As filed with the Securities and Exchange Commission on August 18, 1997
SEC Registration No. 333-5534
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO FORM SB-2
Registration Statement
Under the Securities Act of 1933
---------------------------------
NEOMEDIA TECHNOLOGIES, INC.
----------------------------------------------
(Name of Small Business Issuer in its charter)
DELAWARE 7373 36-3680347
- ----------------------------- --------------------------- -------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2201 SECOND STREET, SUITE 600
FORT MYERS, FLORIDA 33901
941-337-3434
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices and principal place of business)
===============================================================================
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, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
[FRONT COVER OF PROSPECTUS]
NEOMEDIA TECHNOLOGIES, INC.
On November 25, 1996, NeoMedia Technologies, Inc. (the "Company") effected a
public offering (the "Public Offering") of 1,700,000 units (singularly,"Unit")
of its securities at $6.00 per Unit (the "Public Offering Price"). See "Recent
Underwriting". Each Unit consisted of one share of the Company's common stock,
$.01 par value (the "Common Stock"), and one five year redeemable common stock
purchase warrant (the "Warrant"). The Common Stock and Warrants are sometimes
hereinafter collectively referred to as the "Securities". Each Warrant entitles
the holder to purchase one share of Common Stock at a price of $7.375 until
November 25, 2001. Of the 1,700,000 Units sold in the Public Offering, 1,235,000
shares of Common Stock and 1,700,000 Warrants were sold by the Company and
465,000 shares of Common Stock were sold by certain stockholders of the Company
(the "Bridge Financing Selling Stockholders"). The Company did not receive any
of the proceeds from the sale of Common Stock by the Bridge Financing Selling
Stockholders. On January 16, 1997, an additional 255,000 Units were sold by the
Company to the public upon the exercise by Joseph Charles & Associates, Inc.,
(the "Representative"), the representative of the underwriters of the Public
Offering, of its option ("Over-allotment Option") to cover over-allotments in
the Public Offering.
The Warrants are redeemable at the option of the Company at $0.05 per Warrant at
any time on or after November 25, 1997, or such earlier date as may be
determined by the Representative upon at least thirty days' notice if the
closing average bid price of the Common Stock equals or exceeds $8.85 per share
for twenty consecutive trading days ending within thirty days prior to the date
notice of redemption is given, and at such time there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants.
The Common Stock and the Warrants, which commenced trading on November 25, 1996,
are traded on the NASDAQ SmallCap Market under the symbols "NEOM" and "NEOMW",
respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION DISCUSSED UNDER "RISK FACTORS" BEGINNING
ON PAGE 7 AND "DILUTION".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS BEING DELIVERED TO
INVESTORS WHO EXERCISE THEIR RIGHTS AS
WARRANT HOLDERS TO PURCHASE SHARES OF
COMMON STOCK OF THE COMPANY.
The date of this Prospectus is _________________, 1997.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO CAREFULLY
READ THIS PROSPECTUS IN ITS ENTIRETY, INCLUDING BUT NOT LIMITED TO THE RISK
FACTORS.
THE COMPANY
The Company provides computer software and consulting services:
/asterisk/ to link printed documents to the computer, the Internet and the
World Wide Web,
/asterisk/ to assist clients in the creation, production and management of
printed documents, and
/asterisk/ to enable clients to update their computer software that
operates only with a specific brand of hardware such as Wang, to
operate with most, if not all, brands of hardware and,
optionally, to convert their software so that it will function
properly with data and operations having dates subsequent to the
year 2000, commonly known as the "Year 2000" or "Millennia"
problem.
The Company currently offers its services and products through the following
three principal business units which, although separate in name, operate under
common management and often function as a team in providing solutions for its
customers:
/bullet/ INTELLIGENT DOCUMENT SOLUTIONS UNIT -- The Company has developed its
own technology, and has rights to use the technology of others, to
generate printed documents which can automatically be "read" by
machines, such as computers and scanners containing the appropriate
software. These documents are "machine readable" because they
incorporate printed codes which contain thousands of bytes of
information, including computer programs. These codes are referred to
in the industry as "high capacity symbologies" and "multi-dimensional"
or "two dimensional" bar codes. By incorporating these codes into
printed documents and scanning them with scanning equipment having the
appropriate software, the paper document functionally becomes a
computer floppy disk with a limited capacity to hold information. The
code operates as the software, which permits the transmission of the
information from the paper document to a computer. This transmission
is accomplished without the necessity of first manually re-entering
the information from the printed document into the computer. The code
thus becomes the link between the worlds of print and electronic
media. This same technology, as well as a variant of the technology
using linear bar codes and typed entry, can also be used to link any
printed document, such as books, newspapers, magazines, invoices and
baseball cards, to computer on-line sources of information, such as
the Internet and the World Wide Web and, the Company believes, can be
applied in a variety of industries, such as management information
services, banking and financial services, health care, government
services, publishing, advertising, gaming and entertainment. Any
printed document incorporating a code is referred to by the Company as
an "Intelligent Document". The Company believes that its Intelligent
Document technology is broad and generally innovative. Through its
Intelligent Documents Solutions Unit, software is provided which
incorporates both high capacity and linear symbologies allowing
clients to embed and extract information and programs from printed
materials when used in conjunction with conventional computer printing
and scanning equipment. Since the Intelligent Document Solutions Unit
has only been recently formed and has only recently completed
development of its initial products, to date it has provided limited
software and consulting services; however, due to the rapidly emerging
era of electronic commerce fostered by the Internet and the World Wide
Web, the Company anticipates that, because of the large number of
potential uses of Intelligent Documents, in terms of revenue it will
be the fastest growing unit of the Company, although no assurances can
be given that this will occur.
2
<PAGE>
/bullet/ DOCUMENT SYSTEM SOLUTIONS UNIT -- This Unit assists clients in
optimizing their document creation, production, printing and
management processes. These efforts have historically focused on
designing and providing high speed and high volume document formatting
and printing solutions to a client's needs. This recently has been
expanded to include document management, scanning and archive
management, as well as automated conversion of the document for
distribution via electronic means, such as the Internet and World Wide
Web.
/bullet/ SYSTEMS TRANSITION SOLUTIONS UNIT -- This Unit enables clients to
update ("migrate") their computer software that operates only with a
specific brand of hardware and operating and data base software
(called a "legacy system"), such as Wang, to operate with most, if not
all, brands of hardware and operating software (called an "open system
platform" or an "open system environment"). Such migration allows the
continued use of existing software, resulting in little or no
retraining and hence little or no business interruption. The Company
provides systems consulting, design, development and support services.
The Company has a comprehensive set of proprietary software tools to
accelerate such migrations, which Management believes provides a
competitive advantage in the marketplace. In addition, after the
Company has completed the migration of a client's legacy system to an
open system, this software can be modernized (i.e., updated) to take
advantage of modern technologies to improve system performance,
enhance user interfaces and generally to update the system. The
Company also plans to provide its Intelligent Document technology to
each client. This "migration and modernization" approach by the
Company allows for fast, cost effective migration with a minimum of
disruption to the client's business operations. In addition, as part
of the services offered by this Unit, the Company offers proprietary
tools, that are tailored to those specific platforms in which the
Company has expertise as a result of their transition business, to
assist companies in correcting their Year 2000 problems by converting
existing software and databases for operational compliance with
post-2000 A.D. dated items and operations.
As part of the services provided in connection with the solutions it offers,
the Company often recommends, specifies, supplies and installs hardware
equipment and software products from third party suppliers, many of whom have
associations with the Company. The Company acts as a re-marketer of equipment
and software products for a number of suppliers and, to date, has generated the
largest portion of its revenue from these activities.
The Company renders its services to all sizes and types of organizations,
from the small, privately-owned company to large, multi-national organizations,
and has performed services for many customers, such as Discover Card Services,
Inc., Ameritech Services, Inc., SunTrust Bank, Inc., Charles Schwab & Co.,
Inc., Fidelity Investments and the State of Wisconsin. In addition, the Company
currently has strategic business relationships with many industry leaders, such
as IBM Corporation, Sun Microsystems Computer Company, Xerox Corporation, Symbol
Technologies, Inc., Oracle Corporation and Netscape. See "Business -Customers".
