applicable to About.com, Inc. and will not bind
subsequent purchasers of its shares. Subject to the right of first refusal described above, control
over the disposition of these shares is held by Primedia, Inc., a Delaware corporation, by virtue of
its position as sole parent corporation of About.com, Inc. Primedia, Inc. is publicly-listed on the New
York Stock Exchange, under the trading symbol, "PRM". The directors of Primedia, Inc. are Thomas S.
Rogers, Charles G. McCurdy and Beverly C. Chell, and the Chief Executive Officer of Primedia, Inc. is
Thomas S. Rogers.
(7) Represents shares that are held in escrow pending the results of negotiations between us and Qode with
respect to the performance of the Qode business unit for the period March 1, 2001 through February 28,
2002. Upon reaching a mutual agreement by NeoMedia and Qode, all such shares may be released to Qode.
Soneet Kapila, trustee for Qode.com, Inc., in its Chapter 7 bankruptcy proceeding.
(8) The address of the referenced individual is 108 Ralph Avenue, White Plains, NY, 10606-3812.
(9) The address of the referenced individual is 443 Upper Colony Road, Wellington, NV, 89444-9580.
(10) The address of the referenced holder(s) is c/o Michael Pritchett, 2777 Finley Rd., Suite 23, Downer's
Grove, IL, 60515. Dispositive control of the referenced shares lies with Michael Pritchett, Manger of
2150 Western Court L.L.C.
(11) The address of the referenced individual is 324 Jay Street, Katonah, NY, 10536.
(12) The address of the referenced holder(s) is Plumtree Software, 500 Sansome Street, San Francisco, CA,
94111. Dispositive control of the referenced shares lies with Greg Wharton, General Counsel for
Plumtree, successor-in-interest to Ripfire, Inc.
16
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Equity Line of Credit. The purchase price of
the shares purchased under the Equity Line of Credit will be equal to 98% of the
lowest closing bid price of our common stock on the OTC Bulletin Board for the 5
trading days immediately following the notice date.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Line of Credit. The table assumes estimated offering expenses of $85,000
and 5% retention of the gross proceeds raised under the Equity Line of Credit.
GROSS PROCEEDS $1,000,000 $5,000,000 $10,000,000
NET PROCEEDS $865,000 4,665,000 9,415,000
USE OF PROCEEDS:
Research and development -- 100,000 500,000
Accounts payable 60,000 1,500,000 3,000,000
Management Compensation 200,000 250,000 400,000
General Working Capital 605,000 2,815,000 5,515,000
--------------- --------------- ---------------
TOTAL $865,000 $4,665,000 $9,415,000
=============== =============== ===============
Any proceeds received upon exercise of outstanding options will be used
for general working capital purposes.
17
DILUTION
The net tangible book value of our company as of September 30, 2002 was
$(7,678,000) or $(0.3054) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of NeoMedia (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to NeoMedia, our net tangible
book value will be unaffected by this offering. Our net tangible book value,
however, will be impacted by the common stock to be issued under the Equity Line
of Credit. The amount of dilution will depend on the offering price and number
of shares to be issued under the Equity Line of Credit. The following example
shows the dilution to new investors at an offering price of $0.04 per share.
If we assume that NeoMedia had issued 100,000,000 shares of common
stock under the Equity Line of Credit at an assumed offering price of $0.04 per
share (I.E., the maximum number of shares registered in this offering under the
Equity Line of Credit), less retention fees of $200,000 and offering expenses of
$85,000, our net tangible book value as of September 30, 2002 would have been
$(3,963,000) or $(0.0317) per share. Note that at an offering price of $0.04 per
share, NeoMedia would receive gross proceeds of $4,000,000 or $6,000,000 less
than is available under the Equity Line of Credit. Such an offering would
represent an immediate increase in net tangible book value to existing
stockholders of $0.2737 per share and an immediate dilution to new stockholders
of $0.0717 per share. The following table illustrates the per share dilution:
Assumed public offering price per share $0.0400
Net tangible book value per share before this offering $(0.3054)
Increase attributable to new investors $ 0.2737
-----------
Net tangible book value per share after this offering $(0.0317)
-----------
Dilution per share to new stockholders $0.0717
===========
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION PER
ASSUMED NO. OF SHARES TO SHARE TO NEW
OFFERING PRICE BE ISSUED (1) INVESTORS
-------------- ------------------ ---------------
$0.1000 100,000,000 $0.0861
$0.0400 100,000,000 $0.0717
$0.0300 100,000,000 $0.0693
$0.0200 100,000,000 $0.0669
$0.0100 100,000,000 $0.0644
----------
(1) This represents the maximum number of shares of common stock that will
be registered under the Equity Line of Credit.
18
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock during
the years ended December 31, 2001 or 2000. Following this offering, our dividend
practices with respect to our common stock will be determined and may be changed
from time to time by our board of directors. We will base any issuance of
dividends upon our earnings, financial condition, capital requirements and other
factors considered important by our board of directors. Delaware law and our
Certificate of Incorporation do not require our Board of Directors to declare
dividends on our common stock. In addition, we have a letter of credit with Bank
One, Chicago, Illinois, which requires Bank One's written consent prior to the
declaration of cash dividends. We expect to retain all earnings, if any,
generated by our operations for the development and growth of our business and
do not anticipate paying any dividends to our stockholders for the foreseeable
future.
19
SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information was taken from our consolidated
financial statements, which have been audited by KPMG LLP, our former
independent accountants, for the years of 1997 and 1998, Arthur Andersen LLP,
our former independent accountants, for the years of 1999 and 2000, and
Stonefield Josephson, Inc., our current independent accountants, for the year
2001. The selected financial data for the years ended December 31, 2001, 2000
and 1999 have been derived from our consolidated financial statements included
elsewhere herein and include, in our management's opinion, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
data for such periods. The selected financial data for the years ended December
31, 1998 and 1997 have been derived from previous annual reports and are not
included elsewhere herein. You should read the data presented below together
with our consolidated financial statements and related notes, the other
financial information contained herein, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------ -------------- -------------- -------------- -------------- -------------
STATEMENT OF OPERATIONS
DATA:
Sales $ 8,142 $ 27,565 $ 25,256 $ 23,478 $ 24,434
Net loss from operations (18,768) (5,583)) (10,246) (11,616) (5,904)
Net loss (25,469) (5,409) (10,472) (11,495) (5,973)
Loss per share $ (1.55) $ (0.39) $ (1.01) $ (1.34) $ (0.90)
Weighted avg. number of
common shares and
common equiv. 16,410,246 13,931,104 10,377,478 8,560,849 6,615,107
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------ -------------- -------------- -------------- -------------- -------------
BALANCE SHEET DATA:
Cash $ 134 $ 4,453 $ 2,460 $ 1,350 $ 10,283
Total assets 9,039 40,594 13,657 12,630 19,799
Short term debt 899 137 625 577 201
Long term debt, less
current portion 390 539 676 801 915
Total stockholders'
equity $ (263) $ 19,110 $ 4,020 $ 3,261 $ 13,126
(in thousands, except share data)
20
SUPPLEMENTARY QUARTERLY FINANCIAL DATA
Certain quarterly financial information regarding NeoMedia is set forth
below:
SEPTEMBER 30, 2002 JUNE 30, 2002 MARCH 31, 2002
--------------------- -------------- -------------------- --------------- ----------------
Sales $3,404,000 $3,652,000 $1,396,000
Gross profit (loss) 582,000 417,000 82,000
Net income (loss) (773,000) (4,347,000) (1,382,000)
Net income (loss) Per
share (basic) $(0.03) $(0.11) $(0.05)
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------------------- -------------- -------------------- --------------- ----------------
Sales $4,459,000 $908,000 $1,237,000 $1,538,000
Gross profit (loss) 597,000 (503,000) (404,000) (414,000)
Net income (loss) (1,692,000) (9,310,000) (11,042,000) (3,425,000)
Net income (loss) Per
share (basic) $(0.11) $(0.60) $(0.72) $(0.24)
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
--------------------- -------------- -------------------- --------------- ----------------
Sales $9,875,000 $4,049,000 $9,547,000 $4,094,000
Gross profit (loss) 7,571,000 42,000 879,000 540,000
Net income (loss) 2,667,000 (3,555,000) (2,085,000) (2,436,000)
Net income (loss) Per
share (basic) $0.21 $(0.25) $(0.15) $(0.19)
21
CAPITALIZATION
The following table sets forth as of September 30, 2002, NeoMedia's
actual capitalization and pro forma capitalization after giving effect to the
issuance of 100,000,000 shares of common stock under the Equity Line of Credit.
This information assumes a purchase price under the Equity Line of Credit of
$0.04 per share, less estimated offering expenses of $85,000 and a retention of
$200,000. This table should be read in conjunction with the information
contained in "Management's Discussion and Analysis or Plan of Operation" and the
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
SEPTEMBER 30, 2002
------------------------------
ACTUAL PROFORMA
--------------- --------------
Long-term debt, net of current portion $268,000 $268,000
--------------- --------------
Stockholders' equity:
Preferred stock, $0.01 par value,
25,000,000 authorized, no issued
and outstanding shares(2)(3) -- --
Common stock, $0.01 par value,
200,000,000 authorized, 26,782,724
shares issued and 25,141,298
outstanding in 2002(1)(2)(4) 251,412 1,251,412
Treasury stock, at cost, 201,230 shares
of common stock (779,000) (779,000)
Additional paid-in capital:
Preferred stock -- --
Common stock 65,237,000 67,952,000
Deferred stock-based compensation (47,000) (47,000)
Accumulated deficit (69,845,000) (69,845,000)
--------------- ---------------
Total stockholders' deficit ($5,182,588) ($1,467,588)
--------------- ---------------
Total capitalization ($4,914,588) ($1,199,588)
=============== ===============
----------
(1) This table excludes outstanding options and warrants which if exercised
into shares of common stock would result in NeoMedia issuing 8,755,219
and 7,705,090, respectively, additional shares of common stock.
(2) On June 6, 2002, our stockholders approved an amendment to our articles
of incorporation that increased the authorized capital stock to
200,000,000 shares of common stock and 25,000,000 shares of preferred
stock.
(3) As of December 31, 2001, there were 452,489 shares of Series B
Convertible Preferred Stock that were converted to shares of common
stock on January 2, 2002. As of December 1, 2002, no Preferred Stock was
outstanding.
(4) An additional 19,000,000 shares were issued in February 2002 in exchange
for $190,000 cash and promissory notes for $3,230,000 maturing at the
earlier of August 12, 2002 or 30 days from the date of registration of
the shares. On August 12, 2002, the notes matured without payment, and
we subsequently cancelled the 19,000,000 shares issued in connection
with such notes. As a result, as of December 1, 2002, we had total
outstanding shares of 25,391,298 shares. Outstanding shares excludes
53,620,023 shares issued into escrow on December 2, 2002, as collateral
for a note payable by NeoMedia to an unrelated investor. The shares are
restricted, and the note holder does not have title to the securities
unless NeoMedia defaults on the note, which matures on May 1, 2003. The
shares are therefore not deemed to be outstanding. As of December 1,
2002, we had outstanding options to purchase 8,755,219 shares of common
stock and 7,705,090 warrants.
22
EQUITY LINE OF CREDIT
SUMMARY. On February 11, 2003, we entered into an Equity Line of Credit
with Cornell Capital Partners. Pursuant to the Equity Line of Credit, we may, at
our discretion, periodically sell to Cornell Capital Partners shares of common
stock for a total purchase price of up to $10.0 million. For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital Partners
will pay 98% of the lowest closing bid price of our common stock on the OTC
Bulletin Board or other principal market on which our common stock is traded for
the 5 trading days immediately following the notice date. Cornell Capital
Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell
Capital Partners will retain a fee of 5% of each advance under the Equity Line
of Credit. In addition, we engaged Westrock Advisors, Inc., an unaffiliated
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services, Westrock Advisors, Inc. received 62,500 shares of our
common stock. The effectiveness of the sale of the shares under the Equity Line
of Credit is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission. The costs associated with this registration
will be borne by us.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit,
we may periodically sell shares of common stock to Cornell Capital Partners to
raise capital to fund our working capital needs. The periodic sale of shares is
known as an advance. We may request an advance every 7 days. A closing will be
held 7 days after such written notice at which time we will deliver shares of
common stock and Cornell Capital Partners will pay the advance amount, less the
5% retention.
We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $10.0 million or two years after the effective date of the
accompanying registration statement, whichever occurs first.
The amount of each advance is subject to a maximum of $150,000 with a
minimum of 6 trading days between advances. The amount available under the
Equity Line of Credit is not dependent on the price or volume of our common
stock. Cornell Capital Partners may not own more than 9.9% of our outstanding
common stock at any time.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we issued 100,000,000 shares to Cornell
Capital Partners (i.e., the maximum number of shares being registered in the
accompanying registration statement), based on a recent price of $0.04 per share
under the Equity Line of Credit, we would receive gross proceeds of $4,000,000
less estimated offering expenses of $85,000 and a retention of $200,000. These
shares would represent 80% of our outstanding common stock upon issuance.
Proceeds used under the Equity Line of Credit will be used in the manner set
forth in the "Use of Proceeds" section of this prospectus. We cannot predict the
total amount of proceeds to be raised in this transaction because we have not
determined the total amount of the advances we intend to draw.
We expect to incur expenses of approximately $85,000 in connection with
this registration, consisting primarily of professional fees. In addition,
Cornell Capital Partners will retain 5% of each advance. In connection with the
Equity Line of Credit, we paid Cornell Capital Partners a commitment of
2,000,000 shares of common stock. In addition, we issued 62,500 shares of common
stock, valued at $10,000, to Westrock Advisors, Inc., an unaffiliated registered
broker-dealer, as a placement agent fee.
23
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the OTC Bulletin Board or in
any other market on which the price of our shares of common stock are quoted or
(ii) in transactions otherwise than on the OTC Bulletin Board or in any other
market on which the price of our shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling stockholders or by agreement between the selling stockholders and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of common stock to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit. Cornell Capital Partners will pay us 98% of the lowest
closing bid price of our common stock on the OTC Bulletin Board or other
principal trading market on which our common stock is traded for the 5 trading
days immediately following the advance date. In addition, Cornell Capital
Partners will retain 5% of the proceeds received by us under the Equity Line of
Credit and received a one-time commitment fee paid by the issuance of 2,000,000
shares of common stock. The 2% discount, the 5% retention, and the one-time
commitment fee are underwriting discounts. In addition, we engaged Westrock
Advisors, Inc., an unaffiliated registered broker-dealer, to advise us in
connection with the Equity Line of Credit. For its services, Westrock Advisors,
Inc. received 62,500 shares of our common stock.
Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make or market in NeoMedia's stock or to otherwise
engage in stabilizing or other transactions intended to help support the stock
price. Prospective investors should take these factors into consideration before
purchasing NeoMedia's common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000, and a one-time fee payable by the issuance of 2,000,000
shares of common stock. In addition, we engaged Westrock Advisors, Inc., a
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services, Westrock Advisors, Inc. received 62,500 shares of our
common stock. The offering expenses consist of: a SEC registration fee of $210,
printing expenses of $2,500, accounting fees of $15,000, legal fees of $50,000
and miscellaneous expenses of $17,282. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders. We will,
however, receive proceeds from the sale of common stock under the Equity Line of
Credit.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
24
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF NEOMEDIA AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
OVERVIEW
Beginning in the second quarter of 2002, NeoMedia's continued focus was
aimed toward the intellectual property commercialization unit of its Internet
Switching Systems (NISS, formerly NAS) business. NISS consists of the patented
PaperClickTM technology that enables users to link directly from the physical to
the digital world, as well as the patents surrounding certain
physical-world-to-web linking processes. NeoMedia's mission is to invent,
develop, and commercialize technologies and products that effectively leverage
the integration of the physical and electronic to provide clear functional value
for NeoMedia's end-users, competitive advantage for their business partners and
return-on-investment for their investors. To this end, the Company signed an
intellectual property license with Brandkey Systems Corporation, the fourth
intellectual property license into which the Company has entered. NeoMedia also
continued its movement into the Storage Area Network (SAN) market through its
NeoMedia Consulting and Integration Services (NCIS) business unit.
NeoMedia's quarterly operating results have been subject to variation
and will continue to be subject to variation, depending upon factors, such as
the mix of business among NeoMedia's services and products, the cost of
material, labor and technology, particularly in connection with the delivery of
business services, the costs associated with initiating new contracts, the
economic condition of NeoMedia's target markets, and the cost of acquiring and
integrating new businesses.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Total net sales for the nine months ended September 30, 2002
were $8.5 million, which represented a $4.7 million, or 124%, increase from $3.8
million for the nine months ended September 30, 2001. This increase primarily
resulted from revenues relating to NeoMedia's newly created SAN practice in
2002. NeoMedia will continue to pursue additional sales of SAN products and
services, and to the extent that such sales can be made, NeoMedia expects total
net sales to more closely resemble the results for the first nine months of
2002, rather than the first nine months of 2001.
LICENSE FEES. License fees were $0.3 million for the nine months ended
September 30, 2002, a decrease of $0.2 million or 40%, compared with $0.5
million for the nine months ended September 30, 2001. The decrease was due to
lower sales of internally developed software licenses in 2002. Demand for such
licenses has historically fluctuated from year to year. NeoMedia intends to
continue to increase sales efforts of its internally developed software licenses
in the future.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales
of software and technology equipment and service fees increased by $4.8 million,
or 145%, to $8.1 million for the nine months ended September 30, 2002, as
compared to $3.3 million for the nine months ended September 30, 2001. This
increase primarily resulted from revenues relating to NeoMedia's newly created
SAN practice in 2002. NeoMedia will continue to pursue additional sales of SAN
products and services.
COST OF SALES. Cost of license fees was $0.8 million for the nine months
ended September 30, 2002, a decrease of $1.2 million, or 150%, compared with
$2.0 million for the nine months ended September 30, 2001. The decrease resulted
from reduced amortization expense of capitalized development costs in 2002
relating to the PaperClick, MLM/Affinity, and Qode products that were written
off during 2002. Cost of resales was $6.6 million for the nine months ended
September 30, 2002, an increase of $3.9 million, or 144%, compared with $2.7
million for the nine months ended September 30, 2001. The increase resulted form
increased resales in 2002 compared with 2001. Cost of resales as a percentage of
related resales was 81% in 2002 and 84% in 2001. NeoMedia expects the cost of
resales as a percentage of related resales to remain relatively stable in the
next 12 months.
GROSS PROFIT. Gross profit was $1.1 million for the nine months ended
September 30, 2002, an increase of $2.0 million, or 222%, compared with a
negative gross profit of ($0.9) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software amortization costs in 2002
26
due to the write-off of Qode-related assets at the end of 2001, and PaperClick
assets in the second quarter of 2002.
SALES AND MARKETING. Sales and marketing expenses were $0.7 million for
the nine months ended September 30, 2002, compared to $2.1 million for the nine
months ended September 30, 2001, a decrease of $1.4 million or 67%. This
decrease resulted from a reduction in sales and marketing personnel following
NeoMedia's cost-reduction initiative started in the second half of 2001.
NeoMedia does not expect sales and marketing expenses to fluctuate dramatically
from 2002 levels over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3.6 million for the nine months ended September 30, 2002 compared with general
and administrative expenses of $3.4 million for the nine months ended September
30, 2001, an increase of $0.2 million or 6%. The increase resulted primarily
from increased legal and professional service. NeoMedia expects general and
administrative expense to decrease slightly in the next 12 months due to reduced
professional service expenses, lease restructuring, and other cost reduction
efforts.
RESEARCH AND DEVELOPMENT. During the nine months ended September 30,
2002, NeoMedia charged to expense $0.7 million of research and development
costs, compared to $0.3 million for the nine months ended September 30, 2001, an
increase of $0.4 million or 133%. The increase is primarily due to the fact that
NeoMedia was capitalizing the majority of its product development costs in 2001
as the Qode Commerce Solution was being implemented. The implementation was
cancelled and the product discontinued in the third quarter of 2001. During the
third quarter of 2002, development resources were devoted primarily to system
maintenance. NeoMedia expects research and development costs will decline over
the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the nine months ended September 30,
2002, NeoMedia recognized a loss on impairment of assets of $1.0 million for the
write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. Due to capital constraints, NeoMedia is not
currently able to devote full-time resources and infrastructure to
commercializing the technology. NeoMedia intends to re-focus sales and marketing
efforts surrounding the product upon the receipt of sufficient capital. During
the nine months ended September 30, 2001, NeoMedia recognized a loss or
impairment of assets of $2.9 million relating to NeoMedia's MLM/Affinity product
line.
WRITE-OFF OF DIGITAL CONVERGENCE LICENSE CONTRACT. During the second
quarter of 2001, NeoMedia took a $7.4 million charge to income to write off the
net assets associated with the Digital Convergence intellectual property license
contract. There were no charges related to the contract in 2002. No charges are
expected in the next 12 months.
INTEREST EXPENSE/(INCOME). Net Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense increased by $129,000 to
$99,000 for the nine months ended September 30, 2002 from income of $(30,000)
for the nine months ended September 30, 2001, due to lower cash balances in
2002, as well as interest charges in 2002 relating to notes payable not held
during 2001. NeoMedia expects net interest expense similar to 2002 levels over
the next 12 months, due to capital constraints and borrowing costs.
LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the nine months ended September 30, 2002 was $5.0 million, which represented a
$12.0 million, or 71% decrease from a $17.0 million loss for the nine months
ended September 30, 2001. The decrease resulted primarily from the $7.4 million
write-off of the Digital Convergence license contract during the second quarter
of 2001, combined with a loss on impairment of the Company's MLM/Affinity
product line of $2.9 million in 2001 and decrease of sales and marketing expense
by $1.4 million due to reduction of sales force.
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. NeoMedia
discontinued operations of its Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $3.7 million for the nine
months ended September 30, 2001. The business unit's assets were purchased in
March 2001 and the implementation was cancelled during the second quarter of
2001. NeoMedia does not expect any charges relating to the Qode business unit in
the next 12 months.
LOSS ON DISPOSAL OF DISCONTINUED BUSINESS UNITS. During the third
quarter of 2001, NeoMedia discontinued operations of its Qode business unit,
resulting in a loss on disposal of discontinued business unit of $3.2 million.
The remaining Qode system assets were held for sale subject to a letter of
intent with the Finx Group, Inc. As of September 30, 2001, December 31, 2001,
and March 31, 2002, NeoMedia recorded on its consolidated balance sheet net
assets held for sale in the amount of $210,000, which was the estimated value to
be received by NeoMedia from the Finx Group in exchange for the Qode assets.
During the second quarter of 2002, the Finx group withdrew its letter of intent.
As a result, during the nine months ended September 30, 2002, NeoMedia
27
recognized an additional loss on disposal of discontinued business unit of $1.5
million to write off the remaining Qode-related assets. NeoMedia does not expect
any charges relating to the Qode business unit in the next 12 months.
NET LOSS. The net loss for the nine months ended September 30, 2002 was
$6.5 million, which represented a $17.3 million, or 73% decrease from a $23.8
million loss for the nine months ended September 30, 2001. The decrease
primarily resulted from the $7.4 million write-off of the Digital Convergence
license contract during the second quarter of 2001, a loss on impairment of
NeoMedia's MLM/Affinity product line of $2.9 million in 2001, loss from
discontinued Qode operations of $6.9 million in 2001, and a reduction in
overhead expenses resulting from a reduction in force initiated in the third
quarter of 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Total net sales for the three months ended September 30, 2002
were $3.4 million, which represented a $2.5 million, or 278%, increase from $0.9
million for the three months ended September 30, 2001. This increase primarily
resulted from revenues relating to a $1.7 million equipment and software order
in 2002. NeoMedia intends to continue to pursue additional software and
equipment sales, as well as sales of its SAN products and services, and to the
extent that such sales can be made, NeoMedia expects future net sales to more
closely resemble the results for the first nine months of 2002, rather than the
first nine months of 2001.
LICENSE FEES. License fees were $0.2 million for the three months ended
September 30, 2002, an increase of $0.1 million or 100%, compared with $0.1
million for the three months ended September 30, 2001. The increase was due to
higher sales of internally developed software licenses in 2002. Demand for such
licenses has historically fluctuated from year to year. NeoMedia intends
continue to increase sales efforts of its internally developed software licenses
in the future.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales
of software and technology equipment and service fees increased by $2.5 million,
or 313%, to $3.3 million for the three months ended September 30, 2002, as
compared to $0.8 million for the three months ended September 30, 2001. This
increase primarily resulted from revenues relating to a $1.7 million equipment
and software order in 2002. NeoMedia intends to continue to pursue additional
software and equipment sales, as well as sales of its SAN products and services.
COST OF SALES. Cost of license fees was $0.1 million for the three
months ended September 30, 2002, a decrease of $0.6 million, or 86%, compared
with $0.7 million for the three months ended September 30, 2001. The decrease
resulted from reduced amortization expense of capitalized development costs in
2002 relating to the PaperClick, MLM/Affinity, and Qode products that were
written off during 2002. Cost of resales was $2.7 million for the nine months
ended September 30, 2002, an increase of $2.0 million, or 286%, compared with
$0.7 million for the nine months ended September 30, 2001. The increase resulted
form increased resales in 2002 compared with 2001. Cost of resales as a
percentage of related resales for the three months ended September 30 was 84% in
2002 and 91% in 2001. This decrease is primarily due to a higher sales mix of
higher-margin equipment, software, and services in 2002.
GROSS PROFIT. Gross profit was $0.6 million for the three months ended
September 30, 2002, an increase of $1.1 million, or 220%, compared with a
negative gross profit of ($0.5) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software amortization costs in 2002
due to the write-off of Qode-related assets at the end of 2001, and PaperClick
assets in the second quarter of 2002.
SALES AND MARKETING. Sales and marketing expenses were $0.2 million for
the three months ended September 30, 2002, compared to $0.7 million for the
three months ended September 30, 2001, a decrease of $0.5 million or 71%. This
decrease resulted from a reduction in sales and marketing personnel resulting
from NeoMedia's cost-reduction initiative started in the second half of 2001.
NeoMedia does not expect sales and marketing expenses to fluctuate dramatically
from 2002 levels over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $0.2 million, or 25%, to $1.0 million for the three months ended
September 30, 2002, compared to $0.8 million for the three months ended
September 30, 2001. The increase resulted primarily from increased legal and
professional service. NeoMedia expects general and administrative expense to
decrease slightly in the next 12 months due to reduced professional service
expenses, lease restructuring, and other cost reduction efforts.
28
RESEARCH AND DEVELOPMENT. During the three months ended September 30,
2002, NeoMedia charged to expense $150,000 of research and development costs, an
increase of $13,000, or 9%, compared to $137,000 for the three months ended
September 30, 2001. NeoMedia expects research and development costs to remain
materially constant over the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the three months ended September
30, 2002, NeoMedia did not recognize a loss on impairment of assets. During the
three months ended September 30, 2001, NeoMedia recognized an impairment loss of
$2.9 million relating to its MLM/Affinity product line. NeoMedia does not expect
any additional losses from asset impairment in the next 12 months.
INTEREST EXPENSE/(INCOME). Net Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense decreased by $20,000 to
$2,000 for the three months ended September 30, 2002 from $22,000 for the three
months ended September 30, 2001. NeoMedia expects net interest expense similar
to 2002 levels over the next 12 months, due to capital constraints and borrowing
costs.
LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the three months ended September 30, 2002 was $0.8 million, which represented a
$4.3 million, or 84% decrease from a $5.1 million loss for the three months
ended September 30, 2001. The decrease resulted primarily from an impairment
loss of $2.9 million relating to NeoMedia's MLM/Affinity product line during the
second quarter of 2001, combined with continued company-wide cost reduction
efforts during the last quarter of 2001 and the first three quarters of 2002.
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. NeoMedia
discontinued operations of its Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $1.0 million for the three
months ended September 30, 2001. The business unit's assets were purchased in
March 2001 and the implementation was cancelled during the second quarter of
2001. NeoMedia does not expect any charges relating to the Qode business unit in
the next 12 months.
NET LOSS. The net loss for the three months ended September 30, 2002 was
$0.8 million, which represented an $8.5 million, or 91% decrease from a $9.3
million loss for the three months ended September 30, 2001. The decrease
resulted from the $7.4 million write-off of the Digital Convergence license
contract and an impairment loss of $2.9 million relating to the Company's
MLM/Affinity product line during the second quarter of 2001.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000
NET SALES. Total net sales for the year ended December 31, 2001 were
$8.1 million, which represented a $19.5 million, or 70.1%, decrease from $27.6
million for the year ended December 31, 2000. This decrease primarily resulted
from reduced resales of Sun Microsystems equipment due to increased competition
and general economic conditions. Additionally, we recognized $7.8 million of
revenue in 2000 related to the DC license contract. No revenue was recognized
related to this contract in 2001. We expect net sales in 2002 will increase
significantly from 2001, due to a resurgence in demand for software and
technology equipment and services, combined with anticipated revenue streams
from intellectual property licenses.
Total net sales during the fourth quarter of 2001 were $4.5 million,
compared with $0.9 million in the third quarter of 2001, $1.2 million in the
second quarter of 2001, and $1.5 million in the first quarter of 2001. The
fourth-quarter increase is primarily due to a large Storage Area Network (SAN)
sale of $1.1 million in that quarter. Additionally, sales from our Consulting
and Integration Services business unit have been historically higher in the
fourth quarter of the calendar year.
LICENSE FEES. License fees were $0.6 million for the year ended December
31, 2001, compared with $8.4 million for the year ended December 31, 2000, a
decrease of $7.8 million, or 92.9%. The decrease resulted primarily from the
recognition of $7.8 million revenue during 2000 related to the
Digital:Convergence license contract. No revenue was recognized related to this
contract in 2001. We are anticipating license revenue growth in 2002 compared
with 2001 as we aggressively pursue license contracts relating to our
intellectual property.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales
of software and technology equipment and service fees decreased by $11.5
million, or 63.4%, to $7.6 million for the year ended December 31, 2001, as
compared to $19.1 million for the year ended December 31, 2000. This decrease
primarily resulted from fewer sales of Sun Microsystems hardware due to
increased competition and general economic conditions. We believe that resurgent
demand for such products, combined with our movement into higher margin and
Value-Add products and services such as Storage Area Networks, will result in
increased revenue from resales of software and technology equipment and service
fees during 2002.
29
COST OF SALES. Cost of resales as a percentage of related resales was
86.0% in 2001, compared to 90% in 2000. This decrease is substantially due to a
sales mix of higher-margin products such as service fees and maintenance
contracts.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses were $2.5 million for the year ended
December 31, 2001, compared to $6.5 million for the year ended December 31,
2000, a decrease of $4.0 million or 61.5%. This decrease primarily resulted from
fewer marketing personnel in 2001, coupled with a decrease in sales commissions
from reduced sales. Sales and marketing expense will continue to decrease in
2002 as we move away from its applications service provider model.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $2.2 million, or 30.1%, to $4.8 million for the year ended December
31, 2001, compared to $7.0 million for the year ended December 31, 2000. The
decrease is primarily related to a reduction in personnel as a result of our
cost reduction initiative. We expect general and administrative expenses will
continue to decline in 2002 as we realize the full-year benefit of
cost-reduction measures begun in the fourth quarter of 2001.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 2001, we
charged to expense $0.5 million of research and development costs, a decrease of
$0.6 million or 54.5% compared to $1.1 million charged to expense for the year
ended December 31, 2000. This decrease is predominately associated with
decreased personnel devoted to our development during the second half of 2001,
combined with increased capitalization of software development costs associated
with our "switching" platform and the Qode Universal Commerce Solution during
the first half of 2001. We expect research and development expense to continue
to decrease in 2002 as we move away from its applications service provider model
LOSS ON IMPAIRMENT OF ASSETS. During the third quarter of 2001, we wrote
off all assets associated with its discontinued MLM/Affinity product line,
resulting in an impairment charge of $2.9 million.
LOSS ON DIGITAL:CONVERGENCE. During the second quarter of 2001, we wrote
off all assets and liabilities relating to its intellectual property license
with Digital:Convergence, resulting in a net charge of $7.4 million.
INTEREST EXPENSE (INCOME), NET. Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and our asset-based collateralized line of credit net of interest earned
on cash equivalent investments. Interest (income) decreased by $153,000, or
87.9%, to $(21,000) for the year ended December 31, 2001 from $(174,000) for the
year ended December 31, 2000, due to reduced cash balances throughout 2001 as
compared to 2000.
LOSS FROM CONTINUING OPERATIONS. During the year ended December 31,
2001, our loss from continuing operations increased by $13.4 million or 248.1%
from $5.4 million in 2000 to $18.8 million in 2001. This increase is primarily
due to the loss on the Digital:Convergence license contract of $7.4 in the
second quarter of 2001 and an impairment loss of $2.8 million in the third
quarter of 2001 related to the discontinuation of our MLM/Affinity product line.
LOSS FROM OPERATIONS AND DISPOSAL OF DISCONTINUED OPERATIONS. We
discontinued operations of our Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $3.6 million. There was no
loss from this business unit during 2000. The business unit's assets were
purchased in March 2001 and the implementation was cancelled during the second
quarter of 2001.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. We sustained a loss of $3.1
million in 2001 from the disposal of the Qode business unit in 2001.
NET LOSS. Our net loss for the year ended December 31, 2001 was $25.5
million, which represented a $20.1 million, or 372.2% increase from a $5.4
million loss for the year ended December 31, 2000. The increase in net loss is
due primarily to the loss on the Digital:Convergence contract, an impairment
loss of in the third quarter of 2001 related to the discontinuation of our
MLM/Affinity product line and the discontinuation of our Qode business unit, and
reduced resales of software and technology equipment and service fees resulting
from increased competition and general economic conditions, offset by lower
expenses as a result of our cost reduction effort.
30
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999
NET SALES. Total net sales for the year ended December 31, 2000 were
$27.6 million, which represented a $2.3 million, or 9.1%, increase from $25.3
million for the year ended December 31, 1999. This increase primarily resulted
from the intellectual property license contract signed with Digital:Convergence,
offset by decreased sales of Y2K licenses and services from $3.3 million in 1999
to $0.1 million in 2000.
LICENSE FEES. Total license fees increased from $2.4 million to $8.4
million, or 250.0%, for the years ended December 31, 1999 and December 31, 2000.
The increase was due to a license agreement, entered into during the fourth of
quarter of 2000, between us and Digital:Convergence, granting
Digital:Convergence a worldwide, non-exclusive license of our patent portfolio.
Revenue from this agreement totaled $7.8 million in 2000. This was offset by a
decrease of $1.8 million due to the discontinuation of our Y2K product line.
Cost of sales as a percentage of related sales was 15.4% during 2000 compared to
73.7% during 1999. This decrease in the cost of sales as a percentage of related
sales was primarily due to the Digital:Convergence license sale in 2000 and the
discontinuation of Y2K licenses on which we paid royalties.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales
of software and technology equipment and service fees decreased by $3.7 million,
or 16.1%, to $19.1 million for the year ended December 31, 2000, as compared to
$22.8 million for the year ended December 31, 1999. This decrease primarily
resulted from decreased resales of IBM equipment due to discontinuation of sales
in the Canadian market. Also contributing to the decrease was reduced service
revenue from Y2K products of $1.6 million. Cost of sales as a percentage of
related sales decreased to 90.0% during 2000 from 90.5% during 1999.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses decreased $0.3 million, or 4.4%, to $6.5
million for the year ended December 31, 2000 from $6.8 million for the year
ended December 31, 1999, due to a decrease in our application services direct
sales force, offset by personnel additions in marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $1.7 million, or 32.1%, to $7.0 million for the year ended December
31, 2000, from $5.3 million for the year ended December 31, 1999. This increase
was due to the accrual of executive performance incentives in 2000. No
performance incentive expense was incurred in 1999. Also, increased legal costs
of $0.5 million were expensed in 2000.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 2000, we
charged to expense $1,101,000 of research and development expenses, an increase
of $114,000 or 11.6% compared to $986,000 charged to expense for the year ended
December 31, 1999. This increase was due to increased resources directed toward
the development of the application services business. To the extent we can
obtain additional capital, we will continue to make significant investments in
research and development.
NET INTEREST (INCOME) EXPENSE. Interest expense consists primarily of
interest paid to creditors as part of financed purchases, capitalized leases and
our asset-based collateralized line of credit net of interest earned on cash
equivalent investments. Interest expense decreased by $400,000, or 177%, to
income of $174,000 for the year ended December 31, 2000 from $226,000 of expense
for the year ended December 31, 1999. This was due to reduced interest expense
resulting from the repayment of notes in the first quarter of 2000, as well as
interest income from higher cash balances during 2000.
NET LOSS. Our net loss for the year ended December 31, 2000 was $5.4
million, which represented a $5.1 million, or 48.6% decrease from a $10.5
million loss for the year ended December 31, 1999. The decrease was primarily
due to revenue from the licensing of our intellectual property in 2000. This was
offset by a 97% decrease of Y2K revenue in 2000 along with increased general and
administrative expenses.
INTANGIBLE ASSETS
At the end of each quarter we perform impairment tests on each of our
intangible assets, which include capitalized patent costs, capitalized software
development costs, and purchased software. In doing so, we evaluate the carrying
value of each intangible asset with respect to several factors, including
historical revenue generated from each intangible asset, application of the
assets in our current business plan, and projected revenue to be derived from
the asset. Intangible asset balances are then adjusted to their current net
realizable value based on these criteria if impaired.
31
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, NeoMedia's cash balance was $9,000 compared to
$10,000 at June 30, 2002 and $134,000 at December 31, 2001.
Net cash used in operating activities for the nine months ended
September 30, 2002 and 2001, was $0.7 million and $4.8 million, respectively.
During the nine months ended September 30, 2002, trade accounts receivable
increased $0.6 million, while accounts payable inclusive of amounts due under
financing agreements, liabilities in excess of assets of discontinued business
unit, accrued expenses and deferred revenue increased $2.0 million. During the
nine months ended September 30, 2001, trade accounts receivable decreased $1.3
million, while accounts payable inclusive of amounts due under financing
agreements, accrued expenses and deferred revenue decreased $0.1 million.
NeoMedia's net cash flow from/(used in) investing activities for the nine months
ended September 30, 2002 and 2001 was $0.1 and ($3.0) million, respectively.
Net cash provided by financing activities for the nine months ended
September 30, 2002 and 2001, was $0.5 million and $3.7 million, respectively.
The decrease was due to $1.6 million proceeds for the sale of common stock and
$1.2 million from the exercise of stock options and warrants in 2001. During the
nine months ended September 30, 2002, NeoMedia sold 19 million shares of its
common stock at $0.17 per share in exchange for promissory notes maturing at the
earlier of i), August 12, 2002, or ii) 30 days from registration of the shares.
During August 2002, the notes matured without payment, and NeoMedia subsequently
cancelled the 19 million shares issued in connection with such notes. NeoMedia
has accrued a liability in the third quarter of $190,000 relating to the par
value paid in connection with the issuance of the shares.
The accompanying unaudited financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the financial
statements do not include any adjustments that might result from NeoMedia's
inability to continue as a going concern. Based on current cash balances and
operating budgets, NeoMedia believes it only has sufficient financing to last
until December 31, 2002. If NeoMedia's financial resources are insufficient,
NeoMedia may be forced to seek protection from its creditors under the United
States Bankruptcy Code or analogous state statutes unless it is able to engage
in a merger or other corporate finance transaction with a better capitalized
entity. NeoMedia cannot predict whether additional financing will be available,
its form, whether equity or debt, or be in another form, or if NeoMedia will be
successful in identifying entities with which it may consummate a merger or
other corporate finance transactions.
On February 11, 2002, NeoMedia and Cornell Capital Partners terminated
the November 2002 Equity Line of Credit Agreement and entered into a new Equity
Line of Credit Agreement with Cornell Capital Partners under which Cornell
Capital Partners agreed to purchase up to $10.0 million of NeoMedia's common
stock over the next two years, with the timing and amount of the purchase at
NeoMedia's discretion. The maximum amount of each purchase is $150,000 with a
minimum of 7 days between purchases. The shares will be valued at 98% of the
lowest closing bid price during the 5-day period following the delivery of a
notice of purchase by NeoMedia. NeoMedia will pay 5% of the gross proceeds of
each purchase to Cornell Capital Partners as a commission. According to the
terms of the agreement, NeoMedia cannot request an advance pursuant to the
Equity Line of Credit until the shares underlying the Equity Line of Credit
Agreement are registered for trading with the Securities and Exchange
Commission.
OTHER DEBTS
On December 2, 2002, NeoMedia issued to Michael Kesselbrenner, a private
investor, a Promissory Note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. In connection
with the default provision of the Promissory Note, NeoMedia entered into a
Pledge Agreement, dated December 2, 2002, under which NeoMedia issued 53,620,020
shares of common stock to an unrelated third party as collateral for the
Promissory Note. In the event of default, the third party will issue the shares
to Mr. Kesselbrenner, and NeoMedia would issue additional shares as required to
increase the Mr. Kesselbrenner's ownership of securities of NeoMedia to equal
51% of its fully-diluted outstanding shares at the time of such default.
On November 12, 2002, NeoMedia settled the lawsuit with its former
General Counsel over payment of the 2000 executive incentive, severance and
unpaid vacation days in the amount of approximately $154,000. The settlement
calls for cash payments totaling approximately $100,000 over a period of 10
months, plus 250,000 vested options to purchase shares of NeoMedia's common
stock at an exercise price of $0.01 and a term of five years.
During November 2002, NeoMedia issued Convertible Secured Promissory
Notes in an aggregate principal amount equal to $60,000 to 3 separate parties,
including Charles W. Fritz, Chairman of our Board of Directors; William E.
Fritz, outside director of NeoMedia; and James J. Keil, outside director of
NeoMedia. The notes bear interest at a rate of 15% per annum, and mature at the
32
earlier of four months or that date the shares underlying the Equity Line of
Credit are registered with the Securities and Exchange Commission. The notes are
convertible, at the option of the holder, into either cash or shares of
NeoMedia's common stock at a 30% discount to the market price upon either the
closing date, or upon the conversion date, whichever is lower. NeoMedia will
also grant to the holders an additional 192,000 shares of NeoMedia's common
stock and 60,000 warrants to purchase shares of NeoMedia's common stock at $0.03
per share, with a term of three years. In the event NeoMedia defaults on the
notes, NeoMedia will issue an additional 1,404,330 shares of its common stock to
the note holders. The notes are secured by NeoMedia's intellectual property,
which is subject to first lien by AirClic, Inc.
GOING CONCERN
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.
Through September 30, 2002, NeoMedia has not been able to generate
sufficient revenues from its operations to cover its costs and operating
expenses. Although NeoMedia has been able to issue its common stock or other
financing for a significant portion of its expenses, it is not known whether
NeoMedia will be able to continue this practice, or if its revenue will increase
significantly to be able to meet its cash operating expenses.
This, in turn, raises substantial doubt about NeoMedia's ability to
continue as a going concern. Management believes that NeoMedia will be able to
raise additional funds through an offering of its common stock or alternative
sources of financing. However, no assurances can be given as to the success of
these plans. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, our most critical
accounting policies include: inventory valuation, which affects our cost of
sales and gross margin; the valuation of purchased intangibles and goodwill,
which affects our amortization and write-offs of goodwill and other intangibles;
the valuation of strategic equity investments, which affects our other income
and expense; and valuation of deferred income taxes, which affects our income
tax expense and benefit. We also have other key accounting policies, such as our
policies for revenue recognition, including the deferral of a portion of
revenues on sales to distributors, and allowance for bad debt. The methods,
estimates and judgments we use in applying these most critical accounting
policies have a significant impact on the results we report in our financial
statements.
INVENTORY VALUATION
Our policy is to value inventories at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventories, including an assessment of excess or obsolete
inventories. We determine excess and obsolete inventories based on an estimate
of the future demand for our products within a specified time horizon, generally
12 months. The estimates we use for demand are also used for near-term capacity
planning and inventory purchasing and are consistent with our revenue forecasts.
If our demand forecast is greater than our actual demand we may be required to
take additional excess inventory charges, which will decrease gross margin and
net operating results in the future. In addition, as a result of the downturn in
demand for our products, we have excess capacity in our manufacturing
facilities. Currently, we are not capitalizing any inventory costs related to
this excess capacity as the recoverability of such costs is not certain. The
application of this policy adversely affects our gross margin.
INTANGIBLE ASSET VALUATION
The determination of the fair value of certain acquired assets and
liabilities is subjective in nature and often involves the use of significant
estimates and assumptions. Determining the fair values and useful lives of
intangible assets especially requires the exercise of judgment. While there are
a number of different generally accepted valuation methods to estimate the value
of intangible assets acquired, we primarily use the discounted cash flow method.
This method requires significant management judgment to forecast the future
operating results used in the analysis. In addition, other significant estimates
are required such as residual growth rates and discount factors. The estimates
we have used are consistent with the plans and estimates that we use to manage
our business, based on available historical information and industry averages.
The judgments made in determining the estimated useful lives assigned to each
33
class of assets acquired can also significantly affect our net operating
results.
ALLOWANCE FOR BAD DEBT
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. Our
allowance for doubtful accounts is based on our assessment of the collectibility
of specific customer accounts, the aging of accounts receivable, our history of
bad debts, and the general condition of the industry. If a major customer's
credit worthiness deteriorates, or our customers' actual defaults exceed our
historical experience, our estimates could change and impact our reported
results.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On July 21, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142 addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized, but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives will continue to
be amortized over their useful lives, but those lives will no longer be limited
to forty years. SFAS No. 141 is effective for all business combinations after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. NeoMedia has implemented the provisions of SFAS No. 141 and No. 142 and
has concluded that the adoption does not have a material impact on the Company's
financial statements.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. NeoMedia does not expect the adoption to have a material
impact to NeoMedia's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption to have a material impact to its financial position or results of
operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. NeoMedia does not expect the adoption to have a material impact to
NeoMedia's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or
Disposal Activities." The provisions of this statement are effective for
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company does not expect the adoption of FASB No. 146 to have a
material impact on the Company's financial position or results of operations.
34
PURCHASE AND DISPOSAL OF QODE.COM, INC.
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675 at the time of issuance. Stock issued was valued at $4.95
per share, which is the average closing price for the few days before and after
the measurement date of March 1, 2001. As of December 31, 2001 NeoMedia had
released 35,074 shares of common stock from escrow for performance for the
period March 1, 2001 to August 31, 2001. The remaining 1,641,426 shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the performance of the Qode business unit for the period
March 1, 2001 through February 28, 2002. As a result, all such shares may be
released to Qode.
NeoMedia accounted for this purchase using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
over the purchase price was allocated to reduce proportionately the values
assigned to noncurrent assets. The accompanying consolidated statements of
operations include the operations of Qode from March 1, 2001, through September
30, 2002.
The purchase price at the original purchase date was calculated and
allocated as follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at
$0.39 $ 13,000
-----------
Total purchase price $ 1,373,000
-----------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
-----------
Total purchase price allocated $ 1,373,000
===========
During the third quarter of 2001, NeoMedia issued an additional 35,074
shares under the terms of the earn-out with Qode.com, Inc. (see explanation
below). The value of these shares in the amount of $13,000 was allocated $9,000
to capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc.,
NeoMedia has placed 1,676,500 shares of its common stock in escrow for a period
of one year, subject to downward adjustment, based upon the achievement of
certain performance targets over the period of March 1, 2001 to February 28,
2002. As of March 1, 2002, these performance targets were not met and therefore,
the remaining 1,641,426 shares held in escrow were not issued. The criteria used
to determine the number of shares released from escrow is a weighted combination
of revenue, page views, and fully allocated earnings before taxes relating to
the Qode Universal Commerce Solution.
35
At the end of each of certain interim periods as outlined in the
purchase agreement, the number of cumulative shares earned by Qode.com is
calculated based on revenue and page views and the shares are released. The
resulting financial impact on NeoMedia is a proportionate increase in the
long-term assets acquired from Qode, resulting in an increase in depreciation
expense from that point forward. The amount of the increase in long-term assets
is dependent upon the number of shares released from escrow, as well as the
value of NeoMedia stock at the time of measurement. The first such measurement
date was July 1, 2001. At the end of the 12-month measurement period (February
28, 2002), the number of shares issued to Qode under the earn-out was 309,773,
allocated as outlined in the table above. The remaining 1,641,426 shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to a disagreement over the performance of, and investment in,
the Qode business unit for the period March 1, 2001 through February 28, 2002.
As a result, all such shares may be released to Qode.
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
(i) Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over three
years.
(ii) Capitalized software development costs relating to the development
of the Qode Universal Commerce Solution.
All Qode related assets were written off during the third and fourth
quarters of 2001.
OTHER
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S.
Bankruptcy Court an involuntary bankruptcy petition for Qode.com, Inc. On July
22, 2002, the case was converted to Chapter 7, U.S. Bankruptcy Code.
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its Ft. Lauderdale-based Qode business unit,
which it acquired in March 2001, to The Finx Group, Inc., a holding company
based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode payables
and $800,000 in long-term leases in exchange for 500,000 shares of the Finx
Group, right to use and sell Qode services, and up to $5 million in affiliate
revenues over the next five years. During the third and fourth quarters of 2001
and the first quarter of 2002, NeoMedia recorded a $2.6 million expense from the
write-down of the Qode assets/liabilities to net realizable value.
The loss for discontinued operations during the phase-out period from
August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No
further loss is anticipated.
During June 2002, the Finx Group notified NeoMedia that it did not
intend to carry out the letter of intent due to capital constraints. As a
result, during the three-month period ended June 30, 2002, the Company recorded
an additional expense of $1.5 million for the write-off of remaining Qode
assets. As of September 30, 2002, NeoMedia had $1.5 million of liabilities
relating to the Qode system on its books.
IMPAIRMENT OF PAPERCLICK ASSET
During the three-month period ending June 30, 2002, NeoMedia recognized
an impairment charge of $1.0 million relating to its PaperClick
physical-world-to-internet software solution. Due to capital constraints, the
Company is not currently able to devote full-time resources and infrastructure
to commercializing the technology. NeoMedia intends to re-focus sales and
marketing efforts surrounding the product upon the receipt of sufficient
capital.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock market. NeoMedia dos not enter into derivative or other
financial instruments for trading or speculative purposes. NeoMedia has limited
exposure to market risks related to changes in interest rates and foreign
currency exchange rates. NeoMedia does not currently invest in equity
instruments of public or private companies for business or strategic purposes.
36
NeoMedia generally conducts business, including sales to foreign
customers, in U.S. dollars, and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on NeoMedia's financial
condition or results of operations.
37
DESCRIPTION OF BUSINESS
We develop proprietary technologies that link physical information and
objects to the Internet marketed under our "PaperClickTM" brand name and
automate print production operations. We are structured as two distinct business
units: Internet Switching Service and Consulting and Integration Service.
NeoMedia Internet Switching Service (NISS) is our core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. Application services develops and supports all of our physical
world to Internet technology as well as its suite of application service
provider services, including our linking "switch" and our application platforms.
NISS also provides the systems integration resources needed to design and build
custom customer solutions predicated on our infrastructure technology.
NeoMedia Consulting and Integration Service (NCIS) is the original
business line upon which we were organized. This unit resells client-server
equipment and related software. The unit also provides general and specialized
consulting services targeted at software driven print applications, and
especially at process automation of production print facilities through its
integrated document factory solution. NCIS also identifies prospects for custom
applications based on our products and services. The operations are based in
Lisle, Illinois.
OUR PRODUCTS AND SERVICES
INTERNET SWITCHING SERVICE
PAPERCLICKTM SWITCHING SERVICE. PaperClickTM is a state-of-the-art
application-switching platform that links physical objects to digital media
through the use of scanned UPC, EAN, or custom PaperClickTM codes. This dynamic
open solution serves a wide variety of customers in industrial, commercial, and
educational applications.
INTELLECTUAL PROPERTY LICENSING. We currently hold five U.S. patents
relating to the physical world-to-Internet marketplace. We intend to license
this intellectual property portfolio to companies endeavoring to tap the
potential of this emerging market. To date, we have entered into such agreements
with Digital:Convergence, A.T. Cross Company, and Symbol Technologies. During
January 2002, we announced that we had entered into an agreement with Baniak
Pine and Gannon, a law firm specializing in patent licensing and litigation,
under which the firm will represent NeoMedia in seeking out potential licensees
of our patent portfolio.
CONSULTING AND INTEGRATION SERVICE
NCIS is a group of highly skilled application developers thoroughly
familiar with MSS and other associated NeoMedia technologies who contract to
develop custom applications for clients.
STORAGE AREA NETWORKS (SAN). SAN is a Storage Management solutions and
consultancy offering consisting of tools and services that insure data
integrity, efficiency and accessibility, achieved through moving data backup,
access and archival functions off of traditional LANs/WANs that are added on to
a highly reliable independent managed network.
PRODUCT SALES AND EQUIPMENT RE-SALES. NCIS markets and sells proprietary
software products, including high-density symbology encoders (e.g. PDF417 and
UPS Maxicode) and resells client-server hardware and related systems such as Sun
Microsystems, IBM and others , as well as related applications software and
services.
INTEGRATED DOCUMENT FACTORY (IDF). The IDF solution provides design and
implementation of a collection of tested hardware and software solutions
utilizing Xerox's printers and Sun servers to turn document creation,
production, and printing into an assembly line manufacturing process. The system
particularly assists financial service concerns such as banks, insurance
companies, and brokerage firms as well as helps to manage high-volume printing
of statements on a frequent basis.
38
OUR MARKETS
INTERNET SWITCHING SERVICE
We believe that our switching platform is a state-of-the-art open and
extensible cross-media publishing tool serving customers in a variety of
industrial, commercial, and educational applications. This business segment is
also responsible for licensing our intellectual property to others as a means of
promoting this new market as well as providing a revenue and cash resource. We
have been developing our physical world-to-Internet technology and offerings
since 1996 and consider ourselves an innovator and pioneer in this industry. In
the past two years, we have seen similar technologies and concepts emerge in the
marketplace, and see these events as a positive validation of the physical
world-to-internet concept.
Press from competitors is expected to continue to raise consumer
awareness of physical-to-Web convergence. We believe the key to the adoption of
physical world-to-Internet technologies in the marketplace will be in the
development of real world applications that provide the end user a valuable
experience. Our service offering, however, differs from those of AirClic and
other competitors in that, unlike their products and services, our products do
not require the use of a proprietary or specified device, and we offer our
service on a private label basis. We believe that we are positioned to provide
solutions that preserve the customer's brand and also provide tailored solutions
to fit the customer needs.
CONSULTING AND INTEGRATION SERVICE
The technology and equipment resale business is becoming a commodity
industry for products undifferentiated by value added proprietary elements and
services. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels.
Proprietary products, such as our encoders, systems integration
services, and integrated document factory solutions, offer a competitive
value-add to our consulting and integration business. We believe that we have
unique offerings, which, to the extent that they meet market needs, offer the
potential for growth in this industry.
This segment also sells migration products, tools designed to migrate
software code from one platform to another platform, primarily to mid-sized to
large corporations and government agencies. The products include proprietary
products and software tools to migrate Wang, HP3000, Data General, DEC and IBM
DOS/VSE platforms, legacy systems, to a Unix or NT open system platform.
RECENT DEVELOPMENTS
QODE.COM ASSETS
In March 2001, we acquired the assets of Qode.com, a Web-based commerce
facilitation service. On September 7, 2001, we announced that we had signed a
non-binding letter of intent to sell the assets of our Fort Lauderdale-based
Qode business unit, which we acquired in March 2001, to The Finx Group, Inc., a
holding company in Elmsford, New York. The agreement called for The Finx Group
to assume approximately $620,000 of Qode's payables and approximately $800,000
in long-term assets. We were expecting to receive 500,000 shares of The Finx
Group common stock, a five-year license to use and sell Qode Services, and up to
$5 million in affiliate revenues from The Finx Group from Qode sales over the
next five years. In connection with the sale of Qode assets, we recognized a
loss of approximately $3.1 million in 2001.
During June 2002, the Finx Group notified us that it did not intend to
carry out the letter of intent due to capital constraints. As a result, during
the three-month period ended June 30, 2002, we recorded an additional expense of
$1.5 million for the write-off of remaining Qode assets. As of June 30, 2002, we
had $1.3 million of liabilities relating to the Qode system on our books.
ABOUT.COM, INC. RELATIONSHIP
In June 2001, we announced that we entered into a one-year license
agreement with About.com, Inc. to provide our Qode Universal Commerce SolutionTM
to About.com's estimated 36 million worldwide users. We and About.com intended
to promote the co-branded shopping service throughout the About.com network. In
June 2001, About.com ran banner ads on its site promoting the Qode Universal
Commerce SolutionTM. As part of the emerging About.com and NeoMedia
relationship, About.com received 452,489 shares of our Series A Convertible
Preferred Stock, par value $0.01 per share, of the 500,000 total Series A
Convertible Preferred shares which we are authorized to issue, in consideration
for these promotions. On January 2, 2002, these 452,489 shares were converted
39
into 452,489 shares of common stock, which are being registered for resale in
this prospectus. Those shares are currently subject to a right of first refusal
in favor of us prior to resale. See "Principal and Selling Stockholders." We
recorded an expense of $882,000 associated with this transaction in the second
quarter of 2001 in sales and marketing expense in the accompanying consolidated
statements of operations. The agreement with About.com was terminated on August
31, 2001, in anticipation of the sale of the Qode assets to the Finx Group.
AIRCLIC, INC. RELATIONSHIP
On July 3, 2001, we entered into a non-binding letter of intent with
AirClic, Inc., which contemplated an intellectual property cross-licensing
transaction between us and AirClic. Under the terms of the letter of intent,
AirClic was to provide us with bridge financing of $2,000,000, which was to be
paid to us in installments. On July 11, 2001, AirClic advanced $500,000 in
bridge financing to us in return for a promissory note secured by all of our
assets. During the negotiation of a definitive set of agreements, the parties
decided not to proceed with the cross-licensing transaction. AirClic has since
initiated two currently pending lawsuits against us.
DIGITAL:CONVERGENCE CORPORATION RELATIONSHIP
We entered into an agreement with a competitor, Digital:Convergence
Corporation, a private company located in the US, in October 2000, granting them
a worldwide, non-exclusive license of our patent portfolio for directly linking
documents, objects, transaction and voice commands to the internet. The
agreement provided for annual license fees over a period of ten years in excess
of $100 million through a combination of cash and equity. We recognized $7.8
million of revenue in 2000 related to this contract, including a $5.0 million
cash payment received in October 2000 for royalties earned before contract
execution, $2.5 million related to the $10 million of payments in Digital
Convergence common stock and cash expected to be received in the first year of
the contract, and $0.3 million related to DC stock received by us to be
recognized over the life of the contract.
As part of the contract, we issued to Digital Convergence a warrant to
purchase 1.4 million shares of our common stock.
In the first quarter of 2001, Digital Convergence issued us an interest
bearing $3 million note payable in lieu of a $3 million cash payment due in
January 2001. We also received shares of Digital Convergence stock in January
with a contractual value of $2 million as part of the first contract-year
royalties due. The note was originally due on April 24, 2001, however, on that
date we agreed to extend it until June 24, 2001. We also partially wrote down,
in the first quarter of 2001, the value of the remaining Digital Convergence
stock receivable, and Digital Convergence stock that had been received in
January, to a value that management believed was reasonable at the time (50% of
the valuation stipulated in the contract). The write-down consisted of a
reduction in assets of $7.7 million and a corresponding reduction in liabilities
of $7.7 million. The Digital Convergence stock received in January 2001 was
valued at $1 million and the Digital Convergence receivable was valued at $9.2
million. In April 2001, we received additional shares of Digital Convergence
stock with a $5 million value based on the valuation method stipulated in the
contract. No revenue was recognized related to these shares and the shares were
not recorded as an asset due to Digital Convergence's worsening financial
condition. All assets and liabilities relating to the contract were subsequently
written off in the second quarter.
Also in April 2001, an agreement was entered into with Digital
Convergence whereby for a period from the date of registration of the shares
underlying the warrant to purchase 1.4 million shares of our common stock until
October 24, 2001, if we would identify a purchaser for our shares, Digital
Convergence would exercise the warrant and purchase 1.4 million shares of common
stock and sell the shares to the identified purchaser. One third of the net
proceeds received by Digital Convergence on the sale of our common stock shall
be paid to us toward repayment of Digital Convergence's obligations under the
note to us in the amount of $3 million. In consideration for this, the warrant
exercise price was reduced during this period to 38 percent of the closing sale
price of our common stock on the day prior to the date of exercise, subject to a
minimum price. Because the exercise of the warrants at this reduced price is
contingent upon our finding a purchaser of the underlying 1.4 million shares,
the value of this re-pricing will be measured and recorded at the time the
shares are sold. As of October 24, 2001, we were not able to locate a purchaser
and therefore, the warrant was not exercised.
On June 24, 2001, Digital Convergence did not pay the note that was due,
and on June 26, 2001, we filed a $3 million lawsuit against Digital Convergence
for breach of contract regarding the $3 million promissory note. It was also
learned in the second quarter of 2001 that Digital Convergence's capital raising
efforts and business operations were having difficulty, and we decided to write
off all remaining amounts related to the Digital Convergence contract. The net
effect of the write-off is a $7,354,000 non-cash charge to income during the
second quarter of 2001, which is included in Loss on Digital:Convergence License
40
Contract in our consolidated statements of operations for the year ending
December 31, 2001. Any future revenues related to this contract will be recorded
as payments are received.
On March 22, 2002, Digital:Convergence filed for bankruptcy under
Chapter 7 of the United States Bankruptcy Code.
OUR STRATEGY
We have spent the past six years developing and patenting the now
confirmed space of linking the physical and Internet environments, and
developing and implementing five generations of continuously refined switch
technology that seamlessly bridges these environments. We are strategically
pursuing potential licensees of the PaperClick switching platform, as well as
intellectual property licensing opportunities with organizations attempting to
commercialize physical world-to-Internet technology, such as Symbol
Technologies, A.T. Cross Company and Brandkey Systems Corporation.
While pursing these goals we remain aware of strategic issues,
opportunities, and constraints that will govern the interplay of competition and
alliances in this rapidly emerging market.
OUR STRATEGIC RELATIONSHIPS
INTERNET SWITCHING SERVICES
In this segment, we have a number of customers who have used or are
using our products and services, including Amway, Solar, A.T. Cross Company,
NYCO and two universities in Latin America. During the year ended December 31,
2000, we entered into a license agreement with Digital:Convergence. This
customer accounted for 28.2% of NeoMedia's total revenue and 96.1% of our
Application Services revenue during such year. During the year ended December
31, 2001, we did not recognize any revenue related to the Digital:Convergence
contract, and we wrote off approximately $7.4 million in net assets and
liabilities related to the contract. In March 2002, Digital Convergence filed
for bankruptcy under Chapter 7. We are aggressively pursuing numerous additional
opportunities for our products and services.
In January 2001, we entered into a patent license with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products. A.T. Cross Company obtained the rights under our physical
world-to-Internet patents for personal portable scanning devices used to link
bar codes on documents and other physical consumer goods to corresponding
Internet content. A.T. Cross Company will pay a royalty per device to us for
license rights granted under this agreement. We have not recognized any revenue
relating to this contract as of the date of this prospectus.
In May 2001, we entered into an agreement with Symbol Technologies,
Inc., granting Symbol a worldwide, non-exclusive license of our patents
surrounding the sale and use of scanning devices used in physical
world-to-Internet technologies. Symbol will pay us a royalty per qualified
device shipped. We have not recognized any revenue relating to this contract as
of the date of this filing.
During January 2002, we engaged Baniak Pine and Gannon, a Chicago law
firm specializing in intellectual property licensing and litigation. The firm
will assist us in seeking out potential licensees of our intellectual property
portfolio, including any resulting litigation.
During May 2002, we granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey has paid us a $50,000 upfront licensing fee and is
obligated to pay 2.5% of all royalty-based revenues earned by Brandkey, with
minimum royalties of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and
after.
CONSULTING AND INTEGRATION SERVICES
Through this segment, we provide services and products to a spectrum of
customers, ranging from closely held companies to Fortune 500 companies. For the
years ended December 31, 2001, 2000, and 1999, one customer, SBC/Ameritech
Services, Inc., accounted for 37%, 30%, and 24%, respectively, of our revenue.
We expect sales to Ameritech as a percentage of total sales to decline in the
future. Furthermore, we do not have a written agreement with Ameritech and,
therefore, there are no contractual provisions to prevent Ameritech from
terminating its relationship with us at any time. Accordingly, the loss of this
customer, or a significant reduction by it in buying the products and services
offered by us, absent diversification, would materially and adversely affect of
our business, prospects, financial condition, and results of operations. In
addition, a single supplier supplies the equipment and software, which is
re-marketed to this customer. Accordingly, the loss of this supplier would
materially adversely affect our business, prospects, financial condition, and
results of operations. For these reasons, we are seeking, and continue to seek,
41
to diversify our sources of revenue and vendors from whom we purchase.
SALES AND MARKETING
INTERNET SWITCHING SERVICE
PAPERCLICKTM. While we eliminated the majority of our sales and
marketing staff during the third quarter of 2001, we continue to promote our
PaperClickTM line of products to potential customers in a wide array of
industries. Upon receipt of sufficient financing, we plan to re-focus our
efforts on the sale of PaperClickTM licenses through the hiring of additional
sales and marketing staff. We have refocused our sales efforts by focusing on
signing up channel partners who have industry market presence. We intend to
negotiate with a number of industry-focused companies who will be our
"go-to-market" partners. No assurances can be given that any successful
association will result.
INTELLECTUAL PROPERTY LICENSING. During January 2002, we engaged Baniak
Pine and Gannon, a law firm specializing in intellectual property licensing and
litigation. The firm will assist us in seeking out potential licensees of our
intellectual property portfolio, including any resulting litigation. On August
13, 2002, our fifth patent surrounding our Physical-World-to-Internet technology
was issued by the U.S. Patent and Trademark Office.
CONSULTING AND INTEGRATION SERVICE
We, through or systems integration services segment, market our products
and services, as well as those for which we act as a re-marketer, primarily
through a direct sales force, which was composed of five individuals as of
December 31, 2001. In addition, this business unit also relies upon strategic
alliances with industry leaders to help market products and services, provide
lead referrals, and establish informal co-marketing arrangements. Our
representatives attend seminars and trade shows, both as speakers and
participants, to help market products and services. In addition, this business
segment has two agents in the United States that sell our products and services.
CUSTOMERS
INTERNET SWITCHING SERVICES
PAPERCLICKTM. Our customers for our physical world-to-Internet offerings
have included Amway, Solar Communications, Inc., NYCO Products Company, and
several large organizations in Latin America, including several prestigious
universities.
INTELLECTUAL PROPERTY LICENSING. To date, we have entered into IP
licensing agreements with Digital:Convergence Corporation, A.T. Cross Company,
Symbol Technologies, and Brandkey Systems Corporation. We intend to pursue
additional license agreements in the future.
CONSULTING AND INTEGRATION SERVICES
We provide equipment and software reselling and integration and
automation consulting services to a variety of customers across a range of
industries, including telecommunications, insurance, financial services,
manufacturing, government entities, and more.
RESEARCH AND DEVELOPMENT
INTERNET SWITCHING SERVICE
NISS employed 3, 24 and 19 persons in the area of product development as
of December 31, 2001, 2000, and 1999, respectively. During the years ended
December 31, 2001, 2000 and 1999, NeoMedia ISS incurred total software
development costs of $2,064,000, $2,888,000 and $1,722,000, respectively, of
which $1,515,000, $1,787,639 and $736,000, respectively, were capitalized as
software development costs and $549,000, $1,101,000 and $986,000, respectively,
were expensed as research and development costs.
42
CONSULTING AND INTEGRATION SERVICES
All significant research and development relating to our consulting and
integration products was discontinued at December 31, 1999 when we discontinued
our Y2K business. All employees that were in this area were reassigned or
released at or prior to such time. If any future research or development of
products is needed, it will be performed by the application services division or
outside contractors.
COMPETITION
INTERNET SWITCHING SERVICES
Although, we have been developing our physical world-to-Internet
technology and offerings since 1996, the physical world-to-Internet market in
which we compete is relatively new. In the past year, new technologies and
concepts have emerged in the physical world-to-Internet space. We view the
increased development of other products in this space as a validation of the
physical world-to-Internet concept and believe that the increased promotion of
these products and services by us and other companies in this space, including
AirClic, Inc., will raise consumer awareness of this technology, resulting in a
larger market. We believe that the significant portfolio of physical
world-to-Internet technologies that we have developed over the last five years
will provide a barrier to entry for most potential competitors.
CONSULTING AND INTEGRATION SERVICES
The largest competition, in terms of number of competitors, is for
customers desiring systems integration, including the re-marketing of another
party's products, and document solutions. These competitors range from local,
small privately held companies to large national and international
organizations, including large consulting firms. A large number of companies act
as re-marketers of another party's products, and therefore, the competition in
this area is intense. In some instances, we, in acting as a re-marketer, may
compete with the original manufacturer.
INTELLECTUAL PROPERTY
Our success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon our proprietary technology,
including patents, and other intellectual property, and on our ability to
protect our proprietary technology and other intellectual property rights. In
addition, we must conduct our operations without infringing on the proprietary
rights of third parties. We also intend to rely upon unpatented trade secrets
and the know-how and expertise of our employees. To protect our proprietary
technology and other intellectual property, we rely primarily on a combination
of the protections provided by applicable patent, copyright, trademark, and
trade secret laws as well as on confidentiality procedures and licensing
arrangements. We have five patents for our physical world-to-Internet
technology. We also have several trademarks relating to our proprietary software
products. In addition, we license from third parties certain software tools that
we include in our services and products. We require our employees and third
parties who are granted access to our proprietary technology to enter into
confidentiality agreements with us in order to attempt to protect our unpatented
proprietary rights. We are currently engaged in two lawsuits initiated against
us by one of our primary competitors, AirClic. AirClic seeks, among other
things, to succeed to our core assets, by suing for alleged default under a
promissory note in the principal amount of $500,000 issued to AirClic by us,
secured by our core assets. AirClic is also suing to invalidate our patents on
our key physical world-to-Internet technologies.
EMPLOYEES
As of December 1, 2002, we employed 18 persons. Of the 18 employees, 8
are located at our headquarters in Fort Myers, Florida, and 10 at other domestic
locations. Of the 18 employees, 3 are dedicated to the Application Services
business unit, 10 are dedicated to the Systems Integration Services business
unit, and 5 provide shared services used by both business units. None of our
employees are represented by a labor union or bound by a collective bargaining
agreement. We believe that our employee relations are good.
43
MANAGEMENT
DIRECTORS AND OFFICERS
Our directors and executive officers, their respective ages, and their
positions held with us are as follows:
NAME AGE POSITION
------------------- ----- --------------------------------------------------
Charles W. Fritz 46 Chairman of the Board of Directors
Charles T. Jensen 59 President, Chief Operating Officer, Acting Chief
Executive Officer and Director
David A. Dodge 27 Vice-President, Chief Financial Officer and
Controller
William E. Fritz 72 Secretary and Director
James J. Keil 75 Director
A. Hayes Barclay 72 Director
The following is certain summary information with respect to the
directors and executive officers of NeoMedia:
CHARLES W. FRITZ is a founder of NeoMedia and has served as an officer
and as a Director of NeoMedia since our inception. On August 6, 1996, Mr. Fritz
was appointed Chief Executive Officer and Chairman of the Board of Directors. On
April 2, 2001, Mr. Fritz was appointed as President where he served until June
2002. Mr. Fritz is currently a member of the Compensation Committee. Prior to
founding NeoMedia, Mr. Fritz was an account executive with IBM Corporation from
January 1986 to January 1988, and Director of Marketing and Strategic Alliances
for the information consulting group from February 1988 to January 1989. Mr.
Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the
University of Florida. Mr. Fritz is the son of William E. Fritz, a Director of
NeoMedia.
CHARLES T. JENSEN was Chief Financial Officer, Treasurer and
Vice-President of NeoMedia since May 1, 1996. Mr. Jensen has been a Director
since August 6, 1996, and currently is a member of the Compensation Committee.
During June 2002, Mr. Jensen was promoted to President, Chief Operating Officer,
and Acting Chief Executive Officer. Prior to joining NeoMedia in November 1995,
Mr. Jensen was Chief Financial Officer of Jack M. Berry, Inc., a Florida
corporation which grows and processes citrus products, from December 1994 to
October 1995, and at Viking Range Corporation, a Mississippi corporation which
manufactures gas ranges, from November 1993 to December 1994. From December 1992
to February 1994, Mr. Jensen was Treasurer of Lin Jensen, Inc., a Virginia
corporation specializing in ladies clothing and accessories. Prior to that, from
January 1982 to March 1993, Mr. Jensen was Controller and Vice-President of
Finance of The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a
B.B.A. in accounting from Western Michigan University and is a Certified Public
Accountant.
DAVID A. DODGE joined NeoMedia in 1999 as the Financial Reporting
Manager. Since then, Mr. Dodge has acted as NeoMedia's Director of Financial
Planning and Controller, and currently holds the title of Vice President, Chief
Financial Officer and Controller. Prior to joining NeoMedia in 1999, Mr. Dodge
was an auditor with Ernst & Young LLP for 2 years. Mr. Dodge holds a B.A. in
economics from Yale University and an M.S. in accounting from the University of
Hartford, and is also a Certified Public Accountant.
WILLIAM E. FRITZ is a founder of NeoMedia and has served as Secretary
and Director of NeoMedia since our inception. Mr. Fritz also served as Treasurer
of NeoMedia from its inception until May 1, 1996. Since February 1981, Mr. Fritz
has been an officer and either the sole stockholder or a majority stockholder of
G.T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark,
Inc.) and EDSCO, three railroad freight car equipment manufacturing companies.
Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the
University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's
former Chief Executive Officer and Chairman of the Board of Directors.
JAMES J. KEIL has been a Director of NeoMedia since August 6, 1996. Mr.
Keil currently is a member of the Compensation Committee, the Stock Option
Committee and the Audit Committee. He is founder and President of Keil & Keil
Associates, a business and marketing consulting firm located in Washington,
D.C., specializing in marketing, sales, document application strategies,
recruiting and electronic commerce projects. Prior to forming Keil & Keil
Associates in 1990, Mr. Keil worked for approximately 38 years at IBM
Corporation and Xerox Corporation in various marketing, sales and senior
44
executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of
Elixir Technologies Corporation (a non-public corporation), and from 1990-1992
was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on
the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S.
degree from the University of Dayton and did Masters level studies at the
Harvard Business School and the University of Chicago in 1961/62.
A. HAYES BARCLAY has been a Director of NeoMedia since August 6, 1996,
and currently is a member of the Stock Option Committee and the Audit Committee.
Mr. Barclay has practiced law for approximately 37 years and, since 1967, has
been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd.
and its predecessor, with offices in Chicago, Wheaton and Arlington Heights,
Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the
University of Illinois and a J.D. from the Illinois Institute of Technology -
Chicago Kent College of Law.
ELECTION OF DIRECTORS AND OFFICERS
Directors are elected at each annual meeting of stockholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. NeoMedia's By-Laws permit the Board of Directors to fill any vacancy
and such director may serve until the next annual meeting of shareholders and
the due election and qualification of his successor.
MEETINGS OF THE BOARD OF DIRECTORS
During our fiscal year ended December 31, 2001, our Board of Directors
held 13 meetings. All members of the Board of Directors attended at least 75% of
such meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
NeoMedia's Board of Directors has an Audit Committee, Compensation
Committee and a Stock Option Committee. The Board of Directors does not have a
standing Nominating Committee.
AUDIT COMMITTEE. The Audit Committee is responsible for nominating
NeoMedia's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with NeoMedia's independent
accountants, and reviewing the financial statements, audit practices and
internal controls of NeoMedia. During 2001, members of the Audit Committee were
nonemployee directors - James J. Keil, A. Hayes Barclay and, until September
2001 when he resigned as a Director, John Lopiano. During 2001, the Audit
Committee held two meetings.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of Directors and for administering NeoMedia's Incentive Plan for
Management. Charles W. Fritz, Charles T. Jensen, James J. Keil, Paul Reece, and,
until September 2001, John Lopiano, were members of NeoMedia's Compensation
Committee during 2001. During January 2002, Mr. Reece resigned from the Board of
Directors and Compensation Committee. This Committee held seven meetings
throughout 2001.
STOCK OPTION COMMITTEE. The Stock Option Committee, which is comprised
of non-employee directors, is responsible for administering NeoMedia's Stock
Option Plans. A. Hayes Barclay and James J. Keil are the current members of
NeoMedia's Stock Option Committee. During 2001, this Committee held four
meetings.
COMPENSATION OF DIRECTORS
Directors are reimbursed for expenses incurred in connection with
attending meetings of the Board of Directors. Upon election or re-election as a
director, non-employee directors receive options to purchase 15,000 shares of
NeoMedia's common stock under the 1998 Stock Option Plan. Each employee director
receives either fees of $2,000 per meeting attended or, at his election, options
to purchase an additional 3,000 shares of NeoMedia's common stock under the 1998
Stock Option Plan. The options vest immediately upon grant.
GENERAL COMPENSATION PHILOSOPHY
Under the supervision of the Committee, NeoMedia's compensation policy
is designed to attract, motivate and retain qualified key executives critical to
NeoMedia's success. It is the objective of NeoMedia to have a portion of each
executive's compensation dependent upon NeoMedia's performance as well as upon
the executive's individual performance. Accordingly, each executive officer's
compensation package is comprised of three elements: (i) base salary which
reflects individual performance and expertise, (ii) variable bonus payable in
45
cash and tied to the achievement of certain annual performance goals and (iii)
stock options which are designed to align the long-term interests of the
executive officer with those of NeoMedia's stockholders.
The Committee considers the total compensation of each executive officer
in establishing each element of compensation, other than stock options which are
the responsibility of the Stock Option Committee. All incentive compensation
plans are reviewed at least annually to assure they meet the current strategies
and needs of NeoMedia.
The summary below describes in more detail the factors that the
Committee considers in establishing each of the three primary components of the
compensation package provided to the executive officers.
BASE SALARY
Base salary ranges are established based on benchmark data from
nationally recognized surveys of similar high-technology companies that compete
with NeoMedia for executive officers and Company research of peer companies.
Each executive officer's base salary is established on the basis of the
individual's qualifications and relevant experience.
VARIABLE BONUS
The Committee believes that a substantial portion of the annual
compensation of each executive should be in the form of variable incentive pay
to reinforce the attainment of Company goals. The Incentive Plan rewards
achievement of specified levels of corporate profitability. A pre- determined
formula, which takes into account profitability against the annual plan approved
by the Board of Directors, is used to determine the bonus award. The individual
executive officer's bonus award is based upon discretionary assessment of each
officer's performance during the prior fiscal year.
COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Since August 1996, Charles W. Fritz has served as NeoMedia's Chairman of
the Board and Chief Executive Officer. Mr. Fritz resigned as Chief Executive
Officer in June 2002. Charles T. Jensen is currently acting Chief Executive
Officer, President, Chief Operating Officer and a Director.
BASE SALARY: The Committee reviews the Chief Executive Officer's major
accomplishments and reported base salary information for the chief executive
officers of other companies in NeoMedia's peer group. Based on this information,
the Committee recommends a salary adjustment to the Board of Directors.
Beginning in 1996, NeoMedia and Mr. Fritz entered into a five-year employment
agreement under which Mr. Fritz was paid $170,000 per year. In January 1998, the
Committee increased Mr. Fritz's salary to $250,000. In April 2001, the
employment agreement expired. In June 2002, Mr. Fritz resigned as Chief
Executive Officer. His salary is currently $120,000 in his capacity as a
part-time business development executive. NeoMedia owes Mr. Fritz approximately
$56,000 relating to deferred salary from 2001 to 2002. Charles T. Jensen is
currently Acting Chief Executive Officer with a salary of $180,000 per year.
CASH INCENTIVE: The Chief Executive Officer's incentive target is at the
discretion of the Committee. Achievement of the target is based on overall
company income versus annual Plan income. Mr. Fritz did not earn a bonus
relating to fiscal 2001. During June 2001, the Committee approved an adjustment,
relating to the Digital:Convergence patent license fees, to the 2000 Incentive
Plan that reduced the bonus payout by approximately $1.1 million. Mr. Fritz's
incentive relating to fiscal 2000 was reduced from $430,800 to $148,800. The
award had not been paid as of December 1, 2002.
COMPENSATION COMMITTEE
Charles W. Fritz
Charles T. Jensen
James J. Keil
46
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists
of Messrs. Fritz, Jensen, and Keil. During the last fiscal year, no interlocking
relationship existed between NeoMedia's Board of Directors or Compensation
Committee and the board of directors or compensation committee of any other
company.
AUDIT COMMITTEE REPORT
The Audit Committee for the last fiscal year consisted of two
nonemployee Directors (a third resigned in September 2001). The Board of
Directors has determined that none of the members of the Audit Committee has a
relationship to NeoMedia that may interfere with his independence from NeoMedia
and its management.
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing financial
reports and other financial information provided by NeoMedia to any governmental
body or the public, NeoMedia's systems of internal controls regarding finance,
accounting, legal compliance and ethics that management and the Board of
Directors have established, and NeoMedia's auditing, accounting and financial
processes generally. The Audit Committee annually recommends to the Board of
Directors the appointment of a firm of independent auditors to audit the
financial statements of NeoMedia and meets with such personnel of NeoMedia to
review the scope and the results of the annual audit, the amount of audit fees,
NeoMedia's internal accounting controls, NeoMedia's financial statements
contained in NeoMedia's Annual Report to Stockholders and other related matters.
The Audit Committee has reviewed and discussed with management the
financial statements for fiscal year 2001 audited by Stonefield Josephson, Inc.,
NeoMedia's independent auditors. The Audit Committee has discussed with
Stonefield Josephson, Inc. various matters related to the financial statements,
including those matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standards, AU ss. 380). The Audit Committee has also
received the written disclosures and the letter from Stonefield Josephson, Inc.
required by Independence Standards Board Standard No. 1 (Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees), and has
discussed with the firm its independence. Based upon such review and discussions
the Audit Committee recommended to the Board of Directors that the audited
financial statements be included in NeoMedia's Annual Report on Form 10-K for
the fiscal year ending December, 2001 for filing with the Securities and
Exchange Commission.