Dev-Tech Associates, Inc., an Illinois corporation ("Dev-Tech"), the
Company's predecessor, was incorporated in December, 1989. NeoMedia
Technologies, Inc. (the "Company") was incorporated under the laws of the State
of Delaware on July 29, 1996, under the name DevSys, Inc. In October, 1996, the
Company's name was changed to NeoMedia Technologies, Inc. On August 5, 1996, as
the result of a tax-free merger, the Company acquired all of the shares of
Dev-Tech in exchange for the issuance of shares of the Company's Common Stock to
the stockholders of Dev-Tech. As a result of this merger, the Company is the
successor to the business and operations of Dev-Tech. Immediately prior to the
date of the Public Offering, Dev-Tech Migration, Inc., an Illinois corporation
("Migration") and an affiliate of Dev-Tech, was merged into NeoMedia Migration,
Inc., a wholly-owned subsidiary of the Company in exchange for the issuance of
shares of the Company's Common Stock to the sole stockholder of Migration. See
"Principal Stockholders" and "Certain Transactions". Unless otherwise specified,
all references herein to the Company mean and refer to the Company and its
wholly-owned subsidiaries, Migration and Distribuidora Vallarta S.P.A., a
Guatemalan corporation which is a wholly-owned subsidiary of Migration. The
Company's executive offices are located at 2201 Second Street, Suite 600, Fort
Myers, Florida 33901. Its telephone number is 941-337-3434.
3
<PAGE>
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA AND INFORMATION
CONTAINED IN THIS PROSPECTUS RELATING TO THE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING (I) GIVES EFFECT TO A STOCK SPLIT IN MARCH, 1996 WHEREBY EACH HOLDER
OF COMMON STOCK RECEIVED 15,555.60975 SHARES OF COMMON STOCK FOR EACH SHARE OF
COMMON STOCK THEN OWNED, (II) GIVES EFFECT TO A REVERSE STOCK SPLIT IN NOVEMBER,
1996, WHEREBY EACH HOLDER OF COMMON STOCK RECEIVED .90386 SHARES OF COMMON STOCK
FOR EACH ONE SHARE THEN OWNED, (III) GIVES EFFECT TO THE MERGER OF DEV-TECH
MIGRATION, INC., AN ILLINOIS CORPORATION, AN AFFILIATE OF THE COMPANY, WHICH WAS
OWNED SOLELY BY CHARLES W. FRITZ, THE COMPANY'S PRESIDENT AND CHIEF EXECUTIVE
OFFICER, INTO NEOMEDIA MIGRATION, INC., A WHOLLY-OWNED SUBSIDIARY OF THE
COMPANY, (IV) GIVES EFFECT TO THE ISSUANCE OF AN AGGREGATE OF 745,938 SHARES OF
COMMON STOCK AND 745,938 WARRANTS UPON CONVERSION OF $2,712,500 PRINCIPAL AMOUNT
OF 10% UNSECURED SUBORDINATED CONVERTIBLE PROMISSORY NOTES OF THE COMPANY
("BRIDGE PROMISSORY NOTES") SOLD IN A PRIVATE PLACEMENT FINANCING IN JULY AND
AUGUST, 1996, (V) ASSUMES NO EXERCISE OF THE WARRANTS, (VI) DOES NOT INCLUDE A
TOTAL OF 1,487,615 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON EXERCISE OF
OPTIONS EITHER OUTSTANDING OR AVAILABLE FOR GRANT UNDER THE COMPANY'S 1996 STOCK
OPTION PLAN (THE "STOCK OPTION PLAN"), (VII) DOES NOT INCLUDE 170,000 UNITS
(EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT, AND THE COMMON
STOCK ISSUABLE UPON THE EXERCISE OF SUCH WARRANTS) RESERVED FOR ISSUANCE TO THE
REPRESENTATIVE UPON EXERCISE OF WARRANTS ISSUED TO THE REPRESENTATIVE UPON
CONSUMMATION OF THE PUBLIC OFFERING (THE "REPRESENTATIVE'S OPTIONS"), (VIII)
DOES NOT INCLUDE 375,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF A
WARRANT TO BE ISSUED TO DOMINICK & DOMINICK INCORPORATED, A CONSULTANT TO THE
COMPANY( "DOMINICK'S WARRANT") , AND (IX) DOES NOT INCLUDE 260,000 SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF A WARRANT (THE "PRINCIPAL STOCKHOLDER'S
WARRANT") ISSUED TO A PRINCIPAL STOCKHOLDER. SEE "BRIDGE FINANCING PRIVATE
PLACEMENT", "RECENT UNDERWRITING", "CERTAIN TRANSACTIONS", "BUSINESS - FINANCIAL
CONSULTANTS" AND "MANAGEMENT -STOCK OPTION PLAN".
THIS PROSPECTUS INCLUDES PRODUCT NAMES, TRADE NAMES AND MARKS OF COMPANIES OTHER
THAN THE COMPANY. ALL OTHER COMPANY OR PRODUCT NAMES ARE SERVICE MARKS,
TRADEMARKS, REGISTERED TRADEMARKS, TRADE NAMES OR MARKS OF THEIR RESPECTIVE
OWNERS AND ARE NOT THE PROPERTY OF THE COMPANY.
<TABLE>
<CAPTION>
SECURITIES SOLD IN THE PUBLIC OFFERING
AND THE COMMON STOCK COVERED BY THIS PROSPECTUS
<S> <C>
Units Sold in the Public Offering(1).................... 1,955,000 Units
Common Stock Currently Outstanding(2)................... 5,381,701 shares
Common Stock to be Outstanding After this Offering(3)... 8,082,639 shares
Use of Proceeds ........................................ To increase the Company's working capital and
for general corporate purposes. See "Use of
Proceeds".
NASDAQ SmallCap Symbols
Common Stock.................................... NEOM
Warrants........................................ NEOMW
Risk Factors............................................ Investment in the Common Stock by Warrant
holders who exercise their Warrants entails a high
degree of risk and should be purchased only by
investors that can afford the loss of their entire
investment. See "Risk Factors". In addition,
there is immediate substantial dilution. See
"Dilution".
<FN>
- ----------------------------
(Footnotes on next page)
4
<PAGE>
THE COMPANY FURNISHES ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING AUDITED
FINANCIAL STATEMENTS AND SUCH OTHER PERIODIC REPORTS AS THE COMPANY DEEMS
APPROPRIATE OR AS MAY BE REQUIRED BY LAW.
1 Represents 1,700,000 Units sold in November, 1996, and 255,000 Units sold in
January, 1997, upon exercise of the Over-allotment Option. See "Recent
Underwriting". Each Unit consisted of one share of Common Stock and one
Warrant. Of the 1,700,000 shares of Common Stock included in the Units sold
in November, 1996, 1,235,000 shares and 465,000 shares were sold by the
Company and the Bridge Financing Selling Stockholders, respectively. The
1,700,000 Warrants included in the Units sold in November, 1996, were sold by
the Company. All 255,000 shares of Common Stock and Warrants included in the
Units sold in January, 1997, were sold by the Company. See "Bridge Financing
Selling Stockholders" and "Recent Underwriting - Over-allotment Option".
2 Includes, in addition to the 465,000 shares of Common Stock sold by the
Bridge Financing Selling Stockholders, 280,938 shares of Common Stock issued
to the Bridge Financing Selling Stockholders upon consummation of the Public
Offering upon conversion of the Bridge Promissory Notes which were registered
simultaneously with the Public Offering for resale from time to time after
twelve months from the consummation of the Public Offering, 255,000 shares of
Common Stock included in the 255,000 Units sold upon exercise of the
Over-allotment Option and 12,385 shares that have been issued upon the
exercise of options granted under the Company's Stock Option Plan. Does not
include (i) up to 255,000 shares of Common Stock issuable upon exercise of
the 255,000 Warrants sold upon exercise of the Over-allotment Option, (ii) up
to 170,000 Units (each consisting of one share of Common Stock and one
Warrant and the Common Stock issuable upon exercise of Warrant) issuable upon
exercise of the Representative's Options, (iii) up to 1,487,615 shares of
Common Stock reserved for issuance upon the exercise of options either
currently outstanding or reserved for future grants under the Company's Stock
Option Plan, (iv) up to 2,445,938 shares of Common Stock issuable upon
exercise of the Warrants (consisting of 1,700,000 Warrants sold by the
Company in the Public Offering and the 745,938 Warrants issued to the Bridge
Financing Selling Stockholders upon consummation of the Public Offering), (v)
up to 375,000 shares of Common Stock issuable upon exercise of the Dominick's
Warrant and (vi) up to 260,000 shares of Common Stock issuable upon exercise
of the Principal Stockholder's Warrant. See "Recent Underwriting",
"Management -Stock Option Plan", "Bridge Financing Selling Stockholders",
"Additional Registered Securities", "Business - Financial Consultants" and
"Certain Transactions".
3 Assumes exercise of all of the 2,700,938 currently outstanding Warrants
consisting of (i) 1,700,000 and 255,000 Warrants sold by the Company in the
Public Offering and upon exercise of the Over-allotment Option, respectively,
and (ii) the 745,938 Warrants issued to the Bridge Financing Selling
Stockholders upon the consummation of the Public Offering.
</FN>
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except share and per share data)
The summary consolidated financial information set forth below is
derived from, should be read in conjunction with and is qualified in its
entirety by the more detailed financial statements and notes thereto, and should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
License fees ............................. $ 276 $ 775 $ 460 $ 335
Software product resales ................. 1,192 2,231 2,059 1,834
Technology equipment resales ............. 8,538 12,438 5,110 8,624
Service fees ............................. 2,795 2,074 1,250 1,032
----------- ----------- ----------- -----------
Total net sales ...................... 12,801 17,518 8,879 11,825
Gross profit ............................. 2,148 2,570 1,731 1,360
Loss before income taxes ................. (1,301) (2,919) (383) (2,544)
Net loss(1) .............................. (1,131) (3,075) (303) (2,499)
Net loss per share(1) .................... (.26) (.72) (.07) (.40)
Weighted average shares outstanding(2) ... 4,362,420 4,266,753 4,071,373 6,209,597
CONSOLIDATED BALANCE SHEET DATA:
JUNE 30, 1997
-------------------------
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
Working capital......................... $ 2,538 $22,457
Total assets............................ 11,103 31,022
Long term debt, less current portion.... 981 981
Total liabilities....................... 7,953 7,953
Shareholders' equity.................... 3,150 23,069
<FN>
- -------------------------
(1) The net loss and net loss per share information represent the consolidated
historical results of the Company. Included in these amounts are the
results from Migration electing to be treated, prior to the Public
Offering, as a small business corporation ("S" corporation) under the
Internal Revenue Code. As indicated in the Notes to Consolidated Financial
Statements, these results would be identical if the results of the
S-Corporation entity had been treated as if this entity were taxable as a
C-corporation.
(2) Includes the dilutive effect of stock options granted subsequent to
December 31, 1995 to purchase an aggregate of 1,332,403 shares of the
Company's Common Stock as if outstanding for all periods presented.
(3) As adjusted to give effect to the exercise of 2,700,938 warrants at $7.375
per share, or total gross proceeds to the Company of $19,919,418. See "Use
of Proceeds" and "Capitalization".
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
THE COMMON STOCK COVERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES
A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. THE PURCHASE OF THE COMMON STOCK
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS OF
THEIR INVESTMENT IN THE COMPANY. BEFORE MAKING A DECISION TO PURCHASE THE
SECURITIES BEING OFFERED HEREBY AND PRIOR TO ANY PURCHASE, PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS
AND, IN PARTICULAR, THE FOLLOWING FACTORS WHICH COULD MATERIALLY AND ADVERSELY
AFFECT THE OPERATIONS AND PROSPECTS OF THE COMPANY OR AN INVESTMENT THEREIN. THE
FOLLOWING IS NOT INTENDED AS, AND SHOULD NOT BE CONSIDERED, AN EXHAUSTIVE LIST.
RISK FACTORS RELATING TO THE COMPANY
1. HISTORY OF OPERATING LOSSES AND FLUCTUATING OPERATING RESULTS. Since
inception through June 30, 1997, the Company's annual results of operations have
fluctuated materially, and the Company has incurred aggregate losses of
approximately $7,024,000. No assurances can be given that this pattern will not
continue or that the Company will ever become profitable. In addition, the
Company is developing further a third business unit, its newly organized
Intelligent Document Solutions Unit, which will provide services and products in
an emerging technological market in which the Company has little prior
experience. The Company's further development of this new unit could materially
adversely affect the Company's future operating results. See "Risk Factors
Relating to the Company - No Assurance of Success of New Business Unit". In
addition, the Company's quarterly operating results may be subject to
significant fluctuations due to many factors not within the Company's control,
such as the unpredictability of when a customer will order products and
services, the size of a customer's order, the demand for the Company's products
and services, the level of competition and general economic conditions. In the
past several years, until the first quarter of fiscal 1996, the Company has
experienced strong fourth quarter revenue followed by weak revenue in the first
quarter. This pattern could continue, which could materially adversely affect
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Recent Underwriting" and
Financial Statements.
2. MIGRATION HISTORY OF OPERATING LOSSES; NO ASSURANCE OF
PROFITABILITY. In June, 1994, Migration, which provides migration services from
legacy systems to open systems platforms, became an affiliate of the Company.
Migration has incurred net losses exclusive of depreciation and amortization of
approximately $ 236,000, $348,000, $511,000 and $582,000 for the fiscal years
ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997,
respectively. These losses demonstrate an historical inability by Migration to
operate profitably. Migration was merged with a wholly-owned subsidiary of the
Company immediately prior to the date of the Public Offering to compliment the
Company's services as a systems integrator. Management believes that the
synergies between the Company and Migration should result in Migration achieving
annual
7
<PAGE>
profitable operations; however, to date this has not occurred and no assurances
of this can be given. See "Business - Systems Transition Solutions Unit" and
Financial Statements.
3. NO ASSURANCE OF SUCCESS OF NEW BUSINESS UNIT. Prior to the Public
Offering, the business of the Company was to provide system analysis and
integration services for information processing systems, to migrate applications
from closed proprietary legacy systems to open systems platforms and to serve as
a supplier of third party equipment and software products, as well as
proprietary software products, required to implement solutions. In addition to
continuing to offer these "core" services and products, the Company has begun to
develop further a third business unit, its newly organized Intelligent Document
Solutions Unit, the function of which is to provide software that employs high
capacity symbologies which allows the user to both embed and extract data and
programs from printed materials, as well as link these documents to on-line
sources of information, such as the Internet and the World Wide Web. It is
currently contemplated that a portion of the net proceeds received from the
exercise of the Warrants will be allocated toward the further development and
expansion of the Intelligent Document Solutions Unit. No assurances can be given
that the Company's Intelligent Document Solutions Unit will be successful, or
that the Company's two other business units, which provide transition and
document systems solutions, will not be materially adversely affected by the
Company focusing its efforts and resources in the Intelligent Document Solutions
Unit. As anticipated, the Company is still developing the products and services
to be provided by this Unit, and as a result, no sales of its products or
services have occurred to date and no assurances can be given that this Unit
will ever achieve profitability. See "Business". In addition, the technology
initially used by the Intelligent Document Solutions Unit has not been developed
by the Company but by third parties and the Company has been granted rights to
its use. Accordingly, failure to maintain these rights would materially
adversely affect the operations of this unit. See "Business - Intelligent
Document Solutions Unit".
4. DEPENDENCE ON PRODUCT LINE AND SERVICES. Historically, the Company
has derived a significant percentage of its net revenue from software and
equipment resales and the services associated therewith, especially those
related to the open systems computing environment, which is a relatively new
environment. If the marketplace does not continue to accept this computing
environment, or even if accepted, grows less rapidly than anticipated, or if the
Company fails to offer products and services which respond to the needs of this
market, the Company would be materially and adversely affected. Prior to the
merger of Migration into a subsidiary of the Company, the Company believed that
growth in revenue would occur, not only as a result of the transition services,
but also as a result of the synergies between the products and services
historically offered by the Company and those of Migration. However, since such
merger, such growth has not occurred and no assurances can be given that it will
ever occur. In addition, the Company, in the future, intends to develop further
new software products and to offer products and services related to high print
capacity symbologies thereby reducing its reliance on one or several products
and services by diversifying. There can be no assurance that the Company will
achieve or sustain significant sales growth in either its historical sales and
products or its migration services, or that applications using high print
capacity symbologies can be successfully developed, or if developed, will gain
market acceptance or successfully compete with the products of others. To the
extent demand for the Company's services and products do not develop, due to
competition, product performance, customer assessment of the Company's resources
and expertise, technological change or other factors, the Company's operations
will be materially adversely affected. See "Business".
8
<PAGE>
5. DEPENDENCE ON RELATIONSHIPS. The Company maintains many
relationships with companies whose products and services it offers. Among other
things, these relationships provide the Company with discounts when purchasing
the products of such companies. In addition, these relationships often result in
the Company providing services to or for these companies and their customers.
The most significant of these relationships are with Sun Microsystems Computer
Company, IBM Corporation and Xerox Corporation. The Company believes that its
relationships with Sun, IBM and Xerox have been beneficial, and any termination,
or deterioration, of any one or all of these relationships would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business".
6. RELIANCE ON MAJOR CUSTOMER AND SINGLE SUPPLIER. Historically, one or
several of the Company's customers has accounted for a significant percentage of
the Company's revenue. One customer, Ameritech Services, Inc., accounted for
approximately 62%, 49%, 40% and 34% of the Company's revenues for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
and for approximately 55%, 44%, 50% and 29% of the Company's receivables as of
December 31, 1994, 1995 and 1996, and as of June 30, 1997, respectively. The
Company hopes that this trend of declining sales to Ameritech Services, Inc. as
a percentage of total sales will continue; however, no assurances of this can be
given. In addition, the equipment and software which is re-marketed to this
customer is supplied by a single supplier. Accordingly, the loss of this
supplier would materially adversely affect the Company. The loss of any
significant customer, or further significant reductions by them in buying
products and services offered by the Company, or the inability to collect
accounts receivable from them, absent diversification of the Company's revenue
over other customers, products and services, would materially and adversely
affect the Company's revenue and results of operations. See "Business".