AUDIT COMMITTEE:
James J. Keil
A. Hayes Barclay
The report of the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this prospectus or
registration statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the filing
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
47
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid during the years ended December 31, 2001, 2000 and 1999 to:
(i) NeoMedia's Chief Executive Officer and (ii) each of NeoMedia's other
executive officers as of December 31, 2001 who received aggregate cash
compensation during the year ended December 31, 2001 in excess of $100,000 for
services rendered to NeoMedia:
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
---------------------------- ---------------------------------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS(2) PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
----------------------------- ------ -------- -------- ------------- ---------- ------------ ---------- ------------
Charles W. Fritz 2001 $221,758 $ - -- -- 400,000 -- $21,352(4)
Chairman of the Board 2000 250,000 148,800(3) -- -- 49,000 -- 22,502(4)
1999 250,000 - -- -- 400,000 -- 84,914(4)
Charles T. Jensen 2001 144,239 - -- -- 240,000 -- 17,794(4)
President, Chief Operating 2000 150,000 87,860(3) -- -- 37,000 -- 29,767(4)
Officer, and Acting Chief 1999 150,000 - -- -- 180,000 -- 42,712(4)
Chief Executive Officer
----------
(1) In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and
other personal benefits has been omitted in those instances where the aggregate amount of such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for the Named
Executive Officer for such year.
(2) Represents options granted under NeoMedia's 1998 Stock Option Plan and warrants granted at the discretion of NeoMedia's
Board of Directors.
(3) In June 2001, NeoMedia's Compensation Committee approved an adjustment, relating to the Digital:Convergence patent license
fees, to the Annual Incentive Plan for Management that reduced the 2000 bonus payout by approximately $1.1 million. The
original amount recorded in 2000 and reported on NeoMedia's Form 10-KSB for 2000 was $430,800 for Charles W. Fritz and
$193,860 for Charles T. Jensen. The adjusted amounts are presented in the table above.
(4) Includes life insurance premiums where policy benefits are payable to his beneficiary and automobile expenses attributable
to personal use and the corresponding income tax effects.
48
The following table contains information regarding options granted in
the year ended December 31, 2001, by NeoMedia's named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT
OF TOTAL
OPTIONS/
SARS
NUMBER OF GRANTED
SECURITIES TO POTENTIAL REALIZED VALUE
UNDERLYING EMPLOYEES EXERCISE AT ASSUMED ANNUAL RATES
OPTIONS IN OR BASE OF STOCK PRICE APPRECIATION
GRANTED FISCAL PRICE FOR OPTION TERM
NAME (#) YEAR ($/SHARE) EXPIRATION DATE 5% ($) 10%($)
----------------- ------------ ---------- --------- -------------------- -----------------------------
Charles W. Fritz 200,000 5.7% $2.50 January 2, 2011 $814,447 $1,296,871
200,000 5.7% $0.20 September 13, 2011 $65,156 $103,750
Charles T. Jensen 90,000 2.6% $2.50 January 2, 2011 $366,501 $583,592
150,000 4.3% $0.20 September 13, 2011 $48,867 $77,812
The following table contains information regarding options exercised in
the year ended December 31, 2001, and the number of shares of common stock
underlying options held as of December 31, 2001, by NeoMedia's named executive
officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT FISCAL
OPTIONS/SARS AT FISCAL YEAR END
YEAR END EXERCISABLE/UNEXERCISABLE(1)
-------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)
----------------- ------------- ---------- ----------- ------------- ----------- -------------
Charles W. Fritz -- -- 699,600 549,400 -- --
Charles T. Jensen -- -- 413,186 292,200 -- --
----------
(1) Based on the closing price of $0.14 of NeoMedia's common stock as quoted
on OTC Bulletin Board on December 31, 2001 and the exercise price of the
option.
OPTION REPRICING PROGRAM
To encourage the exercise of options, our Board of Directors in April
2002 adopted an option repricing program. Under the program, those persons
holding options granted under the 1996, 1998 and 2002 Stock Option Plans, to the
extent their options are exercisable during the period ending October 9, 2002,
were allowed to exercise the option at a price which is the greater of $0.12 per
share or 50% of the last sale price of a share of our common stock on the OTC
Bulletin Board on the trading date immediately preceding the date of exercise.
No options were exercised under the program.
Under applicable provisions of the Internal Revenue Code, to the extent
the nonqualified options are exercised, the holders will be deemed to have the
taxable income to the extent of the difference between the fair market value and
the exercise price and we will suffer a comparable charge to our earnings.
Alpine Securities Inc., a broker-dealer registered under the Securities Exchange
Act has agreed to assist option holders in the option exercise and the sale of
shares acquired and the payment to us of the exercise price from the sale
proceeds.
EMPLOYMENT AGREEMENTS
The five year employment agreements between NeoMedia and each of Charles
W. Fritz, as Chief Executive Officer and Chairman of the Board, and Charles T.
Jensen, as Executive Vice-President and Chief Technical Officer expired on April
49
30, 2001. Their annual compensation, which at the time of expiration was
$250,000 and $150,000, respectively, was continued except that each agreed,
along with other officers of NeoMedia, to a 20% reduction in the annual rate for
the two month period ended July 15, 2001 in the effort to reduce expenses. We
plan to renegotiate new employment agreements with Mr. Jensen. Mr. Fritz
resigned as Chief Executive Officer in June 2002. In the interim, we entered
into agreements providing for six months severance in the event of termination
related to a change of control. During the year ended December 31, 2001, the
Board of Directors granted Mr. Fritz options to purchase 400,000 shares of
common stock under the 1998 Stock Option Plan, 200,000 of which were exercisable
at the price of $0.20 per share, and 200,000 of which were exercisable at a
price of $2.50 per share. During the year ended December 31, 2001, the Board of
Directors granted Mr. Jensen options to purchase 240,000 shares of common stock
under the 1998 Stock Option Plan, 150,000 of which were exercisable at the price
of $0.20 per share, and 90,000 of which were exercisable at a price of $2.50 per
share. Mr. Fritz had received under the 1998 Stock Option Plan during the year
ended December 31, 2000, options to purchase 49,000 shares of common stock at a
price of $4.44 per share and during the year ended December 31, 1999, options to
purchase 200,000 shares at a price of $3.63 per share and options to purchase
200,000 shares at a price of $5.13. Mr. Jensen received options to purchase
37,000 shares at $4.44 per share during 2000, and 90,000 shares at $3.63 and
90,000 shares at $5.13 during 1999, in each case under the 1998 Stock Option
Plan.
INCENTIVE PLAN FOR MANAGEMENT
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive
Plan for Management, which provides for annual bonuses to eligible employees
based upon the attainment of certain corporate and/or individual performance
goals during the year. The Incentive Plan is designed to provide additional
incentive to NeoMedia's management to achieve these growth and profitability
goals. Participation in the Incentive Plan is limited to those employees holding
positions assigned to incentive eligible salary grades and whose participation
is authorized by NeoMedia's Compensation Committee which administers the
Incentive Plan, including determination of employees eligible for participation
or exclusion. The Board of Directors can amend, modify or terminate the
Incentive Plan for the next plan year at any time prior to the commencement of
such next plan year.
To be eligible for consideration for inclusion in the Incentive Plan, an
employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and/or the
employee's performance during the year, and if performance goals are attained,
eligible employees are entitled to an award based upon a specified percentage of
their base salary.
STOCK OPTION PLANS
Effective as of February 1, 1996, NeoMedia adopted its 1996 Stock Option
Plan, which was amended and restated effective July 18, 1996 and further amended
through November 18, 1996. The 1996 Stock Option Plan provides for the granting
of non-qualified stock options and "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, and provides
for the issuance of a maximum of 1,500,000 shares of common stock. Nonqualified
options granted under the 1996 Stock Option Plan with respect to 155,664 shares
were outstanding as of December 1, 2002.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan.
The 1998 Stock Option Plan provides for authority for the Board of Directors to
the grant non-qualified stock options with respect to a maximum of 8,000,000
shares of common stock. Nonqualified options granted under the 1998 Stock Option
Plan with respect to 5,454,555 shares were outstanding as of December 1, 2002.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan provides for authority for the Board of Directors to the
grant non-qualified stock options with respect to a maximum of 10,000,000 shares
of common stock. Nonqualified options granted under the 2002 Stock Option Plan
with respect to 3,145,000 shares were outstanding as of December 1, 2002.
50
401(K) PLAN
NeoMedia maintains a 401(k) Profit Sharing Plan and Trust. All employees
of NeoMedia who are 21 years of age and who have completed three months of
service are eligible to participate in the 401(k) Plan. The 401(k) Plan provides
that each participant may make elective contributions of up to 20% of such
participant's pre-tax salary (up to a statutorily prescribed annual limit, which
is $10,500 for 2001 and $11,000 for 2002) to the 401(k) Plan, although the
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The 401(k)
Plan also provides for matching and discretionary contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.
PROPERTIES
Our principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. We occupy
approximately 5,000 square feet under terms of a written lease from an
unaffiliated party which expires on January 31, 2004, with monthly rent totaling
approximately $16,000. During September 2002, we entered into an agreement with
the landlord of this facility under which we vacated approximately 70% of our
previously rented space in exchange for reduced rent. We maintain a sales
facility at 2150 Western Court, Suite 230, Lisle, Illinois 60532, where we
occupy approximately 6,000 square feet under the terms of a written lease from
an unaffiliated party expiring on October 31, 2003. Monthly rent on this
facility was negotiated from approximately $9,000 per month to $3,000 per month
for a period of nine months as part of a settlement agreement between us and the
landlord finalized in August 2002. In March 2001, with the acquisition of the
assets of Qode.com, Inc., we added an additional 8,388 square feet office lease
at 4850 N. State Road 7, Suite 104, Ft. Lauderdale, Florida, with monthly rent
totaling approximately $9,200. Upon the discontinuation of the Qode business
unit, we vacated the premises. We were subsequently sued by Headway Associates,
the landlord, for past and future rents on the facility. We settled the suit for
cash payments of $100,000, all of which have been made. During 2001, we closed
our office in Monterrey, Mexico, which was primarily used for sales and
consulting efforts. We believe that existing office space is adequate to meet
current and short-term requirements.
51
LEGAL PROCEEDINGS
INTERNATIONAL DIGITAL SCIENTIFIC, INC.
On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for arbitration relating to past due payments on an uncollateralized
note payable from us to IDSI dated October 1, 1994. The note was issued in
exchange for the purchase by us of computer software from IDSI. The note calls
for the Company to make payments of the greater of: (i) 5% of the collected
gross revenues from sales of software or (ii) $16,000 per month. As of September
30, 2002, we had a past due balance under the IDSI note of approximately
$256,000. We have filed a counterclaim with the arbitrator relating to this
matter. The arbitration hearing has not yet been scheduled.
NEOMEDIA SHAREHOLDERS
During January 2002, certain of NeoMedia's shareholders filed a
complaint with the Securities and Exchange Commission, alleging that the
shareholders were not included in the special shareholders meeting of November
25, 2001, to vote on the issuance of 19 million shares of NeoMedia common stock.
On March 11, 2002, NeoMedia filed its response claiming that NeoMedia had fully
complied with all of its obligations under the laws and regulations administered
by the Securities and Exchange Commission, as well as with its obligation under
Delaware General Corporation Law.
AIRCLIC, INC. LITIGATION
On July 3, 2001, we entered into a non-binding letter of intent with
AirClic which contemplated an intellectual property cross-licensing transaction
between us and AirClic. Under the terms of the letter of intent, AirClic was to
provide us with bridge financing of $2,000,000, which was to be paid to us in
installments. On July 11, 2001, AirClic advanced $500,000 in bridge financing to
us in return for a promissory note from us secured by all of our assets,
including our physical world-to-Internet patents. During the negotiation of
definitive agreements, the letter of intent was abandoned on the basis of our
alleged breach of certain representations made by us in the promissory note.
On September 6, 2001, AirClic filed suit against us in the Court of
Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, the
accelerated repayment of a $500,000 loan it advanced to us under the terms of a
letter of intent entered into between AirClic and us. The letter of intent was
subsequently abandoned on the basis of our alleged breach of certain
representations made by us in the promissory note issued to AirClic in respect
of such advance. The note issued by us in respect of AirClic's $500,000 advance
is secured by substantially all of our property, including our core physical
world-to-Internet technologies. If we are unsuccessful in this litigation,
AirClic, which is one of our key competitors, could acquire our core
intellectual property and other assets, which would have a material adverse
effect on our business, prospects, financial condition, and results of
operations. We are vigorously defending this claim and have filed counterclaims
against AirClic. As of the date of this prospectus, pleadings were closed and
the parties have engaged in written discovery. Whether or not AirClic is
successful in asserting its claims that we breached certain representations made
by it in the note, the note became due and payable in accordance with its terms
on January 11, 2002. Based on the cash currently available to us, payment of the
note and related interest would have a material adverse effect on our financial
condition. If we fail to pay such note, AirClic could proceed against our
intellectual property and other assets securing the note which would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We have not accrued any additional liability over and
above the note payable and related accrued interest. As of December 3, 2002,
pleadings were closed and the parties have engaged in written discovery.
AirClic has also filed suit against us in the United States District
Court for the Eastern District of Pennsylvania. In this second action, AirClic
seeks a declaration that certain core intellectual property securing the note
issued by us to AirClic, some of which is patented and others for which a patent
application is pending, is invalid and in the public domain. Any declaration
that our core patented or patentable technology is non-protectable and in the
public domain would have a material adverse effect on our business, prospects,
financial condition, and results of operations. We are vigorously defending this
second action as well. On November 21,2001, we filed a motion to dismiss the
complaint. On December 19, 2001, AirClic filed a response opposing that
position. On September 18, 2002, the court ruled in favor of the Company and
dismissed AirClic's complaint. The Company has not accrued any liability in
connection with this matter.
DIGITAL: CONVERGENCE LITIGATION
On June 26, 2001, we filed a $3 million lawsuit in the U.S. District
Court, Northern District of Texas, Dallas Division, against Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid. We are seeking payment of the $3 million note
plus interest and attorneys fees. We have not accrued any gain contingency
related to this matter. On March 22, 2002, Digital:Convergence filed for
bankruptcy under Chapter 7 of the United States Bankruptcy Code.
OTHER LITIGATION
In April 2001, our former President and director filed a lawsuit against
us and several of our directors. The suit was filed in the Circuit Court of the
Twentieth Judicial Circuit for Sarasota, Florida. The claim alleges the
individual was fraudulently induced into accepting employment and that we
52
breached the employment agreement. The individual's employment with us ended in
January 2001. During May 2002, we settled the suit. We will make cash payments
of $90,000 directly to the plaintiff during the period May 2002 through December
2002, of which $50,000 has been paid as of the date of this prospectus. We will
also make cash payments to the plaintiff's attorney for legal fees in the amount
of $45,000 over the next several months, of which $7,500 has been paid as of the
date of this prospectus. In addition, the plaintiff was granted 360,000 options
to purchase shares of our common stock at an exercise price of $0.08. As of
March 31, 2002, we had accrued a $347,000 liability relating to the suit. As a
result, we recognized an increase to net income of approximately $176,000 during
the three-month period ended June 30, 2002 to adjust the liability to the
settlement amount. As of September 30, 2002 we had an accrued liability of
$72,000 relating to this matter.
On August 20, 2001, Ripfire, Inc. filed suit against us in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between Ripfire and us in May 2001 relating to
implementation of the Qode Universal Commerce Solution. On September 6, we
settled the suit for $133,000 of our common stock, to be valued at the average
closing price for the five days preceding the date that such shares are
registered for resale with the Securities and Exchange Commission.
On October 3, 2001, Headway Associates, Ltd. filed a complaint for
damages in the Circuit Court of the Seventeenth Judicial Circuit for Broward
County, Florida. Headway Associates, Ltd. is seeking payment of all amounts due
under the terms the lease agreement of the Ft. Lauderdale office of NeoMedia's
Qode business unit. The lease commenced on March 3, 2000 and terminates on March
31, 2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment
over a two-month period for settlement of all past-due and future amounts owed
under the lease. As of June 30, 2002, we had made all payments relating to the
settlement.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
We are currently negotiating settlement of this matter. We have accrued a
liability of $525,000 in the accompanying financial statements.
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full
payment of approximately $38,700 relating to past due and future payments under
an office equipment lease. During April 2002, we settled this matter for cash
payments totaling $29,000. As of September 30, 2002, we had made all payments
under the settlement agreement.
On July 22, 2002, 2150 Western Court, L.L.C., the property manager for
our Lisle, IL, office, filed a summons seeking payment of approximately $72,000
for all past due rents on the facility. The summons asked for a judgment for the
above amount plus possession of the premises. On August 8, 2002, we settled for
cash payments of approximately $72,000 on past due amounts over the remaining
term of the lease, which expires in October 2003. Additionally, we issued
900,000 shares of our common stock, which are included in this registration
statement, in exchange for a reduction in rent of approximately $55,000 over the
period from August 2002 to March 2003. NeoMedia had a liability of approximately
$61,000 relating to this matter as of September 30, 2002.
On July 27, 2002, our former General Counsel filed suit in U.S. District
Court, Ft. Myers division, seeking payment of the 2000 executive incentive,
severance and unpaid vacation days in the amount of approximately $154,000. In
June 2001, our compensation committee approved an adjustment to the 2000
executive incentive plan that reduced the executive incentive payout as a result
of the write-off of the Digital:Convergence intellectual property license
contract in the second quarter of 2001. As a result, we reduced the accrual for
such payout by an aggregate of approximately $1.1 million in the second quarter
of 2002. On November 12, 2002, NeoMedia settled the lawsuit with its former
General Counsel over payment of the 2000 executive incentive, severance and
unpaid vacation days in the amount of approximately $154,000. The settlement
calls for cash payments totaling approximately $100,000 over a period of 10
months, plus 250,000 vested options to purchase shares of NeoMedia's common
stock at an exercise price of $0.01 and a term of five years.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills. We have accrued approximately $92,000 relating to this matter.
We are attempting to negotiate settlement of this issue out of court prior to
the court date.
53
On September 13, 2002, Wachovia Bank, N.A. filed a complaint in Circuit
Court of The Twentieth Judicial Circuit in and for Lee County, Florida, seeking
payment of approximately $225,000 in past due rents on our headquarters in Ft.
Myers, Florida. On October 28, 2002, NeoMedia settled this lawsuit. The
settlement calls for cash payments of past due rents of approximately $250,000
over a period of 16 months. NeoMedia will also vacate approximately 70% of the
unused space in its headquarters, and the rent for the remainder of the lease,
which expires January 2004, will be reduced according to square footage used.
NeoMedia accrued a liability of approximately $250,000 relating to this matter
as of September 30, 2002.
On October 28, 2002, Merrick and Klimek, P.C., a law firm that formerly
represented us, filed a complaint in Circuit Court for the Twentieth Judicial
Circuit of Florida, seeking payment of a note payable in the amount of
approximately $170,000. The note was entered into in September 2001 between us
and Merrick and Klimek and matured unpaid in February 2002. The balance of the
note consists of fees for legal services provided in 2001 and earlier.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 1, 2002, certain
information regarding beneficial ownership of NeoMedia's common stock by: (i)
each person known by NeoMedia to be the beneficial owner of more than 5% of
NeoMedia's outstanding common stock; (ii) each director and director-nominee;
(iii) each named executive officer; and (iv) all executive officers and
directors as a group.
COMMON STOCK BENEFICIALLY OWNED
-------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES PERCENT OF CLASS(1)
---------------------------------------- ----------------- ----------------- -------------------
Charles W. Fritz (2)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 4,454,955 17.5%
Fritz Family Limited Partnership(3)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 1,511,742 6.0%
Chandler T. Fritz 1994 Trust(3)(4)(5)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 58,489 *
Charles W. Fritz 1994 Trust(3)(4)(6)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 58,489 *
Debra F. Schiafone 1994 Trust(3)(4)(7)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 48,489 *
William Fritz(3)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 439,701 1.7%
Edna Fritz(3)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 90,609 *
Charles T. Jensen(8)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 1,420,086 5.6%
David A. Dodge(9)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 188,820 *
A. Hayes Barclay(10)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 269,000 1.1%
James J. Keil(11)
2201 Second Street, Suite 402
Fort Myers, Florida 33901 Common Stock 423,000 1.7%
Officers and Directors As a Group (9
Persons) (12) Common Stock 8,863,380 34.9%
Thornhill Capital LLC (13)
C/o Alan Refkin
3709 Fielding Drive
Springfield, IL. 62707 Common Stock 3,336,955 13.1%
----------
* Indicates less than 1%.
(1) Applicable percentage of ownership is based on 25,391,298 shares of
common stock outstanding as of December 1, 2002, together with
securities exercisable or convertible into shares of common stock within
60 days of December 1, 2002 for each stockholder. Beneficial ownership
is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to
securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable
or exercisable within 60 days of December 1, 2002 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person. Outstanding shares excludes 53,620,023
shares issued into escrow on December 2, 2002, as collateral for a note
payable by NeoMedia to an unrelated investor. The shares are restricted,
55
and the note holder does not have title to the securities unless
NeoMedia defaults on the note, which matures on May 1, 2003. The shares
are therefore not deemed to be outstanding.
(2) Shares beneficially owned include 100 shares owned by each of Mr.
Fritz's four minor children for an aggregate of 400 shares, 1,369,400
shares of common stock issuable upon exercise of options granted under
our 2002 and 1998 stock option plans, 1,500,000 shares issuable upon
exercise of stock warrants, 42,186 shares of common stock owned by Mr.
Charles W. Fritz directly, and 1,542,969 shares of common stock held by
the CW/LA II Family Limited Partnership, a family limited partnership
for the benefit of Mr. Fritz's family.
(3) William E. Fritz, our corporate secretary, and his wife, Edna Fritz, are
the general partners of the Fritz Family Limited Partnership and
therefore each are deemed to be the beneficial owner of the 1,511,742
shares held in the Fritz Family Partnership. As trustee of each of the
Chandler R. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F.
Schiafone 1994 Trust, William E. Fritz is deemed to be the beneficial
owner of the shares of NeoMedia held in each trust. Accordingly, Mr.
William E. Fritz is deemed to be the beneficial owner of an aggregate of
2,207,519 shares, 165,467 of which as a result of being trustee of the
Chandler T. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F.
Schiafone 1994 Trust, 1,511,742 shares as a result of being co-general
partner of the Fritz Family Partnership, 268,787 shares owned by Mr.
Fritz or his spouse, 12,523 shares to be issued upon the exercise of
warrants held by Mr. Fritz or his spouse and 249,000 shares to be issued
upon the exercise of options held by Mr. Fritz or his spouse. Mr.
William E. Fritz may be deemed to be a parent and promoter of NeoMedia,
as those terms are defined in the Securities Act.
(4) William E. Fritz is the trustee of this Trust and therefore is deemed to
be the beneficial owner of such shares.
(5) Chandler T. Fritz, son of William E. Fritz, is the primary beneficiary
of this trust.
(6) Charles W. Fritz, son of William E. Fritz and our president, chief
executive officer, and Chairman of the Board, is the primary beneficiary
of this trust.
(7) Debra F. Schiafone, daughter of William E. Fritz, is the primary
beneficiary of this trust.
(8) Includes 1,418,586 shares of common stock issuable upon exercise of
options granted under our 2002, 1998, and 1996 stock option plans.
(9) Includes 188,820 shares of common stock issuable upon exercise of
options granted under our 2002 and 1998 stock option plans.
(10) Includes 264,000 shares of common stock issuable upon exercise of
options granted under our 1996 and 1998 stock option plans. The address
of the referenced individual is c/o Barclay & Damisch Ltd. 115 West
Wesley Street Wheaton, IL 60187.
(11) Includes 283,000 shares of common stock issuable upon exercise of
options granted under NeoMedia's 1996 and 1998 stock option plans, and
140,000 shares owned by Mr. Keil directly. The address of the referenced
individual is c/o Keil & Keil Associates 733 15th Street, N.W.
Washington D.C., 20005.
(12) Includes an aggregate of 3,772,806 currently exercisable options to
purchase shares of common stock granted under our 1996 stock option plan
and 1998 stock option plan and 1,512,523 currently exercisable warrants
to purchase shares of common stock.
(13) Beneficial ownership is comprised of 1,432,055 shares issuable upon
exercise of stock options granted under our 2002 and 1998 stock option
plans, and 1,904,900 shares issuable upon exercise of stock warrants.
56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During November 2002, NeoMedia issued Convertible Secured Promissory
Notes with an aggregate face value of $60,000 to 3 separate parties, including
Charles W. Fritz, Chairman of the Board of Directors of NeoMedia; William E.
Fritz, an outside director; and James J. Keil, an outside director. The notes
bear interest at a rate of 15% per annum, and mature at the earlier of i.) four
months, or ii.) that date the shares underlying the Cornell Equity Line of
Credit are registered with the SEC. The notes are convertible, at the option of
the holder, into either cash or shares of our common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia will also grant to the holders an additional 192,000 shares of our
common stock and 60,000 warrants to purchase shares of our common stock at $0.03
per share, with a term of three years. In the event NeoMedia defaults on the
note, NeoMedia will issue an additional 1,404,330 shares of its common stock to
the note holders. The notes are secured by our intellectual property, which is
subject to first lien by AirClic, Inc. NeoMedia will continue to pursue
additional capital through the issuance of Convertible Secured Promissory Notes
with the same terms as above.
During April 2002, we borrowed $11,000 from William E. Fritz under a
note payable bearing interest at 8% per annum with a term of 60 days. The note
had not been repaid as of the date of this filing and continues to accrue
interest.
During March 2002, we borrowed $190,000 from William E. Fritz under a
note payable bearing interest at 8% per annum with a term of 16 days. The note
was repaid during March 2002.
During February 2002, we borrowed $10,000 from William E. Fritz under a
note payable bearing interest at 8% per annum with a term of 30 days. The note
has not been repaid as of the date of this filing and continues to accrue
interest.
During October 2001, we borrowed $4,000 from Charles W. Fritz, our
Chairman, our former Chief Executive Officer and a director, under a note
payable bearing interest at 10% per annum with a term of six months. The note
has not been repaid as of the date of this filing and continues to accrue
interest.
We believe that all of the above transactions were conducted at "arm's
length", representing what we believe to be fair market value for those
services.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's
officers and directors, and persons who own more than ten percent of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulation to furnish NeoMedia with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to
NeoMedia, NeoMedia believes that during 2001 there was no delinquency in the
Section 16(a) filing obligations of NeoMedia's officers, directors and ten
percent beneficial owners.
57
COMPARATIVE STOCK PERFORMANCE
The following graph compares the yearly percentage change in the
cumulative total stockholder return (change in stock price plus reinvested
dividends) on NeoMedia's common stock with the cumulative total return for the
Nasdaq Stock Market Index (U.S.) and the Dow Jones Internet Composite Index. The
graph assumes that $100 was invested in the common stock of NeoMedia and in each
of the comparative indices on December 31, 1996, the trading day before the
beginning of NeoMedia's fifth preceding fiscal year. The graph further assumes
that such amount was initially invested in the common stock of NeoMedia at a per
share price of $5.625, the price at which shares of NeoMedia's common stock
closed on the Nasdaq SmallCap Market on December 31, 1996. The comparisons in
the graph are required by the Securities and Exchange Commission and are not
intended to forecast or be indicative of possible future performance of
NeoMedia's common stock.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG NEOMEDIA TECHNOLOGIES, INC.
THE NASDAQ COMPOSITE AND DOW-JONES INTERNET INDEX
[GRAPHIC OMITTED]
---------------------------------
NEOM 100 ECM
---------------------------------
--------------------------------------------
Nasdaq Dow-Jones
Date NeoMedia Comp Internet
--------------------------------------------
12/31/1996 100.000 100.000 100.000
01/31/1997 111.111 112.198 100.000
02/28/1997 102.222 103.543 100.000
03/31/1997 86.667 97.041 100.000
04/30/1997 86.667 106.499 100.000
05/28/1997 82.222 119.631 100.000
06/30/1997 134.444 116.551 100.000
07/30/1997 156.667 134.044 100.000
08/31/1997 193.333 130.765 104.531
09/30/1997 183.333 133.578 122.281
10/29/1997 171.111 125.373 122.566
11/30/1997 144.444 127.899 117.909
12/31/1997 161.668 120.633 120.115
01/31/1998 122.222 130.409 120.873
02/28/1998 132.222 145.384 148.263
03/31/1998 138.889 148.614 168.266
04/30/1998 155.001 151.958 183.807
05/28/1998 137.778 147.905 166.109
06/30/1998 86.667 162.820 214.476
07/30/1998 60.555 173.134 201.712
08/31/1998 46.667 138.836 132.534
09/30/1998 45.556 163.811 171.905
10/29/1998 44.444 169.999 180.672
11/30/1998 35.556 189.681 256.419
12/31/1998 51.111 223.533 322.964
01/31/1999 73.333 258.984 491.346
02/28/1999 63.333 234.401 397.430
03/31/1999 82.222 256.451 524.322
04/30/1999 87.221 260.104 601.392
05/28/1999 93.333 254.401 505.556
06/30/1999 108.889 279.630 530.373
07/30/1999 140.000 276.484 450.490
08/31/1999 157.778 291.817 457.637
09/30/1999 120.000 293.160 503.910
10/29/1999 94.444 321.106 533.503
11/30/1999 97.778 361.195 655.996
12/31/1999 84.444 451.426 861.668
01/31/2000 173.333 434.651 811.297
02/29/2000 248.889 519.497 957.774
03/31/2000 151.111 535.434 824.677
04/30/2000 168.889 459.382 643.207
05/31/2000 91.666 404.704 515.420
06/30/2000 104.444 458.239 618.012
07/31/2000 104.444 439.436 570.532
08/31/2000 78.889 496.444 690.105
09/30/2000 113.333 434.719 615.344
10/31/2000 88.889 399.618 491.997
11/30/2000 53.333 305.169 315.420
12/31/2000 53.333 285.100 292.744
01/31/2001 88.889 315.696 326.155
02/28/2001 86.667 232.337 204.374
03/31/2001 88.889 191.542 149.487
04/30/2001 52.089 225.863 187.927
05/31/2001 38.044 219.135 188.378
06/30/2001 34.667 223.136 181.041
07/31/2001 20.444 204.978 146.312
08/31/2001 4.267 178.935 113.485
09/30/2001 3.911 142.248 83.446
10/31/2001 2.844 166.161 99.387
11/30/2001 1.956 194.318 126.180
------- ------- -------
12/31/2001 2.489 192.005 133.575
The above graph compares the closing price of NeoMedia's common stock on
the Nasdaq SmallCap Market at the end of each month versus the weekend closing
price of the Nasdaq Composite Index and the Dow-Jones Internet Composite Index
for the period January 1, 1997 through December 31, 2001. We believe these
indices provide the best benchmark by which to compare the price of our stock
against competitors and others in similar markets.
58
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock began trading on The Nasdaq SmallCap Market under the
symbol "NEOM" on November 25, 1996, the date of our initial public offering. On
March 11, 2002, we received a Nasdaq Staff Determination stating that, as of
December 31, 2001, we did not meet either the minimum net tangible assets
($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for continued
listing on the Nasdaq SmallCap Market and advising that, accordingly, our shares
were subject to de-listing from such market. Our shares are now trading on the
OTC Bulletin Board under the symbol "NEOM." As of December 1, 2002, there were
25,391,298 common shares outstanding. This amount of outstanding shares excludes
53,620,023 shares issued into escrow on December 2, 2002, as collateral for a
note payable by NeoMedia to an unrelated investor. The shares are restricted,
and the note holder does not have title to the securities unless NeoMedia
defaults on the note, which matures on May 1, 2003. The shares are therefore not
deemed to be outstanding.
The following table summarizes the high and low closing sales prices per
share of the common stock for the periods indicated as reported on The Nasdaq
SmallCap Market:
THE NASDAQ SMALLCAP MARKET
(U.S. $)
------------------------------------------------------------------------------
2000 HIGH LOW
------------------------------------------------------------------------------
First Quarter $14.50 $5.69
Second Quarter 11.13 5.00
Third Quarter 6.75 4.13
Fourth Quarter 6.50 1.94
------------------------------------------------------------------------------
2001 HIGH LOW
------------------------------------------------------------------------------
First Quarter $6.00 $2.50
Second Quarter 4.50 1.76
Third Quarter 1.85 0.16
Fourth Quarter 0.24 0.11
------------------------------------------------------------------------------
2002 HIGH LOW
------------------------------------------------------------------------------
First Quarter $0.41 $0.14
Second Quarter 0.17 0.05
Third Quarter 0.13 0.02
HOLDERS OF COMMON EQUITY
As of December 1, 2002, NeoMedia had 168 recordholders of common stock.
DIVIDENDS
We have not declared or paid any dividends on our common stock during
the nine months ended September 30, 2002 or the years ended December 31, 2002,
2001 or 2000. Following this offering, our dividend practices with respect to
our common stock will be determined and may be changed from time to time by our
board of directors. We will base any issuance of dividends upon our earnings,
financial condition, capital requirements and other factors considered important
by our board of directors. Delaware law and our certificate of incorporation do
not require our board of directors to declare dividends on our common stock. In
addition, we have a letter of credit with Bank One, Chicago, Illinois, the terms
of which require Bank One's written consent prior to the declaration of cash
dividends. We expect to retain all earnings, if any, generated by our operations
for the development and growth of our business and do not anticipate paying any
dividends to our stockholders for the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2002, Jerald Eicke was issued 4,000,000 shares of common
stock in exchange for consulting services rendered. The shares of common stock
were priced at $0.05 totaling a value of $200,000.
59
On December 2, 2002, NeoMedia issued to Michael Kesselbrenner, a private
investor, a Promissory Note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. In connection
with the default provision of the Promissory Note, NeoMedia entered into a
Pledge Agreement, dated December 2, 2002, by and between NeoMedia and the
Investor under which NeoMedia issued 53,620,020 shares of common stock to an
unrelated third party as collateral for the Promissory Note. In the event of
default, the third party would issue the shares to the Investor, and NeoMedia
would issue additional shares as required to increase Mr. Kesselbrenner's
ownership of securities of NeoMedia to equal 51% of its fully-diluted
outstanding shares at the time of such default.
On February 11, 2003, NeoMedia and Cornell Capital Partners terminated
the November 2002 Equity Line of Credit Agreement and entered into a new Equity
Line of Credit Agreement with Cornell under which Cornell agreed to purchase up
to $10.0 million of NeoMedia's common stock and over the next two years, with
the timing and amount of the purchase at NeoMedia's discretion. The maximum
amount of each purchase is $150,000 with a minimum of seven days between
purchases. The shares will be valued at 98% of the lowest closing bid price
during the five day period following the delivery of a notice of advance by
NeoMedia. NeoMedia will pay 5% of the gross proceeds of each purchase to Cornell
as a commission. According to the terms of the agreement, NeoMedia cannot draw
on the line of credit until the shares underlying the agreement are registered
for trading with the Securities and Exchange Commission. Cornell Capital
received a one-time commitment fee payable in 2,000,000 shares of our common
stock. Additionally, Westrock Advisors, Inc. was paid a fee of 62,500 shares of
NeoMedia's common stock for acting as the placement agent.
In September 2002, NeoMedia issued 1,161,402 shares of common stock upon
exercise of outstanding options by an unrelated consultant at a price of $0.01
per share. The gross proceeds of such transaction were approximately $12,000.
In August 2002, NeoMedia issued 900,000 shares of common stock to 2150
Western Court L.L.C, the landlord of its Lisle, Illinois sales office, as
settlement of a lawsuit relating to past-due and future building rents. The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.
In July, August and September 2002, we issued an aggregate of 3,000,000
shares of our common stock upon the exercise of outstanding options by a
consultant at a price of $0.01 per share. The gross proceeds of such transaction
were $30,000.
In July 2002, we issued 575,980 shares of common stock upon the exercise
of outstanding options by an unrelated consultant at a price of $0.01 per share.
The gross proceeds of such transaction were approximately $6,000.
In June 2002, we issued 900,000 shares of common stock to two unrelated
consultants as payment for consulting services to be performed from June 2002
through June 2003. There were no cash proceeds to us in these transactions.
In June 2002, we issued 10,000 shares of common stock to an unrelated
vendor as an interest payment on past-due accounts payable. There were no cash
proceeds to us in these transactions.
In May 2002, we issued an aggregate of 200 shares of our common stock
upon the exercise of outstanding options by an employee at a price of $0.12 per
share. The gross proceeds of such transaction were $24.
During April 2002, NeoMedia repriced 7.4 million of its common stock
options held by employees, consultants and advisors for a period of six months.
During the term of the option repricing program, participating holders are
entitled to exercise subject options at an exercise price per share equal to the
greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the OTCBB, on the trading date immediately preceding the date of exercise.
Shortly after the announcement of the repricing program, the market price for
the Company's common stock fell below $0.12, and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing program during
the nine months ended September 30, 2002 due to immaterial effect on the
financial statements.
In April 2002, we issued an aggregate of 140,775 shares of our common
stock upon the exercise of outstanding warrants by Charles W. Fritz, its
Chairman and Chief Executive Officer, at a price of $0.12 per share. Mr. Fritz
subsequently sold the shares into the market. The gross proceeds of such
transaction were approximately $17,000. In accordance with Section 16(b), all
proceeds from the sales were retained by us.
In April 2002, we issued an aggregate of 1,962,255 shares of our common
stock upon the exercise of outstanding options by two unrelated parties at a
price of $0.12 per share. The gross proceeds of such transaction were
approximately $235,000.
60
In April 2002, we issued an aggregate of 40,000 shares of our common
stock upon the exercise of outstanding options by James J. Keil, an outside
director. Mr. Keil purchased 25,000 shares at an exercise price of $0.135 and
15,000 shares at $0.20. The gross proceeds of such transaction were
approximately $6,000.
During March 2002, NeoMedia repriced 1.2 million of its common stock
warrants for a period of six months. During the term of the warrant repricing
program, participating holders are entitled to exercise qualified warrants at an
exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the
last sale price of shares of Common Stock on the OTCBB, on the trading date
immediately preceding the date of exercise. Approximately 370,000 warrants were
exercised in connection with the program, and NeoMedia recognized approximately
$38,000 in expense relating to the repricing during the nine months ended
September 30, 2002.
In March 2002, we issued an aggregate of 228,675 shares of our common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such transaction were approximately
$27,000.
In February 2002, we issued 19,000,000 shares of our common stock at a
price of $0.17 per share to five individuals and two institutional unrelated
parties. The shares were issued in exchange for limited recourse promissory
notes maturing at the earlier of i.) 90 days from the date of issuance, or ii.)
30 days from the date of registration of the shares. The gross proceeds of such
transaction will be approximately $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash.
During August 2002, the notes matured without payment, and we subsequently
cancelled the 19 million shares issued in connection with such notes. We have
accrued a liability in the third quarter of $190,000 relating to the par value
paid in connection with the issuance of the shares.
In January 2002, we issued 452,489 shares of common stock to About.com,
Inc. The shares were issued upon conversion of 452,489 shares of Series A
Convertible Preferred Stock issued to About.com, Inc. as payment for advertising
expenses incurred during 2001. This issuance was made pursuant to Section
3(a)(9) of the Act.
In January 2002, NeoMedia issued 55,000 shares of its common stock at a
price of $0.13 per share to an individual unrelated party. Cash proceeds to
NeoMedia were $7,150.
In January 2002, we issued 1,646,987 shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under equipment lease agreements. There were no cash proceeds to us in these
transactions.
In September 2001, we issued 150,000 options to buy shares of common
stock at a price of $0.20 per share for consulting services.
In July 2001, we issued an aggregate of 11,300 shares of our common
stock upon the exercise of outstanding warrants at a price of $2.00 per share.
The gross proceeds of such transaction were $23,000. The warrants were
originally issued to one unrelated party for professional services provided to
us.
In June 2001, we issued warrants to purchase 404,900 shares of common
stock with an exercise price of $2.09 for consulting services.
In June 2001, we issued an aggregate of 4,100 shares of our common stock
upon the exercise of outstanding warrants at a price of $2.00 per share. The
gross proceeds of such transaction were $8,000. The warrants were originally
issued to one unrelated party for professional services provided to us.
In May 2001, we issued an aggregate of 320,050 shares of our common
stock upon the exercise of outstanding warrants at a price of $2.00 per share.
The gross proceeds of such transaction were $641,000. The warrants were
originally issued to one related party in exchange for forgiveness of debt and
one unrelated party for professional services provided to us.
In April 2001, we issued warrants to purchase 50,000 shares of common
stock at a price of $0.01 per share to an outside institution for services
performed.
In March and April 2001, we issued 316,500 shares of our common stock at
a price of $3.40 per share to four foreign institutional unrelated parties. The
gross proceeds of such transaction were approximately $1,076,000. In connection
61
with the sale, we issued as a commission 50,000 warrants to purchase shares of
our common stock at an exercise price of $3.56 per share to a foreign
individual.
In March 2001, we issued 18,000 shares of our common stock at a price of
$3.41 per share to a foreign institutional unrelated party. The gross proceeds
of such transaction were $61,000.
In March 2001, we issued 156,250 shares of our common stock at a price
of $3.20 per share to a foreign institutional unrelated party. The gross
proceeds of such transaction were $500,000.
In March 2001, we issued 170,000 shares of our common stock issuable
upon the exercise of outstanding warrants held by a foreign institutional
unrelated party, originally issued in connection with the transaction described
in paragraph 4, above. The gross proceeds of such transaction were approximately
$362,000.