7. CONCENTRATION OF REVENUE IN REMARKETING OF EQUIPMENT; LIMITATION ON
FINANCING TO PURCHASE EQUIPMENT. Historically, revenue generated from the
re-marketing of computer equipment has accounted for a significant percentage of
the Company's revenue. Such sales accounted for approximately 74%, 67%, 71% and
73% of the Company's revenue for the years ended December 31, 1994, 1995 and
1996, and six months ended June 30, 1997, respectively. Absent diversification
of the Company's revenue over other products and services, loss of this revenue
would have a materially adverse effect on the Company. See "Business."
The Company receives short-term financing from a finance company to
purchase computer equipment and software that it re-markets. The amount of
financing which the Company can obtain is currently limited by its financial
condition. Consequently, the Company's ability to increase its revenue through
computer equipment and software sales will continue to be limited until the
Company is able to increase its financing commitments. No assurances can be
given that the Company will obtain an increased line of credit, or if obtained,
that increased sales or revenue will result.
8. LACK OF CREDIT FACILITY. Prior to the Public Offering, the Company
maintained a credit facility with The First National Bank of Chicago, which was
repaid from the proceeds of the Public Offering. No assurances can be given that
any credit facility will be obtainable on terms satisfactory to the Company. The
failure to replace it with another credit facility or loan on at least equal
terms could materially adversely affect the Company. See "Business" and "Certain
Transactions".
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9. SIGNIFICANT CAPITAL REQUIREMENTS; DEPENDENCE ON PROCEEDS OF THIS
OFFERING; NEED FOR ADDITIONAL CAPITAL. The Company's capital requirements have
been and will continue to be significant. Until the date of the Public Offering,
the Company was dependent primarily on loans, principally from the Company's
stockholders, as well as the net proceeds from the Bridge Financing Private
Placement in July and August, 1996, to fund its capital requirements. Prior to
the Public Offering, there was limited equity investment in the Company. A
significant portion of the proceeds of the Public Offering was used to fund
ongoing operations as well as to implement proposed expansion plans and repay
loans. The Company anticipated that the proceeds to it from the Public Offering,
together with projected cash flow from operations, would be sufficient to fund
its operations during the twelve months following the consummation of the Public
Offering. The Company's experience since the Public Offering has been that the
proceeds from the Public Offering, together with the cash flow from operations,
will be sufficient to fund its operations for nine months. Accordingly, the
Company is seeking additional financing. Any additional equity financing may
involve substantial dilution to the Company's then-existing stockholders. The
Company has no current commitments or arrangements with respect to, or readily
available sources of, additional financing and it is not anticipated that the
majority stockholders of the Company will provide any portion of the Company's
future financing requirements. There can be no assurance that additional
financing will be available to the Company when needed or, if available, that it
can be obtained on commercially reasonable terms. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company including requiring the Company to curtail the expansion of its
operations and possibly causing the Company to cease its operations. In
addition, the Company's current business plan is highly dependent upon the
realization of revenue from certain software and migration tools, in which the
Company has made substantial capital investments. If the Company's substantial
capital investments in these software and migration tools are not recovered
through revenue generated from them, and given the Company's continued reliance
on obtaining additional financing, substantial concerns exist concerning the
Company's ability to achieve its business plan which could result in the Company
materially curtailing, and possibly ceasing, operations. Prospective investors
should be aware that if the Company is not successful in its operations, future
acquisitions or expansion, their entire investment in the Company could become
worthless. Even if the Company is successful in its expansion plans, no
assurances can be given that such expansion or acquisitions will be successful
or that investors will derive a profit from their investment. See "Use of
Proceeds", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business" and Financial Statements.
10. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent on the continued service of certain key management personnel,
in particular Charles W. Fritz, the Company's President. The loss or
interruption of Mr. Charles Fritz's services, for whatever reason, would have a
material adverse effect on the Company. The loss of services of Robert T. Durst,
Jr., Vice-President of Technology and the Company's Chief Technical Officer,
would materially adversely effect the Company and, in particular, the Company's
operations with respect to its high capacity symbologies operations and the
further development of its Intelligent Document Solutions Unit. In the event of
the loss of services of either Messrs. Fritz or Durst, no assurances can be
given that the Company will be able to obtain the services of adequate
replacement personnel. The Company has entered into five year employment
agreements with both Messrs. Fritz and Durst. Under the terms of his employment
agreement, Mr. Fritz may perform services for family owned businesses, other
entities and individuals whether or not affiliated with the Company provided
that such services do not prevent him from attending to the affairs of the
Company and he is not in
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competition with the Company. The Company currently maintains $1 million life
insurance policies on the lives of Messrs. Fritz and Durst. The Company's
success also depends in part on its ability to attract and retain qualified
professional, technical, managerial and marketing personnel. Competition for
such personnel in the markets in which the Company competes is intense, and
there can be no assurance the Company will be successful in attracting and
retaining the personnel it requires to conduct its operations successfully. The
Company's results of operations could be materially adversely affected if the
Company were unable to attract, hire, train and manage these personnel. See
"Management" and "Business".
11. ABILITY TO MANAGE GROWTH OF THE COMPANY. The merger of Migration
into the Company's wholly-owned subsidiary and the introduction of products and
services using high capacity symbologies will require the Company to expand and
grow. In addition, the Company may expand and grow through acquisitions.
Accordingly, the Company could experience a period of significant growth, which
could place a significant strain on the Company's management and other
resources. For example, the Company has expended considerable amounts to expand
its infrastructure to manage current and expected future growth. See
"Management's Discussion & Analysis of Financial Condition and Results of
Operations". The Company's ability to manage and sustain growth effectively will
depend, in part, on the ability of its management to manage growth through the
implementation of appropriate management, operational and financial systems and
controls, and successfully to train, motivate and manage its employees. If the
Company's management is unable to manage its growth effectively, the Company's
results of operations could be materially adversely affected. While Management
believes it can manage such growth, there can be no assurance that it will be
able to do so. See "Management" and "Business".
12. PERSONNEL. The Company's growth and expansion (and in particular
further development of its Intelligent Document Solutions Unit) is dependent
upon hiring and keeping qualified personnel. No assurances can be given that
qualified personnel can be hired, or if hired that the Company will be able to
retain them as employees. The inability of the Company to hire and keep
qualified personnel could materially adversely affect the Company. See
"Business".
13. INTENSE COMPETITION. The markets in which the Company competes are
highly competitive and rapidly changing. A number of companies offer products
and services similar to those offered by the Company, and target the same
customers as the Company. The Company's ability to compete depends upon many
factors within and outside its control. Since the Company offers a variety of
products and services, no generalities can be made as to its competitors, all of
which differ depending upon the product or service offered. The Company believes
that it has been able to compete to date primarily through product quality,
technical excellence, customer service and its ability to achieve desired
results. There are many well-established competitors possessing substantially
greater financial, marketing and technical resources and established, extensive
direct and indirect channels of distribution for their products and services. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products and services
than the Company. The Company also anticipates that competition within these
markets will increase as a result of the consolidation of companies. In
addition, many of the Company's competitors have established, or may establish,
cooperative relationships among themselves or with prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. There can be no
assurance
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that the Company will be able to compete successfully against current or future
competitors, or that competitive pressures will not have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business - Competition".
14. RAPID TECHNOLOGICAL CHANGE. The markets in which the Company
competes are characterized by rapid technological change, frequent new product
and service introductions, evolving industry standards and changes in customer
demands. The introduction of products and services embodying new technologies
and the emergence of new industry standards can, in a relatively short period of
time, render existing products obsolete and unmarketable. The Company believes
that its success will depend upon its ability continuously to develop new
products and services (and in particular its high capacity symbologies
applications) and to enhance its current products and to introduce them promptly
into the market. There can be no assurance that the Company will be successful
in developing and marketing new product enhancements, new products or services
(and in particular its high capacity symbologies applications) that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the success or development,
introduction and marketing of these products, enhancements and services, or that
any new product, product enhancement and services it may introduce will achieve
market acceptance. Failure to develop and introduce new products, product
enhancements or services, or to gain customer acceptance of such products,
product enhancements or services in a timely fashion could harm the Company's
competitive position and materially adversely affect it. See "Business -
Competition".
15. DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF THIRD PARTY
INFRINGEMENT CLAIMS. The Company presently has patent applications pending with
respect to certain of its proprietary technology; however, no assurances can be
given that any patent for such technology will be granted. Furthermore, if there
are other patents or patents pending by competitors for technology similar to
the Company's, this would materially adversely affect the business of the
Company's Intelligent Document Solutions Unit and the Company's competitive
position, and would materially adversely effect the Company's operating results
and financial condition. The Company currently relies upon copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary technology, all of which afford only
limited protection. Accordingly, there can be no assurance that the Company's
measures to protect its current proprietary rights will be adequate to prevent
misappropriation of such rights or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies. Additionally, although the Company
believes that its products and technologies do not infringe upon the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert infringement claims against the Company. Similarly, infringement
claims could be asserted against products and technologies which the Company
licenses, or has the rights to use, from third parties. Any such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to, and legal costs associated
with, litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations. See "Business
- -- Research and Development".
16. INSUFFICIENT PRODUCT LIABILITY OR ERRORS AND OMISSIONS INSURANCE.
The Company could be subject to claims in connection with the products and
services that it sells. There can be no
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assurance that the Company would have sufficient resources to satisfy any
liability resulting from any such claim, or that it would be able to have its
customers indemnify or insure it against any such liability. The Company
currently maintains product liability and errors and omissions insurance;
however, there can be no assurance that such coverage will be adequate in term
and scope to protect the Company against material adverse effects in the event
of a successful claim. See "Business".
17. DILUTIVE EFFECT OF OPTIONS. A maximum of 1,500,000 options to
purchase shares of Common Stock of the Company may be granted under the
Company's Stock Option Plan. Of such 1,500,000 options, there are currently
options granted and outstanding to purchase an aggregate of 1,352,267 shares of
Common Stock. An aggregate of 135,348 options (of the 1,500,000) are available
to be granted. In addition, the Company's Board of Directors has authorized
Management to explore the possibility of establishing a second stock option
plan. To the extent that current and subsequent stock options are exercised,
dilution of the percentage ownership of the Company's stockholders will occur,
and any sales in the public market of the Common Stock underlying options might
adversely affect prevailing market prices for the Company's Securities. See
"Management-Stock Option Plan".
RISK FACTORS RELATING TO THIS OFFERING
1. DISPROPORTIONATE RISK BORNE BY PURCHASERS IN THIS OFFERING. Assuming
exercise of all of the outstanding 2,700,938 Warrants and assuming no exercise
of (i) the Representative's Options, (ii) the 1,352,267 unexercised options
under the Company's Stock Option Plan, (iii) the Dominick's Warrant, or (iv) the
Principal Stockholder's Warrant, upon completion of this offering, the
stockholders of the Company prior to the Public Offering, not including the
Bridge Financing Selling Stockholders whose Notes were automatically converted
into 745,938 shares of Common Stock and 745,938 Warrants upon the consummation
of the Public Offering, paid considerably less per share for their 3,133,378
shares of Common Stock, or approximately 39% of the Company's then issued and
outstanding Common Stock on a pro forma basis, whereas investors exercising
their Warrants will have paid an aggregate of $19,919,418 (based upon an
exercise price of $7.375) for 2,700,938 shares of Common Stock or approximately
33% of the Company's then issued and outstanding shares of Common Stock.
Accordingly, the new investors will bear a disproportionate amount of financial
risk because of the disparity in purchase price. See "Dilution" and "Bridge
Financing Private Placement".
2. IMMEDIATE AND SUBSTANTIAL DILUTION. An investor in this offering
will experience immediate and substantial dilution of $4.515, or 61%, per share
between the adjusted pro forma net book value per share after the offering and
the $7.375 exercise price of the Warrants. To the extent that any options or
other securities convertible into shares of Common Stock currently outstanding
or subsequently granted to purchase the Company's Common Stock are exercisable
at a price less than the net book value per share following this offering, there
will be further dilution when exercised. See "Dilution", "Management - Stock
Option Plan" and "Description of Securities".
3. CONTROL AND INFLUENCE BY PRINCIPAL STOCKHOLDERS; REPRESENTATIVE'S
RIGHT TO DESIGNATE NOMINEE TO BOARD OF DIRECTORS. Based on the 8,082,639 shares
of Common Stock which will be outstanding following this offering assuming all
of the 2,700,938 Warrants are exercised and assuming no exercise of the
Representative's Options, the Dominick's Warrant, the Principal Stockholder's
Warrant or the remaining 1,487,615 shares of Common Stock reserved for issuance
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under the Company's Stock Option Plan, the Company's officers and directors and
their affiliates, as a group, will beneficially own and control approximately
39% of the Company's outstanding Common Stock (or approximately 36% assuming all
of the foregoing Warrants and options are granted and exercised to their fullest
extent). The Company's by-laws provide that the holders of more than
thirty-three and one-third percent of the issued and outstanding Common Stock
constitute a quorum at stockholder meetings, and the vote of the holders of a
majority of Common Stock present at a meeting will decide any question brought
before it, except for certain actions, such as amendments to the Company's
Certificate of Incorporation, mergers or dissolutions, all of which require the
vote of the holders of a majority of the outstanding Common Stock. In addition,
cumulative voting (which provides that a stockholder can cast votes in the
election of directors equal to the number of shares owned by such stockholder
multiplied by the number of directors to be elected to a single candidate or
among the candidates as the stockholders wishes) is not permitted with respect
to the Company's Common Stock. As a result, these stockholders, acting together,
will be able to control or exercise significant influence over all matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions. It is likely, therefore, that
Warrant holders exercising their Warrants to purchase Common Stock will have
little or no voice in the direction of the Company's operations. In addition,
the Underwriting Agreement between the Company and the underwriters relating to
this offering provides, among other things, that for a period of four years from
the date of this Prospectus, the Representative has the right to nominate an
individual, reasonably acceptable to the Company, for election to the Company's
Board of Directors. This could influence who is elected to the Company's Board
of Directors. See "Principal Stockholders", "Underwriting" and "Management -
Stock Option Plan".
4. NO DIVIDENDS ON COMMON STOCK. The Company has not previously paid
any cash or other dividends on its Common Stock and does not anticipate payment
of any dividends for the foreseeable future; it being anticipated that any
earnings would be retained by the Company to finance its operations and future
growth and expansion. In addition, the Company's prior credit facility with The
First National Bank of Chicago prohibited the payment of any cash dividends, and
any future credit facility may also prohibit the payment of cash dividends. See
"Risk Factors Relating to the Company - Lack of Credit Facility" and "Dividend
Policy".
5. ARBITRARY DETERMINATION OF EXERCISE PRICE OF WARRANTS. The exercise
price of the Warrants was determined arbitrarily by the Company and the
Representative and does not necessarily bear any relationship to the assets,
performance, book value or net worth of the Company or any other recognized
criteria of value. Among the factors considered in determining such price was
the past record of the Company's management, the prospects for the industry in
which the Company operates and prevailing market conditions generally. The
exercise price of the Warrants should not be considered to be an indication of
the actual value of the Company, and is substantially in excess of the adjusted
pro forma net book value of $.59 per share. Since the exercise price of the
Warrants was determined arbitrarily and does not necessarily bear any
relationship to any recognized criteria of value, and since the exercise price
of the Warrants is substantially in excess of the current adjusted pro forma net
book value of the Common Stock, investors may not be able to resell the Common
Stock received upon exercise of the Warrants at or above the exercise price
which could result in investors sustaining a significant or total loss of their
investment. See "Dilution" and "Recent Underwriting - Determination of Offering
Price".
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6. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The net proceeds
received from the exercise of the Warrants will be used for working capital and
general corporate purposes. Accordingly, Management of the Company has broad
discretion to use the net proceeds. See "Use of Proceeds".
7. NO ASSURANCE OF CONTINUED PUBLIC TRADING MARKET; POSSIBLE VOLATILITY
OF STOCK PRICE. Prior to the Public Offering, there was no established trading
market for the Company's Securities and there can be no assurance that an active
trading market for the Company's Securities will continue. The Common Stock and
Warrants are currently listed for quotation on the NASDAQ SmallCap Market
("NASDAQ"). If the Company should experience losses from operations, it may be
unable to maintain the standards for continued quotation on NASDAQ. If, for any
reason, the Company's Common Stock is not eligible for continued listing,
Warrant holders exercising their Warrants and purchasing Common Stock may have
difficulty selling their Common Stock should they desire to do so. The trading
prices of the Company's Common Stock could be subject to wide fluctuations in
response to quarterly variations in actual or anticipated results of operations
of the Company, changes in analysts' earnings estimates, announcements of
technological innovations or new products or services by the Company or its
competitors, general conditions in the computer industry, or other factors. In
addition, the securities markets frequently experience extreme price and volume
fluctuations which affect market prices for securities of companies generally,
and technology companies in particular. Such fluctuations are often unrelated to
the operating performance of the affected companies. Broad market fluctuations
may adversely affect the market price of the Company's Securities. See "Price
Range of Securities".