In October 2000, we issued warrants to purchase 80,000 shares of common
stock at a price of $4.13 per share for consulting services.
In October 2000, we issued warrants to purchase 1,400,000 shares of
common stock at a price of $6.00 per share to Digital:Convergence Corporation as
consideration for a 10-year intellectual property license agreement.
In March 2000, we issued an aggregate of 1,000,000 shares of our common
stock at a price of $7.50 per share to 20 foreign individuals and one foreign
institutional unrelated party. The gross proceeds of such transaction were
approximately $7,500,000. In connection with the sale, we issued as a commission
125,000 warrants to purchase shares of our common stock at an exercise price of
$7.50 per share, 125,000 warrants to purchase shares of our common stock at an
exercise price of $15.00 per share, and 100,000 warrants to purchase shares of
our common stock at an exercise price of $7.20 per share to the institutional
investor and an independent consultant.
In March 2000, we issued 187,500 shares of our common stock upon the
exercise of outstanding warrants at a price of $7.38 per share. The gross
proceeds of such transaction were approximately $1,383,000. The warrants were
originally issued as payment for professional services provided to us.
In February 2000, we issued 39,535 shares of our common stock at a price
of $6.88 per share to one individual and one institutional unrelated party. In
connection with the sale, we also issued 2,500 warrants with an exercise price
of $12.74 and 1,454 warrants with an exercise price of $9.56. The gross proceeds
of such transaction were approximately $272,000.
In February 2000, we issued 50,000 shares of our common stock at a price
of $6.00 per share to an institutional unrelated party. In connection with the
sale, we also issued 2,982 warrants with an exercise price of $10.06. The gross
proceeds of such transaction were approximately $300,000.
In February 2000, we issued 37,500 shares of our common stock upon the
exercise of outstanding warrants at a price of $2.00 per share, originally
issued in connection with the transaction described above in March 2002. The
gross proceeds of such transaction were approximately $75,000.
In January 2000, we issued an aggregate of 301,368 shares of our common
stock at a price of $3.75 per share to 14 unrelated parties, 3 of which were
institutions and 11 of which were individuals, of which two were foreign. In
connection with the sale, we also issued an aggregate of 12,570 warrants with an
exercise price of $7.19, 5,400 warrants with an exercise price of $6.44, and
12,167 warrants with an exercise price of $7.37. The gross proceeds of such
transaction were approximately $1,130,000. In connection with the sale, we
issued as commissions 9,502 shares of its common stock valued at $7.09 per
share.
In December 1999, we issued options to purchase 150,000 shares of common
stock at a price of $0.20 per share for consulting services.
In November 1999, we issued an aggregate of 143,334 shares of our common
stock at a price of $3.75 per share to two individual and two institutional
unrelated parties. In connection with the sale, we also issued an aggregate of
5,067 warrants with an exercise price of $5.50, 1,267 warrants with an exercise
price of $4.75, 5,333 warrants with an exercise price of $4.67, and 2,667
warrants with an exercise price of $5.84. The gross proceeds of such transaction
were approximately $538,000. In connection with the sale, we paid commissions of
approximately $35,000.
62
In October 1999, we issued 15,000 shares of our common stock at a price
of $4.38 per share to an individual unrelated party. In connection with the
sale, we also issued 1,500 warrants with an exercise price of $4.38. The gross
proceeds of such transaction were approximately $66,000.
In September 1999, we issued an aggregate of 210,000 shares of our
common stock at a price of $7.00 per share to one foreign individual and two
foreign institutional unrelated parties. The gross proceeds of such transaction
were approximately $1,470,000. In connection with the sale, we issued as a
commission 105,000 warrants to purchase shares of our common stock at an
exercise price of $6.00 per share to a foreign institutional investor.
In September 1999, we issued an aggregate of 275,231 shares of our
common stock at a price of $5.75 per share to two individual and three
institutional unrelated parties. In connection with the sale, we also issued an
aggregate of 27,523 warrants with an exercise price of $6.75. The gross proceeds
of such transaction were approximately $1,583,000. In connection with the sale,
we paid commissions of $30,000 cash, and also issued 11,172 shares of its common
stock valued at $6.19 per share and 10,000 warrants to purchase shares of our
common stock at an exercise price of $6.19 per share.
In June 1999, we issued 250,000 shares of our common stock at a price of
$4.00 per share to A.T. Cross Company, an unrelated party. In connection with
the sale, we also issued 100,000 warrants with an exercise price of $7.00. The
gross proceeds of such transaction were approximately $1,000,000.
In May 1999, we issued an aggregate of 65,000 shares of our common stock
at a price of $4.75 per share to two individual unrelated parties. In connection
with the sale, we also issued an aggregate of 6,500 warrants with an exercise
price of $5.00. The gross proceeds of such transaction were approximately
$309,000. In connection with the sale, we paid commissions of $3,375 cash plus
3,250 warrants to purchase shares of our common stock at an exercise price of
$5.00 per share.
In April 1999, we issued an aggregate of 1,000,000 shares of our common
stock at a price of $3.45 per share to two foreign individual unrelated parties
and four institutional unrelated parties, three of which were foreign. The gross
proceeds of such transaction were approximately $3,450,000. In connection with
the sale, we issued as a commission 175,000 warrants to purchase shares of our
common stock at an exercise price of $3.45 per share to a foreign institutional
unrelated party.
In April 1999, we issued warrants to purchase 50,000 shares of common
stock at a price of $0.01 per share to an outside institution for services
performed.
In February 1999, we issued 250,000 shares of our common stock at a
price of $4.00 per share to A.T. Cross Company, an unrelated party. In
connection with the sale, we also issued 100,000 warrants with an exercise price
of $5.00. The gross proceeds of such transaction were $1,000,000.
In January and February 1999, we issued an aggregate of 145,000 shares
of our common stock at a price of $3.50 per share to six unrelated parties, two
of which were foreign institutions, two of which were foreign individuals, and
two of which were domestic individuals. In connection with the sale, we also
issued an aggregate of 3,000 warrants with an exercise price of $3.50. The gross
proceeds of such transaction were approximately $507,500. In connection with the
sale, we also issued as a commission 280,000 warrants to purchase shares of our
common stock at an exercise price of $2.13 per share to five of the purchasers.
In January 1999, we issued 42,857 shares of our common stock at a price
of $3.50 per share to an individual related party. In connection with the sale,
we also issued 4,286 warrants with an exercise price of $3.50. The gross
proceeds of such transaction were approximately $150,000.
In January 1999, we issued 82,372 shares of our common stock to an
individual related party at a price of $3.04 per share. In connection with the
sale, we also issued 8,237 warrants with an exercise price of $3.04. The gross
proceeds of such transaction were approximately $250,000.
In January 1999, we issued warrants to purchase 230,000 shares of common
stock at a price of $2.13 per share to an outside consultant for services
performed.
In November 1998, we borrowed $500,000, in two separate notes from
unrelated third parties. These notes were due in November 1999 with an interest
rate of 20%. One $250,000 note was extended until January 6, 2000, and the other
was extended until February 25, 2000. These notes were secured by 375,000 shares
of our common stock by placing them in an escrow account. These shares were
63
considered issued but not outstanding for 1999. As part of obtaining the
financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to
the lender. These warrants were exercised in February 2000. During 2000, both
notes were repaid and the 375,000 shares securing the notes have been released
from escrow and retired by us.
We relied upon the exemption provided in Section 4(2) of the Securities
Act and/or Rule 506 thereunder, which cover "transactions by an issuer not
involving any public offering," to issue securities discussed above without
registration under the Securities Act of 1933. We made a determination in each
case that the person to whom the securities were issued did not need the
protection that registration would afford. The certificates representing the
securities issued displayed a restrictive legend to prevent transfer except in
compliance with applicable laws, and our transfer agent was instructed not to
permit transfers unless directed to do so by us, after approval by our legal
counsel. We believe that the investors to whom securities were issued had such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the prospective investment. We also believe
that the investors had access to the same type of information as would be
contained in a registration statement.
64
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of
our Certificate of Incorporation and By-Laws is a summary and is qualified in
its entirety by the provisions of our Certificate of Incorporation and By-Laws,
which have been filed as exhibits to our registration statement of which this
prospectus is a part.
On June 6, 2002, our shareholders voted to (i) increase the number of
shares of common stock, par value $0.01 per share, that we are authorized to
issue from 50,000,000 to 200,000,000 and the number of share of preferred stock,
par value $0.01 per share, that we are authorized to issue from 10,000,000 to
25,000,000; and (ii) implement the 2002 Stock Option Plan, under which NeoMedia
is authorized to grant to employeees, directors, and consultants up to
10,000,000 options to purchase shares of its common stock. As of December 1,
2002, 25,391,298 shares of common stock were outstanding, and no shares of
preferred stock were outstanding. This amount of outstanding shares excludes
53,620,023 shares issued into escrow on December 2, 2002, as collateral for a
note payable by NeoMedia to an unrelated investor. The shares are restricted,
and the note holder does not have title to the securities unless NeoMedia
defaults on the note, which matures on May 1, 2003. The shares are therefore not
deemed to be outstanding. None of our shares of preferred stock are outstanding
as of the date of this prospectus.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding shares of common stock, subject to the rights
of the holders of preferred stock, can elect all of our directors, if they
choose to do so. In this event, the holders of the remaining shares of common
stock would not be able to elect any directors. Subject to the prior rights of
any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available for that purpose and, upon our liquidation, dissolution, or
winding up, are entitled to share ratably in all assets remaining after payment
of liabilities and payment of accrued dividends and liquidation preferences on
the preferred stock, if any. Holders of common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The
outstanding common stock is duly authorized and validly issued, fully paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result, their percentage equity interest in us
would be diluted.
The shares of our common stock offered in this offering will be, when
issued and paid for, fully paid and not liable for further call and assessment.
Except as otherwise permitted by Delaware law, and subject to the rights of the
holders of preferred stock, all stockholder action is taken by the vote of a
majority of the outstanding shares of common stock voted as a single class
present at a meeting of stockholders at which a quorum consisting of a majority
of the outstanding shares of common stock is present in person or proxy.
PREFERRED STOCK
We may issue preferred stock in one or more series and having the
rights, privileges, and limitations, including voting rights, conversion rights,
liquidation preferences, dividend rights and preferences and redemption rights,
as may, from time to time, be determined by the Board of Directors. Preferred
stock may be issued in the future in connection with acquisitions, financings,
or other matters, as the Board of Directors deems appropriate. In the event that
we determine to issue any shares of preferred stock, a certificate of
designation containing the rights, privileges, and limitations of this series of
preferred stock shall be filed with the Secretary of State of the State of
Delaware. The effect of this preferred stock designation power is that our Board
of Directors alone, subject to Federal securities laws, applicable blue sky
laws, and Delaware law, may be able to authorize the issuance of preferred stock
which could have the effect of delaying, deferring, or preventing a change in
control of NeoMedia without further action by our stockholders, and may
adversely affect the voting and other rights of the holders of our common stock.
The issuance of preferred stock with voting and conversion rights may also
adversely affect the voting power of the holders of our common stock, including
the loss of voting control to others.
During December 1999, our Board of Directors approved a Certificate of
Resolutions Designating Rights and Preferences of Preferred Stock, filed with
the Secretary of State of the State of Delaware on December 20, 1999. By this
approval and filing, 200,000 shares of Series A Preferred Stock were designated.
Series A Preferred carries the following rights:
65
o The right to receive mandatory cash dividends equal to the greater
of $0.001 per share or 100 times the amount of all dividends (cash
or non-cash, other than dividends of shares of common stock) paid
to holders of the common stock, which dividend is payable 30 days
after the conclusion of each calendar quarter and immediately
following the declaration of a dividend on common stock;
o One hundred votes per each share of Series A Preferred on each
matter submitted to a vote of our stockholders;
o The right to elect two directors at any meeting at which directors
are to be elected, and to fill any vacancy on the Board of
Directors previously filled by a director appointed by the Series A
Preferred holders;
o The right to receive an amount, in preference to the holders of
common stock, equal to the amount per share payable to holders of
common stock, plus all accrued and unpaid dividends, and following
payment of 1/100th of this liquidation preference to the holders of
each share of common stock, an additional amount per share equal to
100 times the per share amount paid to the holders of common stock.
o The right to exchange each share of Series A Preferred for 100
times the consideration received per share of common stock in
connection with any merger, consolidation, combination or other
transaction in which shares of common stock are exchanged for or
converted into cash, securities or other property.
o The right to be redeemed in accordance with our stockholders rights
plan.
While accrued mandatory dividends are unpaid, we may not declare or pay
dividends or distributions on, or redeem, repurchase or reacquire, shares of any
class or series of junior or parity stock.
The Series A Preferred was created to be issued in connection with our
stockholders rights plan, described below. No shares of Series A Preferred have
been issued to date.
On June 19, 2001, our Board of Directors approved a Certificate of
Designations to Create a Class of Series A Convertible Preferred Stock for
NeoMedia Technologies, Inc., filed with the Secretary of State of the State of
Delaware on June 20, 2001. By this approval and filing, 47,511 shares are
designated as Series A Convertible Preferred Stock. Our Series A Convertible
Preferred Stock, par value $0.01 per share, has the following rights:
o Series A Convertible Preferred is convertible into shares of our
common stock at a one-to-one ratio, subject to proportional
adjustments in the event of stock splits or combinations, and
dividends or distributions of shares of common stock, at the option
of the holder; shares are subject to automatic conversion as
determined in each agreement relating to the purchase of shares of
Series A Convertible Preferred;
o Each share of Series A Convertible Preferred is entitled to receive
a liquidation preference equal to the original purchase price of
such share in the event of liquidation, dissolution, or winding up;
o Upon merger or consolidation, or the sale, lease or other
conveyance of all or substantially all of our assets, shares of
Series A Convertible Preferred are automatically convertible into
the number of shares of stock or other securities or property
(including cash) to which the common stock into which it is
convertible would have been entitled;
o Shares of Series A Convertible Preferred are entitled to one vote
per share, and vote together with holders of common stock.
In June 2001, 452,489 shares of Series A Convertible Preferred were
issued to About.com, Inc. pursuant to a certain Agreement for Payment in Common
Stock, in lieu of cash payment to About.com for online advertising services. On
January 2, 2002, such shares were converted into 452,489 shares of common stock,
which are being registered for sale hereby.
On January 16, 2002, our Board of Directors approved a Certificate of
Designation, Preferences, Rights and Limitations of Series B 12% Convertible
Redeemable Preferred Stock of NeoMedia Technologies, Inc., filed with the
Secretary of State of the State of Delaware on February 28, 2002. By this
approval and filing, 100,000 shares are designated as Series B 12% Convertible
66
Redeemable Preferred Stock. Our Series B 12% Convertible Redeemable Preferred
Stock, par value $0.01 per share, has the following rights:
o Series B Preferred shares accrue dividends at a rate of 12% per
annum, or $1.20 per share, between the date of issuance and the
first anniversary of issuance;
o Series B Preferred is redeemed to the maximum extent permitted by
law (based on our funds legally available for redemption) at a
price per share of $15.00, plus accrued dividends (a total of
$16.20 per share) on the first anniversary of issuance;
o Series B Preferred receive proceeds of $12.00 per share upon our
liquidation, dissolution or winding up;
o To the extent, not redeemed on the first anniversary of issuance,
Series B Preferred is automatically convertible into our then
existing general class of common stock on the first anniversary of
issuance at a price equal to $16.20 divided by the greater of $0.20
and the lowest publicly-sold share price during the 90 day period
preceding the conversion date, but in no event more than 19.9% of
our outstanding capital stock as of the date immediately prior to
conversion.
o Upon merger or consolidation, or the sale, lease or other
conveyance of all or substantially all of our assets, shares of
Series B Preferred are automatically convertible into the number of
shares of stock or other securities or property (including cash) to
which the common stock into which it is convertible would have been
entitled; and
o Shares of Series B Preferred are entitled to one vote per share and
vote with common stock, except where the proposed action would
adversely affect the Series B Preferred or where the non-waivable
provisions of applicable law mandate that the Series B Preferred
vote separately, in which case Series B Preferred vote separately
as a class, with one vote per share.
Our Preferred Stock is currently comprised of 25,000,000 shares, par
value $0.01 per share, of which 200,000 shares are designated as Series A
Preferred Stock, none of which are issued or outstanding, and, following the
conversion into common stock of 452,489 shares of Series A Convertible Preferred
Stock issued to About.com, of which 47,511 shares are designated as Series A
Convertible Preferred Stock, none of which are issued and outstanding, and of
which 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock,
none of which are issued and outstanding. We have no present agreements relating
to or requiring the designation or issuance of additional shares of preferred
stock.
WARRANTS AND OPTIONS
As of December 1, 2002 there were outstanding warrants and options to
purchase 7,705,090 and 8,755,219, shares of our common stock, respectively, with
exercise prices ranging from $0.00 to $15.00. The number of shares issuable upon
exercise and the exercise prices of the warrants are subject to adjustment in
the event of certain events such as stock dividends, splits and combinations,
capital reorganization and with respect to certain warrants, issuance of shares
of common stock at prices below the then exercise price of the warrants.
As of June 6, 2002, NeoMedia shareholders approved the 2002 Option Plan.
Under this plan, NeoMedia is authorized to grant to employees, directors, and
consultants up to 10,000,000 options to share of its common stock. As of
November 20, 2002, we had issued 6,415,000 options under the 2002 plan, of which
3,250,000 had been exercised.
In March 2002, we adopted a warrant repricing program. The program
entitled holders of up to 1.2 million warrants to exercise the warrants within a
period ending the earlier of September 19, 2002 or the expiration date of the
warrant at a price per share equal to the greater of $0.12 or 50% of the closing
sales per share price on the OTC Bulletin Board of our common stock on the
trading date immediately preceding the date of exercise. Approximately 0.4
million of the warrants placed in the program were exercised. We recognized
approximately $38,000 in expense relating to the program during the first nine
months of 2002.
During April 2002, we repriced 7.4 million of our common stock options
held by employees, consultants and advisors for a period of six months. During
the term of the option repricing program, participating holders were entitled to
exercise subject options at an exercise price per share equal to the greater of
(1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the
OTCBB, on the trading date immediately preceding the date of exercise. Shortly
after the announcement of the repricing program, the market price for our common
67
stock fell below $0.12, and has not closed above $0.12 since. As a result, no
options were exercised under the terms of the program and we did not recognize
any expense relating to the repricing program during the first six months of
2002.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
On December 10, 1999, our Board of Directors adopted a stockholders
rights plan and declared a non-taxable dividend of one right on each outstanding
share of our common stock to stockholders of record on December 10, 1999 and
each share of common stock issued prior to the rights plan trigger date. The
stockholder rights plan was adopted as an anti-takeover measure, commonly
referred to as a "poison pill." The stockholder rights plan was designed to
enable all stockholders to receive fair and equal treatment in any proposed
takeover of the corporation and to guard against partial or two-tiered tender
offers, open market accumulations and other hostile takeover tactics to gain
control of NeoMedia. The stockholders rights plan, which is similar to plans
adopted by many leading public companies, was not adopted in response to any
effort to acquire control of NeoMedia at the time of adoption. Certain of our
directors, officers and principal stockholders, Charles W. Fritz, William E.
Fritz and The Fritz Family Limited Partnership and their holdings were exempted
from the triggering provisions of our "poison pill" plan, as a result of the
fact that, as of the plans adoption, their holdings might have otherwise
triggered the "poison pill".
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer, located in New York, New York. The transfer agent's phone number is
(718) 921-8293.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DGCL"), we have
included in our Certificate of Incorporation a provision to eliminate the
personal liability of our directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, except for liability (i) for any
breach of the director's duty of loyalty to NeoMedia or its stockholders, (ii)
for acts or omissions not in good faith or which involved intentional misconduct
or a knowing violation of law, (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases, as provided in Section 174 of the
DGCL, or (iv) for any transaction from which the director derived an improper
personal benefit. The effect of this provision is to eliminate the rights of
NeoMedia and its stockholders (through stockholders' derivative suits on behalf
of NeoMedia) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director except in the situations described in (i)
through (iv) above. This provision does not limit nor eliminate the rights of
NeoMedia or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. These
provisions will not alter the liability of directors under federal securities
laws.
The certificate of incorporation and the by-laws of NeoMedia provide
that we are required and permitted to indemnify our officers and directors,
employees and agents under certain circumstances. In addition, if permitted by
law, we are required to advance expenses to our officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, we are not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
NeoMedia in which indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of NeoMedia pursuant to the foregoing provisions, or otherwise, NeoMedia
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
68
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for us
by Kirkpatrick and Lockhart LLP, Miami, Florida.
EXPERTS
The audited consolidated financial statements of NeoMedia Technologies,
Inc. and its subsidiaries for the year ended December 31, 2001, included in this
prospectus and elsewhere in the registration statement have been audited by
Stonefield Josephson, Inc., independent certified public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes an explanatory paragraph with
respect to the uncertainty regarding NeoMedia's ability to continue as a going
concern, as discussed in Note 3 to the financial statements.
The audited consolidated financial statements of NeoMedia Technologies,
Inc. and its subsidiaries for the years ended December 31, 2000 and 1999,
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent certified public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes an explanatory paragraph with
respect to the uncertainty regarding NeoMedia's ability to continue as a going
concern, as discussed in Note 3 to the financial statements. In accordance with
Securities Act Rule 437a, the consent of Arthur Andersen LLP has not been
included as an exhibit herewith. NeoMedia has been unable to obtain a consent of
Arthur Andersen LLP due to the departure of their engagement team leaders from
such firm. Any recovery by investors posed by the lack of consent is limited by
Securities Act Rule 437a.
The financial statements of Qode.com, Inc. (A Development Stage
Enterprise) at December 31, 1999 and for the period from March 29, 1999
(inception) through December 31, 1999, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their report thereon (which
contain an explanatory paragraph describing conditions that raise substantial
doubt about NeoMedia's ability to continue as a going concern as described in
Note 1 to the financial statements) appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On June 7, 1999, we filed a Report on Form 8-K reporting that KPMG LLP
had resigned as our independent auditors. In connection with the audit of
NeoMedia's financial statements for the fiscal year ended December 31, 1998 and
in the subsequent interim periods, there were no disagreements with KPMG LLP on
any matters of accounting principles or practice, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the
matter in their report. In their report ended March 18, 1998 for the year ended
December 31, 1997, KPMG LLP did not issued a qualified or adverse opinion.
Effective July 14, 1999, we engaged Arthur Andersen LLP to audit our
consolidated financial statements for the fiscal year ending December 31, 1999.
On October 29, 2001, we filed a Report on Form 8-K reporting that we had
dismissed Arthur Andersen LLP as our independent auditors. In connection with
the audit of NeoMedia's financial statements for the fiscal years ended December
31, 2000 and 1999 and in the subsequent interim periods, there were no
disagreements with Arthur Andersen LLP on any matters of accounting principles
or practice, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Arthur Andersen LLP would have
caused Arthur Andersen LLP, to make reference to the matter in their report. In
their report dated March 30, 2001, for the years ended December 31, 2000 and
1999, Arthur Andersen LLP did not issue an adverse opinion, but did issue a
qualified opinion with a "going concern" clause. Effective October 25, 2001 we
engaged Stonefield Josephson, Inc. as our new independent accountants.
69
HOW TO GET MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the operation of the Public Reference
Room. The SEC maintains an Internet site at http://www.sec.gov where certain
information regarding issuers, including NeoMedia, may be found. Our Web site is
http://www.neom.com.
This prospectus is part of a registration statement that we filed with
the SEC. The registration statement contains more information than this
prospectus regarding NeoMedia and its common stock, including certain exhibits
and schedules. You can get a copy of the registration statement from the SEC at
the address listed above or from its Internet site, www.sec.gov.
70
INDEX OF FINANCIAL STATEMENTS
Qode.com Inc. financial statements for the year ending
December 31, 2000..........................................................F-1
Qode.com, Inc. financial statements for Period from
March 29, 1999 (inception) to December 31, 1999...........................F-19
Pro-forma financial information............................................F-36
NeoMedia Technologies, Inc. consolidated financial
statements for the years ended December 31, 2001,
2000 and 1999,...........................................................F-41
NeoMedia Technologies, Inc. consolidated financial
statements for the nine months ended September 30,
2002 and 2001.............................................................F-68
71
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Qode.com, Inc.'s filing for the year ended December 31, 2000.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this registration statement. See Exhibit 23.4 for further discussion.
FINANCIAL INFORMATION
Report of Independent Certified Public Accountants
To Qode.com, Inc.:
We have audited the accompanying balance sheet of Qode.com, Inc. (a Florida
corporation in the development stage) as of December 31, 2000, and the related
statements of operations, changes in redeemable preferred stock and
stockholders' deficit, and cash flows for the year then ended and the related
statements of operations and cash flows for the period from inception (March 29,
1999) to December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Qode.com, Inc. for the period from inception to December 31, 1999.
Such statements are included in the cumulative inception to December 31, 2000,
totals of the statements of operations and cash flows and reflect total revenues
and net loss of zero percent and 13 percent, respectively, of the related
cumulative totals. Those statements were audited by other auditors, whose report
has been furnished to us, and our opinion, insofar as it relates to amounts for
the period from inception to December 31, 1999, included in the cumulative
totals, is based solely upon the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Qode.com, Inc. as of December 31, 2000, and the
results of its operations and its cash flows for the year then ended and for the
period from inception to December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and the
current cash position of the Company raises 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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida,
May 4, 2001 (except with respect to the matter discussed in Note 13, as to which
the date is June 30, 2001)
F-1
QODE.COM, INC.
(A Development Stage Enterprise)
BALANCE SHEET - DECEMBER 31, 2000
ASSETS Amount
------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,686
Accounts receivable 6,041
Inventory 218,690
Other current assets 13,499
------------
Total current assets 256,916
PROPERTY AND EQUIPMENT, net 875,263
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,359,932
DEPOSITS 39,539
------------
Total assets $ 3,531,650
============
F-2
QODE.COM, INC.
(A Development Stage Enterprise)
BALANCE SHEET - DECEMBER 31, 2000
(continued)
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT Amount
-----------
CURRENT LIABILITIES:
Accounts payable $ 982,610
Dividends payable 94,119
Accrued expenses 425,103
Current portion of notes payable 3,617,323
Current portion of capital lease obligations 368,574
Loans from officers 224,740
-----------
Total current liabilities 5,712,469
NOTES PAYABLE, net of current portion 5,857
CAPITAL LEASE OBLIGATIONS, net of current portion 168,176
-----------
Total liabilities 5,886,502
-----------
COMMITMENTS AND CONTINGENCIES
SERIES A 15% CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK, $.0001 par value; 3,000,000 2,480,991
shares authorized, 2,044,560 shares issued
and outstanding, liquidation value of $2,502,641
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value; 25,000,000 shares 802
authorized, 8,023,000 shares issued and outstanding
Additional paid-in capital - common stock 1,927,313
Series U convertible preferred stock, $.0001 par value; 150
1,500,000 shares authorized, issued and outstanding
Additional paid-in capital - preferred stock 2,999,850
Accumulated deficit (9,763,958)
-----------
Total stockholders' deficit (4,835,843)
-----------
Total liabilities, redeemable preferred stock and
stockholders' deficit $ 3,531,650
============
The accompanying notes are an integral part of this balance sheet.
F-3
QODE.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD
FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000
CUMULATIVE
FROM
INCEPTION
MARCH 29, 1999
YEAR ENDED TO
DECEMBER 31, DECEMBER 31
2000 2000
--------------- --------------
REVENUE $ 211,952 $ 211,952
COST OF GOODS SOLD 213,345 213,345
--------------- --------------
GROSS MARGIN (1,393) (1,393)
COSTS AND EXPENSES:
Research and development 1,109,686 1,505,928
Sales and marketing 556,541 598,516
General and administrative 5,839,413 6,686,825
--------------- --------------
Total costs and expenses 7,505,640 8,791,269
NET INTEREST EXPENSE 1,008,938 971,296
--------------- --------------
NET LOSS (8,515,971) (9,763,958)
PREFERRED STOCK DIVIDENDS (356,203) (552,200)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE ON PREFERRED STOCK (15,296) (20,010)
--------------- --------------
Net LOSS AVAILABLE TO COMMON
STOCKHOLDERS $(8,887,470) $(10,336,168)
=============== ==============
NET LOSS PER SHARE - BASIC AND DILUTED $ (1.11) $ (1.29)
=============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 8,023,000 8,018,071
=============== ==============
The accompanying notes are an integral part of these statements.
F-4
QODE.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2000
ADDITIONAL ADDITIONAL
SERIES A PAID-IN
REDEEMABLE CAPITAL SERIES U
PREFERRED COMMON STOCK FOR COMMON PREFERRED STOCK
STOCK SHARES AMOUNT STOCK SHARES AMOUNT
------------ --------- ---------- ----------- --------- ---------
BALANCE, December 31,
1999 $ 2,154,711 8,023,000 $802 $ (49,557) -- $ --
Issuance of 19,560
shares of Series A
preferred stock in
exchange for
services 48,900 -- -- -- -- --
Issuance of Series U
preferred stock -- -- -- -- 1,500,000 150
Issuance of 372,780
warrants in
exchange for
services -- -- -- 1,126,790 -- --
Issuance of 326,666
warrants attached
with notes payable -- -- -- 675,681 -- --
Issuance of employee
stock options with
exercise price
below market value -- -- -- 150,216 -- --
Re-pricing of
employee stock
options -- -- -- 395,682 -- --
Series A preferred
stock dividends 262,084 -- -- (262,084) -- --
Series U preferred
stock dividends -- -- -- (94,119) -- --
Accretion of
beneficial
conversion
feature on preferred
stock 15,296 -- -- (15,296) -- --
Net loss -- -- -- -- -- --
------------ ---------- ---------- ----------- --------- ----------
BALANCE, December 31,
2000 $2,480,991 8,023,000 $802 $ 1,927,313 1,500,000 $ 150
============ ========== ========== =========== ========= ==========
ADDITIONAL
PAID-IN
CAPITAL
FOR TOTAL
PREFERRED ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT DEFICIT
----------- ----------- -------------
BALANCE, December 31,
1999 -- $(1,247,987) $ (1,296,742)
Issuance of 19,560
shares of Series A
preferred stock in
exchange for
services -- -- --
Issuance of Series U
preferred stock 2,999,850 -- 3,000,000
Issuance of 372,780
warrants in
exchange for
services -- -- 1,126,790
Issuance of 326,666
warrants attached
with notes payable -- -- 675,681
Issuance of employee
stock options with
exercise price
below market value -- -- 150,216
Re-pricing of
employee stock
options -- -- 395,682
Series A preferred
stock dividends -- -- (262,084)
Series U preferred
stock dividends -- -- (94,119)
Accretion of
beneficial
conversion feature
on preferred stock -- -- (15,296)
Net loss -- (8,515,971) (8,515,971)
------------ -------------- --------------
BALANCE, December 31,
2000 $ 2,999,850 $ (9,763,958) $ (4,835,843)
============ ============== ==============
The accompanying notes are integral part of this statement.
F-5
QODE.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD
FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000
CUMULATIVE
FROM
INCEPTION
(MARCH 29,
1999)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31
2000 2000
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,515,971) $(9,763,958)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 417,410 434,932
Series A preferred stock issued for services 48,900 48,900
Warrants issued in exchange for services 1,126,790 1,884,627
Stock options issued with exercise price below market value 150,216 150,216
Expense related to the re-pricing of employee stock options 395,682 395,682
Changes in assets and liabilities-
Accounts receivable (6,041) (6,041)
Inventory (218,690) (218,690)
Other current assets 4,652 (13,499)
Deposits (9,310) (39,539)
Accounts payable 831,022 982,610
Accrued expenses 377,857 425,103
------------ ------------
Net cash used in operating activities (5,397,483) (5,719,657)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (382,222) (509,013)
Capitalization of software development costs (2,498,752) (2,498,752)
------------ ------------
Net cash used in investing activities (2,880,974) (3,007,765)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and detachable warrants 4,298,861 3,623,180
Proceeds from loans from officers 151,407 224,740
Principal repayments of capital lease (125,612) (125,612)
Proceeds from the issuance of common stock -- 23,800
Proceeds from the issuance of Series A redeemable preferred stock net -- 2,000,000
of issuance costs of $25,000
Proceeds from issuance of Series U convertible preferred stock 3,000,000 3,000,000
------------ ------------
Net cash provided by financing activities 7,324,656 8,746,108
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (953,801) 18,686
CASH AND CASH EQUIVALENTS, beginning of year 972,487 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 18,686 $ 18,686
============ ============
F-6
QODE.COM, INC.
A Development Stage Enterprise
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
AND THE PERIOD FROM MARCH 29, 1999 (DATE OF INCEPTION),
THROUGH DECEMBER 31, 2000
(continued)
CUMULATIVE
FROM
INCEPTION
(MARCH 29,
1999)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
2000 2000
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 180,000 $ 160,189
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of redeemable preferred stock $ 15,296 20,010
Accrued dividends on Series A preferred stock $ 262,084 458,081
Accrued dividends on Series U preferred stock $ 94,119 94,119
Property and equipment acquired under capital lease $ 662,362 662,362
The accompanying notes are an integral part of these statements.
F-7
QODE.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1 NATURE OF BUSINESS ORGANIZATION
Qode.com, Inc. (Qode.com or the Company) commenced operations on March 29, 1999,
and is incorporated in the State of Florida. Qode.com is a development stage
company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting By Development Stage Enterprises". The Company intends
to provide manufacturers, retailers, advertisers and users a unique tool for
Website navigation through the use of imbedded standard bar codes and Uniform
Product Codes (UPC). It is the Company's mission to develop, operate, maintain
and promote the use of Qode.com technologies to enable any bar code to interface
with their technology.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has incurred losses since its
inception and during its development stage as it has devoted substantially all
of its efforts toward building network infrastructure, internal staffing,
developing systems, expanding into new markets, building a proprietary database
and raising capital. The Company has generated little revenue to date and is
subject to a number of risks, including dependence on key individuals, the
ability to demonstrate technological feasibility, and the need to obtain
adequate additional financing necessary to fund the development and marketing of
its products and services, and customer acceptance. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may results from the outcome of this
uncertainty.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market, and at December 31, 2000 was
comprised of QoderTM handheld scanning systems. Cost is determined using the
weighted average method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Repairs
and maintenance are charged to expense as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Computer hardware and purchased software are being depreciated over a
three-year period, and furniture and fixtures are being depreciated over a
five-year period.
Depreciation expense was $278,590 for the year ended December 31, 2000.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In accordance with the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use," all costs related to the development or
purchase of internal use software other than those incurred during the
F-8
application development stage are to be expensed as incurred. Costs incurred
during the application development stage are required to be capitalized and
amortized over the useful life of the software. The Company has expensed
$1,109,686 in research and development costs for the year ended December 31,
2000. The Company has capitalized $2,498,752 in software development costs for
the year ended December 31, 2000. Amortization expense was $138,820 for the year
ended December 31, 2000.
REDEEMABLE PREFERRED STOCK
Redeemable preferred stock is carried at the net consideration to the Company at
time of issuance, increased by accrued and unpaid cumulative dividends and
periodic accretion to redemption value using the interest method. Accrued and
unpaid dividends and redemption accretion are affected by charges against
retained earnings, or, in the absence of retained earnings, additional paid-in
capital.
REVENUE RECOGNITION
Revenue is generated from the sale of Qode's proprietary hand held bar code
scanners. Revenue is recognized when the product is delivered to the customer.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", income taxes are accounted for using the assets
and liabilities approach. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. 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. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be recognized. The Company has recorded a 100% valuation
allowance as of December 31, 2000.
COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the period.
The Company has excluded all common stock equivalents from the calculation of
diluted net loss per share because these securities are anti-dilutive. The
shares excluded from the calculation of diluted net loss per share and reserved
for future issuance are detailed in the table below:
2000
-------------
Outstanding stock OPTIONS 1,540,511
Outstanding warrants 1,229,146
Shares issuable on conversion of notes
payable 6,800,000
Shares issuable on conversion of Series
A preferred stock 4,049,701
Shares issuable on conversion of notes payable were calculated based on the
terms of the notes as if they were converted on December 31, 2000.
FINANCIAL INSTRUMENTS
The Company believes that the fair value of its financial instruments
approximate carrying value.
CONCENTRATION OF CREDIT RISK
Revenue was generated from the selling of barcode scanners with approximately 91
percent of those sales to one customer.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based compensation."
The provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
F-9
forth in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), but disclose the pro forma effects on net income
or loss as if the fair value had been expensed. The Company has elected to apply
APB 25 in accounting for its employee stock options and, accordingly recognizes
compensation expense for the difference between the fair value of the underlying
common stock and the grant price of the option at the measurement date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS 138.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets of liabilities in the balance sheet
and measure those instruments at fair value. The adoption of these new
accounting standards did not have an impact on the Company's financial position
or results of operations.
On December 3, 1999 the Securities and Exchange Commission (SEC) staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition". This SAB
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. The Company implemented SAB No. 101 for the quarter ended
June 30, 2000. It did not have an impact on the Company's results of operations.
COMPREHENSIVE INCOME
For the year ended December 31, 2000, there were no differences between the
balance sheet and income statement and therefore no comprehensive income.
3 LOANS FROM OFFICERS
Between October and December 2000, several of the Company's officers elected to
defer their salaries due to cash flow difficulties experienced by the Company.
The total amount deferred was $83,154.
On November 28, 2000, the Company issued promissory notes to officers totaling
$135,000, with an interest rate of 6.09 percent. The principal and interest are
payable on February 26, 2001
4 PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2000:
2000
------------
Computer hardware and purchased software $ 1,139,578
Furniture and fixtures 31,797
------------
1,171,375
Less- Accumulated depreciation (296,112)
------------
$ 875,263
============
5 NOTES PAYABLE
CONVERTIBLE NOTES
On January 18, 2000, the Company entered into a note purchase agreement with an
investor for $3,000,000, with an interest rate of 12 percent. The principal and
interest were due July 17, 2000. The principal and interest are convertible at
the option of the holder upon or after a $10 million financing. The conversion
rate is 85 percent of the price per share in the financing. In connection with
this note, 200,000 warrants were issued with an exercise price of $4.50 per
share for the Company's common stock. These warrants may be exercised at anytime
following the closing of a $10 million financing and expire January 17, 2005.
The Company allocated the proceeds from the issuance of the note between the
note and warrants based on the relative fair value method. The difference
between the face amount of the note and the amount allocated to it was recorded
as a discount, and amortized to interest expense over the life of the note.
F-10
On August 1, 2000, the Company extended this note to November 17, 2000. As
additional consideration for the extension of the note, the Company reduced the
exercise price of the 200,000 warrants to $1.00. The additional expense of
$63,180 that resulted from the re-pricing was charged to interest expense. As of
December 31, 2000, the note had not been repaid.
During 2000, the Company entered into four separate note purchase agreements
with investors totaling $400,000 with interest rates of 12 percent. The
principal and interest on three of the notes were due October 9, 2000 through
November 4, 2000, and principal and interest on the other note is due January 6,
2001. The principal and interest are convertible at the option of the holder
upon or after a $7 million financing. The conversion rate is 85 percent of the
price per share in the financing. In connection with these notes, 26,666
warrants were issued with an exercise price of $2.00 per share for the Company's
common stock. These warrants may be exercised at anytime following the closing
of a $7 million financing. The proceeds from the issuance of these notes and
warrants were allocated between the two using the relative fair value method.
The resulting discount on the notes was amortized to interest expense over the
life of the notes.
OTHER NOTE PAYABLE
During March 2000, the Company entered into a note agreement in the amount of
$42,500, bearing interest at a rate of 11 percent per year and expiring on March
15, 2002, to finance its phone system. The note is secured by telephone
equipment.
On November 28, 2000 and December 14, 2000, the Company signed two promissory
notes in the amounts of $20,000 and $200,000, bearing interest at a rate of 6.09
percent and 15 percent per year, with principal and accrued interest payable
February 26, 2001 and January 28, 2001, respectively. In connection with the
December 14, 2000 note, 100,000 warrants were issued with an exercise price of
$.50 per share for the Company's common stock. These warrants may be exercised
at anytime following the closing of the Next Financing, as defined in the
warrant agreement. The proceeds from the issuance of this note and warrants were
allocated between the two using the relative fair value method. The resulting
discount on the note is being amortized to interest expense over the life of the
note.
Notes payable consists of the following:
AMOUNT
------------
Convertible notes, interest bearing at 12% per annum $ 3,400,000
Note payable, interest bearing at 11% per annum, due
in monthly installments through March 2002 27,679
Note payable, unsecured interest bearing at 6.09% per
annum, due February 2001 20,000
Note payable, unsecured interest bearing at 15% per
annum, due January 2001 200,000
------------
Total notes payable 3,647,679
Less discount (24,499)
Less- Current portion (3,617,323)
------------
Notes payable, net of current portion $ 5,857
============
AS OF DECEMBER 31, 2000 THERE WAS $197,740 OF ACCRUED INTEREST.
F-11
6 INCOME TAXES
For the years ended December 31, 2000, the components of income tax expense were
as follows:
2000
------------
Current $ -
Deferred -
------------
Income tax $ -
expense
The net amounts of deferred tax assets recorded in the balance sheet at December
31, 2000, are as follows:
2000
------------
Deferred tax asset:
Depreciation of property and equipment $ 17,901
Start-up costs 199,566
Net operating loss carryforward 3,443,643
Less- Valuation allowance (3,661,110)
------------
Total deferred tax asset $ --
============
Deferred tax liabilities: $ --
============
Total net deferred taxes $ --
============
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not,
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $3,661,110 valuation allowance at December 31, 2000 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current year
is $3,194,880. At December 31, 2000, the Company has available net operating
loss carryforwards of $9,151,323, which expire in the year 2020 and 2019.
A reconciliation of income taxes computed at the U.S. federal statutory tax rate
to income tax expense for the year ended December 31, 2000, is as follows:
2000
------------
Taxes at the U.S. statutory rate $(2,895,430)
State taxes, net of federal benefit (309,129)
Nondeductible items 9,679
Change in valuation allowance 3,194,880
------------
Total income tax expense $ -
============
7 COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is not presently a party to any significant litigation. From time to
time, however, the Company is involved in various legal actions arising in the
normal course of business, which the Company believes will not materially affect
the financial position or results of operations.
F-12
EMPLOYMENT CONTRACTS
The Company has employment contracts with William Carpenter, Greg Miller and
Michael Miller beginning November 1, 2000.
Future payments under the above employment contracts are:
2001 $ 450,000
2002 450,000
2003 375,000
-----------
Total $ 1,275,000
===========
CAPITAL LEASE OBLIGATIONS
During April 2000, the Company acquired computer equipment for $662,362 under a
capital lease, expiring on April 26, 2002. Accumulated depreciation on this
equipment was approximately $166,000 at December 31,2001
Future minimum lease payments on capital lease obligations as of December
31,2000, are as follows:
YEAR AMOUNT
-------------------------------------------------- -----------
2001 $ 415,358
2002 173,519
-----------
588,877
Less - Amount representing interest on
obligations under capital leases (15%) (52,127)
Current portion of capital lease obligations (368,574)
-----------
Capital lease obligations, net of current portion $ 168,176
===========
OPERATING LEASE OBLIGATIONS
The Company leases its office facility under a non-cancelable operating lease
expiring in March 2005. Rental expense, net of sub-lease income, was $73,036 for
the year ended December 31, 2000.
Lease commitments under this non-cancelable operating leases as of December 31,
2000, are as follows:
YEAR ENDING AMOUNT
------------- --------------
2001 $ 391,399
2002 233,876
2003 154,905
2004 117,768
2005 5,103
--------------
$ 903,051
==============
F-13
8 PREFERRED STOCK
SERIES A 15% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Board of Directors (the Board) has authorized the issuance of up to
3,000,000 shares of Series A 15 percent $.0001 par value, voting, cumulative,
redeemable, convertible preferred stock (the Series A Preferred Stock). Series A
Preferred Stock is convertible at any time at the option of the holder prior to
the closing of a Public Offering, as defined in the agreement, or within 20 days
following receipt of a Notice of Redemption, as defined in the agreement, into
the Company's common stock for each share of the Series A Preferred Stock held
plus accrued and unpaid dividends on the Series A Preferred Shares. The Series A
Preferred Stock has a liquidation preference of $1 per share and is mandatorily
redeemable on April 15, 2004.
In June 2000, the Company issued 19,560 shares of the Series A Preferred Stock
at $2.50 per share for services rendered.
Dividends on the Series A Preferred Stock accrue, on a daily basis, commencing
on the date of issuance at an interest rate of 15 percent per annum and are
payable on a semi-annual basis. The Company, at its option, may pay dividends
either in cash or by the issuance of additional shares of Series A Preferred
Stock. Aggregate cumulative dividends in arrears at December 31, 2000 totaled
$458,081, and are included in Series A 15 % cumulative convertible redeemable
preferred stock on the accompanying balance sheet.
SERIES U CONVERTIBLE PREFERRED STOCK
The Board has authorized the issuance of up to 1,500,000 shares of Series U, 8
percent $.0001 par value, voting, cumulative, convertible preferred stock (the
Series U Preferred Stock). Series U Preferred Stock is convertible at any time
at the option of the holder prior to the closing of a Public Offering into the
Company's common stock for each share of the Series U Preferred Stock held plus
accrued and unpaid dividends on the Series U Preferred Shares. Between May and
October 2000, the Company issued 1,500,000 at $2 per share, with proceeds to the
Company of $3,000,000.
Dividends on the Series U Preferred Stock accrue, on a daily basis, commencing
on the date of issuance at an interest rate of 8 percent per annum and are
payable on a semi-annual basis. The Company, at its option, may pay dividends
either in cash or by the issuance of additional shares of Series U Preferred
Stock. Aggregate cumulative dividends in arrears at December 31, 2000, totaled
$94,119.
9 COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of its $.0001 par
value common stock. During 2000, no shares of common stock were issued. As of
December 31, 2000, 8,023,000 shares were issued and outstanding.
10 STOCK BASED COMPENSATION
STOCK WARRANTS GRANTED IN EXCHANGE FOR SERVICES
During 2000, the Company granted 372,780 warrants, with exercise prices ranging
from $1.00 to $4.50 per share, to consultants for certain advisory and
consulting services. The warrants vest immediately upon issuance and can be
exercised over a five-year period. In August 2000, 250,000 warrants granted at
$4.50 were re-priced to $1.00 per share. In September 2000, 100,000 warrants
granted at $1.50 were re-priced to $0.01 per share. The Company valued these
warrants, and their re-pricing, at $1,126,790 in accordance with SFAS 123, and
recognized the entire amount in 2000 as general and administrative expenses in
the accompanying statement of operations.
STOCK WARRANTS GRANTED ATTACHED TO DEBT AGREEMENTS
During 2000, the Company granted 326,666 warrants, with exercise prices ranging
from $.50 to $4.50, attached to various debt agreements. The warrants vest
immediately upon issuance and can be exercised over a five-year period. The
Company applied APB Opinion No. 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants", and accounted for the portion of the
proceeds of the debt issued with warrants, which was allocable to the warrants,
as additional paid-in capital based on the relative fair values of the
securities at the time of issuance, and also recognized a discount on the debt
as a result.
F-14
In September 2000, 200,000 warrants granted at $4.50 were re-priced to $1.00 per
share in connection with an extension of the term date of the debt. The Company
valued the re-pricing at $63,180, and recognized the entire amount in 2000 as
interest expense in the accompanying statement of operations.
Warrant activity for the year ended December 31, 2000, is as follows:
Balance December 31, 1999 529,700
Issued 699,446
Exercised -
Expired -
------------
Balance December 31, 2000 1,229,146
============
The following table summarizes information about warrants outstanding at
December 31, 2000, all of which are exercisable:
WEIGHTED
AVERAGE
REMAINING
NUMBER OF CONTRACTUAL WEIGHTED
OUTSTANDING LIFE EXERCISE
RANGE OF EXERCISE AVERAGE PRICES WARRANTS (YEARS) PRICE
$0.01 to $0.50 200,000 3.3 $0.26
$1.00 527,780 4.2 $1.00
$1.50 429,700 3.8 $1.50
$2.00 26,666 4.3 $2.00
$2.50 45,000 4.2 $2.50
----------- ----------- ---------
1,229,146 3.9 $1.13
=========== =========== =========
STOCK OPTIONS
The Board approves all issuances of stock options. All stock options expire five
years from the grant date. In general, options vest and become exercisable one
third on the one year anniversary of the date of grant, and the remainder vest
evenly over the two years subsequent to that date.
The following table summarizes stock option activity for the year ended December
31, 2000:
2000
WTD AVG
OPTIONS EXERCISE
(IN 000'S) PRICE
-------------- ----------
Outstanding at Beginning of Year 881 $ 1.36
Granted 1,000 1.10
Exercised -- 0.00
Forfeited (340) 1.63
-------------- ----------
Outstanding at end of year 1,541 $ 1.15
============== ==========
Vested Options 846 $ 0.56
Remaining Options available for Grant 3,459
F-15
In June 2000, the Company reduced the exercise price on all its outstanding
stock options. As a result, the Company recognized $395,682 in compensation
expense in 2000 for the vested portion of these options, and will recognize
$933,568 in subsequent periods as these options vest.
The Company accounts for issuances to employees under APB 25, and accordingly,
$545,898 of compensation expense, including the amount discussed above, has been
recognized for the year ended December 31, 2000.
SFAS 123 requires pro forma information regarding net income as if the Company
has accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions: (i)
risk-free interest rate of 6 percent, which approximates the four-year U.S.
Treasury Bill rate at the date of grant, (ii) dividend yield of 0 percent (iii)
expected volatility of 80 percent (iv) and an average expected life of the
option of four years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
YEAR ENDED
DECEMBER 31,
2000
--------------
Net loss:
As reported $(8,515,971)
SFAS 123 pro forma $(8,902,427)
The following table summarizes the weighted average fair value of options
granted to employees during the year ended December 31, 2000:
2000
--------------
Stock Price Greater than Exercise Price
Weighted Average Fair Value $2.98
Stock Price Equal to Exercise Price
Weighted Average Fair Value $0.84
Stock Price Less than Exercise Price
Weighted Average Fair Value $0.82
The following table summarizes information about Company's stock options
outstanding as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------
AVG. SHARES
RANGE OF OUTSTANDING WTD. AVG WTD. AVG OPTIONS
EXERCISE EXERCISE REMAINING EXERCISE EXERCISABLE WTD.
PRICES (IN 000'S) LIFE PRICE (IN 000'S) PRICE
---------- ------------ ---------- --------- ----------- --------
$.25 350 3.5 $0.25 239 $0.25
$.50 371 4.3 $0.50 341 $0.50
$.75 375 4.2 $0.75 185 $0.75
$1.00
to $1.50 445 4.4 $1.05 81 $1.26
------------ ---------- --------- ----------- --------
1,541 846 $0.56
============ =========== ========
F-16
11 RELATED PARTIES
The Company's primary legal counsel holds 3,200,000 shares of the Company's
common stock in trust for the law firm's partners. During 2000, the Company
recorded expenses of approximately $123,000 related to services performed by its
primary legal counsel. The Company owed its primary legal counsel approximately
$61,000 at December 31, 2000.
During 2000, Q Productions, Inc., whose owners also own 4,800,000 shares of the
Company, provided various information technology services to the Company. The
Company recorded approximately $930,364 in expenses related to services
performed by Q Productions, Inc. for the year ended December 31, 2000. The
Company owed Q Productions, Inc. approximately $171,000 at December 31, 2000. Q
Productions, Inc. rented space from Qode.com in 2000 for $43,167 in total.
During 2000, the Company granted 20,000 warrants with an exercise price of $1.00
per share to Q Productions, Inc.
The Company has issued several promissory notes to officers (see Note 3).
12 SUBSEQUENT EVENTS
On January 11, 2001, the Company entered into a note purchase agreement with an
investor for $300,000, with an interest rate of 18 percent. The principal and
interest are due March 1, 2001.
In January 2001, the Company entered into a short-term loan agreement with
NeoMedia Technologies, Inc. ("NeoMedia") for the amount of $440,000. The note
was forgiven in March 2001 upon the acquisition of substantially all of the
Company's assets by NeoMedia.
On March 1, 2001, NeoMedia purchased all of the assets of the Company other than
cash including but not limited to, contracts, customer lists, licenses and
intellectual property. In consideration for these assets, the Company received
1,676,500 shares of NeoMedia's Common Stock. In addition, NeoMedia issued
274,699 of its Common Stock to certain creditors of the Company, for the
repayment of $1,561,037 of debt, forgave the $440,000 short-term note due from
the Company (see above paragraph), and assumed approximately $1,407,000 of the
Company's liabilities. The 1,676,500 shares paid to the Company are to be held
in escrow for one year, and are subject to downward adjustment, based upon the
achievement of certain performance targets over the period of March 1, 2001 to
February 28, 2002.
Notes payable as of December 31, 2000 that were not acquired as part of the
March 1, 2001 sale totaled 3,000,000 as of December 31, 2000.
13 SUBSEQUENT EVENTS
On May 31, 2001, three creditors of Qode.com, Inc, filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has
consulted with legal counsel and will be opposing the Chapter 7 proceeding and
plans to proceed under Chapter 11, U.S. Code to reorganize its debts.
F-17
FINANCIAL STATEMENTS
Qode.com, Inc.
(A Development Stage Enterprise)
Period from March 29, 1999 (inception) to December 31, 1999 with Report of
Independent Certified Public Accountants
F-18
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
CONTENTS
Report of Independent Certified Public Accountants F-20
Audited Financial Statements
Balance Sheet F-21
Statement of Operations F-22
Statement of Changes in
Redeemable Preferred Stock and Stockholders' Deficit F-23
Statement of Cash Flows F-24
Notes to Financial Statements F-25
F-19
Report of Independent Certified Public Accountants
The Stockholders and Board of Directors Qode.com, Inc.
We have audited the accompanying balance sheet of Qode.com, Inc. (the Company)
(A Development Stage Enterprise) as of December 31, 1999 and the related
statement of operations, and statement of changes in redeemable preferred stock
and stockholders' deficit, and statement of cash flows for the period from March
29, 1999 (inception) through December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Qode.com, Inc. at December 31,
1999, and the results of its operations and its cash flows for the period March
29, 1999 (inception) through December 31, 1999, in conformity with accounting
standards generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 1, the
Company, which is in the developmental stages has incurred a net operating loss,
experienced negative cash flow from operations and has a net capital deficit.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regards to these matters are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
July 21, 2000,
except for the seventh and eighth paragraphs of Note 8, as to which the dates
are June 30, 2001 and July 22, 2002, respectively
F-20
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 972,487
Other current assets 18,151
------------
Total current assets 990,638
Property and equipment, net 109,269
Deposits 30,229
------------
Total assets $ 1,130,136
============
Liabilities, redeemable preferred stock and
stockholders' deficit
Current liabilities:
Accounts payable $ 151,588
Accrued expenses 47,246
Due to officers 73,333
------------
Total current liabilities 272,167
15% cumulative convertible redeemable preferred
stock, $.0001 par value, 3,000,000 shares authorized,
2,025,000 shares issued and outstanding, liquidation
value of $2,221,000 2,154,711
Commitments
Stockholders' deficit:
Common stock, $.0001 par value, 25,000,000 shares
authorized, 8,023,000 shares issued and outstanding 802
Capital deficiency (49,557)
Deficit accumulated during the development stage (1,247,987)
------------
Total stockholders' deficit (1,296,742)
------------
Total liabilities, redeemable preferred stock
and stockholders' deficit $ 1,130,136
============
See accompanying notes.
F-21
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
Costs and expenses:
Research and development $ 396,242
Sales and marketing 41,975
General and administrative 847,412
------------
Total costs and expenses 1,285,629
Net interest income (37,642)
------------
Net loss (1,247,987)
Preferred dividends and redemption accretion (200,711)
------------
Net loss applicable to common stockholders $(1,448,698)
============
See accompanying notes.
F-22
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
REDEEMABLE DEFICIT
TOTAL ACCUMULATED
PREFERRED DURING THE TOTAL
STOCKHOLDERS' COMMON STOCK CAPITAL DEVELOPMENT STOCKHOLDERS'
STOCK SHARES AMOUNT DEFICIENCY STAGE DEFICIT
------------- --------- ---------- ------------ ------------- ---------------
Issuance of common
stock on March 29,
1999 (inception) $ -- 8,000,000 $800 $ -- $ -- $ 800
Issuance of redeemable
preferred stock with
detachable warrants
valued at $46,000,
net of issuance
costs of $25,000 1,954,000 -- -- 46,000 -- 46,000
Issuance of common
stock -- 23,000 2 22,998 -- 23,000
Issuance of warrants
in exchange for
services -- -- -- 82,156 -- 82,156
Preferred dividends
and redemption
accretion 200,711 -- -- (200,711) (200,711)
Net loss -- -- -- -- (1,247,987) (1,247,987)
------------- --------- ---------- ------------ ------------- ---------------
Balance at December
31, 1999 $2,154,711 8,023,000 $ 802 $ (49,557) $(1,247,987) $(1,296,742)
============= ========= ========== ============ ============= ===============
See accompanying notes.
F-23
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
Operating activities
Net loss $ (1,247,987)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 17,522
Issuance of warrants in exchange for services 82,156
Changes in assets and liabilities:
Other current assets (18,151)
Deposits (30,229)
Accounts payable 151,588
Accrued expenses 47,246
Due to officers 73,333
-------------
Net cash used in operating activities (924,522)
-------------
Investing activities
Purchases of property and equipment (126,791)
-------------
Net cash used in investing activity (126,791)
-------------
Financing activities
Proceeds from the issuance of redeemable preferred stock,
net of issuance costs of $25,000 2,000,000
Proceeds from the issuance of common stock 23,800
-------------
Net cash provided by financing activities 2,023,800
-------------
Net increase in cash and cash equivalents 972,487
Cash at beginning of period --
-------------
Cash at end of period $ 972,487
=============
Supplemental disclosure of cash flow information Interest paid $ 171
Noncash financing and investing activities
Accrued dividends on redeemable preferred stock $ 195,997
Accretion of redeemable preferred stock $ 4,714
See accompanying notes.
F-24
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999
1. NATURE OF BUSINESS
ORGANIZATION
Qode.com, Inc. (the Company) commenced operations on March 29, 1999 and is
incorporated in the state of Florida. Qode.com is a development stage company,
as defined in Statement of Financial Accounting Standards (SFAS) No. 7,
Accounting and Reporting By Development Stage Enterprises. The Company intends
to provide manufactures, retailers, advertisers, and users a unique tool for Web
site navigation by the use of imbedded standard bar codes and Uniform Product
Codes (UPC). It is the Company's mission to develop, operate, maintain and
promote the use of Qode.com technologies to enable any bar code to interface
with their technology.
The Company has incurred losses since its inception as it has devoted
substantially all of its efforts toward building network infrastructure,
internal staffing, developing systems, expanding into new markets, building a
proprietary database and raising capital. The Company has generated no revenue
to date and is subject to a number of risks similar to those of other
development stage companies, including dependence on key individuals, the
ability to demonstrate technological feasibility, and the need to obtain
adequate additional financing necessary to fund the development and marketing of
its products and services, and customer acceptance.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has a limited operating history
and intends to significantly increase its operational expenses in fiscal year
2000 to pursue certain sales and marketing plans. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may results from the outcome of this
uncertainty. In fiscal year 2000, the Company plans to raise additional
financing from private equity financing. The Company entered into a financing
agreement subsequent to year end that will provide the Company with an
additional $3 million, see Note 8.
F-25
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Computer hardware and software are being depreciated over a three year period
and furniture and fixtures are being depreciated over a five year period.
SOFTWARE DEVELOPMENT COSTS
In accordance with the AICPA SOP No. 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, all costs related to the
development or purchase of internal use software other than those incurred
during the application development stage are to be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the useful life of the software. The Company has incurred
$259,480 in software development costs for the period from March 29, 1999
(inception) through December 31, 1999. All costs have been expensed since the
Company has not entered the application development stage as of December 31,
1999.
F-26
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method, which requires
the establishment of a deferred tax asset or liability for the recognition of
future deductions or taxable amounts, and operating loss and tax credit
carryforwards. Deferred tax expense or benefit is recognized as a result of the
change in the deferred asset or liability during the year. If necessary, the
Company will establish a valuation allowance to reduce any deferred tax asset to
an amount which will, more likely than not, be realized.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk consist principally of cash and cash equivalents. The Company
maintains its cash and cash equivalents with high quality financial institutions
to mitigate this credit risk.
REDEEMABLE PREFERRED STOCK
Redeemable preferred stock is carried at the net consideration to the Company at
time of issuance (fair value), increased by accrued and unpaid cumulative
dividends and periodic accretion to redemption value using the interest method.
Accrued and unpaid dividends and redemption accretion are affected by charges
against retained earnings, or, in the absence of retained earnings, paid-in
capital (capital deficiency).
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. The provisions of SFAS 123 allow
companies to either expense the estimated fair value of stock options or to
continue to follow the intrinsic value method set forth in Accounting Public
Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees but disclose
the pro forma effects on net income or loss as if the fair value had been
expensed. The Company has elected to apply APB 25 in accounting for its employee
stock options and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of grant.
F-27
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
1999
------------
Computer hardware and software $ 120,791
Furniture and fixtures 6,000
------------
126,791
Less accumulated depreciation (17,522)
------------
$ 109,269
============
Depreciation and amortization expense was $17,939 for the period from March 29,
1999 (inception) to December 31, 1999.
4. INCOME TAXES
The net amounts of deferred tax assets recorded in the balance sheet at December
31, 1999 are as follows:
1999
------------
Deferred tax asset:
Net operating loss carryforward $ 469,050
Less valuation allowance (466,230)
------------
Total deferred tax asset $ 2,820
Deferred tax liabilities:
Fixed assets $ (2,820)
------------
Total net deferred taxes $ -
============
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $466,230 valuation allowance at December 31, 1999 is
F-28
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current year
is $466,230. At December 31, 1999, the Company has available net operating loss
carryforwards of $1,246,478, which expire in the year 2019.
A reconciliation of income taxes computed at the U.S. federal statutory tax rate
to income tax expense for the year ended December 31, 1999 is as follows:
1999
------------
Taxes at the U.S. statutory rate $ (424,315)
State taxes, net of federal benefit (44,975)
Nondeductible items 3,060
Change in valuation allowance 466,230
------------
Total income tax expense $ -
============
5. COMMITMENTS
The Company leases its office facility under a non-cancelable operating lease
expiring March 2005. Rental expense was $19,711 for the period from March 29,
1999 (inception) to December 31, 1999.
Lease commitments under these non-cancelable operating leases as of December 31,
1999 are as follows:
2000 $ 100,656
2001 104,682
2002 108,876
2003 113,238
2004 117,768
-----------
$ 545,220
===========
F-29
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
15% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK SERIES A
The Board of Directors has authorized the issuance of up to 3,000,000 shares of
Series A 15% $.0001 par value, voting, cumulative, redeemable, convertible,
preferred stock (the Preferred Stock) which may be issued in series from time to
time with such designations, rights, preferences and limitations as the Board of
Directors may declare by resolution. In May 1999, the Company issues 2,025,000
shares of Preferred Stock at $1.00 per share, less issuance costs of $25,000.
One detachable warrant was attached to each share of the Preferred Stock. The
Preferred Stock was recorded at $1,954,000, net of the value of the detachable
warrants which was estimated to be $46,000. The detachable warrants were valued
in accordance with SFAS No. 123 at $.23 per share and are convertible into
common stock at $1.50 per share. The Preferred Stock is convertible at any time
at the option of the holder prior to the closing of a Public Offering, as
defined in the agreement, or within 20 days following receipt of a Notice of
Redemption, as defined in the agreement, into the Company's common stock for
each share of the Preferred Stock held plus accrued and unpaid dividends on the
Series A Preferred Shares. The Preferred Stock has a liquidation preference of
$1 per share and is mandatorily redeemable on April 15, 2004. As of December 31,
1999, all 2,025,000 shares of the Preferred Stock and related 202,500 detachable
warrants remain outstanding.
Dividends on the preferred stock accrue on a daily basis commencing on the date
of issuance at an interest rate of 15% per annum and are payable on a
semi-annual basis. The Company, at its option, may pay dividends either in cash
or by the issuance of additional shares of Series A Preferred Stock. Aggregate
cumulative dividends in arrears at December 31, 1999 totaled $195,997.
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of its $.0001 par
value common stock. On March 29, 1999 (inception) the Company received $800 by
issuing 8,000,000 shares of its common stock to its founders.
F-30
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Additionally, the Company issued 13,000 shares of common stock to a Company
employee in lieu of relocation expense reimbursement of $13,000, and 10,000
shares of common stock to an executive recruiter for a corporate staffing fee of
$10,000. These amounts were expensed.
STOCK OPTIONS AND WARRANTS GRANTED IN EXCHANGE FOR SERVICES
During 1999, the Company granted 327,200 common stock warrants with an exercise
price of $1.50 per share to consultants for certain advisory and consulting
services performed during the Company's start-up phase. The warrants vest
immediately upon issuance and can be exercised over a five year period. The
Company valued the warrants at $82,156 in accordance with SFAS No. 123, and
recognized the entire amount as a general and administrative expense in the
accompanying statement of operations. The Company had 327,200 warrants
outstanding at December 31, 1999.
During 1999, the Company granted 400,000 in common stock options to purchase
shares of common stock at an exercise price of $.10 per share to an investment
advisor in exchange for investment advisory services. The options expired on
June 30, 2000 without being exercised and accordingly no expense has been
recorded.
STOCK OPTIONS
In 1999, the Company's Board of Directors and stockholders approved the 1999
Equity Compensation Plan (the Plan). The Plan provides for the issuance of
incentive stock options, nonqualified stock options and restricted stock to
directors, officers, and key employees of the Company as well as non-employee
directors, advisors, and consultants. The Board administers the Plan. The
Company has reserved 5,000,000 shares of common stock to be issued under the
Plan.
The exercise price (as established by the Board) of the stock options granted is
in excess of fair market value of the Company's Common Stock on the date of the
grant. All stock options expire five years from the grant date in 2004. Options
granted under the Plan are exercisable as determined by the Board.
F-31
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity for the period from March
29, 1999 (inception) to December 31, 1999:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -----------
Outstanding at March 29, 1999 (inception) - $ -
Granted 880,600 1.36
Exercised - -
Forfeited - -
----------- -----------
Outstanding at December 31, 1999 880,600 $ 1.36
=========== ===========
At December 31, 1999, 142,642 options are exercisable, at a weighted average
exercise price of $1.28 per share. The weighted-average remaining contractual
life of the options is 4.7 years.
During 1999, all of the stock options issued were granted to employees of the
Company. The Company accounts for issuances to employees under APB 25 and
accordingly, no compensation cost has been recognized for the period from March
29, 1999 (inception) to December 31, 1999.
SFAS No. 123 requires pro forma information regarding net income as if the
Company has accounted for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates equal to the three-year U.S. Treasury Bill
rate on the grant date, dividend yield of 0%, expected volatility of 81.1%, and
an average expected life of the option of three years.
F-32
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. All employee options
granted to date vest over a one to three year period. The Company's pro forma
information is as follows:
PERIOD
FROM MARCH 29, 1999
(INCEPTION)
TO DECEMBER 31, 1999
--------------------
Net loss:
As reported $(1,247,987)
SFAS No. 123 pro forma $(1,305,831)
The weighted average fair value of options granted to employees during the
period from March 29, 1999 to December 31, 1999 for which the estimated fair
value of the stock is less than the exercise price is $0.29 per share. The
weighted average fair value of options granted to employees during the period
from March 29, 1999 to December 31, 1999 for which the estimated fair value of
the stock equals the exercise price is $0.47 per share.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company has reserved the following shares of stock for
issuance:
Common stock 11,977,000
Convertible preferred stock 975,000
------------
12,952,000
============
F-33
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTIES
The Company's primary legal counsel holds 3,200,000 shares of the Company's
common stock in trust for the firm's partners. During 1999, the Company recorded
expenses of approximately $32,000 related to services performed by its primary
legal counsel. The Company owed its primary legal counsel approximately $3,000
at December 31, 1999.
During 1999, Q Productions, Inc. provided various information technology
services to the Company. Two owners of Q Productions, Inc. also aggregately own
4,800,000 shares of the Company. The Company recorded approximately $129,000 in
expenses related to services performed by Q Productions, Inc. The Company owed Q
Productions, Inc. approximately $97,000 at December 31, 1999.
8. SUBSEQUENT EVENTS
On January 18, 2000, the Company issued a convertible subordinated promissory
note for $3 million with a fixed interest rate of 12% to Novus Holding
Corporation. Principal and accrued interest on the note are payable upon the
earlier of a) the day immediately following the closing of financing or
successive financings which cumulatively aggregate proceeds of $10,000,000 or b)
180 days from the date of the note. The debt is convertible into common stock at
a price equal to 85% of the purchase price per share paid by investors in the
next financing or successive financings of $5,000,000 or more.
On February 11, 2000, the Company entered into a letter of intent with a major
supplier to produce portable bar code scanning devices in exchange for payments
ranging from $32,000,000 to $35,000,000 over a 16 month period commencing April
28, 2000 through August 1, 2001.
On March 15, 2000, the Company entered into a two year term note with a major
lender. The principal amount of the note was $42,500 with a fixed interest rate
of 11%. Principal and interest payments of $1,984 are due monthly through
maturity on March 15, 2002.
On March 24, 2000, the Company obtained a letter of credit for $1,400,000 with
the lender of their term note.
F-34
QODE.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
On March 27, 2000, the Company entered into a consulting agreement with a
consultant for a five month period in return for 250,000 common stock options
convertible into the Company's common stock. The options have a term of five
years and an exercise price of $2 per share. 125,000 options vest 45 days from
the commencement of the agreement based on the fulfillment of certain
contractual obligations. The remaining 125,000 options vest 90 days from the
commencement of the agreement based on the fulfillment of certain contractual
obligations. Additionally, the Company will pay the consultants $100,000 over
the period of the contract.
On May 22, 2000, the Board of Directors authorized the issuance of 1,500,000
shares of Series U Convertible Preferred Stock (the Series U Preferred Stock).
Dividends on the preferred stock accrue on a daily basis commencing on the date
of issuance at an interest rate of 8% per annum. The Series U Preferred Stock is
convertible at any time at the option of the holder prior to the closing of a
Public Offering, as defined in the agreement, into one share of the Company's
common stock for each share of the Company's Series U Preferred Stock held plus
accrued and unpaid dividends on the Series U Preferred Shares. In the event of
the closing of the next financing of $4,000,000 or more within 90 days from the
authorization of the Series U Preferred Stock, the holder of the Series U
Preferred Stock shall have the right to convert all Series U Preferred Shares
into a number of shares of stock issued in the next financing which represents
the equivalent amount for the consideration paid for the Series U Preferred
Stock. The Series U Preferred Stock has a liquidation preference of $2.00 per
share. On May 22, 2000, the Company entered into an agreement for the issuance
of 1,500,000 shares of Series U Preferred Stock in exchange for $3,000,000. The
shares will be issued in three separate financings. The initial 500,000 shares
are to be issued on the date of the agreement. The next 500,000 shares are to be
issued upon the Company meeting certain performance goals defined in the
agreement. The remaining 500,000 shares are to be issued, not earlier than
August 1, 2000 nor later than October 15, 2000, upon the Company meeting certain
performance goals defined in the agreement.
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has
consulted with legal counsel and will be opposing the Chapter 7 proceeding and
plans to proceed under Chapter 11, U.S. Code, to reorganize its debts.
On July 22, 2002, Qode.com, Inc. filed for bankruptcy under Chapter 7, U.S.
Bankruptcy Code.
F-35
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed combined statements of operations give effect
to the acquisition by NeoMedia Technologies, Inc. of the assets of Qode.com,
Inc. The pro forma condensed combined statement of operations for the year
December 31, 2000 gives effect to the acquisition as if it had occurred as of
January 1, 2000, combining the results of NeoMedia Technologies, Inc. for the
year ended December 31, 2000 with those of the same period for Qode.com, Inc.
The pro-forma condensed combined statement of operations for the year ended
December 31, 2001, gives effect to the acquisition as if it had occurred as of
January 1, 2001, combining the results of NeoMedia Technologies, Inc. for the
year ended December 31, 2001 with those of Qode.com, Inc. through the
acquisition date. The pro forma adjustments are based on estimates, available
information and certain assumptions that management deems appropriate. The pro
forma financial data do not purport to represent what our results of operations
would actually have been if such transactions had occurred on those dates and
are not necessarily representative of our results of operations for any future
period. The pro forma financial statements should be read in conjunction with
the separate historical financial statements and footnotes of NeoMedia
Technologies, Inc. and Qode.com, Inc.
PURCHASE PRICE
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc.
(Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the
average closing price for the few days before and after the measurement date of
March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of
common stock from escrow for performance for the period March 1, 2001 to August
31, 2001. The remaining 1,641,426 shares are being held in escrow pending the
results of negotiations between the Company and Qode with respect to the
performance of the Qode business unit for the period March 1, 2001 through
February 28, 2002. As a result, all such shares may be released to Qode.
The Company accounted for this purchase using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". The excess fair market value of the net assets acquired over the
purchase price was allocated to reduce proportionately the values assigned to
noncurrent assets. The accompanying consolidated statements of operations
include the operations of Qode from March 1, 2001, through June 30, 2002.
F-36
The purchase price at the original purchase date was calculated and allocated as
follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at $0.39 $ 13,000
-------------
Total purchase price $ 1,373,000
-------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
--------------
Total purchase price allocated $ 1,373,000
==============
During the third quarter of 2001, the Company issued an additional 35,074 shares
under the terms of the earn-out with Qode.com, Inc. (see explanation below). The
value of these shares in the amount of $13,000 was allocated $9,000 to
capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has
placed 1,676,500 shares of its common stock in escrow for a period of one year,
subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March 1, 2002, these performance targets were not met and therefore, the
remaining 1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue, page views, and fully allocated earnings before taxes relating to the
Qode Universal Commerce Solution.
At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date was July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
number of shares issued to Qode under the earn-out was 309,773, allocated as
outlined in the table above. The remaining 1,641,426 shares are being held in
escrow pending the results of negotiations between the Company and Qode with
respect to a disagreement over the performance of, and investment in, the Qode
business unit for the period March 1, 2001 through February 28, 2002. As a
result, all such shares may be released to Qode.
F-37
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
i). Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over three
years.
ii). Capitalized software development costs relating to the development of the
Qode Universal Commerce Solution.
OTHER
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.
Disposal of Qode Business Unit
On August 31, 2001, the Company signed a non-binding letter of intent to sell
the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which
it acquired in March 2001, to The Finx Group, Inc., a holding company based in
Elmsford, NY. The Finx Group was to assume $620,000 in Qode payables and
$800,000 in long-term leases in exchange for 500,000 shares of the Finx Group,
right to use and sell Qode services, and up to $5 million in affiliate revenues
over the next five years. During the third and fourth quarters of 2001 and the
first quarter of 2002, the company recorded a $2.6 million expense from the
write-down of the Qode assets/liabilities to net realizable value.
The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $439,000. No further loss is
anticipated.
During June 2002, the Finx Group notified the Company that it did not intend to
carry out the letter of intent due to capital constraints. As a result, during
the three-month period ended June 30, 2002, the company recorded an additional
expense of $1.5 million for the write-off of remaining Qode assets. As of June
30, 2002, the Company had $1.3 million of liabilities relating to the Qode
system on its books.
F-38
QODE.COM, INC.
Pro-forma Condensed Combined Consolidated Statement of Operations For the year
ended December 31, 2000 (In thousands, except per share data)
PRO-FORMA PRO-FORMA
NEOMEDIA QODE.COM ADJUSTMENT COMBINED
----------- ---------- ------------ -----------
Revenue
License fees $ 8,417 $ -- $ -- $ 8,417
Resales of software and technology equipment and
service fees 19,148 212 -- 19,360
---------- ---------- ------------ -----------
Total Revenue 27,565 212 -- 27,777
---------- ---------- ------------ -----------
Cost of goods sold
License fees 1,296 -- -- 1,296
Resales of software and technology 17,237 213 -- 17,450
---------- ---------- ------------ -----------
Total cost of goods sold 18,533 213 -- 18,746
---------- ---------- ------------ -----------
Gross profit 9,032 (1) -- 9,031
Selling & marketing expense 6,504 557 -- 7,061
General & administrative expense 7,010 5,839 (27)(a) 12,822
Research & development expense 1,101 1,110 -- 2,211
---------- ---------- ------------ -----------
Loss from operations (5,583) (7,507) 27 (13,063)
Interest expense/(income) (174) 1,009 -- 835
---------- ---------- ------------ -----------
Net loss (5,409) (8,516) 27 (13,898)
Dividends & accretion -- 371 -- 371
---------- ---------- ------------ -----------
Net income applicable to common stockholders $ (5,409) $ (8,887) $ 27 $ (14,269)
========== ========== ============ ===========
Loss per share $ (0.39) $ (1.11) $ (1.00)
========== ========== ===========
Weighted average shares outstanding 13,931,104 8,023,000 14,205,803
========== ========== ===========
Pro-forma adjustments
(a) adjustment of amortization of assets
F-39
NEOMEDIA TECHNOLOGIES, INC.
PRO-FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO-FORMA PRO-FORMA
NEOMEDIA QODE.COM ADJUSTMENTS COMBINED
-------- -------- ----------- ----------
Revenue
License fees $ 576 $ 86 $ - $ 662
Resales of software and technology
equipment and service fees 7,566 - - 7,566
----------- ---------- ------------ ------------
Total revenue 8,142 86 - 8,228
Cost of goods sold
License Fees 2,355 34 - 2,389
Resales of software and technology
equipment and service fees 6,511 - - 6,511
----------- ---------- ------------ ------------
Total cost of goods sold 8,866 34 - 8,900
Gross profit (724) 52 - (672)
Selling & marketing expense 2,519 16 - 2,535
General & administrative expense 4,772 1,064 276(a) 6,112
Research & development expense 549 20 - 569
Loss on impairment of assets 2,871 - - 2,871
Write-off of Digital
Convergence license contract 7,354 - - 7,354
----------- ---------- ------------ ------------
Loss from operations (18,789) (1,048) (276) (20,113)
Interest expense/(income) (21) 111 14(b) 104
----------- ---------- ------------ ------------
Net Loss (18,768) (1,159) (290) (20,217)
Loss from operations
of discontinued business units (3,613) - - (3,613)
Loss on disposal of discontinued
business units, including provision of
$503 for losses during phase-out period (3,088) - - (3,088)
----------- ---------- ------------ ------------
Net loss applicable to common
shareholders $ (25,469) $ (1,159) $ (290) $ (26,918)
=========== ========== ============ ============
Loss per share $ (1.55) $ (0.14) $ (1.64)
=========== ========== ============
Weighted average shares outstanding 16,410,246 8,023,000 16,456,029
=========== =========== ============
Pro-forma adjustments
---------------------
(a) - adjustment of amortization of assets
(b) - adjustment of interest expense
F-40
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Qode.com, Inc.'s filing for the year ended December 31, 2000.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this registration statement. See Exhibit 23.4 for further discussion.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To NeoMedia Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of NeoMedia
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of NeoMedia Technologies, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and the current cash position of the Company raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
March 30, 2001
F-41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Neomedia Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Neomedia
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides 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 Neomedia
Technologies, Inc. and subsidiaries as of December 31, 2001, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's significant operating losses
and current cash flow position 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 this uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
---------------------------------
Irvine, California
March 28, 2002
F-42
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 134 $ 4,453
Restricted cash -- 750
Short-term investments -- --
Trade accounts receivable, net of allowance for
doubtful accounts of $65 and $484 in 2001 and 2000 2,583 4,370
Digital Convergence receivable -- 5,144
Costs and estimated earnings in excess of billings
on uncompleted contracts 43 89
Inventories 197 116
Assets held for sale 210 --
Prepaid expenses and other current assets 582 946
---------- -----------
Total current assets 3,749 15,868
Property and equipment, net 205 365
Digital Convergence receivable, net of current
portion -- 10,288
Prepaid - Digital Convergence -- 4,116
Capitalized patents, net 2,500 2,661
Capitalized and purchased software costs and other
intangible assets, net 1,828 6,382
Other long-term assets 757 914
------------ ------------
Total assets $ 9,039 $ 40,594
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,886 $ 1,187
Amounts due under financing agreements 2,283 1,114
Accrued expenses 1,922 2,691
Stock liability -- --
Current portion of long-term debt 149 137
Note Payable 750 --
Sales taxes payable 135 261
Billings in excess of costs and estimated earnings
on uncompleted contracts 13 49
Deferred revenues - Digital Convergence -- 1,543
Deferred revenues 767 449
Other 7 11
------------ ------------
Total current liabilities 8,912 7,442
Long-term debt, net of current portion 390 539
Long-term deferred revenue - Digital Convergence -- 13,503
------------ ------------
Total liabilities 9,302 21,484
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, 452,289 issued and outstanding in
2001, none issued and outstanding in 2000 5 --
Additional paid-in capital, preferred stock 878 --
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,446,343 shares issued and 18,804,917
outstanding in 2001, 14,460,384 shares issued and
outstanding in 2000 188 145
Additional paid-in capital 63,029 57,619
Stock subscriptions receivable (240) --
Accumulated deficit (63,344) (37,875)
Treasury stock, at cost, 201,230 shares of common
stock (779) (779)
------------ ------------
Total shareholders' equity (263) 19,110
------------ ------------
Total liabilities and shareholders' equity $ 9,039 $ 40,594
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
F-43
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
---------- ----------- ----------
NET SALES:
License fees $ 576 $ 8,417 $ 2,430
Resales of software and technology
equipment and service fees 7,566 19,148 22,826
---------- ----------- ----------
Total net sales 8,142 27,565 25,256
---------- ----------- ----------
COST OF SALES:
License fees 2,355 1,296 1,790
Resales of software and technology
equipment and service fees 6,511 17,237 20,680
---------- ----------- ----------
Total cost of sales 8,866 18,533 22,470
---------- ----------- ----------
GROSS PROFIT (724) 9,032 2,786
Sales and marketing expenses 2,519 6,504 6,765
General and administrative expenses 4,772 7,010 5,281
Research and development costs 549 1,101 986
Loss on impairment of assets 2,871 -- --
Loss on Digital:Convergence license contract 7,354 -- --
---------- ----------- ----------
Loss from operations (18,789) (5,583) (10,246)
Interest (income) expense, net (21) (174) 226
Loss from continuing operations (18,768) (5,409) (10,472)
Discontinued operations (Note 1):
Loss from operations of discontinued
business unit (3,613) -- --
Loss on disposal of discontinued business
unit, including provision of $439 in
2001 for operating losses during
phase-out period (3,088) -- --
---------- ----------- ----------
NET LOSS $(25,469) $ (5,409) (10,472)
========== =========== ==========
NET LOSS PER SHARE FROM CONTINUING
OPERATIONS - BASIC AND DILUTED $ (1.14) $ (0.39) $ (1.01)
========== =========== ==========
NET LOSS PER SHARE FROM DISCONTINUED
OPERATIONS - BASIC AND DILUTED $ (0.41) $ -- $ --
========== =========== ==========
NET LOSS PER SHARE--BASIC AND DILUTED $ (1.55) $ (0.39) $ (1.01)
========== =========== ==========
Weighted average number of common
shares--basic and diluted 16,410,246 13,931,104 10,377,478
========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-44
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,469) $ (5,409) $ (10,472)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,369 2,336 2,029
Loss on disposal of discontinued business units 2,649 -- --
Loss on disposal of and impairment of assets 2,871 58 --
Effect of loss on Digital:Convergence contract 7,354 -- --
Preferred stock issued to pay advertising expense 882 -- --
Expense associated with warrant repricing 947 -- --
Fair value of stock based compensation granted for
professional services 69 437 28
Changes in operating assets and liabilities
Trade accounts receivable, net (709) 1,548 2,271
Digital Convergence receivable (2,767) --
Prepaid - Digital Convergence 118 -- --
Costs and estimates earnings in excess of billings on
uncompleted contracts 46 (89) 222
Other current assets (109) (121) 382
Other long-term assets -- (194) --
Accounts payable, accrued expenses and stock liability 2,502 (2,676) (1,286)
Billings in excess of costs and estimates earnings on
uncompleted contracts (36) (82) 131
Deferred revenue 318 184 (391)
Other current liabilities (4) -- 76
--------- ----------- -----------
Net cash used in operating activities (5,202) (6,775) (7,010)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased
intangible assets (2,883) (2,317) (1,470)
(Increase)/decrease in value of life insurance policies 158 (199) (522)
Acquisition of property and equipment (81) (123) (127)
--------- ----------- -----------
Net cash used in investing activities (2,806) (2,639) (2,119)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of
issuance costs of $149 in 2001, $74 in 2000, and $148
in 1999 1,638 9,203 8,172
Net proceeds from exercise of stock warrants 1,045 2,877 75
Net proceeds from exercise of stock options 138 537 1,061
Common stock repurchased -- (779) --
Borrowings under notes payable and long-term debt 504 -- 2,000
Change in restricted cash 750 194 (194)
Repayments on notes payable and long-term debt (386) (625) (125)
--------- ----------- -----------
Net cash provided by financing activities 3,689 11,407 10,989
--------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (4,319) 1,993 1,860
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,453 2,460 600
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 134 $ 4,453 $ 2,460
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year $ (61)$ $ 170 $ 146
Non-cash investing and financing activities:
Net assets acquired as part of Qode purchase agreement in
exchange for common stock and forgiveness of note 1,800 -- --
Shares earned by Qode.com under purchase agreement 13
Accounts payable converted to note payable 246 -- --
Common stock issued in exchange for note receivable 240 -- --
Net assets classified as "Liabilities held for sale" 210 -- --
Daystar assets purchased with shares of common stock -- 3,520 --
Conversion of short-term debt to equity -- -- 2,000
Issuance costs for shares issued through private placement 149 96 112
Stock liability due upon issuance of patent -- -- 1,863
Warrants issued for license contract -- 4,704 --
Deferred revenue relating to license contract -- 15,432 --
The accompanying notes are an integral part of these consolidated financial statements.