8. POTENTIAL FUTURE SALES OF COMMON STOCK. Upon consummation of this
offering, the Company will have 8,082,639 shares of Common Stock outstanding out
of a total of 15,000,000 shares of Common Stock authorized, assuming exercise of
all of the 2,700,938 outstanding Warrants, but not including (i) 170,000 shares
of Common Stock issuable upon exercise of the Representative's Options, (ii)
170,000 shares of Common Stock issuable upon exercise of the Warrants included
in the Representative's Options, (iii) 1,487,615 shares of Common Stock reserved
for issuance under the Company's Stock Option Plan, (iv) 375,000 shares of
Common Stock issuable upon exercise of the Dominick's Warrant, and (v) 260,000
shares of Common Stock issuable upon exercise of the Principal Stockholder's
Warrant. Of these 8,082,639 outstanding shares of Common Stock, 4,655,938 will
be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). In addition, 280,938
additional shares of Common Stock which were issued upon conversion of the
Bridge Promissory Notes were also registered simultaneously with the Public
Offering for resale by the holders thereof from time to time after twelve months
from the consummation of the Public Offering. When sold, such shares will be
freely tradable without restriction or further registration under the Securities
Act. The remaining 3,145,763 shares of Common Stock are "restricted securities"
as that term is defined under Rule 144 promulgated under the Securities Act and
may only be sold, pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. All of such 3,145,763 shares of Common Stock
are immediately eligible for sale under Rule 144; however, the holders of such
restricted shares have agreed not to sell any shares of Common Stock owned by
them for a period of twelve months after November 25, 1996 without the
Representative's prior written consent. No prediction can be made as to the
effect, if any, that sales of shares of Common Stock or even the availability of
such shares for sale will have on the market prices of the Company's Securities
prevailing from time to time.
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The possibility that substantial amounts of the Company's Securities may be sold
in the public market may adversely affect prevailing market prices for the
Securities and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Description of Securities", "Shares Eligible
for Future Sale" and "Underwriting".
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Company's
Securities in any market which may develop and, therefore, the ability of any
investor to sell his Securities may be dependent directly upon the number of
Securities that are offered and sold. No prediction can be made as to the
effect, if any, that sales of the Company's Securities or even the availability
of such Securities for sale will have on the market prices prevailing from time
to time.
9. FUTURE ISSUANCES OF STOCK BY THE COMPANY WITHOUT SHAREHOLDER
APPROVAL. Assuming the exercise of all of the outstanding 2,700,938 Warrants,
the Company will have outstanding 8,082,639 shares of Common Stock out of a
total of 15,000,000 shares of Common Stock authorized, not including up to (i)
170,000 shares of Common Stock issuable upon exercise of the Representative's
Options, (ii) 170,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Representative's Options, (iii) 1,487,615 shares
reserved for issuance under the Company's Stock Option Plan, (iv) 375,000 shares
of Common Stock issuable upon exercise of the Dominick's Warrant, and (v)
260,000 shares of Common Stock issuable upon exercise of the Principal
Stockholder's Warrant. If the maximum number of shares of Common Stock are
issued as a result of the exercise of each of the foregoing, a total of
10,545,254 shares of Common Stock will be issued and outstanding. The remaining
4,454,746 shares of Common Stock not issued or reserved for specific purposes
may be issued without any action or approval of the Company's stockholders.
Although there are no present plans, agreements or undertakings involving the
issuance of such shares, except as disclosed in this Prospectus, any such
issuance could be used as a method of discouraging, delaying or preventing a
change in control of the Company or could significantly dilute the public
ownership of the Company, which could adversely affect the market. There can be
no assurance that the Company will not undertake to issue such shares if it
deems it appropriate to do so. The holders of the options, warrants and other
securities convertible into shares of Common Stock have the opportunity to
profit from a rise in the market price of the Common Stock, if any, without
assuming the risk of ownership, with a resulting dilution in the interest of
other stockholders. The existence of the aforementioned options and warrants and
any other options or warrants that may be granted in the future may prove to be
a hindrance to future equity financing by the Company. Further, the holders of
such warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Dilution", "Description of Securities", and "Underwriting -
LockUp Agreement" and "- Representative's Options".
10. BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS AND MANAGEMENT; SALES
BY BRIDGE FINANCING SELLING STOCKHOLDERS. An aggregate of $1,441,848, or
approximately 25% of the net proceeds of the Public Offering, was used to repay
indebtedness, and advances on behalf of, the Company. Of this amount, $66,748
was paid to an employee of the Company and $1,375,000 was paid to the Company's
lender to retire debt guaranteed by certain officers and directors of the
Company. As a result of such payments, less of the net proceeds from the Public
Offering was available for other purposes. To the extent that income from the
Company's operations is
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insufficient, salaries of employees, including executives' salaries, may be paid
from proceeds of this offering. See "Use of Proceeds", "Management", "Certain
Transactions" and Financial Statements.
The Registration Statement for the Public Offering included 745,938
shares of Common Stock owned by the Bridge Financing Selling Stockholders.
Although the costs incurred with the registration of those shares and the
Securities registered for future sale by the Bridge Financing Selling
Stockholders, which were not subject to any limits, were borne by the Company,
the Bridge Financing Selling Stockholders, and not the Company, received the
proceeds from the sale of their respective securities, thus receiving a benefit
from the Company. After payment of an underwriting discount at a Public Offering
Price of $6.00 per Unit and attributing $5.90 thereof to the offering price of a
share of Common Stock, an aggregate of $2,496,585 was received by the Bridge
Financing Selling Stockholders for the sale of their 465,000 shares of Common
Stock. The remaining 280,938 shares of Common Stock held by the Bridge Financing
Selling Stockholders may be sold after November 25, 1997, twelve months from the
date of the Public Offering. The 745,938 Warrants owned by the Bridge Financing
Selling Stockholders are exercisable and may be sold at any time after November
25, 1996; however, the Common Stock received by the Bridge Financing Selling
Stockholders upon exercise of such a Warrant may not be sold by a Bridge
Financing Selling Stockholder until after November 25, 1997, one year from the
consummation of the Public Offering. Sales of such shares or Warrants or the
potential of such sales at any time may have an adverse effect on the market
prices of the Company's Securities.
The Company paid to the Representative a non-accountable expense
allowance equal to two and one-half percent of the gross proceeds of the sale by
the Bridge Financing Selling Stockholders of their 465,000 shares of Common
Stock sold in the Public Offering, or $68,588 (based upon a Public Offering
Price of $6.00 per Unit and attributing $5.90 thereof to the offering price of a
share of Common Stock). The Company believes that except for the non-accountable
expense allowance payable to the Representative on behalf of the shares sold by
the Bridge Financing Selling Stockholders, any increase in expenses attributable
to the inclusion in the Registration Statement of the shares owned by the Bridge
Financing Selling Stockholders was minimal. Payment by the Company of these
expenses (including the non-accountable expense allowance) attributable to the
shares offered by the Bridge Financing Selling Stockholders resulted in benefits
to the owners of such securities and in less of the net proceeds of the Public
Offering being available for use by the Company. See "Certain Transactions",
"Description of Securities", "Additional Registered Securities" and
"Underwriting".
11. LIMITATION ON DIRECTOR LIABILITY. As permitted by the Delaware
General Corporation Law, the Company's Certificate of Incorporation limits the
liability of directors to the Company or its stockholders for monetary damages
for breach of a director's fiduciary duty except for liability for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involved intentional
misconduct or knowing violation of law, (iii) unlawful payments of dividends or
unlawful stock purchases or redemptions as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of the Company's
charter provision and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty. See "Management -
Limitation of Liability and Indemnification of Directors".
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12. CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO
EXERCISE WARRANTS. The Company will be able to issue shares of its Common Stock
upon the exercise of Warrants only if there is a current prospectus relating to
the Common Stock issuable upon the exercise of the Warrants under an effective
registration statement filed with the Securities and Exchange Commission and
such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdictions in which the various
holders of Warrants reside. Although the Company has undertaken to maintain the
effectiveness of a current Prospectus covering the Common Stock underlying the
Warrants, there can be no assurance, however, that the Company will be
successful in maintaining a current registration statement. The Warrants,
therefore, may be deprived of any value if for any reason a current Prospectus
covering the Common Stock issuable upon exercise of the Warrants is not kept
effective, or if such Common Stock is not qualified or exempt from qualification
in the states in which the Warrant holders reside. The Company qualified the
sale of the Common Stock and the Warrants in a significant number of states,
although certain exemptions under certain state securities ("blue sky") laws may
permit the Common Stock and Warrants to be transferred to purchasers in states
other than those in which the Common Stock and Warrants were initially
qualified. The Company will be prevented, however, from issuing Common Stock
upon exercise of the Warrants in those states where exemptions are unavailable
and the Company has failed to qualify the Common Stock issuable upon exercise of
the Warrants. The Common Stock was not qualified in all of the states in which
the holders of the Warrants may reside. Accordingly, the Warrants of those
purchasers will expire and have no value if such Warrants cannot be sold. As
such, the market for the Warrants may be limited because of the Company's
obligation to fulfill the foregoing requirements. See "Description of
Securities-Warrants".
13. POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS. Each
Warrant entitles the holder to purchase one share of Common Stock at an exercise
price of $7.375, which is equal to 125% of the Public Offering Price, commencing
November 25, 1996 ("Effective Date"). The Warrants are redeemable by the Company
for $.05 per Warrant at any time one year after the Effective Date (which such
period may be reduced or waived by the Representative in its sole discretion)
upon at least thirty days' prior written notice provided the closing price of
the Common Stock for twenty consecutive trading days within the 30-day period
preceding the date of the notice of redemption equals or exceeds $8.85 (150% of
the Public Offering Price). In the event the Company exercises the right to
redeem the Warrants, a holder would be forced either to exercise the Warrant
within the period of the notice of redemption (which could occur at a time when
it may be disadvantageous for them to do so), to sell the Warrants at the then
current market price when the holder might otherwise wish to hold them, or to
accept the redemption price which will be substantially less than the market
value of the Warrants at the time of redemption. The Company presently expects
to call all of the Warrants for redemption as soon as the trading price of its
Common Shares meets the minimum amount for the specified number of days provided
it is one year from the Effective Date (or such earlier date as may be
determined by the Representative) and a current Prospectus relating to the
Common Stock underlying such Warrants is then in effect. See "Description of
Securities - Warrants".
18
<PAGE>
USE OF PROCEEDS
The proceeds received by the Company from the Warrant holders who exercise
their right to purchase Common Stock will be used to increase the Company's
working capital and for general corporate purposes.
DIVIDEND POLICY
The Company intends to retain earnings, if any, to finance the development
and expansion of its business. Accordingly, the Company does not intend to pay
cash dividends in the foreseeable future on its Common Stock. Holders of the
Company's Common Stock are entitled to dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. The payment of
dividends, therefore, is within the discretion of the Company's Board of
Directors. Cash dividends, if any, that may be paid in the future to holders of
Common Stock will be payable when, as and if declared by the Board of Directors
of the Company, based upon the Board's assessment of the financial condition of
the Company, its earnings, need for funds, capital requirements, and other
factors, including any applicable laws. The Company's prior credit facility with
The First National Bank of Chicago prohibited the payment of any cash dividends,
and any financing which the Company may obtain in the future may also contain
provisions restricting the Company's ability to pay dividends. Accordingly,
there can be no assurance that dividends of any kind or amount will ever be paid
in the future. Investors needing immediate or future income by way of dividends
should not exercise their Warrants and purchase the Common Stock offered hereby.
19
<PAGE>
PRICE RANGE OF SECURITIES
Since November 25, 1996, the date of the Public Offering, the Company's
Common Stock and Warrants have been traded on the NASDAQ SmallCap Market. Prior
to that time, there was no established public trading market for the Common
Stock and the Warrants.
Set forth below is the range of high and low sales prices for the Common
Stock and for the Warrants as reported by NASDAQ. The quotations do not include
retail markups, markdowns, or commissions and may not represent actual
transactions.
TYPE OF SECURITY PERIOD ENDED HIGH LOW
- ---------------- ------------ ---- ---
Common Stock December 31, 1996 (1) $7.50 $5.13
March 31, 1997 $6.31 $4.75
June 30, 1997 $9.13 $4.19
July 31, 1997 (2) $9.38 $7.63
Warrants December 31, 1996 (1) $1.50 $0.50
March 31, 1997 $1.75 $1.00
June 30, 1997 $2.00 $1.00
July 31, 1997 (2) $3.13 $1.63
- -----------------------------------------
(1) Includes only the period November 25, 1996 through December 31, 1996.
(2) Includes only the period July 1, 1997 through July 31, 1997.
As of July 30, 1997, there were approximately 59 and 69 holders of record of
the Company's Common Stock and Warrants, respectively. The Company believes that
it has a greater number of shareholders and warrant holders because Management
believes that a substantial number of the Company's Common Stock and Warrants
are held of record in street name by broker/dealers for their customers.
20
<PAGE>
DILUTION
The net book value of the Company's Common Stock at June 30, 1997 was
$3,150,000 or $.59 per share. After giving effect to the sale of the shares of
Common Stock sold as the result of the exercise of all of the Warrants and
assuming the exercise of all the Warrants, (see "Description of Securities -
Warrants"), the pro forma net book value as adjusted at June 30, 1997 would have
been $23,069,000 or $2.86 per share, representing an immediate increase in
adjusted pro forma net book value of $2.27 per share to the existing
shareholders and an immediate dilution of $4.515 per share to new investors.
"Dilution" means the difference between the price paid for a share of Common
Stock upon the exercise of a Warrant and the pro forma net book value per share
as adjusted for the sale of such Common Stock.
The following table illustrates the dilution of a new investor's equity
in one share of Common Stock as of June 30, 1997, assuming exercise of all
Warrants:
Price paid per share upon the exercise of Warrants $7.375
Net book value per share $ .59
Increase per share attributable to the exercise
of Warrants 2.27
Net book value per share as adjusted for the
sale of Common Stock upon the exercise of Warrants 2.860
-------
Dilution per share to new investors $4.515
======
21
<PAGE>
The following table sets forth, on a pro forma basis as of June 30,
1997, the differences in the total consideration paid and the average price per
share between the shares purchased by (i) the initial stockholders prior to the
Public Offering, (ii) the Bridge Financing Selling Stockholders, (iii) the
investors in the Public Offering, (iv) the exercise of Company stock options,
and (v) Warrant holders, assuming the exercise of all of the Warrants with
respect to the Company's Common Stock:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- -----------------------------
APPROXIMATE APPROXIMATE AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial Stockholders 3,133,378 39% $ 740,000(1) 2% $0.24
Bridge Financing
Selling Stockholders 280,938(2) 4% 1,022,614 3% $3.64
Investors in Public
Offering 1,955,000(3) 24% 11,730,000 35% $6.00(4)
Exercise of Stock
Options 12,385 -- 10,403 -- $0.84
Exercising Warrant
Holders(5) 2,700,938 33% 19,919,418 60% $7.375
--------- ---- ----------- -----
Total 8,082,639(6) 100% $33,422,435 100%
========= ==== =========== =====
<FN>
- ----------
(1) Includes a shareholder's contribution of $738,000 of a $1,200,000 note due
from the Company in October, 1996.
(2) Does not include 465,000 shares of Common Stock sold by the Bridge
Financing Selling Stockholders in the Public Offering.
(3) Includes 1,490,000 and 465,000 shares of Common Stock sold by the Company
and by the Bridge Financing Selling Stockholders, respectively, in the
Public Offering.
(4) Of the Public Offering Price of $6.00, $5.90 was attributed to one share of
Common Stock and $.10 was attributed to one Warrant.
(5) Assumes all of the 2,700,938 outstanding Warrants are exercised.
(6) Does not reflect the issuance of up to (i) 170,000 shares of Common Stock
issuable upon exercise of the Representative's Options and 170,000 shares
of Common Stock issuable upon exercise of the Warrants included in the
Representative's Options, (ii) 1,487,615 shares of Common Stock issuable
upon the exercise of options either currently outstanding or reserved for
future grants under the Company's Stock Option Plan, (iii) 375,000 shares
of Common Stock issuable upon exercise of the Dominick's Warrant, and (iv)
260,000 shares of Common Stock issuable upon exercise of the Principal
Stockholder's Warrant, the exercise or issuance of any of which could have
a substantial dilutive effect to new investors. See "Description of
Securities", "Recent Underwriting" and "Management - Stock Option Plan".
</FN>
</TABLE>
22
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company (i) as of June 30, 1997, and (ii) on a pro forma basis as adjusted
to give effect to the exercise of all of the Warrants and the application of the
net proceeds therefrom as described under "Use of Proceeds". This table should
be read in conjunction with the financial statements and notes thereto included
elsewhere in this Prospectus.