F-45
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Preferred Stock Treasury Stock
--------------------------- -------------------------- --------------
Additional Stock Additional Total
Paid-in Subscription Paid-in Accumulated Stockholders'
Shares Amount Capital Receivable Shares Amount Capital Deficit Shares Amount Equity
----------- ------ ------- ---------- -------- ------ -------- ----------- ------- ------ -----------
BALANCE, DECEMBER 31,
1998 8,699,080 $87 $25,168 - - - - ($21,994) - - $3,261
Exercise of employee
options 611,854 6 1,055 - - - - - - - 1,061
Issuance of common stock
through Private
placement, net of
$260 of Issuance costs 1,978,794 20 8,039 - - - - - - - 8,059
Fair value of warrants
issued for
professional services
rendered - - 28 - - - - - - - 28
Exercise of warrants 231,764 1 74 - - - - - - - 75
Fair value of stock
granted in Conjunction
with financing 501,897 5 2,003 - - - - - - - 2,008
Net Loss - - - - - - - (10,472) - - (10,472)
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
BALANCE, DECEMBER 31,
1999 12,023,389 $119 $36,367 - - - - ($32,466) - - $4,020
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
Exercise of employee
options 182,787 2 535 - - - - - - - 537
Issuance of common stock
through Private
placement, net of $170
of Issuance costs 1,415,279 15 9,188 - - - - - - - 9,203
Fair value of warrants
issued for
Professional services
rendered - - 253 - - - - - - - 253
Fair value of stock
issued for
professional Services
rendered 21,500 1 183 - - - - - - - 184
Fair value of warrants
issued Related to
license agreement With
Digital Convergence - - 4,704 - - - - - - - 4,704
Exercise of warrants 495,600 5 2,872 - - - - - - - 2,877
Stock issued to purchase
assets 321,829 3 3,517 - - - - - - - 3,520
Treasury stock at cost - - - - - - - - 201,230 (779) (779)
Net Loss - - - - - - - (5,409) - - (5,409)
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
BALANCE, DECEMBER 31,
2000 14,460,384 $145 $57,619 - - - - ($37,875) 201,230 ($779) $19,110
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
Exercise of employee
options 38,560 - 138 - - - - - - - 138
Issuance of Common Stock
through private
Placement, Net of $149
of issuance costs 3,490,750 35 1,843 - - - - - - - 1,878
Expense associated with
warrant repricing - - 947 - - - - - - - 947
Fair value of options
issued for
Professional services
rendered - - 69 - - - - - - - 69
Exercise of Warrants 505,450 5 1,040 - - - - - - - 1,045
Stock issued to purchase
assets 309,773 3 1,373 - - - - - - - 1,376
Issuance of Preferred
Stock for services - - - - 452,489 5 878 - - - 883
Stock Subscription
Receivable (240) (240)
Net Loss - - - - - - - (25,469) - - (25,469)
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
BALANCE, DECEMBER 31,
2001 18,804,917 $188 $63,029 (240) 452,489 $5 $878 ($63,344) 201,230 ($779) ($263)
---------- ---- ------- ----- ------- -- ---- --------- ------- ------ --------
The accompanying notes are an integral part of these consolidated financial statements.
F-46
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia
Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A.
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc. incorporated in
Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH
incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated
in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in
Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico;
NeoMedia Technologies do Brasil Ltd. incorporated in Brazil and NeoMedia
Technologies UK Limited incorporated in the United Kingdom, and are collectively
referred to as "NeoMedia" or the "Company". The consolidated financial
statements of NeoMedia are presented on a consolidated basis for all periods
presented. All significant intercompany accounts and transactions have been
eliminated in preparation of the consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
The Company is structured and evaluated by its Board of Directors and Management
as two distinct business units:
NeoMedia Internet Switching Services (NISS), and
NeoMedia Consulting and Integration Services (NCIS)
NEOMEDIA INTERNET SWITCHING SERVICES (NISS)
NISS (physical world-to-Internet offerings) is the core business and is based in
the United States, with development and operating facilities in Fort Myers,
Florida. NISS develops and supports the Company's physical world to Internet
core technology, including our linking "switch" and application platforms. NISS
also manages the Company's valuable intellectual property portfolio, including
the identification and execution of licensing opportunities surrounding the
patents.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES (NCIS)
NCIS (systems integration service offerings) is the original business line upon
which the Company was organized. This unit resells client-server equipment and
related software. The unit also provides general and specialized consulting
services targeted at software driven print applications, and especially at
process automation of production print facilities through its integrated
document factory solution. Systems integration services also identifies
prospects for custom applications based on NeoMedia's products and services. The
operations are based in Lisle, Illinois.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated balance sheets and consolidated statements
of cash flows, all highly liquid investments with original maturities of three
months or less are considered cash equivalents.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
License fees, including Intellectual Property license, represent revenue from
the licensing of NeoMedia's proprietary software tools and applications
products. NeoMedia licenses its development tools and application products
pursuant to non-exclusive and non-transferable license agreements. Resales of
software and technology equipment represent revenue from the resale of purchased
F-47
third party hardware and software products and from consulting, education,
maintenance and post contract customer support services.
Under American Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended, license
revenue is recognized if persuasive evidence of an agreement exists, delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.
Software and technology equipment resale revenue is recognized when all of the
components necessary to run software or hardware have been shipped. Service
revenues include maintenance fees for providing system updates for software
products, user documentation and technical support and are recognized over the
life of the contract. Software license revenue from long-term contracts has been
recognized on a percentage of completion basis, along with the associated
services being provided. Other service revenues, including training and
consulting, are recognized as the services are performed. The Company uses
stand-alone pricing to determine an element's vendor specific objective evidence
(VSOE) in order to allocate an arrangement fee amongst various pieces of a
multi-element contract. NeoMedia records an allowance for uncollectible accounts
on a customer-by-customer basis as appropriate.
PURCHASE AND DISPOSAL OF QODE.COM, INC.
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc.
(Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the
average closing price for the few days before and after the measurement date of
March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of
common stock from escrow for performance for the period March 1, 2001 to August
31, 2001. The remaining 1,641,426 shares held in escrow as contingent
compensation will not be issued due to the business unit not attaining certain
performance targets.
The Company accounted for this purchase using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". The excess fair market value of the net assets acquired over the
purchase price was allocated to reduce proportionately the values assigned to
noncurrent assets. The accompanying consolidated statements of operations
include the operations of Qode from March 1, 2001, through September 30, 2001.
The purchase price at the original purchase date was calculated and allocated as
follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at $0.39 $ 13,000
-------------
Total purchase price $ 1,373,000
-------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
-------------
Total purchase price allocated $ 1,373,000
==============
F-48
During the third quarter of 2001, the Company issued an additional 35,074 shares
under the terms of the earn-out with Qode.com, Inc. (see explanation below). The
value of these shares in the amount of $13,000 was allocated $9,000 to
capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has
placed 1,676,500 shares of its common stock in escrow for a period of one year,
subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March 1, 2002, these performance targets were not met and therefore, the
remaining 1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue, page views, and fully allocated earnings before taxes relating to the
Qode Universal Commerce Solution.
At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date is July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
final number of shares issued to Qode under the earn-out was 309,773, allocated
as outlined in the table above.
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
i). Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over three
years.
ii). Capitalized software development costs relating to the development of the
Qode Universal Commerce Solution.
PROFORMA INFORMATION
Proforma results of operations as though the companies had combined at the
beginning of the period is as follows:
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Revenue $ 8,228 $ 27,776
Net Loss $ (20,959) $ (14,297)
EPS - basic and diluted $ (1.28) $ (1.01)
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to sell
the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which
it acquired in March 2001, to The Finx Group, Inc., a holding company based in
Elmsford, NY. The final contract is contingent upon the completion of due
diligence and definitive terms and conditions stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all inventory, equipment and the ownership and operation of the comprehensive
universal internet database along with the corresponding patents. The Finx Group
will assume $620,000 in Qode payables and $800,000 in long-term leases in
exchange for 500,000 shares of the Finx Group, right to use and sell Qode
services, and up to $5 million in affiliate revenues over the next five years.
As of December 31, 2001, the transaction had not been consummated due to the
encumbrance of certain of NeoMedia's Qode-related assets under the Company's
note payable to Airclic, Inc. The Finx group has taken possession of certain
Qode system assets and has taken over ongoing expenses related to the business
unit. Management believes that the sale will be completed immediately upon
resolution of Airclic litigation. During the third and fourth quarters of 2001,
the company recorded a $2.6 million expense from the write-down of the Qode
assets/liabilities to the following net realizable value:
F-49
DECEMBER 31, 2001
(BALANCES IN THOUSANDS)
-----------------------
Inventory $ 144
Equipment 265
Intangible Assets 1,027
--------
Assets 1,436
--------
Accounts Payable 1,108
Note Payable 15
Capital Lease 103
--------
Liabilities 1,226
--------
Net Realizable Value $ 210
========
The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $439,000. No further loss is
anticipated.
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.
DIGITAL: CONVERGENCE CORPORATION INTELLECTUAL PROPERTY LICENSE AGREEMENT
The Company entered into an agreement with a competitor, Digital:Convergence
Corporation ("DC"), a private company located in the US, in October 2000,
granting them a worldwide, non-exclusive license of the Company's extensive
patent portfolio for directly linking documents, objects, transaction and voice
commands to the internet. The agreement provided for annual license fees over a
period of ten years in excess of $100 million through a combination of cash and
equity. The Company recognized $7.8 million of revenue in 2000 related to this
contract, including a $5.0 million cash payment received in October 2000 for
royalties earned before contract execution, $2.5 million related to the $10
million of payments in DC common stock and cash expected to be received in the
first year of the contract, and $0.3 million related to DC stock received by
NeoMedia to be recognized over the life of the contract.
As part of the contract, the Company issued to DC a warrant to purchase 1.4
million shares of NeoMedia common stock.
In the first quarter of 2001, DC issued the Company an interest bearing $3
million note payable in lieu of a $3 million cash payment due in January 2001.
The Company also received shares of DC stock in January with a contractual value
of $2 million as part of the first contract-year royalties due. The note was
originally due on April 24, 2001, however, on that date the Company agreed to
extend it until June 24, 2001. The Company also partially wrote down, in the
first quarter of 2001, the value of the remaining DC stock receivable, and DC
stock that had been received in January, to a value that management believed was
reasonable at the time (50% of the valuation stipulated in the contract). The
write-down consisted of a reduction in assets of $7.7 million and a
corresponding reduction in liabilities of $7.7 million. The DC stock received in
January 2001 was valued at $1 million and the DC receivable was valued at $9.2
million. In April 2001, the Company received additional shares of DC stock with
a $5 million value based on the valuation method stipulated in the contract. No
revenue was recognized related to these shares and the shares were not recorded
as an asset due to DC's worsening financial condition. All assets and
liabilities relating to the contract were subsequently written off in the second
quarter (see below).
Also in April, an agreement was entered into with DC whereby for a period from
the date of registration of the shares underlying the warrant to purchase 1.4
million shares of the Company's common stock until October 24, 2001, if the
Company would identify a purchaser for the Company's shares, DC would exercise
the warrant and purchase 1.4 million shares of common stock and sell the shares
to the identified purchaser. One third of the net proceeds received by DC on the
sale of the Company's common stock shall be paid to the Company toward repayment
of DC's obligations under the note to the Company in the amount of $3 million.
In consideration for this, the warrant exercise price was reduced during this
period to 38 percent of the closing sale price of the Company's common stock on
the day prior to the date of exercise, subject to a minimum price. Because the
exercise of the warrants at this reduced price is contingent upon the Company
finding a purchaser of the underlying 1.4 million shares, the value of this
re-pricing will be measured and recorded at the time the shares are sold. As of
October 24, the Company was not able to locate a purchaser and therefore, the
warrant was not exercised.
On June 24, 2001, DC did not pay the note that was due, and on June 26, 2001,
the Company filed a $3 million lawsuit against DC for breach of contract
regarding the $3 million promissory note. It was also learned in the second
quarter of 2001 that DC's capital raising efforts and business operations were
F-50
having difficulty, and the Company decided to write off all remaining amounts
related to the DC contract. The following table represents balance sheet
balances at December 31, 2000 and March 31, 2001, as well as all amounts written
off during the second quarter of 2001:
DECEMBER 31, MARCH 31,
2000 2000 WRITE-OFF
BALANCES BALANCES JUNE 30, 2001
---------------- ---------------- ----------------
(UNAUDITED)
---------------------------------------------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------
ASSETS
Available for sale securities - Digital Convergence $ - $ 1,000 $ 1,000
Trade Accounts Receivable 2,500 1,500 1,500
Digital Convergence receivable 5,144 5,144 5,144
Prepaid expenses (current portion) 470 470 470
Digital Convergence receivable, net of current
portion 10,288 2,572 2,572
Prepaid DC (long-term portion) 4,116 3,998 3,998
--------------- --------------- ---------------
Total assets $ 22,518 $ 14,684 $ 14,684
=============== =============== ===============
LIABILITIES
Deferred revenues DC $ 1,543 $ 772 $ 772
Long-term deferred revenues - DC 13,503 6,558 6,558
--------------- --------------- ---------------
Total liabilities $ 15,046 $ 7,330 $ 7,330
=============== =============== ===============
The net effect of the write-off is a $7,354,000 non-cash charge to income during
the second quarter, which is included in Loss on Digital:Convergence License
Contract in the consolidated statements of operations for the year ending
December 31, 2001. Any future revenues related to this contract will be recorded
as payments are received.
AIRCLIC, INC. RELATIONSHIP
On July 3, 2001, NeoMedia signed a non-binding letter of intent with AirClic,
Inc. to cross-license the companies' intellectual property. The terms of the
proposed agreement called for NeoMedia to: (i) acquire an equity interest in
AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic,
which interest would likely have exceeded 50% of NeoMedia's outstanding equity
securities. Further terms of the agreement called for NeoMedia to acquire
AirClic's Connect2 comparison shopping business unit, which was to be combined
with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a
secured note due on the earlier of (i) the date on which NeoMedia raises $5
million in equity financing from a source other than AirClic, (ii) a change in
control of NeoMedia, or (iii) January 11, 2002.
During the negotiation of a definitive set of agreements between the companies,
it was determined that the consummation of the transaction as provided in the
non-binding letter of intent would not be completed. As a result, additional
notes aggregating $1,500,000 will not be executed between the companies.
On September 6, 2001, AirClic filed suit against the Company in the Court of
Common Pleas, Montgomery County, PA, for breach of contract relating to the July
3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic
claims that the Company violated express representations and warranties relating
to the Company's assets and state of business affairs. AirClic seeks a judgment
to accelerate repayment of the $500,000 note due January 11, 2002, and to
relieve AirClic from any obligation to make further loans to the Company as
outlined in the letter of intent. AirClic has also filed suit against the
Company in the United States District Court for the Eastern District of
Pennsylvania. In this second action, AirClic seeks a declaration that certain
core intellectual property securing the note issued by us to AirClic, some of
which is patented and others for which a patent application is pending, is
invalid and in the public domain. (see "Legal Proceedings" in Footnote 11)
ADVERTISING EXPENSE
During the year ended December 31, 2001, the Company entered into a one-year
license agreement with About.com, Inc. to provide the Qode Universal Commerce
SolutionTM to About.com's users. In June 2001, About.com ran banner ads on its
site promoting the Qode Universal Commerce SolutionTM. As part of this
transaction, About.com received 452,489 shares of our Series B Convertible
Preferred Stock, par value $0.01 per share, of the 500,000 total Series B
Convertible Preferred shares the Company is authorized to issue, in
F-51
consideration for these promotions. The Company recorded an advertising expense
of $882,000 associated with this transaction in sales and marketing expense in
the accompanying consolidated statements of operations. The agreement with
About.com was terminated on August 31, 2001, in anticipation of the sale of the
Qode assets to the Finx Group.
SEVERANCE EXPENSE
During the third quarter of 2001, the Company laid off 55 employees, including
the chief technology officer and the chief operating officer, representing a 60%
decrease in its total workforce. In connection with the layoffs, the Company
recognized a severance expense of approximately $494,000 during the third
quarter of 2001. The layoffs were part of a company-wide cost reduction
initiative.
EXECUTIVE INCENTIVE EXPENSE
In June 2001, the Company's compensation committee approved an adjustment,
relating to the Digital:Convergence patent license fees, to the 2000 executive
incentive plan that reduced the bonus payout by approximately $1.1 million. This
was recorded as a negative expense in the accompanying consolidated statement of
operations.
WARRANT REPRICING PROGRAM
In May 2001, the Company re-priced approximately 1.5 million additional warrants
subject to a limited exercise period and other conditions, including certain
warrants issued in connection with NeoMedia's initial public offering in 1996,
which will expire at the end of 2001. The repricing program allowed the warrant
exercise price to be reduced to 33 percent of the closing sale price of the
Company's common stock (subject to a minimum) on the day prior to the date of
exercise for a period of six months from the date the repricing program began.
The exercise of the warrants and sale of the underlying common stock was at the
discretion of a broker selected by the Company, within the parameters of the
repricing arrangement. In accordance with FASB Interpretation, FIN 44,
Accounting for Certain Transactions Involving Stock Transactions, the award was
accounted for as variable from the date of modifications on May 1, 2001.
Accordingly, $181,000 was recorded as compensation in the accompanying
consolidated statement of operations.
WARRANT ISSUANCE
In June 2001, the Board of Directors' approved the issuance of 414,000 warrants
for Charles W. Fritz, NeoMedia's Chairman, CEO, and president at a exercise
price of $2.09. However, the warrants were not issued during 2001. The Company
does not intend to issue these warrants in 2002.
VALUATION AND RESERVES
Allowance for doubtful accounts activity for the years ended December 31, 2001
and 2000 was as follows:
(DOLLARS IN THOUSANDS)
------------------------
2001 2000
--------- ----------
Beginning balance $ 484 $ 888
Bad debt expense (169) 303
Write-off of uncollectible accounts (68) (17)
Collection of accounts previously written of (182) (75)
Adjustment to general allowance - (615)
--------- ---------
Ending balance $ 65 $ 484
========= =========
INVENTORIES
Inventory is stated at the lower of cost or market, and at December 31, 2001,
2000 and 1999 was comprised of purchased computer technology resale products.
Cost is determined using the first-in, first-out method.
F-52
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less allowance for accumulated
depreciation. Repairs and maintenance are charged to expense as incurred.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the related assets. The estimated useful lives range
from three to five years for equipment and seven years for furniture and
fixtures. Leasehold improvements are amortized over the shorter of the life of
the lease or the useful lives of the related assets. Upon retirement or sale,
cost and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in the consolidated statements of operations.
Depreciation expense was $249,000, $263,000 and $367,000 for the years ended
December 31, 2001, 2000 and 1999 respectively.
CAPITALIZED AND PURCHASED SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS
Intangible assets consist of capitalized software development costs and patents.
Software development costs are accounted for in accordance with Statement of
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Costs associated with the
planning and designing phase of software development, including coding and
testing activities necessary to establish technological feasibility, are
classified as research and development and expensed as incurred. Once
technological feasibility has been determined, additional costs incurred in
development, including coding, testing, quality assurance and documentation are
capitalized. Once a product is made available for sale, capitalization is
stopped unless the related costs are associated with a technologically feasible
enhancement to the product. Amortization of purchased and developed software is
provided on a product-by-product basis over the estimated economic life of the
software, generally three years, using the straight-line method.
In accordance with SFAS No. 86, at the end of each quarterly reporting period,
the Company evaluates each of its software products for impairment by adjusting
the unamortized capitalized costs of each computer software product to its net
realizable value. Net realizable value is equal to the estimated future gross
revenues from each product reduced by the estimated future costs of completing
and disposing of that product, including the costs of performing maintenance and
customer support required to satisfy the Company's responsibility set forth at
the time of sale. It is reasonably possible that the estimates underlying the
impairment analysis could change in the near term, and the effect of the change
could be material to the financial statements.
Patents (including patents pending and intellectual property) and acquired
customer lists are stated at cost, less accumulated amortization. Patents are
generally amortized over periods ranging from five to seventeen years.
Intangible assets activity for the years ended December 31, 2001 and 2000 was as
follows:
DECEMBER 31,
--------------------------
2001 2000
---------- -----------
Beginning Balance $ 9,043 $ 5,296
Additions 2,493 5,837
Intangible Assets Moved To "Assets Held (1,027) ---
for Sale"
Amortization/Write-offs (6,181) (2,090)
---------- ----------
Ending Balance $ 4,328 $ 9,043
========== ==========
Amortization expense of intangible assets was $3,120,000 $2,073,000 and
$1,662,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
LOSS ON IMPAIRMENT OF ASSETS
In connection with the Company's reduction in work force during the third
quarter 2001, the Company sold the rights to its Pacer Advantage end-user
software product for $40,000 cash. Accordingly, the Company wrote off all its
assets aggregating $2.9 million related to the MLM/Affinity program including
assets pertaining to the purchase of Daystar services, LLC and a customer list
purchased in 1998. Revenue related to the MLM/Affinity program was $92,000,
$259,000, and $0 for the years ended December 31, 2001, 2000, and 1999,
F-53
respectively. Net loss allocated to the MLM/Affinity program was $832,000,
$1,075,000, and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively.
EVALUATION OF LONG-LIVED ASSETS
The Company periodically performs an evaluation of the carrying value of its
long-lived assets, including intangible assets, in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This evaluation consists primarily of a comparison to the
future undiscounted net cash flows from the associated assets in comparison to
the carrying value of the assets. As of December 31, 2001, the Company is of the
opinion that no impairment of its long-lived assets has occurred.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes", income taxes are
accounted for using the assets and liabilities approach. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. 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. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be recognized. The Company has
recorded a 100% valuation allowance as of December 31, 2001, 2000 and 1999.
COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all outstanding stock options and warrants from the
calculation of diluted net loss per share because these securities are
anti-dilutive for all years presented. The shares excluded from the calculation
of diluted net loss per share are detailed in the table below:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2000
------------ ------------ ------------
Outstanding Stock Options 4,214,000 4,294,000 3,418,000
Outstanding Warrants 3,240,000 3,968,000 2,676,000
FINANCIAL INSTRUMENTS
The Company believes that the fair value of its financial instruments
approximate carrying value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject NeoMedia to concentrations of
credit risk consist primarily of trade accounts receivable with customers.
Credit risk is generally minimized as a result of the large number and diverse
nature of NeoMedia's customers, which are located throughout the United States.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $65,000, $484,000 and
$888,000 in its December 31, 2001, 2000 and 1999 consolidated balance sheets,
respectively. NeoMedia had net sales to one major customer in the
telecommunications industry (Ameritech) of $2,983,000, $5,824,000 and $5,843,000
during the years ended December 31, 2001, 2000 and 1999, respectively, resulting
in trade accounts receivable of $1,499,000, $229,000 and $225,000 as of December
31, 2001, 2000 and 1999, respectively. In addition, a single company supplies
the equipment and software, which is re-marketed to this customer. Accordingly,
the loss of this customer or supplier would materially adversely affect NeoMedia
CIS. Revenue generated from the remarketing of computer software and technology
equipment has accounted for a significant percentage of NeoMedia's revenue. Such
sales accounted for approximately 73%, 66% and 78% of NeoMedia's revenue for the
years ended December 31, 2001, 2000 and 1999, respectively. NeoMedia had license
fees to one major customer (DC) of $7,768,000 during the year ended December 31,
2000, resulting in an accounts receivable of $2,500,000 as of December 31, 2000.
Revenue generated from this licensing agreement accounted for approximately 28%
of NeoMedia revenue for the year ended December 31, 2000. No revenue was
recognized under this agreement during the year ended December 31, 2001.
F-54
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform to the 2001 presentation.
COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2000 and 1999, the Company did not have
other comprehensive income and therefore has not included the statement of
comprehensive income in the accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 21, 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations",
and No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 141 requires
the purchase method of accounting to be used for all business combinations
initiated after June 30, 2001 and establishes specific criteria for the
recognition of intangible assets separately from goodwill; SFAS No. 142
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
intangible assets which have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. It also provides that
intangible assets that have finite useful lives will continue to be amortized
over their useful lives, but those lives will no longer be limited to forty
years. SFAS No. 141 is effective for all business combinations after June 30,
2001. The provisions of SFAS No. 142 are effective beginning January 1, 2002.
The Company is considering the provisions of SFAS No. 141 and No. 142 and at
present has not determined the impact of adopting SFAS No. 141 and SFAS No. 142.
The Company does not expect the adoption to have a material impact to the
Company's financial position or results of operations.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
3. LIQUIDITY
During the years ended December 31, 2001, 2000 and 1999 the Company's net loss
totaled approximately $25,469,000, $5,409,000 and $10,472,000 respectively. As
of December 31, 2001 the Company had an accumulated deficit of approximately
$63,344,000 and approximately $134,000 in unrestricted cash balances. As of
December 31, 2001, the working capital was negative $5,163,000 and cash flow
from operations was negative $5,202,000. The Company's unrestricted cash balance
as of March 12, 2002 was approximately $134,000 (unaudited).
The Company cannot be certain that anticipated revenues from operations will be
sufficient to satisfy its ongoing capital requirements. Management's belief is
based on the Company's operating plan, which in turn is based on assumptions
that may prove to be incorrect. If the Company's financial resources are
insufficient the Company may require additional financing in order to execute
its operating plan and continue as a going concern. The Company cannot predict
whether this additional financing will be in the form of equity or debt, or be
in another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations.
F-55
Subsequent to December 31, 2001, the Company has undertaken the following
initiatives:
During February 2002, the Company sold 19 million shares of its common stock at
$0.17 per share in exchange for promissory notes maturing at the earlier of i)
90 days from the date of issuance, or ii) 30 days from registration of the
shares. Proceeds from this transaction will be $3,230,000.
During March 2002, the Company repriced 1.2 million of its common stock warrants
for a period of six months. During the term of the warrant repricing program,
participating holders are entitled to exercise qualified warrants at an exercise
price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale
price of shares of Common Stock on the NASDAQ Small Cap Market on the trading
date immediately preceding the date of exercise.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge to revenue generation
from the Company's valuable intellectual property portfolio and PaperClickTM
internet "switching" software. To this end, the Company has retained the law
firm of Baniak Pine & Gannon to pursue potential license agreements, and plans
to implement a sales strategy for PaperClickTM upon receipt of adequate funding.
4. CONTRACT ACCOUNTING
NeoMedia periodically enters into long-term software development and
consultation agreements with certain customers. As of December 31, 2001, 2000
and 1999, certain contracts were not completed and information regarding these
uncompleted contracts was as follows:
2001 2000
--------- ---------
Costs Incurred on Contracts $ 50 $ 321
Profit to Date 15 1,087
Total Costs and Estimated Earnings 65 1,408
Less - Billings to Date (35) (1,368)
--------- ---------
Costs and Estimated Earnings in
Excess of Billings $ 30 $ 40
========= =========
The above are included in the accompanying consolidated balance sheets under the
following captions:
2001 2000
--------- ----------
Costs and Estimated Earnings in Excess $ 43 $ 89
of Billings
Billing in Excess of Costs and
Estimated Earnings (13) (49)
--------- ---------
Costs and Estimated Earnings in Excess
of Billings, Net $ 30 $ 40
========= ==========
F-56
5. PROPERTY AND EQUIPMENT
As of December 31, 2001, 2000 and 1999, property and equipment consisted of the
following:
2001 2000
------------ ------------
(IN THOUSANDS)
Furniture and fixtures $ 643 $ 314
Leasehold improvements 109 124
Equipment 326 504
------------ ------------
Total 1,078 942
Less accumulated depreciation (608) (577)
Less property and equipment held (265) ---
for sale
------------ -----------
Total property and equipment, net $ 205 $ 365
============ ===========
6. CAPITALIZED PATENTS, CAPITALIZED AND PURCHASED SOFTWARE COSTS, AND OTHER
INTANGIBLE ASSETS
As of December 31, 2001 and 2000 , intangible assets consisted of the following:
2001 2000
------------ -----------
(IN THOUSANDS)
Capitalized and purchased software costs $ 8,520 $ 6,418
Customer list --- 1,143
Repurchased license rights and other --- 3,520
Patents and related costs 3,125 3,026
------------ -----------
Total 11,645 14,107
Less accumulated amortization:
Capitalized and purchased software costs (5,665) (3,590)
Customer list - (609)
Repurchased license rights and other - (500)
Patents and related costs (625) (365)
Less capitalized software included in
"Assets held for sale" (1,027) -
------------ -----------
Total intangible assets, net $ 4,328 $ 9,043
============ ===========
At December 31, 1999, the Company had a liability of $1,862,500 to the seller of
a patent purchased by the Company in 1998. The liability was settled by the
Company in cash during 2000. The patent is being amortized over seventeen years.
7. FINANCING AGREEMENTS
The Company has entered into two separate financing agreements during the years
ended December 31, 2001 and 2000.
IBM COMMERCIAL CREDIT. During the years ended December 31, 2001 and 2000, the
Company had an agreement with IBM Commercial Credit that provided short-term
financing for certain computer hardware and software purchases. Under the
agreement, there were generally no financing charges for amounts paid within 30
or 45 days, depending on the vendor used to source the product. Under this
agreement there were two separate lines of credit. The first line had credit
availability of $750,000. The second line had credit availability of up to
$2,000,000, based upon the Company's customer credit rating. Borrowings were
collateralized by all inventory, property and equipment, and accounts
receivable. In addition, as of December 31, 2000, a $750,000 letter of credit
was issued to the benefit of the commercial finance company. At December 31,
2000, NeoMedia collateralized this letter with a restricted cash balance of
$750,000. This line of credit expired during 2001. As of December 31, 2001 and
2000, amounts due under this financing agreement included in "Amounts due under
financing agreements" were $0 and $1,101,000, respectively.
F-57
GE ACCESS. The Company has an agreement with GE Access that provides short-term
financing for certain computer hardware and software purchases. Under the
agreement, there are generally no financing charges for amounts paid within 30
days. Under this agreement there are two separate lines of credit. The first
line has credit availability of up to $1,500,000 as of December 31, 2001. The
second line has unlimited credit availability, based upon the Company's customer
credit rating. Under this second agreement, the financing company finances the
purchase pending credit approval of NeoMedia's customer. Payments are then
remitted directly to the finance company, at which time the finance company
forwards to NeoMedia the Company's margin on the sale. Borrowings are
collateralized by all inventory, property and equipment, and accounts
receivable. As of December 31, 2001 and 2000, amounts due under this financing
agreement included in "Amounts due under financing agreements" were $2,283,000
and $13,000, respectively.
8. LONG-TERM DEBT
As of December 31, 2001 and 2000, long-term debt consisted of the following:
2001 2000
---------- ----------
(IN THOUSANDS)
Note payable to International Digital
Scientific, Inc. (IDSI), non-interest
bearing with interest imputed at 9%,
due with minimum monthly installments
of $16,000 through March 2005 $ 624 $ 816
Less: unamortized discount (84) (140)
---------- ----------
Total long-term debt 540 676
Less: current portion (150) (137)
---------- ----------
Long-term debt, net of current portion $ 390 $ 539
========== ==========
The long-term debt repayments for each of the next five fiscal years ending
December 31 are as follows:
(IN THOUSANDS)
------------
2002 $ 192
2003 192
2004 192
2005 48
2006 ----
------------
Total $ 624
------------
In October 1994, the Company purchased, via seller financing, certain computer
software from IDSI. The aggregate purchase price was $2,000,000 and was funded
by the seller with an uncollateralized note payable, without interest, in an
amount equal to the greater of: (i) 5% of the collected gross revenues of
NeoMedia Migration for the preceding month; or (ii) the minimum installment
payment as defined, until paid in full. The minimum installment payment is the
amount necessary to provide an average monthly payment for the most recent
twelve month period of $16,000 per month. The present value of $2,000,000
discounted at 9% (the Company's then incremental borrowing rate) for 125 months
was approximately $1,295,000, the capitalized cost of the assets acquired. The
discount is being accreted to interest expense over the term of the note. The
software acquired was amortized over its estimated useful life of three years.
As of December 31, 2001 and 2000, the balance of the note payable, net of
unamortized discount, was $540,000 and $676,000, respectively.
F-58
9. INCOME TAXES
For the years ended December 31, 2001, 2000 and 1999, the components of income
tax expense were as follows:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Current $ -- $ -- $ --
Deferred -- -- --
-------- -------- --------
Income tax expense/(benefit) $ -- $ -- $ --
======== ======== ========
As of December 31, 2001, 2000 and 1999, the types of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts which gave rise to deferred taxes, and their tax effects were as
follows:
2001 2000 1999
---------- ----------- ----------
(IN THOUSANDS)
Accrued employee benefits $ 62 $ 30 $ 31
Provisions for doubtful accounts 26 182 337
Deferred revenue -- 13 --
Capitalized software development costs and 676 284 98
fixed assets
Net operating loss carryforwards (NOL) 22,916 15,021 12,724
Research and Development Credit -- -- 91
Accruals 470 864 51
Loss on disposal of Qode business unit 1,060 -- --
Other -- 17 8
Alternative minimum tax credit carryforward 45 45 45
---------- ---------- ----------
Total deferred tax assets 25,255 16,456 13,385
Valuation Allowance (25,255) (16,456) (13,385)
---------- ---------- ----------
Net deferred income tax asset $ -- $ -- $ --
========== =========== ==========
Because it is more likely than not that NeoMedia will not realize the benefit of
its deferred tax assets, a valuation reserve has been established against them.
For the years ended December 31, 2001, 2000 and 1999, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:
2001 2000 1999
--------- --------- ----------
(IN THOUSANDS)
Benefit at federal statutory rate $ (8,659) $ (1,839) $ (3,561)
State income taxes, net of federal (1,009) (196) (380)
Foreign income taxes, net of federal -- -- 61
Exercise of non-qualified stock
options (17) (176) (1,874)
Permanent difference - write-off of
Digital Convergence stock 1,190 -- --
Permanent and other, net (304) (860) (12)
Change in valuation allowance 8,799 3,071 5,766
---------- ---------- ----------
Income tax expense/(benefit) $ -- $ -- $ --
========== ========== ==========
As of December 31, 2001, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $57.3 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities occurring during the year
ended December 31, 1997, NeoMedia anticipates that the annual usage of its
pre-1998 net operating loss carryforwards may be further restricted pursuant to
the provisions of Section 382 of the Internal Revenue Code.
10. TRANSACTIONS WITH RELATED PARTIES
In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of
the Company's common stock at a price of $3.03 per share. In January 1999,
William Fritz purchased 42,857 shares of the Company's common stock at a price
F-59
of $3.50 per share. As part of these purchases, Edna Fritz received a total of
8,237 warrants to purchase stock at $3.04 per share and William Fritz received
4,286 warrants to purchase stock at $3.50 per share.
In June 1999, the Company sold a license for the right to utilize its Neolink
Information Server to Daystar Services L.L.C. ("Daystar") a Tennessee limited
liability company, owned in part by an officer and one of the Company's board
members, for $500,000. The original business purpose of the sale was to generate
revenue through the sale of an exclusive license to Daystar. In April 2000, in
anticipation of either a potential acquisition of the Company by
Digital:Convergence ("DC") (which subsequently did not occur), or a long-term
intellectual property license with DC, the Company purchased substantially all
the assets of Daystar, including the rights to the license it sold to Daystar in
1999, for approximately $3.5 million of our common stock. In order to enter into
a 10-year intellectual property license agreement with DC, the Company was
required to re-purchase the exclusive license agreement. Additional Daystar
assets purchased were to be employed in our MLM/Affinity licensing program. The
assets purchased were recorded as intangible assets at approximately $3.5
million on the accompanying consolidated balance sheets. The Company believes
this transaction was conducted on terms as good as favorable as those would have
been derived from an arm's length negotiation.
In July 1999, the Company paid professional fees in the amount of $73,000 to
James J. Keil, a director of the Company, for services related to the
recruitment of the Company's President and Chief Operating Officer and one sales
representative.
During the years ended December 31, 1999 and 1998, the Company leased from
William E. Fritz a trade show booth for rental payments totaling $31,000 and
$34,000, respectively. The lease expired during 1999.
During each of the years ended December 31, 2000 and 1999, the Company leased
office and residential facilities from related parties for rental payments
totaling $5,000 and $13,000, respectively. The lease expired during 2000.
During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its
Chairman and Chief Executive Officer, under a note payable bearing interest at
10% per annum with a term of six months.
The Company believes this transaction was conducted on terms as good as
favorable as those would have been derived from an arm's length negotiation.
11. COMMITMENTS AND CONTINGENCIES
NeoMedia leases its office facilities and certain office and computer equipment
under various operating leases. These leases provide for minimum rents and
generally include options to renew for additional periods. For the years ended
December 31, 2001, 2000 and 1999, NeoMedia's rent expense was $1,246,000,
$1,067,000 and $1,268,000, respectively.
The following is a schedule of the future minimum lease payments under
non-cancelable operating leases as of December 31, 2001:
PAYMENTS
--------------
(IN THOUSANDS)
2002 $ 844
2003 473
2004 56
2005 2
2006 --
----------
Total $ 1,375
==========
Of the $844,000 minimum lease payment due in 2002, approximately $205,000
relates to leases for Qode Universal Commerce Solution equipment that will be
assumed by the Finx Group, Inc. upon consummation of The Finx Group's letter of
intent with the Company.
As of December 31, 2001, none of the Company's employees were under contract.
Additionally, the Company was not party to any long-term consulting agreements
as of December 31, 2001.
F-60
LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal course of
business, both as claimant and defendant. While it is not possible to determine
with certainty the outcome of these matters, it is the opinion of management
that the eventual resolution of the following legal actions could have a
material adverse effect on the Company's financial position or operating
results.
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the Company
in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among
other things, the accelerated repayment of a $500,000 loan it advanced to the
Company under the terms of a letter of intent entered into between AirClic and
the Company. The letter of intent was subsequently abandoned on the basis of the
Company's alleged breach of certain representations made by the Company in the
promissory note issued by the Company to AirClic in respect of such advance. The
note issued by the Company in respect of AirClic's $500,000 advance is secured
by substantially all of the Company's intellectual property, including its core
physical world-to-Internet technologies. If the Company is deemed to have
defaulted under the note, and does not pay the judgment, AirClic, which is one
of the NeoMedia's key competitors, could acquire the Company's core intellectual
property, which would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
vigorously defending this lawsuit and has interposed counterclaims against
AirClic. The lawsuit is in its preliminary stages and, as such, at this time it
is difficult to assess the outcome. Whether or not AirClic is successful in
asserting its claims that the Company breached certain representations made by
the Company in the note, the note became due and payable in accordance with its
terms on January 11, 2002. Based on the cash currently available to the Company,
payment of the note and related interest would have a material adverse effect on
the Company's financial condition. If the Company fails to pay such note,
AirClic could proceed against the Company's intellectual property securing the
note, which would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
aggressively seeking bridge financing to enable it to pay the principal and
interest remaining under the note following the resolution of the counterclaims
against AirClic. The Company has not accrued any additional liability over and
above the note payable and related accrued interest.
AirClic has also filed suit against the Company in the United States District
Court for the Eastern District of Pennsylvania. In this second action, AirClic
seeks a declaration that certain core intellectual property securing the note
issued by the Company to AirClic, some of which is patented and others for which
a patent application is pending is invalid and unenforceable. Any declaration
that the Company's core patented or patentable technology is invalid and
unenforceable would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
vigorously defending against this lawsuit as well. The Company has not accrued
any liability in connection with this matter.
On June 26, 2001, the Company filed a $3 million lawsuit in the U.S. District
Court, Northern District of Texas, Dallas Division, against Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid. The Company is seeking payment of the $3
million note plus interest and attorneys fees. The Company has not accrued any
gain contingency related to this matter.
In April 2001, the former President and director of NeoMedia filed a lawsuit
against the Company and several of its directors. The suit was filed in the
Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim
alleges the individual was fraudulently induced into accepting employment and
that the Company breached the employment agreement. The individual's employment
with the Company ended in January 2001. The Company believes the claim is
without merit and is vigorously defending itself. Final outcome of this matter
is uncertain and a range of loss cannot reasonably be estimated. The Company has
accrued approximately $347,000 in severance and incentive payments payable to
Mr. Goins. The Company has not accrued any additional liability related to the
suit.
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. The Company
has entered into a letter of intent with the Finx Group, Inc. to sell certain
assets and liabilities relating to Qode. As part of the letter of intent, the
Finx Group will assume all liabilities up to $138,000 relating to the Ripfire
contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages in
the Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida. Headway Associates, Ltd. is seeking payment of all amounts due under
the terms the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode
business unit. The lease commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment over
F-61
a two-month period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking payment
in full of approximately $525,000 relating to a software and services contract
associated with implementation of the Qode Universal Commerce Solution. The
Company has entered into a letter of intent with the Finx Group, Inc. to sell
certain assets and liabilities relating to Qode. As part of the letter of
intent, the Finx Group will assume all liabilities up to $530,000 relating to
the Orsus contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment of
approximately $38,700 relating to past due and future payments under an office
equipment lease. The Company has returned the equipment and intends to settle
the past due amounts. As of December 31, 2001, the Company had recorded a
liability of approximately $10,000 relating to this matter.
12. DEFINED CONTRIBUTION SAVINGS PLAN
NeoMedia maintains a defined contribution 401(k) savings plan. Participants may
make elective contributions up to established limits. All amounts contributed by
participants and earnings on these contributions are fully vested at all times.
The plan provides for matching and discretionary contributions by NeoMedia,
although no such contributions to the plan have been made to date.
13. EMPLOYEE STOCK OPTION PLAN
Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan making
available for grant to employees of NeoMedia options to purchase up to 1,500,000
shares of NeoMedia's common stock. The stock option committee of the board of
directors has the authority to determine to whom options will be granted, the
number of options, the related term, and exercise price. The option exercise
price shall be equal to or in excess of the fair market value per share of
NeoMedia's common stock on the date of grant. These options granted expired ten
years from the date of grant. These options vest 100% one year from the date of
grant.
Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making
available for grant to employees of NeoMedia options to purchase up to 8,000,000
shares of NeoMedia's common stock. The stock option committee of the board of
directors has the authority to determine to whom options will be granted, the
number of options, the related term, and exercise price. The option exercise
price may be less than the fair market value per share of NeoMedia's common
stock on the date of grant. Options granted during 2000 and 1999 were granted at
an exercise price equal to fair market value on the date of grant. Options
generally vest 20% upon grant and 20% per year thereafter. The options expire
ten years from the date of grant.
Effective January 1, 1996, NeoMedia adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" defines a fair-value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, SFAS 123 also allows an entity to continue to measure
compensation cost for stock-based compensation plans using the intrinsic-value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
continue using the accounting method in APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair-value method of accounting
had been adopted. Because NeoMedia elected to continue using the accounting
method in APB 25, no compensation expense was recognized in the consolidated
statements of operations for the years ended December 31, 2000 and 1999 for
stock-based employee compensation.
For grants in 2001, 2000 and 1999, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5% for 2001, 6% for 2000
and 5% for 1999; (iii) expected volatility of 135% for 2001, 80% for 2000 and
70% for 1999 and (iv) an expected life of 5 years for options granted in 2001
and 4 years for options granted in 2000 and 1999. The fair-value was determined
using the Black-Scholes option-pricing model.
The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements. These options vest in the same manner as the employee options
granted under the 1998 Stock Option Plan.
F-62
Utilizing the assumptions detailed above, our net loss and loss per share, as
reported, would have been the following pro forma amounts ($ in thousands except
per share data).
2001 2000 1999
---------- --------- ----------
NET LOSS
As reported. $ 25,469 $ 5,409 $ 10,472
Pro forma $ 27,888 $ 7,498 $ 11,731
NET LOSS PER SHARE
As reported $ 1.55 $ 0.39 $ 1.01
Pro forma $ 1.70 $ 0.54 $ 1.13
A summary of the status of NeoMedia's 1996 and 1998 stock option plans as of and
for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
-------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------------- -------- -------------- --------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Outstanding at
beginning of year 4,294 $ 4.71 3,418 $ 4.43 3,164 $ 4.40
Granted 3,499 2.00 1,192 4.87 1,721 4.71
Exercised (38) 3.60 (170) 2.83 (599) 1.77
Forfeited (3,541) 4.13 (146) 5.78 (868) 5.79
--------------- -------- -------------- --------- -------------- --------
Outstanding at
end of year 4,214 $ 2.96 4,294 $ 4.71 3,418 $ 4.43
=============== ======== ============== ========= ============== =========
Options exercisable
at year-end 2,452 2,140 1,398
Weighted-average
fair value of
options granted
during the year
granted during
the year $1.81 $3.05 $2.68
Available for
grant at the
end of the year 4,158 4,116 5,162
The following table summarizes information about NeoMedia's stock options outstanding
as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------
WEIGHTED
AVERAGED WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- ----------- ---------- ------------ ---------
(IN THOUSANDS) (IN THOUSANDS)
$--to $0.84 1,441 9.4 years $ 0.24 667 $ 0.28
1.88 to 2.91 767 8.0 years 2.52 429 2.52
3.25 to 4.98 1,055 7.9 years 3.81 619 3.76
5.06 to 7.88 836 7.2 years 6.15 632 6.25
8.44 to 10.88 115 7.7 years 8.89 105 8.92
--------------- ----------- ----------- ---------- ----------- ---------
$0.84 to $10.88 4,214 8.3 years $ 2.96 2,452 $ 3.46
=============== =========== =========== ========== =========== ==========
In December 1999, the Company issued 20,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $7.00 per share
for consulting services rendered, and recognized $28,200 in expense in its 1999
consolidated financial statements. These options vest in the same manner as the
employee options granted under the 1998 Stock Option Plan. All these options
were outstanding at December 31, 2000 and 1999. Of these options, 8,000 and
4,000 were vested at December 31, 2000 and 1999, respectively.
In October 2000, the Company issued 80,000 warrants to buy shares of the
Company's common stock to an outside consultant at a price of $4.13 per share
for consulting services rendered, and recognized approximately $253,000 in
expense in its 2000 consolidated financial statements. These warrants vest in
the same manner as the employee options granted under the 1998 Stock Option
Plan. All these warrants were outstanding at December 31, 2001. Of these
warrants, 16,000 were vested at December 31, 2001.
F-63
In September 2001, the Company issued 150,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.20 per share
for consulting services rendered, and recognized $18,800 in expense in the 2001
consolidated financial statements. The warrants vest 40% upon grant and the
remaining 60% one year from the grant date. As of December 31, 2001, all 150,000
warrants were outstanding and 60,000 were vested.
WARRANTS
Warrant activity as of December 31, 2001, 2000 and 1999, is as follows:
Balance December 31, 1998 1,639,832
Warrants issued 1,118,630
Warrants exercised 82,100
---------------
Balance December 31, 1999 2,676,362
Warrants issued 1,787,073
Warrants exercised 495,600
---------------
Balance December 31, 2000 3,967,835
Warrants issued 887,512
Warrants exercised 505,450
Warrants expired 1,110,000
---------------
Balance December 31, 2001 3,239,897
===============
During 2000, the Company issued 1,400,000 warrants as part of a ten year license
of the Company's intellectual property. These warrants were immediately vested
and exercisable. The associated expense is being recognized over the life of the
contract. During 2000, $118,000 was recorded as a reduction of the license
revenue related to the contract.
During 2001, the Company re-priced approximately 1.5 million additional warrants
subject to a limited exercise period and other conditions, including certain
warrants issued in connection with NeoMedia's initial public offering in 1996,
which expired at the end of 2001. The repricing program allowed the warrant
exercise price to be reduced to 33 percent of the closing sale price of the
Company's common stock (subject to a minimum) on the day prior to the date of
exercise for a period of six months from the date the repricing program began.
The exercise of the warrants and sale of the underlying common stock was at the
discretion of a broker selected by the Company, within the parameters of the
repricing arrangement. In accordance with FASB Interpretation, FIN 44,
Accounting for Certain Transactions Involving Stock Transactions, the award was
accounted for as variable from the date of modifications on May 1, 2001.
Accordingly, $181,000 was recorded in during 2001 as compensation expense.
In June 2001, the Board of Directors approved the issuance of 404,900 warrants
to an outside consultant at an exercise price of $2.09. The Company recognized
an expense of approximately $742,000 related to this transaction, which is
included in general and administrative expense in the accompanying consolidated
statements of operations. The Company used the Black-Scholes option-pricing
model to value the shares, with the following assumptions: (i) no expected
dividends (ii) a risk-free interest rate of 4.5% (iii) expected volatility of
135% and (iv) an expected life of 3 years.
F-64
The following table summarizes information about warrants outstanding at
December 31, 2001, all of which are exercisable:
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED
RANGE OF WARRANTS LIFE AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
----------------- ----------- ----------- --------------
$0.10 to $5.50 927 2.6 $ 2.51
$5.51 to $6.99 1,558 3.5 $ 6.02
$7.00 to $9.99 524 1.0 $ 8.04
$10.00 to $15.00 231 1.1 $ 12.74
----------------- ----------- ----------- --------------
$0.10 to $15.00 3,240 2.7 $ 5.82
=========== =========== ==============
14. SEGMENT INFORMATION
Beginning with the year ended December 31, 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company is organized into two business segments: (a) NeoMedia ISS, and (b)
NeoMedia CIS. Performance is evaluated and resources allocated based on specific
segment requirements and measurable factors. Management uses the Company's
internal income statements to evaluate each business unit's performance. Assets
of the business units are not available for management of the business segments
or for disclosure.
Operational results for the two segments for the years ended December 31, 2001,
2000 and 1999 are presented below (in thousands):
NEOMEDIA ISS NEOMEDIA CIS
(FORMERLY (FORMERLY
NEOMEDIA ASP) NEOMEDIA SI) CONSOLIDATED
------------- ------------ ------------
YEAR ENDED DECEMBER 31, 2001
Net Sales
Qode Business Unit $ 13 $ - $ 13
Paperclick/Amway/MLM 140 140
Software and equipment resales and related
services - 8,002 8,002
------------ ------------ ------------
Total gross sales 153 8,002 8,155
Less: Qode Business Unit Sales (13) - (13)
------------ ------------ ------------
Total net sales 140 8,002 8,142
============ ============ ============
Loss from Continuing Operations (17,639) (1,129) (18,768)
Loss from operations of and disposal of discontinued
business unit (6,701) - (6,701)
Net Loss (24,340) (1,129) (25,469)
YEAR ENDED DECEMBER 31, 2000
Net Sales $ 8,083 $ 19,482 $ 27,565
Net Loss (4,225) (1,184) (5,409)
YEAR ENDED DECEMBER 31, 1999
Net Sales $ 795 $ 24,461 $ 25,256
Net Loss (5,916) (4,556) (10,472)
15. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflects all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
F-65
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------
TOTAL FOURTH THIRD SECOND FIRST
--------- -------- -------- --------- --------
2001
----
Total net sales $8,142 $4,459 $908 $1,237 $1,538
Gross profit ($724) $597 ($503) ($404) ($414)
(Loss) before income taxes
and discontinued operations ($18,768) $771 ($5,072) ($11,042) ($3,425)
Net (loss) ($25,469) ($1,692) ($9,310) ($11,042) ($3,425)
Net (loss) per share:
basic and diluted ($1.55) ($0.11) ($0.60) ($0.72) ($0.24)
2000
----
Total net sales $27,565 $9,875 $4,049 $9,547 $4,094
Gross profit $9,032 $7,571 $42 $879 $540
(Loss) before income taxes
and discontinued operations ($5,409) $2,667 ($3,555) ($2,085) ($2,436)
Net (loss) ($5,409) $2,667 ($3,555) ($2,085) ($2,436)
Net (loss) per share:
basic and diluted ($0.39) $0.21 ($0.25) ($0.15) ($0.19)
1999
----
Total net sales $25,256 $5,091 $5,019 $7,342 $7,804
Gross profit $2,786 ($156) ($11) $1,269 $1,684
(Loss) before income taxes
and discontinued operations ($10,472) ($3,881) ($2,937) ($1,888) ($1,766)
Net (loss) ($10,472) ($3,881) ($2,937) ($1,888) ($1,766)
Net (loss) per share:
basic and diluted ($1.01) ($0.34) ($0.27) ($0.19) ($0.20)
16. COMMON STOCK
On October 24, 2001, the Company filed a proxy statement with the SEC to request
a shareholder vote to increase the number of the Company's authorized shares of
common stock from 50,000,000 shares to 100,000,000 and increase the number of
the Company's authorized shares of preferred stock from 10,000,000 shares to
25,000,000. The shareholder meeting was held on December 11, 2001. This
resolution did not pass as a result of the failure to secure favorable votes
from holders of a majority of the outstanding shares.
The proxy also requested approval to sell 19,000,000 shares of common stock to
accredited investors in exchange for limited recourse promissory notes accruing
interest at a rate of 6% per annum, with a term of three months, providing for
mandatory repayment of principal in the amount of the proceeds of any sale of
the shares of common stock (or other securities or assets issued in respect of
such shares of common stock) purchased by means of such promissory notes, with
sole recourse under the event of default under the promissory note limited to
recovery of the shares of common stock purchased (or other assets or securities
issued in respect thereof) by means of such promissory note. This resolution
passed. During the fourth quarter of 2001, the Company issued 3,000,000 of the
19,000,000 shares at $0.08 per share in exchange for limited recourse promissory
notes as described above. The Company has recorded a stock subscription
receivable of $240,000 as of December 31, 2001 with respect to these shares.
Subsequent to December 31, 2001, the Company has cancelled the 3,000,000 shares
issued in 2001 and re-issued them, along with 16,000,000 additional shares, at a
price of $0.17 per share, subject to the same terms described above.
During the year ended December 31, 2001, the Company issued through private
placements 3,490,750 shares of the Company's Common Stock for proceeds of
$1,637,000.
During the year ended December 31, 2000, the Company issued through private
placements 1,415,279 shares of the Company's Common Stock for proceeds of
$9,203,000. In connection with these private placements, the Company also issued
387,073 warrants with strike prices ranging from $6.00 to $12.74. These warrants
were immediately vested and have a life of three to five years.
F-66
In 1999, an unrelated third party converted their $2.0 million note receivable
from the Company into shares of the Company's common stock at a price of $4.00
per share. The unrelated third party also received 200,000 warrants. These
warrants were 100% vested upon issuance. Of these warrants, 100,000 were issued
at $5.00 and 100,000 were issued at $7.00. All 200,000 warrants had a three-year
expiration and were subsequently exercised in 2000.
17. PREFERRED STOCK
In June 2001, the Company entered into a one-year license agreement with
About.com, Inc. to provide the Qode Universal Commerce SolutionTM to About.com's
estimated 36 million worldwide users. The Company and About.com intended to
promote the co-branded shopping service throughout the About.com network. In
June 2001, About.com ran banner ads on its site promoting the Qode Universal
Commerce SolutionTM. As part of the emerging About.com and NeoMedia
relationship, About.com received 452,489 shares of our Series B Convertible
Preferred Stock, par value $0.01 per share, of the 500,000 total Series B
Convertible Preferred shares which we are authorized to issue, in consideration
for these promotions. Each share was convertible into one share of NeoMedia
common stock. We recorded an expense of $882,000 associated with this
transaction in the second quarter in sales and marketing expense in the
accompanying consolidated statements of operations. The agreement with About.com
was terminated on August 31, 2001, in anticipation of the sale of the Qode
assets to the Finx Group, Inc. Subsequent to December 31, 2001, the Series B
Convertible Preferred Stock issued to About.com automatically converted to
452,289 shares of NeoMedia common stock on January 2, 2002.
18. SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the following events have occurred:
o During January 2002, certain of the Company's shareholders filed a
complaint with the Securities and Exchange Commission, alleging that the
shareholders were not included in the special shareholders meeting of
November 25, 2001, to vote on the issuance of 19 million shares of
NeoMedia common stock. On March 11, the Company filed its response
claiming that the Company had fully complied with all of its obligations
under the laws and regulations administered by the Securities and
Exchange Commission, as well as with its obligation under Delaware
General Corporation Law.
o During February 2002, the Company sold 19 million shares of its common
stock at $0.17 per share in exchange for promissory notes maturing at
the earlier of i) 90 days from the date of issuance, or ii) 30 days from
registration of the shares. During 2001, the Company had issued 3
million shares to unrelated investors at $0.08 per share payable in the
same manner. Those shares were cancelled and re-issued as part of the 19
million share offering in 2002.
o During February 2002, the Company issued 1,646,987 shares of its common
stock to two separate vendors as settlement of past due liabilities and
future payments relating to equipment leases.
o During March 2002, the Company requested a hearing before a Nasdaq
listing qualifications panel to review a staff determination issued by
Nasdaq. The determination indicated that as of December 31, 2001 the
Company did not comply with either the minimum $2 million net tangible
assets or the minimum $2.5 million stockholders' equity requirement for
continued listing, and that the company's shares were therefore subject
to delisting. NeoMedia responded by requesting a hearing before a Nasdaq
listing panel to review the staff determination. The hearing is
scheduled for April 18, 2002.
o During March 2002, the Company repriced 1.2 million of its common stock
warrants for a period of six months. During the term of the warrant
repricing program, participating holders are entitled to exercise
qualified warrants at an exercise price per share equal to the greater
of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the NASDAQ Small Cap Market on the trading date immediately preceding
the date of exercise. We are accounting for the repricing using variable
accounting at each reporting date, in accordance with FIN 44. Under this
treatment, expense is recognized for unexercised stock warrants repriced
below market based on the closing price of NeoMedia stock on the last
day of each reporting period. Additionally, if any warrants are
exercised pursuant to he repricing program, expense is recognized for
the difference between the market price of NeoMedia stock at the time of
exercise and the restated exercise price.
F-67
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 9 $ 134
Trade accounts receivable, net of allowance for doubtful account of $81
in 2002 and $65 in 2001 3,230 2,583
Costs and estimated earnings in excess of billings on uncompleted
contracts 6 43
Inventories 141 197
Assets held for sale --- 210
Prepaid expenses and other current assets 786 582
------------- ------------
Total current assets 4,172 3,749
Property and equipment, net 121 205
Capitalized patents, net 2,311 2,500
Capitalized and purchased software costs, net 184 1,828
Other long-term assets 677 757
------------- ------------
Total assets $ 7,465 $ 9,039
============= ============
F-68
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,939 $ 2,886
Amounts due under financing agreements 2,375 2,283
Liabilities in excess of assets of discontinued business unit 1,489 ---
Accrued expenses 2,351 1,922
Current portion of long-term debt 160 149
Notes payable 785 750
Sales taxes payable 356 135
Billings in excess of costs and estimated earnings on uncompleted
contracts 2 13
Deferred revenues 913 767
Other 10 7
------------- ------------
Total current liabilities 12,380 8,912
Long-term debt, net of current portion 268 390
------------- ------------
Total liabilities 12,648 9,302
------------- ------------
Shareholders' equity:
Preferred stock, $01 par value, 25,000,000 shares authorized, none
issued and outstanding in 2002, 452,489 issued and outstanding in 2001 --- 5
Additional paid-in capital, preferred stock --- 878
Common stock, $01 par value, 200,000,000 shares authorized, 26,782,724
shares issued and 25,141,298 outstanding in 2002 251 188
Additional paid-in capital 65,237 63,029
Stock subscription receivable --- (240)
Deferred stock-based compensation (47) ---
Accumulated deficit (69,845) (63,344)
Treasury stock, at cost, 201,230 shares of common stock (779) (779)
------------- ------------
Total shareholders' equity (5,183) (263)
------------- ------------
Total liabilities and shareholders' equity $ 7,465 $ 9,039
============= ============
The accompanying notes are an integral part of these consolidated financial statements.
F-69
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30,
2002 2001
------------ ----------
NET SALES:
License fees $ 303 $ 522
Resale of software and technology equipment and service fees 8,149 3,268
------------ ----------
Total net sales 8,452 3,790
------------ ----------
COST OF SALES:
License fees 764 1,996
Resale of software and technology equipment and service fees 6,607 2,737
------------ ----------
Total cost of sales 7,371 4,733
------------ ----------
GROSS PROFIT (LOSS) 1,081 (943)
Sales and marketing expenses 719 2,100
General and administrative expenses 3,556 3,409
Research and development costs 683 280
Loss on impairment of assets 1,003 2,871
Loss on Digital: Convergence license contract --- 7,354
------------ ----------
Loss from operations (4,880) (16,957)
Interest expense (income), net 99 (30)
------------ ----------
Loss from continuing operations (4,979) (16,927)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit --- (3,653)
Loss on disposal of discontinued business unit, including provision of
$424 in 2001 for operating losses during phase-out period (1,523) (3,197)
------------ ----------
NET LOSS $ (6,502) $ (23,777)
============ ==========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED $(0.24) $ (1.12)
============ ==========
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED $(0.07) $ (0.45)
============ ==========
NET LOSS PER SHARE--BASIC AND DILUTED $(0.31) $ (1.57)
============ ==========
Weighted average number of common shares--basic and diluted 20,736,080 15,142,312
============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-70
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED SEPTEMBER 30,
2002 2001
------------ ----------
NET SALES:
License fees $ 150 $ 92
Resale of software and technology equipment and service fees 3,254 816
------------ ----------
Total net sales 3,404 908
------------ ----------
COST OF SALES:
License fees 80 668
Resale of software and technology equipment and service fees 2,742 743
------------ ----------
Total cost of sales 2,822 1,411
------------ ----------
GROSS PROFIT (LOSS) 582 (503)
Sales and marketing expenses 207 721
General and administrative expenses 996 818
Research and development costs 150 137
Loss on impairment of assets --- 2,871
Loss from operations (771) (5,050)
Interest expense (income), net 2 22
------------ ----------
Loss from continuing operations (773) (5,072)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit --- (1,041)
Loss on disposal of discontinued business unit, including provision of
$424 in 2001 for operating losses during phase-out period --- (3,197)
------------ ----------
NET LOSS $ (773) $ (9,310)
============ ==========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED $ (0.03) $ (0.33)
============ ==========
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED $ --- $ (0.27)
============ ==========
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.03) $ (0.60)
============ ==========
Weighted average number of common shares--basic and diluted 22,979,755 15,570,693
============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-71
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,502) $ (23,777)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 938 2,932
Loss on disposal of discontinued business unit 1,523 2,773
Loss on impairment of assets 1,003 2,871
Effect of Digital Convergence write-off --- 7,354
Preferred stock issued to pay advertising expense --- 882
Expense associated with warrant repricing 38 845
Stock options and warrants granted for services 383 94
Changes in operating assets and liabilities:
Trade accounts receivable (610) 1,299
Prepaid - Digital: Convergence --- 118
Other current assets 491 (167)
Accounts payable, amounts due under financing agreements,
liabilities in excess of assets of discontinued business
unit, and accrued expenses 1,916 (235)
Deferred revenue 148 174
Other current liabilities 3 (11)
---------------- -----------------
Net cash used in operating activities (669) (4,848)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of patent costs, software development and
purchased intangible assets (24) (2,939)
(Increase)/decrease in value of life insurance policies 80 (3)
Acquisition of property and equipment --- (81)
---------------- -----------------
Net cash used in investing activities 56 (3,023)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock net of $0 issuance
costs in 2002 and $10 in 2001 198 1,637
Net proceeds from exercise of stock warrants 43 1,034
Net proceeds from exercise of stock options 272 139
Net proceeds from release of restricted cash held for line of
credit --- 750
Net proceeds from issuance of notes payable 21 500
Issuance of stock-based deferred compensation (46) ---
Repayments on notes payable and long-term debt --- (352)
---------------- -----------------
Net cash provided by financing activities 488 3,708
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (125) (4,163)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 134 4,453
---------------- -----------------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30, 2001 $ 9 $ 290
================ =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the nine months ended
September 30 (net) $ (66) $ (31)
Non-cash investing and financing activities:
Net assets acquired as part of Qode purchase agreement in
exchange for common stock and forgiveness of note --- 1,800
Issuance costs for shares issued through private placements --- 10
Shares earned by Qode under purchase agreement --- 13
Common stock issued to settle debt 27 ---
Cancellation of common stock issued in 2001 to offset stock
subscription receivable (240) ---
Net effect of issuance and subsequent cancellation of common
stock underlying notes receivable (190)
Accounts payable converted to note payable --- 170
The accompanying notes are an integral part of these consolidated financial statements.
F-72
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial statements
of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. These condensed
consolidated financial statements and related notes should be read in
conjunction with the Company's Form 10-K for the fiscal year ended December 31,
2001. In the opinion of management, these condensed consolidated financial
statements reflect all adjustments which are of a normal recurring nature and
which are necessary to present fairly the consolidated financial position of
NeoMedia as of September 30, 2002, and the results of operations for the three-
and nine-month periods ended September 30, 2002 and 2001, and cash flows for the
nine-month period ended September 30, 2002 and 2001. The results of operations
for the three- and nine-month periods ended September 30, 2002 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. All significant intercompany accounts and transactions have been
eliminated in preparation of the condensed consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
The Company is structured and evaluated by its Board of Directors and Management
as two distinct business units: NeoMedia Internet Switching Service (NISS) and
NeoMedia Consulting and Integration Service (NCIS).
NEOMEDIA INTERNET SWITCHING SERVICE (NISS)
NISS (physical world-to-Internet offerings) is the core business and is based in
the United States, with development and operating facilities in Fort Myers,
Florida. NISS develops and supports the Company's physical world to Internet
core technology, including its linking "switch" and application platforms. NISS
also manages the Company's valuable intellectual property portfolio, including
the identification and execution of licensing opportunities surrounding the
patents.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES (NCIS)
NCIS (systems integration service offerings) is the original business line upon
which the Company was organized. This unit resells client-server equipment and
related software, and general and specialized consulting services targeted at
software driven print applications, especially at process automation of
production print facilities through its integrated document factory solution.
Systems integration services also identify prospects for custom applications
based on the Company's products and services. This unit recently moved its
business offerings to a much higher Value-Add called Storage Area Networks
(SAN). The operations are based in Lisle, Illinois.
RECLASSIFICATIONS
Certain amounts in the 2001 condensed consolidated financial statements have
been reclassified to conform to the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 21, 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations",
and No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 141 requires
the purchase method of accounting to be used for all business combinations
initiated after June 30, 2001 and establishes specific criteria for the
recognition of intangible assets separately from goodwill; SFAS No. 142
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
intangible assets which have indefinite useful lives will not be amortized, but
rather will be tested at least annually for impairment. It also provides that
F-73
intangible assets that have finite useful lives will continue to be amortized
over their useful lives, but those lives will no longer be limited to forty
years. SFAS No. 141 is effective for all business combinations after June 30,
2001. The provisions of SFAS No. 142 are effective beginning January 1, 2002.
The Company has implemented the provisions of SFAS No. 141 and No. 142 and has
concluded that the adoption does not have a material impact on the Company's
financial statements.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
its financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities." The provisions of this statement are effective for disposal
activities initiated after December 31, 2002, with early application encouraged.
The Company does not expect the adoption of FASB No. 146 to have a material
impact on the Company's financial position or results of operations.
PURCHASE AND DISPOSAL OF QODE.COM, INC.
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc.
(Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675 at the time of issuance. Stock issued was valued at $4.95
per share, which is the average closing price for the few days before and after
the measurement date of March 1, 2001. As of December 31, 2001 the Company had
released 35,074 shares of common stock from escrow for performance for the
period March 1, 2001 to August 31, 2001. The remaining 1,641,426 shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the performance of the Qode business unit for the period
March 1, 2001 through February 28, 2002. As a result, all such shares may be
released to Qode.
The Company accounted for this purchase using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". The excess fair market value of the net assets acquired over the
purchase price was allocated to reduce proportionately the values assigned to
noncurrent assets. The accompanying consolidated statements of operations
include the operations of Qode from March 1, 2001, through September 30, 2002.
F-74
The purchase price at the original purchase date was calculated and allocated as
follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at $0.39 $ 13,000
-------------
Total purchase price $ 1,373,000
-------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
-------------
Total purchase price allocated $ 1,373,000
=============
During the third quarter of 2001, the Company issued an additional 35,074 shares
under the terms of the earn-out with Qode.com, Inc. (see explanation below). The
value of these shares in the amount of $13,000 was allocated $9,000 to
capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has
placed 1,676,500 shares of its common stock in escrow for a period of one year,
subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March 1, 2002, these performance targets were not met and therefore, the
remaining 1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue, page views, and fully allocated earnings before taxes relating to the
Qode Universal Commerce Solution.
At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date was July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
number of shares issued to Qode under the earn-out was 309,773, allocated as
outlined in the table above. The remaining 1,641,426 shares are being held in
escrow pending the results of negotiations between the Company and Qode with
respect to a disagreement over the performance of, and investment in, the Qode
business unit for the period March 1, 2001 through February 28, 2002. As a
result, all such shares may be released to Qode.
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
i). Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over three
years.
ii). Capitalized software development costs relating to the development of the
Qode Universal Commerce Solution.
F-75
OTHER
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. On July 22, the case
was converted to Chapter 7, U.S. Code.
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to sell
the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which
it acquired in March 2001, to The Finx Group, Inc., a holding company based in
Elmsford, NY. The Finx Group was to assume $620,000 in Qode payables and
$800,000 in long-term leases in exchange for 500,000 shares of the Finx Group,
right to use and sell Qode services, and up to $5 million in affiliate revenues
over the next five years. During the third and fourth quarters of 2001 and the
first quarter of 2002, the company recorded a $2.6 million expense from the
write-down of the Qode assets/liabilities to net realizable value.
The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $439,000. No further loss is
anticipated.
During June 2002, the Finx Group notified the Company that it did not intend to
carry out the letter of intent due to capital constraints. As a result, during
the three-month period ended June 30, 2002, the Company recorded an additional
expense of $1.5 million for the write-off of remaining Qode assets. As of
September 30, 2002, the Company had $1.5 million of liabilities relating to the
Qode system on its books.
IMPAIRMENT OF PAPERCLICK ASSET
During the three-month period ending June 30, 2002, the Company recognized an
impairment charge of $1.0 million relating to its PaperClick
physical-world-to-internet software solution. Due to capital constraints, the
Company is not currently able to devote full-time resources and infrastructure
to commercializing the technology. The Company intends to re-focus sales and
marketing efforts surrounding the product upon the receipt of sufficient
capital.
OTHER EVENTS
During January 2002, certain of the Company's shareholders filed a complaint
with the Securities and Exchange Commission, alleging that the shareholders were
not included in the special shareholders meeting of November 25, 2001, to vote
on the issuance of 19 million shares of NeoMedia common stock. On March 11,
2002, the Company filed its response claiming that the Company had fully
complied with all of its obligations under the laws and regulations administered
by the Securities and Exchange Commission, as well as with its obligation under
Delaware General Corporation Law.
During January 2002, NeoMedia announced that it had entered into an agreement
with Baniak Pine and Gannon, a law firm specializing in patent licensing and
litigation, under which the firm will represent NeoMedia in seeking out
potential licensees of the Company's patent portfolio.
During February 2002, the Company sold 19 million shares of its common stock to
five individuals and two institutional unrelated parties at $0.17 per share in
exchange for promissory notes maturing at the earlier of i) August 12, 2002, or
ii) 30 days from registration of the shares. Assuming full payment of the notes,
proceeds from this transaction would have been $3,230,000, of which $190,000 par
value was paid during the first quarter of 2002. During August 2002, the notes
matured without payment, and the Company subsequently cancelled the 19 million
shares issued in connection with such notes. The Company has accrued a liability
in the third quarter of $190,000 relating to the par value paid in connection
with the issuance of the shares.
During February 2002, the Company issued 1,646,987 shares of its common stock to
two separate vendors as settlement of past due liabilities and future payments
relating to equipment leases.
During March 2002, the Company repriced 1.2 million of its common stock warrants
for a period of six months. During the term of the warrant repricing program,
participating holders are entitled to exercise qualified warrants at an exercise
price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale
price of shares of Common Stock on the OTCBB, on the trading date immediately
preceding the date of exercise. Approximately 370,000 warrants were exercised in
connection with the program, and the Company recognized approximately $38,000 in
expense relating to the repricing during the nine months ended September 30,
2002.
F-76
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment of
approximately $38,700 relating to past due and future payments under an office
equipment lease. The Company returned the equipment and settled the liability
for cash payments totaling $30,000.
During April 2002, the Company repriced 7.4 million of its common stock options
held by employees, consultants and advisors for a period of six months. During
the term of the option repricing program, participating holders are entitled to
exercise subject options at an exercise price per share equal to the greater of
(1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the
OTCBB, on the trading date immediately preceding the date of exercise. Shortly
after the announcement of the repricing program, the market price for the
Company's common stock fell below $0.12, and has not closed above $0.12 since.
As a result, no options were exercised under the terms of the program and the
Company did not recognize any expense relating to the repricing program during
the nine months ended September 30, 2002 due to immaterial effect on the
financial statements.
On May 16, 2002, the Company received notification from the Nasdaq Listing
Qualifications Panel that its shares were delisted effective May 17, 2002, due
to failure to meet either the minimum net tangible assets ($2,000,000) or
minimum stockholders' equity ($2,500,000) criteria for continued listing. The
Company's shares are now trading on the Over-the-Counter Bulletin Board
("OTCBB").
During May 2002, the Company settled its lawsuit with William Goins, its former
President and Chief Operating Officer (see "Legal Proceedings"). The Company is
obligated to make cash payments of $90,000 directly to the plaintiff from the
period May 2002 through December 2002, and cash payments to the plaintiff's
attorney for legal fees in the amount of $45,000 due in July and August 2002. In
addition, Mr. Goins was granted 360,000 options to purchase shares of NeoMedia
common stock at an exercise price of $0.08. These options were valued at
approximately $36,000. The Company had a remaining liability of approximately
$72,000 as of September 30, 2002.
During May 2002, the Company entered into an Equity Line of Credit Agreement
with Cornell Capital Partners LP ("Cornell"). Under the terms of the agreement,
Cornell has agreed to purchase up to $5.0 million of NeoMedia common stock over
the next two years at the Company's discretion.
During May 2002, the Company granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey will pay the Company $50,000 upfront licensing fee plus
2.5 % of all royalty-based revenues earned by Brandkey, with minimum royalties
of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and after. Royalty
revenue earned by the Company may not exceed $1.0 million in any given year. The
Company recognized approximately $16,000 in revenue relating to this contract
during the nine months ended September 20, 2002.
On June 6, 2002, the Company held its annual meeting of shareholders, at which
shareholders approved proposals to: i.) amend NeoMedia's Certificate of
Incorporation to increase the number of shares of authorized common stock, par
value $.01, from 50,000,000 to 200,000,000 shares and to increase the number of
shares of authorized preferred stock, par value $0.01, from 10,000,000 to
25,000,000; and ii.) implement the 2002 Stock Option Plan, under which the
Company is authorized to grant to employees, directors, and consultants up to
10,000,000 options to purchase shares of its common stock.
On June 26, 2002, the Company announced that its chairman, Charles W. Fritz, had
been granted a 90-day leave of absence from his responsibilities as Chief
Executive Officer by the company's Board, which, concurrently, elected Charles
T. Jensen president and Chief Operating Officer, and also named him acting CEO.
The Company also announced that it had promoted David Dodge, its Controller, to
Vice President and Chief Financial Officer. On September 23, 2002, Mr. Fritz
officially resigned his duties as Chief Executive Officer. He will remain
Chairman of the Board of Directors and a part-time executive of the Company. Mr.
Jensen has assumed the role of acting CEO.
On August 9, 2002, the Company settled its lawsuit with 2150 Western Court
L.L.C., the property manager for the Company's Lisle, IL, office, in which 2150
Western Court L.L.C. was seeking payment of past due rent plus possession of the
premises. The settlement calls for past due rents of approximately $72,000 to be
paid over a 15-month period, as well as reduced rents for the period August 2002
through March 2003. As additional consideration in the settlement, the Company
issued 900,000 shares of its common stock to 2150 Western Court L.L.C. The
Company had a liability of approximately $61,000 relating to this matter as of
September 30, 2002.
F-77
2. LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited financial statements have been prepared assuming the
Company will continue as a going concern. Accordingly, the financial statements
do not include any adjustments that might result from the Company's inability to
continue as a going concern. Based on current cash balances and operating
budgets, the Company believes it will need to raise operating capital in the
next 30 days. If the Company's financial resources are insufficient, the Company
may be forced to seek protection from its creditors under the United States
Bankruptcy Code or analogous state statutes unless it is able to engage in a
merger or other corporate finance transaction with a better capitalized entity.
The Company cannot predict whether additional financing will be available, its
form, whether equity or debt, or be in another form, or if the Company will be
successful in identifying entities with which it may consummate a merger or
other corporate finance transactions.
3. GOING CONCERN
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.
Through September 30, 2002, the Company has not been able to generate
significant revenues from its operations to cover its costs and operating
expenses. Although the Company has been able to issue its common stock or other
financing for a significant portion of its expenses, it is not known whether the
Company will be able to continue this practice, or if its revenue will increase
significantly to be able to meet its cash operating expenses.
This, in turn, raises substantial doubt about the Company's ability to continue
as a going concern. Management believes that the Company will be able to raise
additional funds through an offering of its common stock or alternative sources
of financing. However, no assurances can be given as to the success of these
plans. The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
4. SUBSEQUENT EVENTS
On October 28, 2002, the Company settled its lawsuit with Wachovia Bank, N.A.,
the owner of the building in which the Company's headquarters is located.
Wachovia was seeking payment of past due rents under its lease agreement with
the Company. The settlement calls for cash payments of past due rents of
approximately $250,000 over a period of 16 months. The Company will also vacate
approximately 70% of the unused space in its headquarters, and the rent for the
remainder of the lease, which expires in January 2004, will be reduced according
to square footage used. The Company has accrued a liability of approximately
$250,000 relating to this matter as of September 30, 2002.
On November 12, 2002, the Company settled the lawsuit with its former General
Counsel over payment of the 2000 executive incentive, severance and unpaid
vacation days in the amount of approximately $154,000. The settlement calls for
cash payments totaling approximately $100,000 over a period of 10 months, plus
250,000 vested options to purchase shares of the Company's common stock at an
exercise price of $0.01 and a term of five years.
During November 2002, the Company issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors; William E. Fritz, outside
director; and James J. Keil, outside director. The notes bear interest at a rate
of 15% per annum, and mature at the earlier of i.) four months, or ii.) that
date the shares underlying the Cornell Equity Line of Credit are registered with
the SEC. The notes are convertible, at the option of the holder, into either
cash or shares of the Company's common stock at a 30% discount to either market
price upon closing, or upon conversion, whichever is lower. The Company will
also grant to the holders an additional 192,000 shares of the Company's common
stock and 60,000 warrants to purchase shares of the Company's common stock at
$0.03 per share, with a term of three years. In the event the Company defaults
on the note, the Company will issue an additional 1,404,330 shares of its common
stock to the note holders. The notes are secured by the Company's intellectual
property, which is subject to first lien by AirClic, Inc. (see "Legal
Proceedings").
On November 12, 2002, the Company and Cornell terminated the May 2002 Equity
Line of Credit Agreement and entered into a new Equity Line of Credit Agreement
with Cornell under which Cornell agreed to purchase up to $10.0 million of
NeoMedia's common stock and over the next two years, with the timing and amount
of the purchase at the Company's discretion. The maximum amount of each purchase
is $150,000 with a minimum of seven days between purchases. The shares will be
valued at 98% of the lowest closing bid price during the five day period
following the delivery of a notice of purchase by NeoMedia. The Company will pay
5% of the gross proceeds of each purchase to Cornell as a commission. According
F-78
to the terms of the agreement, the Company cannot draw on the line of credit
until the shares underlying the agreement are registered for trading with the
Securities and Exchange Commission.
F-79
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS
ABOUT NEOMEDIA TECHNOLOGIES, INC. EXCEPT
THE INFORMATION OR REPRESENTATIONS
CONTAINED IN THIS PROSPECTUS. YOU SHOULD
NOT RELY ON ANY ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an -----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
[ ] except the common stock offered by -----------------------
this prospectus;
[ ] in any jurisdiction in which the
offer or solicitation is not authorized;
113,408,376 SHARES OF COMMON STOCK
[ ] in any jurisdiction where the dealer
or other salesperson is not qualified to
make the offer or solicitation;
NEOMEDIA TECHNOLOGIES, INC.
[ ] to any person to whom it is unlawful
to make the offer or solicitation; or
_____, 2003
[ ] to any person who is not a United
States resident or who is outside the
jurisdiction of the United States.
The delivery of this prospectus or any
accompanying sale does not imply that:
[ ] there have been no changes in the
affairs of NeoMedia Technologies, Inc.
after the date of this prospectus; or
[ ] the information contained in this
prospectus is correct after the date of
this prospectus.
-----------------------
Until _____, 2003, all dealers effecting
transactions in the registered securities,
whether or not participating in this
distribution, may be required to deliver
a prospectus. This is in addition to the
obligation of dealers to deliver a
prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. NeoMedia will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $ 210
Printing and Engraving Expenses $ 2,500
Accounting Fees and Expenses $ 15,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 17,290
TOTAL $ 85,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, we have included in
our Certificate of Incorporation a provision to eliminate the personal liability
of our directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, except for liability (i) for any breach of the
director's duty of loyalty to NeoMedia or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, as provided in Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of this provision is to eliminate the rights of NeoMedia and
its stockholders (through stockholders' derivative suits on behalf of NeoMedia)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director except in the situations described in (i) through (iv)
above. This provision does not limit nor eliminate the rights of NeoMedia or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The certificate of incorporation and the by-laws of NeoMedia provide that
we are required and permitted to indemnify our officers and directors, employees
and agents under certain circumstances. In addition, if permitted by law, we are
required to advance expenses to our officers and directors as incurred in
connection with proceedings against them in their capacity as a director or
officer for which they may be indemnified upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification. At
present, we are not aware of any pending or threatened litigation or proceeding
involving a director, officer, employee or agent of NeoMedia in which
indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2002, Jerald Eicke was issued 4,000,000 shares of common
stock in exchange for consulting services rendered. The shares of common stock
were priced at $0.05 totaling a value of $200,000.
On December 2, 2002, NeoMedia issued to Michael Kesselbrenner, a private
investor, a Promissory Note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. In connection
with the default provision of the Promissory Note, NeoMedia entered into a
Pledge Agreement, dated December 2, 2002, by and between NeoMedia and the
Investor under which NeoMedia issued 53,620,020 shares of common stock to an
unrelated third party as collateral for the Promissory Note. In the event of
default, the third party would issue the shares to the Investor, and NeoMedia
would issue additional shares as required to increase Mr. Kesselbrenner's
ownership of securities of NeoMedia to equal 51% of its fully-diluted
outstanding shares at the time of such default.
II-1
On November 12, 2002, NeoMedia and Cornell Capital Partners terminated the
May 2002 Equity Line of Credit Agreement and entered into a new Equity Line of
Credit Agreement with Cornell under which Cornell agreed to purchase up to $10.0
million of NeoMedia's common stock and over the next two years, with the timing
and amount of the purchase at NeoMedia's discretion. The maximum amount of each
purchase is $150,000 with a minimum of seven days between purchases. The shares
will be valued at 98% of the lowest closing bid price during the five day period
following the delivery of a notice of advance by NeoMedia. NeoMedia will pay 5%
of the gross proceeds of each purchase to Cornell as a commission. According to
the terms of the agreement, NeoMedia cannot draw on the line of credit until the
shares underlying the agreement are registered for trading with the Securities
and Exchange Commission. Cornell Capital received a one-time commitment fee
payable in 2,000,000 shares of our common stock. Additionally, Westrock
Advisors, Inc. was paid a fee of 62,500 shares of NeoMedia's common stock for
acting as the placement agent.
In September 2002, NeoMedia issued 1,161,402 shares of common stock upon
exercise of outstanding options by an unrelated consultant at a price of $0.01
per share. The gross proceeds of such transaction were approximately $12,000.
In August 2002, NeoMedia issued 900,000 shares of common stock to 2150
Western Court L.L.C, the landlord of its Lisle, Illinois sales office, as
settlement of a lawsuit relating to past-due and future building rents. The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.
In July, August and September 2002, we issued an aggregate of 3,000,000
shares of our common stock upon the exercise of outstanding options by a
consultant at a price of $0.01 per share. The gross proceeds of such transaction
were $30,000.
In July 2002, we issued 575,980 shares of common stock upon the exercise
of outstanding options by an unrelated consultant at a price of $0.01 per share.
The gross proceeds of such transaction were approximately $6,000.
In June 2002, we issued 900,000 shares of common stock to two unrelated
consultants as payment for consulting services to be performed from June 2002
through June 2003. There were no cash proceeds to us in these transactions.
In June 2002, we issued 10,000 shares of common stock to an unrelated
vendor as an interest payment on past-due accounts payable. There were no cash
proceeds to us in these transactions.
In May 2002, we issued an aggregate of 200 shares of our common stock upon
the exercise of outstanding options by an employee at a price of $0.12 per
share. The gross proceeds of such transaction were $24.
During April 2002, NeoMedia repriced 7.4 million of its common stock
options held by employees, consultants and advisors for a period of six months.
During the term of the option repricing program, participating holders are
entitled to exercise subject options at an exercise price per share equal to the
greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the OTCBB, on the trading date immediately preceding the date of exercise.
Shortly after the announcement of the repricing program, the market price for
the Company's common stock fell below $0.12, and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing program during
the nine months ended September 30, 2002 due to immaterial effect on the
financial statements.
In April 2002, we issued an aggregate of 140,775 shares of our common
stock upon the exercise of outstanding warrants by Charles W. Fritz, its
Chairman and Chief Executive Officer, at a price of $0.12 per share. Mr. Fritz
subsequently sold the shares into the market. The gross proceeds of such
transaction were approximately $17,000. In accordance with Section 16(b), all
proceeds from the sales were retained by us.
In April 2002, we issued an aggregate of 1,962,255 shares of our common
stock upon the exercise of outstanding options by two unrelated parties at a
price of $0.12 per share. The gross proceeds of such transaction were
approximately $235,000.
In April 2002, we issued an aggregate of 40,000 shares of our common stock
upon the exercise of outstanding options by James J. Keil, an outside director.
Mr. Keil purchased 25,000 shares at an exercise price of $0.135 and 15,000
shares at $0.20. The gross proceeds of such transaction were approximately
$6,000.
During March 2002, NeoMedia repriced 1.2 million of its common stock
warrants for a period of six months. During the term of the warrant repricing
program, participating holders are entitled to exercise qualified warrants at an
II-2
exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the
last sale price of shares of Common Stock on the OTCBB, on the trading date
immediately preceding the date of exercise. Approximately 370,000 warrants were
exercised in connection with the program, and NeoMedia recognized approximately
$38,000 in expense relating to the repricing during the nine months ended
September 30, 2002.
In March 2002, we issued an aggregate of 228,675 shares of our common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such transaction were approximately
$27,000.
In February 2002, we issued 19,000,000 shares of our common stock at a
price of $0.17 per share to five individuals and two institutional unrelated
parties. The shares were issued in exchange for limited recourse promissory
notes maturing at the earlier of i.) 90 days from the date of issuance, or ii.)
30 days from the date of registration of the shares. The gross proceeds of such
transaction will be approximately $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash.
During August 2002, the notes matured without payment, and we subsequently
cancelled the 19 million shares issued in connection with such notes. We have
accrued a liability in the third quarter of $190,000 relating to the par value
paid in connection with the issuance of the shares.
In January 2002, we issued 452,489 shares of common stock to About.com,
Inc. The shares were issued upon conversion of 452,489 shares of Series A
Convertible Preferred Stock issued to About.com, Inc. as payment for advertising
expenses incurred during 2001. This issuance was made pursuant to Section
3(a)(9) of the Act.
In January 2002, NeoMedia issued 55,000 shares of its common stock at a
price of $0.13 per share to an individual unrelated party. Cash proceeds to
NeoMedia were $7,150.
In January 2002, we issued 1,646,987 shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under equipment lease agreements. There were no cash proceeds to us in these
transactions.
In September 2001, we issued 150,000 options to buy shares of common stock
at a price of $0.20 per share for consulting services.
In July 2001, we issued an aggregate of 11,300 shares of our common stock
upon the exercise of outstanding warrants at a price of $2.00 per share. The
gross proceeds of such transaction were $23,000. The warrants were originally
issued to one unrelated party for professional services provided to us.
In June 2001, we issued warrants to purchase 404,900 shares of common
stock with an exercise price of $2.09 for consulting services.
In June 2001, we issued an aggregate of 4,100 shares of our common stock
upon the exercise of outstanding warrants at a price of $2.00 per share. The+
gross proceeds of such transaction were $8,000. The warrants were originally
issued to one unrelated party for professional services provided to us.
In May 2001, we issued an aggregate of 320,050 shares of our common stock
upon the exercise of outstanding warrants at a price of $2.00 per share. The
gross proceeds of such transaction were $641,000. The warrants were originally
issued to one related party in exchange for forgiveness of debt and one
unrelated party for professional services provided to us.
In April 2001, we issued warrants to purchase 50,000 shares of common
stock at a price of $0.01 per share to an outside institution for services
performed.
In March and April 2001, we issued 316,500 shares of our common stock at a
price of $3.40 per share to four foreign institutional unrelated parties. The
gross proceeds of such transaction were approximately $1,076,000. In connection
with the sale, we issued as a commission 50,000 warrants to purchase shares of
our common stock at an exercise price of $3.56 per share to a foreign
individual.
In March 2001, we issued 18,000 shares of our common stock at a price of
$3.41 per share to a foreign institutional unrelated party. The gross proceeds
of such transaction were $61,000.
II-3
In March 2001, we issued 156,250 shares of our common stock at a price of
$3.20 per share to a foreign institutional unrelated party. The gross proceeds
of such transaction were $500,000.
In March 2001, we issued 170,000 shares of our common stock issuable upon
the exercise of outstanding warrants held by a foreign institutional unrelated
party, originally issued in connection with the transaction described in
paragraph 4, above. The gross proceeds of such transaction were approximately
$362,000.
In October 2000, we issued warrants to purchase 80,000 shares of common
stock at a price of $4.13 per share for consulting services.
In October 2000, we issued warrants to purchase 1,400,000 shares of common
stock at a price of $6.00 per share to Digital:Convergence Corporation as
consideration for a 10-year intellectual property license agreement.
In March 2000, we issued an aggregate of 1,000,000 shares of our common
stock at a price of $7.50 per share to 20 foreign individuals and one foreign
institutional unrelated party. The gross proceeds of such transaction were
approximately $7,500,000. In connection with the sale, we issued as a commission
125,000 warrants to purchase shares of our common stock at an exercise price of
$7.50 per share, 125,000 warrants to purchase shares of our common stock at an
exercise price of $15.00 per share, and 100,000 warrants to purchase shares of
our common stock at an exercise price of $7.20 per share to the institutional
investor and an independent consultant.
In March 2000, we issued 187,500 shares of our common stock upon the
exercise of outstanding warrants at a price of $7.38 per share. The gross
proceeds of such transaction were approximately $1,383,000. The warrants were
originally issued as payment for professional services provided to us.
In February 2000, we issued 39,535 shares of our common stock at a price
of $6.88 per share to one individual and one institutional unrelated party. In
connection with the sale, we also issued 2,500 warrants with an exercise price
of $12.74 and 1,454 warrants with an exercise price of $9.56. The gross proceeds
of such transaction were approximately $272,000.
In February 2000, we issued 50,000 shares of our common stock at a price
of $6.00 per share to an institutional unrelated party. In connection with the
sale, we also issued 2,982 warrants with an exercise price of $10.06. The gross
proceeds of such transaction were approximately $300,000.
In February 2000, we issued 37,500 shares of our common stock upon the
exercise of outstanding warrants at a price of $2.00 per share, originally
issued in connection with the transaction described above in March 2002. The
gross proceeds of such transaction were approximately $75,000.
In January 2000, we issued an aggregate of 301,368 shares of our common
stock at a price of $3.75 per share to 14 unrelated parties, 3 of which were
institutions and 11 of which were individuals, of which two were foreign. In
connection with the sale, we also issued an aggregate of 12,570 warrants with an
exercise price of $7.19, 5,400 warrants with an exercise price of $6.44, and
12,167 warrants with an exercise price of $7.37. The gross proceeds of such
transaction were approximately $1,130,000. In connection with the sale, we
issued as commissions 9,502 shares of its common stock valued at $7.09 per
share.
In December 1999, we issued options to purchase 150,000 shares of common
stock at a price of $0.20 per share for consulting services.
In November 1999, we issued an aggregate of 143,334 shares of our common
stock at a price of $3.75 per share to two individual and two institutional
unrelated parties. In connection with the sale, we also issued an aggregate of
5,067 warrants with an exercise price of $5.50, 1,267 warrants with an exercise
price of $4.75, 5,333 warrants with an exercise price of $4.67, and 2,667
warrants with an exercise price of $5.84. The gross proceeds of such transaction
were approximately $538,000. In connection with the sale, we paid commissions of
approximately $35,000.
In October 1999, we issued 15,000 shares of our common stock at a price of
$4.38 per share to an individual unrelated party. In connection with the sale,
we also issued 1,500 warrants with an exercise price of $4.38. The gross
proceeds of such transaction were approximately $66,000.
In September 1999, we issued an aggregate of 210,000 shares of our common
stock at a price of $7.00 per share to one foreign individual and two foreign
institutional unrelated parties. The gross proceeds of such transaction were
II-4
approximately $1,470,000. In connection with the sale, we issued as a commission
105,000 warrants to purchase shares of our common stock at an exercise price of
$6.00 per share to a foreign institutional investor.
In September 1999, we issued an aggregate of 275,231 shares of our common
stock at a price of $5.75 per share to two individual and three institutional
unrelated parties. In connection with the sale, we also issued an aggregate of
27,523 warrants with an exercise price of $6.75. The gross proceeds of such
transaction were approximately $1,583,000. In connection with the sale, we paid
commissions of $30,000 cash, and also issued 11,172 shares of its common stock
valued at $6.19 per share and 10,000 warrants to purchase shares of our common
stock at an exercise price of $6.19 per share.
In June 1999, we issued 250,000 shares of our common stock at a price of
$4.00 per share to A.T. Cross Company, an unrelated party. In connection with
the sale, we also issued 100,000 warrants with an exercise price of $7.00. The
gross proceeds of such transaction were approximately $1,000,000.
In May 1999, we issued an aggregate of 65,000 shares of our common stock
at a price of $4.75 per share to two individual unrelated parties. In connection
with the sale, we also issued an aggregate of 6,500 warrants with an exercise
price of $5.00. The gross proceeds of such transaction were approximately
$309,000. In connection with the sale, we paid commissions of $3,375 cash plus
3,250 warrants to purchase shares of our common stock at an exercise price of
$5.00 per share.
In April 1999, we issued an aggregate of 1,000,000 shares of our common
stock at a price of $3.45 per share to two foreign individual unrelated parties
and four institutional unrelated parties, three of which were foreign. The gross
proceeds of such transaction were approximately $3,450,000. In connection with
the sale, we issued as a commission 175,000 warrants to purchase shares of our
common stock at an exercise price of $3.45 per share to a foreign institutional
unrelated party.
In April 1999, we issued warrants to purchase 50,000 shares of common
stock at a price of $0.01 per share to an outside institution for services
performed.
In February 1999, we issued 250,000 shares of our common stock at a price
of $4.00 per share to A.T. Cross Company, an unrelated party. In connection with
the sale, we also issued 100,000 warrants with an exercise price of $5.00. The
gross proceeds of such transaction were $1,000,000.
In January and February, 1999, we issued an aggregate of 145,000 shares of
our common stock at a price of $3.50 per share to six unrelated parties, two of
which were foreign institutions, two of which were foreign individuals, and two
of which were domestic individuals. In connection with the sale, we also issued
an aggregate of 3,000 warrants with an exercise price of $3.50. The gross
proceeds of such transaction were approximately $507,500. In connection with the
sale, we also issued as a commission 280,000 warrants to purchase shares of our
common stock at an exercise price of $2.13 per share to five of the purchasers.
In January 1999, we issued 42,857 shares of our common stock at a price of
$3.50 per share to an individual related party. In connection with the sale, we
also issued 4,286 warrants with an exercise price of $3.50. The gross proceeds
of such transaction were approximately $150,000.
In January 1999, we issued 82,372 shares of our common stock to an
individual related party at a price of $3.04 per share. In connection with the
sale, we also issued 8,237 warrants with an exercise price of $3.04. The gross
proceeds of such transaction were approximately $250,000.
In January 1999, we issued warrants to purchase 230,000 shares of common
stock at a price of $2.13 per share to an outside consultant for services
performed.
In November 1998, we borrowed $500,000, in two separate notes from
unrelated third parties. These notes were due in November, 1999 with an interest
rate of 20%. One $250,000 note was extended until January 6, 2000, and the other
was extended until February 25, 2000. These notes were secured by 375,000 shares
of our common stock by placing them in an escrow account. These shares were
considered issued but not outstanding for 1999. As part of obtaining the
financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to
the lender. These warrants were exercised in February 2000. During 2000, both
notes were repaid and the 375,000 shares securing the notes have been released
from escrow and retired by us.
II-5
We relied upon the exemption provided in Section 4(2) of the Securities
Act and/or Rule 506 thereunder, which cover "transactions by an issuer not
involving any public offering," to issue securities discussed above without
registration under the Securities Act of 1933. We made a determination in each
case that the person to whom the securities were issued did not need the
protection that registration would afford. The certificates representing the
securities issued displayed a restrictive legend to prevent transfer except in
compliance with applicable laws, and our transfer agent was instructed not to
permit transfers unless directed to do so by us, after approval by our legal
counsel. We believe that the investors to whom securities were issued had such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the prospective investment. We also believe
that the investors had access to the same type of information as would be
contained in a registration statement.
II-6
EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
3.1 Articles of Incorporation of Dev-Tech Incorporated by reference to Exhibit
Associates, Inc. and amendment thereto 3.1 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.2 Bylaws of DevSys, Inc. Incorporated by reference to Exhibit
3.2 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.3 Restated Certificate of Incorporation of Incorporated by reference to Exhibit
DevSys, Inc. 3.3 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.4 By-laws of DevSys, Inc. Incorporated by reference to Exhibit
3.4 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.5 Articles of Merger and Agreement and Plan of Incorporated by reference to Exhibit
Merger of DevSys, Inc and Dev-Tech Associates, 3.5 to Registrant's Registration
Inc. Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.6 Certificate of Merger of Dev-Tech Associates, Incorporated by reference to Exhibit
Inc. into DevSys, Inc. 3.6 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.7 Articles of Incorporation of Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. and amendment thereto 3.7 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.8 By-laws of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit
3.8 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.9 Restated Certificate of Incorporation of DevSys Incorporated by reference to Exhibit
Migration, Inc. 3.9 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.10 Form of By-laws of DevSys Migration, Inc. Incorporated by reference to Exhibit
3.10 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
II-7
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
3.11 Form of Agreement and Plan of Merger of Incorporated by reference to Exhibit
Dev-Tech Migration, Inc. into DevSys Migration, 3.11 to Registrant's Registration
Inc. Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.12 Form of Certificate of Merger of Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. into DevSys Migration, Inc. 3.12 to Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.13 Certificate of Amendment to Certificate of Incorporated by reference to Exhibit
Incorporation of DevSys, Inc. changing its name 3.13 to Registrant's Registration
to NeoMedia Technologies, Inc. Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.14 Form of Certificate of Amendment to Certificate Incorporated by reference to Exhibit
of Incorporation of NeoMedia Technologies, Inc. 3.14 to Registrant's Registration
authorizing a reverse stock split Statement No. 333-5534 as filed with
the SEC on November 25, 1996
3.15 Form of Certificate of Amendment to Restated Incorporated by reference to Exhibit
Certificate of Incorporation of NeoMedia 3.5 to Registrant's Annual Report as
Technologies, Inc. increasing authorized filed with the SEC on November 2,
capital and creating preferred stock 2001
4.1 Form of Certificate for Common Stock of DevSys, Incorporated by reference to Exhibit
Inc. 4.1 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.2 Form of Joseph Charles' Warrant Agreement Incorporated by reference to Exhibit
4.2 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.3 Form of Private Placement Financing Converted Incorporated by reference to Exhibit
Securities Registration Rights Agreement 4.4 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.4 Form of 10% Unsecured Subordinate Convertible Incorporated by reference to Exhibit
Promissory Note 4.5 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.5 Form of Principal Stockholder's Warrant Incorporated by reference to Exhibit
4.6 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.6 Form of Placement Agent's Registration Rights Incorporated by reference to Exhibit
Agreement 4.7 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
II-8
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
4.7 Form of Placement Agent's Warrant for the Incorporated by reference to Exhibit
Purchase of Shares of Common Stock and Warrants 4.8 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.8 Form of Warrant Agreement and Warrant Incorporated by reference to Exhibit
4.9 to the Registrant's Registration
Statement No. 333-5534 as filed with
the SEC on November 25, 1996
4.9 NeoMedia Technologies, Inc. 1998 Stock Option Incorporated by reference to
Plan Appendix A to the Registrant's Form
14A as filed with the SEC on
February 18, 1998
4.10 Form of Warrant to Charles W. Fritz Incorporated by reference to Exhibit
4.10 to the Registrant's
Registration Statement on Form
10-KSB as filed with the SEC on
March 31, 1998
4.11 Form of Warrant to Dominick & Dominick, Incorporated by reference to Exhibit
Incorporated 4.11 to the Registrant's Annual
Report on Form 10-KSB as filed with
the SEC on March 31, 1998
4.12 Form of Warrant to Compass Capital LLC Incorporated by reference to Exhibit
4.12 to the Registrant's Annual
Report on Form 10-KSB as filed with
the SEC on March 31, 1998
4.13 Form of Warrant to Thornhill Capital, LLC Incorporated by reference to Exhibit
4.13 to the Registrant's Annual
Report on Form 10-KSB as filed with
the SEC on March 31, 1998
4.14 Form of Warrant to Southeast Research Partners, Incorporated by reference to Exhibit
Inc. 4.14 to the Registrant's Annual
Report on Form 10-KSB as filed with
the SEC on March 31, 1998
4.15 Form of Warrant to Joseph Charles & Associates, Incorporated by reference to Exhibit
Inc. 4.15 to the Registrant's Annual
Report on Form 10-KSB as filed with
the SEC on March 31, 1998
5.1 Opinion re: Legality Provided herewith
10.1 Form of "Lock Up" Agreement to be entered into Incorporated by reference to Exhibit
by NeoMedia and its Officers, Directors, and 10.1 to the Registrant's
Shareholders Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.2 Form of Nonsolicitation and Confidentiality Incorporated by reference to Exhibit
Agreement 10.2 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.3 Employment Agreement, dated May 1, 1996 between Incorporated by reference to Exhibit
Dev-Tech Associates, Inc. and Charles W. Fritz 10.3 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
II-9
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.4 Employment Agreement, dated April 1, 1996 Incorporated by reference to Exhibit
between Dev-Tech Associates, Inc. and Robert T. 10.4 to the Registrant's
Durst, Jr. Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.5 Employment Agreement, dated May 1, 1996, Incorporated by reference to Exhibit
between Dev-Tech Associates, Inc. and Charles 10.5 to the Registrant's
T. Jensen Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.6 Lease Agreement dated September 1, 1994 for 112 Incorporated by reference to Exhibit
South Tryon Street, Charlotte, North Carolina 10.6 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.7 Lease dated August 29, 1995 for 280 Shuman Incorporated by reference to Exhibit
Boulevard, Naperville, Illinois 10.8 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.8 Promissory Note, dated as of December 31, 1994, Incorporated by reference to Exhibit
in the principal amount of $413,000 from 10.9 to the Registrant's
Dev-Tech Associates, Inc. payable to William E. Registration Statement No. 333-5534
Fritz as filed with the SEC on November
25, 1996
10.9 Promissory Note, dated as of December 31, 1994, Incorporated by reference to Exhibit
in the principal amount of $75,000 from 10.10 to the Registrant's
Dev-Tech Associates, Inc. payable to Dev-Mark, Registration Statement No. 333-5534
Inc. as filed with the SEC on November
25, 1996
10.11 Promissory Note, dated as of December 31, 1994, Incorporated by reference to Exhibit
in the principal amount of $90,000 from 10.12 to the Registrant's
Dev-Tech Migration, Inc. payable to William E. Registration Statement No. 333-5534
Fritz as filed with the SEC on November
25, 1996
10.12 Promissory Note, dated as of December 31, 1994, Incorporated by reference to Exhibit
in the principal amount of $10,000 from 10.13 to the Registrant's
Dev-Tech Migration, Inc. payable to Charles W. Registration Statement No. 333-5534
Fritz as filed with the SEC on November
25, 1996
10.13 Demand Promissory Note, dated as of December 9, Incorporated by reference to Exhibit
1994, in the principal amount of $500,000 from 10.14 to the Registrant's
Dev-Tech Migration, Inc. payable to Dev-Tech Registration Statement No. 333-5534
Associates, Inc. as filed with the SEC on November
25, 1996
10.14 Promissory Note, dated as of December 28, 1995, Incorporated by reference to Exhibit
in the principal amount of $450,000 from 10.15 to the Registrant's
Dev-Tech Migration, Inc. payable to Charles W. Registration Statement No. 333-5534
Fritz as filed with the SEC on November
25, 1996
10.15 Promissory Note, dated as of January 2, 1996, Incorporated by reference to Exhibit
in the principal amount of $360,000 from 10.16 to the Registrant's
Dev-Tech Associates, Inc. to Dev-Tech Registration Statement No. 333-5534
Migration, Inc. as filed with the SEC on November
25, 1996
II-10
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.16 Promissory Note, dated as of January 2, 1996, Incorporated by reference to Exhibit
in the principal amount of $472,000 from 10.17 to the Registrant's
William E. Fritz to Dev-Tech Associates, Inc. Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.17 Promissory Note, dated as of January 2, 1996, Incorporated by reference to Exhibit
in the principal amount of $750,000 from 10.18 to the Registrant's
Dev-Tech Migration, Inc. to Charles W. Fritz Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.18 Promissory Note, dated as of December 31, 1994, Incorporated by reference to Exhibit
in the principal amount of $46,748 from 10.19 to the Registrant's
Dev-Tech Migration, Inc. to Brandon Edenfield Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.19 Promissory Note, dated as of June 19, 1995, in Incorporated by reference to Exhibit
the principal amount of $20,000 from Dev-Tech 10.20 to the Registrant's
Migration, Inc. to Brandon Edenfield Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.20 Security Agreement, dated as of December 9 Incorporated by reference to Exhibit
1994, between Dev-Tech Associates, Inc. and 10.21 to the Registrant's
Dev-Tech Migration, Inc Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.21 Agreement for Wholesale Financing (Security Incorporated by reference to Exhibit
Agreement), dated October 20, 1992, to IBM 10.35 to the Registrant's
Credit Corporation from Dev-Tech Associates, Registration Statement No. 333-5534
Inc. as filed with the SEC on November
25, 1996
10.22 Guaranty from Gen-Tech, Inc. to IBM Credit Incorporated by reference to Exhibit
Corporation 10.36 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.23 Guaranty from Dev-Mark, Inc. to IBM Credit Incorporated by reference to Exhibit
Corporation 10.37 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.24 Amendment to Agreement for Wholesale Financing Incorporated by reference to Exhibit
and Addendum to Agreement for Wholesale 10.38 to the Registrant's
Financing Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.25 Assignment Agreement, dated September 15, 1994, Incorporated by reference to Exhibit
from Dev-Tech Associates, Inc. to IBM Credit 10.39 to the Registrant's
Corporation Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.26 Guaranty dated October 20, 1992 to IBM Credit Incorporated by reference to Exhibit
Corporation from Charles W. Fritz 10.40 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
II-11
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.27 Collateralized Guaranty, dated August 16, 1994, Incorporated by reference to Exhibit
to IBM Credit Corporation from Charles W. 10.41 to the Registrant's
Fritz, as Guarantor Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.28 Collateralized Guaranty, dated August 16, 1994, Incorporated by reference to Exhibit
to IBM Credit Corporation from Dev-Mark, Inc. 10.42 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.29 Dev-Tech Associates, Inc. Annual Incentive Plan Incorporated by reference to Exhibit
for Management 10.43 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.30 Dev-Tech Associates, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit
10.44 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.31 First Amendment and Restatement of Dev-Tech Incorporated by reference to Exhibit
Associates, Inc. 1996 Stock Option Plan 10.45 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.32 Form of Stock Option Agreement - Dev-Tech Incorporated by reference to Exhibit
Associates, Inc. 10.46 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.33 Dev-Tech Migration, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit
10.47 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.34 First Amendment and Restatement of Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. 10.48 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.35 Form of Stock Option Agreement - Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. 10.49 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.36 Dev-Tech Associates, Inc. 401(k) Plan and Incorporated by reference to Exhibit
amendments 10.50 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.37 Engagement Letter, dated March 13, 1995, with Incorporated by reference to Exhibit
Compass Capital, Inc. and Amendments thereto 10.51 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
II-12
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.38 Mutual General Release and Stock Purchase Incorporated by reference to Exhibit
Agreement with the Estate of Thomas Ruberry 10.52 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.39 Form of "Lock-Up" Agreement with Bridge Incorporated by reference to Exhibit
Financing Selling Stockholders and Form of 10.53 to the Registrant's
Addendum to Subscription Agreement Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.40 Forms of Agreements Not to Sell Incorporated by reference to Exhibit
10.58 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.41 Letter of Intent dated October 11, 1996 between Incorporated by reference to Exhibit
NeoMedia Technologies, Inc. and E-Stamp 10.59 to the Registrant's
Corporation Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.42 First Amendment and Restatement of NeoMedia Incorporated by reference to Exhibit
Technologies, Inc. 1996 Stock Option Plan 10.60 to the Registrant's
Registration Statement No. 333-5534
as filed with the SEC on November
25, 1996
10.43 Agreement of Lease, dated November 27, 1996, Incorporated by reference to Exhibit
between First Union National Bank of Florida 10.43 to the Registrant's Annual
and NeoMedia Technologies, Inc. Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.44 Sublease Agreement between NeoMedia Incorporated by reference to Exhibit
Technologies, Inc. and Lancaster Annuity 10.44 to the Registrant's Annual
Services Company dated November 8, 1996 Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.45 Agreement for Sale of Assets between Basic Incorporated by reference to Exhibit
Developments, Inc. and Meja Sistemas C.A. and 10.45 to the Registrant's Annual
NeoMedia Technologies, dated February 12, 1997 Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.46 Master Lease between William E. Fritz and Incorporated by reference to Exhibit
NeoMedia Technologies, Inc., dated November 6, 10.46 to the Registrant's Annual
1996 Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.47 Agreement for Wholesale Financing, dated Incorporated by reference to Exhibit
February 20, 1997, between IBM Credit 10.47 to the Registrant's Annual
Corporation and NeoMedia Technologies, Inc. Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.48 Collateralized Guaranty, dated February 20, Incorporated by reference to Exhibit
1997, between IBM Credit Corporation and 10.48 to the Registrant's Annual
NeoMedia Technologies, Inc. Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.49 Lease by and between American National Bank and Incorporated by reference to Exhibit
Trust Company of Chicago and NeoMedia 10.50 to the Registrant's Quarterly
Technologies, Inc., February 25, 1997 Report on Form 10-QSB as filed with
the SEC on March 31, 1997
II-13
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.50 Letter Agreement by and between Dominick & Incorporated by reference to Exhibit
Dominick, Incorporated and NeoMedia 10.51 to the Registrant's Quarterly
Technologies, Inc. dated March 20, 1997 Report on Form 10-QSB as filed with
the SEC on June 30, 1997
10.51 Stock Purchase Agreement dated August 30, 1997 Incorporated by reference to Exhibit
by and between NeoMedia Technologies, Inc. and 99.1 to the Registrant's Current
George Luntz and Gerald L. Willis Report on Form 8-K as filed with the
SEC on September 25, 1997
10.52 Registration Rights Agreement dated September Incorporated by reference to Exhibit
25, 1997 by and between NeoMedia Technologies, 99.2 to the Registrant's Current
Inc., Gerald L. Willis and George G. Luntz Report on Form 8-K as filed with the
SEC on September 25, 1997
10.53 Consulting Agreement dated August 30, 1997 by Incorporated by reference to Exhibit
and between NeoMedia Technologies, Inc. and 99.3 to the Registrant's Current
George Luntz Report on Form 8-K as filed with the
SEC on September 25, 1997
10.54 Employment Agreement dated August 30, 1997 by Incorporated by reference to Exhibit
and between NeoMedia Technologies, Inc. and 99.4 to the Registrant's Current
George Luntz Report on Form 8-K as filed with the
SEC on September 25, 1997
10.55 Termination of Collaterized Guaranty between Incorporated by reference to Exhibit
IBM Credit Corporation, Gen-Tech, Inc. and 10.49 to the Registrant's Annual
Dev-Mark, Inc., dated February 5, 1997 Report on Form 10-KSB as filed with
the SEC on March 27, 1997
10.56 Purchase Agreement dated December 31, 1998, by Incorporated by reference to Exhibit
and between NeoMedia Technologies, Inc. and 10.30 to the Registrant's Annual
Solar Communications, Inc. Report on Form 10-KSB as filed with
the SEC on April 15, 1999
10.57 NeoMedia Technologies, Inc. 1998 Stock Option Incorporated by reference to
Plan Appendix A of the Registrant's Form
14A as filed with the SEC on
February 18, 1998
10.58 Amendment to NeoMedia Technologies 1998 Stock Incorporated by reference to Form
Option Plan 14A as filed with the SEC on July 2,
1999
10.59 Employment Agreement dated August 2, 1999 Incorporated by reference to Exhibit
between NeoMedia Technologies, Inc. and William 10.32 to the Registrant's Annual
Goins Report on Form 10-KSB as filed with
the SEC on March 30, 2000
10.60 Licensing Agreement between Digital Convergence Incorporated by reference to Exhibit
Corporation and NeoMedia Technologies, Inc. 10.1 to the Registrant's Quarterly
Report on Form 10-QSB as filed with
the SEC on October 30, 2000
10.61 Sale and Purchase Agreement between Qode.com, Incorporated by reference to Exhibit
Inc. and NeoMedia Technologies, Inc. 10.48 to the Registrant's Current
Report on Form 8-K as filed with the
SEC on March 15, 2001
10.62 Warrant repricing letter dated March 19, 2002 Incorporated by reference to Exhibit
1.2 to the Registrant's Current
Report on Form 8-K as filed with the
SEC on April 2, 2002
10.63 Option repricing letter dated April 3, 2002 Incorporated by reference to Exhibit
1.2 to the Registrant's Current
Report on Form 8-K as filed with the
SEC on April 15, 2002
II-14
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.64 Intellectual Property licensing agreement Incorporated by reference to Exhibit
between NeoMedia and A.T. Cross Company 10.18 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.65 Intellectual Property licensing agreement Incorporated by reference to Exhibit
between NeoMedia and Symbol Technologies, Inc. 10.19 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.66 Sponsorship and Advertising Agreement between Incorporated by reference to Exhibit
NeoMedia and About.com, Inc. 10.20 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.67 Letter of Intent regarding proposed strategic Incorporated by reference to Exhibit
transaction between NeoMedia and AirClic, Inc. 10.21 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.68 Form of Promissory Note issued to AirClic, Inc. Incorporated by reference to Exhibit
10.22 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.69 Form of Limited Recourse Promissory Note issued Incorporated by reference to Exhibit
in exchange for 19 Million Shares of Common 10.23 to the Registrant's Form S-1/A
Stock as filed with the SEC on April 24,
2002
10.70 Nasdaq Staff Determination Letter with respect Incorporated by reference to Exhibit
to de-listing of NeoMedia securities from the 10.24 to the Registrant's Form S-1/A
Nasdaq SmallCap market as filed with the SEC on April 24,
2002
10.71 Revised warrant repricing letter dated April 3, Incorporated by reference to Exhibit
2002 10.25 to the Registrant's Form S-1/A
as filed with the SEC on April 24,
2002
10.72 RESERVED
10.73 License Agreement, dated October 18, 2000, Incorporated by reference to Exhibit
between Digital Convergence Corporation and 10.1 to the Registrants Form 10-QSB
NeoMedia as filed on October 30, 2000
10.74 Nasdaq Staff delisting notification letter Incorporated by reference to Exhibit
dated May 16, 2002 10.18 to the Registrant's Quarterly
Report on Form 10-Q as filed with
the SEC on August 14, 2002
10.75 Settlement Agreement relating to wrongful Incorporated by reference to Exhibit
termination lawsuit brought by former 10.19 to the Registrant's Form 10-Q
president and Chief Operating Officer as filed with the SEC on August 14,
2002
10.76 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and 2150 Western Court 10.20 to the Registrants Form 10-Q
Company, LLC as filed on November 14, 2002
10.77 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Ripfire, Inc. 10.21 to the Registrants Form 10-Q
as filed on November 14, 2002
II-15
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.78 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Wachovia Bank, N.A. 10.22 to the Registrants Form 10-Q
as filed on November 14, 2002
10.79 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Marianne LePera, 10.23 to the Registrants Form 10-Q
NeoMedia Technologies' former General Counsel as filed on November 14, 2002
10.80 Equity Line of Credit Agreement, Provided herewith
dated February 11, 2003, between NeoMedia
Technologies and Cornell Capital Partners LP
10.81 Sponsorship and Advertising Agreement, dated Incorporated by reference to Exhibit
May 23, 2001, between About.com and NeoMedia 23.7 to the Registrants Form S-1/A
as filed on November 16, 2001
10.82 Promissory Note dated December 2, 2002 between Incorporated by reference to Exhibit
Michael Kesselbrenner and NeoMedia 99.1 of the Registrant's Form 8-K as
filed with the SEC on December 12,
2002.
10.83 Pledge Agreement dated December 2, 2002, Incorporated by reference to Exhibit
between Michael Kesselbrenner and NeoMedia 99.2 of the Registrant's Form 8-K as
filed with the SEC on December 12,
2002.
10.84 Form of Placement Agent Agreement, dated Provided herewith
November 2002, between NeoMedia Technologies
and Westrock Advisors, Inc.
10.85 Form of Escrow Agreement, dated November 2002, Provided herewith
between NeoMedia Technologies and Cornell
Capital Partners
10.86 Form of Registration Rights Agreement, dated Provided herewith
November 2002, between NeoMedia Technologies
and Cornell Capital Partners
10.87 Promissory Note, dated February 23, 2001, Provided herewith
between Digital Convergence Corporation and
NeoMedia
10.88 Termination Agreement, dated August 21, 2001, Provided herewith
between About.com and NeoMedia
21.0 Subsidiaries Incorporated by reference to Exhibit
21 of the Registrant's Annual Report
on Form 10-K as filed on April 18, 2001.
23.1 Consent of Stonefield Josephson, Inc. Provided herewith
23.2 Consent of Ernst & Young, LLP Provided herewith
23.3 Consent of Kirkpatrick & Lockhart, LLP Incorporated by reference to Exhibit
5.1 of this filing
23.4 Notice regarding consent of Arthur Andersen LLP Provided herewith
II-16
II-17
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on our behalf by the undersigned, on February 11, 2003.
NEOMEDIA TECHNOLOGIES, INC.
By: /s/ Charles T. Jensen
---------------------------------------
Charles T. Jensen
President, Chief Executive Officer,
Chief Operating Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Charles T. Jensen
--------------------- President, Chief Executive Officer,
Charles T. Jensen Chief Operating Officer and Director February 11, 2003
/s/ William E. Fritz
-------------------- Director and Secretary February 11, 2003
William E. Fritz
/s/ Charles W. Fritz
-------------------- Chairman of the Board
Charles W. Fritz February 11, 2003
/s/ David A. Dodge
-------------------- Vice-President, Chief Financial
David A. Dodge Officer and Controller February 11, 2003
/s/ Hayes Barclay
-------------------- Director February 11, 2003
Hayes Barclay
/s/ James J. Keil
-------------------- Director February 11, 2003
James J. Keil
II-19