JUNE 30, 1997
(IN THOUSANDS)
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
Current portion of long-term debt $ 264 $ 264
-------- --------
Long-term debt, net of current portion 981 981
-------- --------
Shareholder's equity:
Common stock; $.01 par value,
authorized 15,000,000 shares;
issued and outstanding
5,378,085 shares actual;
8,079,023 shares pro
forma as adjusted 54 81
Additional paid-in capital 10,120 30,012
Retained deficit (7,024) (7,024)
-------- --------
Total shareholders' equity 3,150 23,069
-------- --------
Total capitalization $ 4,395 $ 24,314
======== ========
- ----------
(1) Does not include the issuance of up to (i) 170,000 shares of Common Stock
issuable upon exercise of the Representative's Options and 170,000 shares
of Common Stock issuable upon exercise of the Warrants included in the
Representative's Option, (ii) 1,487,615 shares of Common Stock issuable
upon the exercise of options either currently outstanding or reserved for
future grants under the Company's Stock Option Plan, (iii) 375,000 shares
of Common Stock issuable upon exercise of the Dominick's Warrant, or (iv)
260,000 shares of Common Stock issuable upon the exercise of the Principal
Stockholder's Warrant. See "Description of Securities", "Recent
Underwriting" and "Management - Stock Option Plan".
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The consolidated financial data set forth below is derived from, should
be read in conjunction with and is qualified in its entirety by the more
detailed financial statements and notes thereto, and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- ---------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
License fees ............................. $ 276 $ 775 $ 460 $ 335
Software product resales ................. 1,192 2,231 2,059 1,834
Technology equipment resales ............. 8,538 12,438 5,110 8,624
Service fees ............................. 2,795 2,074 1,250 1,032
----------- ----------- ----------- -----------
Total net sales ...................... 12,801 17,518 8,879 11,825
Gross profit ............................. 2,148 2,570 1,731 1,360
Loss before income taxes ................. (1,301) (2,919) (383) (2,544)
Net loss(1) .............................. (1,131) (3,075) (303) (2,499)
Net loss per share(1) .................... (.26) (.72) (.07) (.40)
Weighted average shares outstanding(2) ... 4,362,420 4,266,753 4,071,373 6,209,597
CONSOLIDATED BALANCE SHEET DATA:
JUNE 30, 1997
-------------------------
ACTUAL ADJUSTED(3)
------- ----------
Working capital .......................... $ 2,538 $22,457
Total assets ............................. 11,103 31,022
Long term debt, less current portion ..... 981 981
Total liabilities ........................ 7,953 7,953
Shareholders' equity ..................... 3,150 23,069
<FN>
- ----------
(1) The net loss and net loss per share information represent the consolidated
historical results of the Company. Included in these amounts are the
results from Migration electing to be treated, prior to the Public
Offering, as a small business corporation ("S" corporation) under the
Internal Revenue Code. As indicated in the Notes to Consolidated Financial
Statements, these results would be identical if the results of the
S-Corporation entity had been treated as if this entity were taxable as a
C-corporation.
(2) Includes the dilutive effect of stock options granted subsequent to
December 31, 1995 to purchase an aggregate of 1,332,403 shares of the
Company's Common Stock as if outstanding for all periods presented.
(3) As adjusted to give effect to the exercise of 2,700,938 warrants at $7.375
per share, or total gross proceeds to the Company of $19,919,418. See "Use
of Proceeds" and "Capitalization".
</FN>
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Dev-Tech Associates, Inc., NeoMedia's predecessor, was organized in
December, 1989, and through the year ended December 31, 1996, a substantial part
of NeoMedia's revenue was derived from software resales and equipment resales.
NeoMedia couples its proprietary software products with independent vendor
products it resells, enabling it to provide a complete "turn-key" service for
its customers. Currently, NeoMedia's revenue consists of software license fees,
resales of software developed by independent vendors ("software resales"),
resales of computer equipment manufactured by independent vendors ("equipment
resales"), and fees for services, including consulting, education and
postcontract software support. In addition, NeoMedia recently formed its
Intelligent Document Solutions Unit to develop enabling technology and
applications for printed materials containing high-capacity symbologies, which
NeoMedia believes to be an expanding area in the emerging world of electronic
commerce.
NeoMedia's strategy is to increase sales of its proprietary software
transition tools and applications as a percentage of total sales. NeoMedia has
built and intends to continue to build an infrastructure that assumes this
strategy will succeed. Therefore, the failure to achieve this strategy could
have a material adverse effect on NeoMedia's business, financial condition and
results of operations.
A substantial portion of NeoMedia's operating expense is related to
personnel, facilities and amortization. Such operating expenses cannot be
adjusted quickly and are therefore fixed in the short term. NeoMedia's expense
levels for these items are based, in significant part, on NeoMedia's
expectations of future sales. If actual sales levels are below management's
expectations, results of operations are likely to be adversely affected by a
similar amount because a relatively small amount of NeoMedia's expense varies
with its sales in the short term.
In general, NeoMedia's sales are difficult to forecast as the market
for client/server equipment and software is rapidly evolving and NeoMedia's
sales cycle, from the initial proposal to the customer through the purchase of
product and related services varies substantially from customer to customer and
from product to product. Also, NeoMedia's operating results may fluctuate
significantly from period to period as a result of a variety of factors,
including changes in the composition of NeoMedia's revenue, the timing of new
product introductions and NeoMedia's expenditures on research and development
and promotional programs, as well as the general state of the national and
global economies. Demand for the products sold by NeoMedia may increase or
decrease as a result of a number of factors, such as client preferences and
product announcements by competitors.
In the past, NeoMedia has realized a substantial portion of its sales
in the last quarter of the year. It is not uncommon for equipment resellers and
software companies to experience strong
25
<PAGE>
fourth quarters followed by weak first quarters. Such seasonality arises from
many factors, such as the timing of product introductions and business cycles of
NeoMedia's customers, and could be material to NeoMedia's interim results. Such
cycles vary from customer to customer, and the overall impact on NeoMedia's
results of operations cannot be predicted. There can be no assurances that
NeoMedia will not display this pattern in future years. In addition, its
business and results of operations could be affected by the overall seasonality
of the industry.
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 or opening
new offices, the economic condition of NeoMedia's target markets, and the cost
of acquiring and integrating new businesses.
SIX MONTHS ENDED JUNE 30, 1997, AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
GENERAL. Total net sales for the six months ended June 30, 1997 were
$11.8 million, which represented a $2.9 million, or 33%, increase from $8.9
million for the six months ended June 30, 1996. This increase primarily resulted
from a $3.5 million increase in equipment resales. Cost of sales for the six
months ended June 30, 1997 were $10.5 million, which represented a $3.3 million
increase from $7.2 million for the six months ended June 30, 1996. This increase
primarily resulted from a $3.1 million increase in the cost of equipment
resales.
During the first quarter of 1996, NeoMedia decided to invest in the
infra-structure needed to manage current and expected future growth. The total
of general, administrative, sales, marketing, research and development expenses
increased $2.0 million to $3.9 million for the six months ended June 30, 1997
from $1.9 million during the six months ended June 30, 1996. This increase
primarily resulted from NeoMedia investing in the expansion of its
infra-structure by hiring management, sales and other personnel to develop,
market and sell new products. Using a portion of the proceeds from the Public
Offering, NeoMedia intends to continue to expand its development, sales and
marketing positions to increase revenue in each of its three business units:
Document Systems Solutions Unit, Systems Transition Solutions Unit and
Intelligent Document Solutions Unit.
The result of these activities was a net loss for the six months ended
June 30, 1997 of $2.5 million as compared to a net loss of $303,000 during the
six months ended June 30, 1996.
LICENSE FEES. License fees for the six months ended June 30, 1997 were
$335,000 compared to $460,000 for the six months ended June 30, 1996, a decrease
of $125,000 or 27.1%. This decrease resulted primarily from the decrease in
sales of existing software transition tools during the second quarter of 1997.
Costs of sales for license fees consisted primarily of fees paid to an
independent software developer for one of the existing software transition
tools. Cost of sales as a percentage of related sales was 41.4% during 1997
compared to 30.3% during 1996. This increase in the costs of sales as a
percentage of related sales was primarily due to the increased sales, as a
percentage of total sales, in the software transition tool where fees are paid
to an independent software developer.
26
<PAGE>
SOFTWARE RESALES. Software resales decreased by $225,000, or 11.0%,
from $2.1 million for the six months ended June 30, 1996 to $1.8 million for the
six months ended June 30, 1997. This decrease primarily resulted from the
discontinuation at the end of 1996 of PRS software sales which contributed
$746,000 to sales for the six months ended June 30, 1996 and the $200,000
decrease in resales of UNIX client server administrative software, partially
offset with the $778,000 increase in resales of software for micro-mainframe
computers. Cost of sales as a percentage of related sales was 87.7% during 1997
compared to 67.2% during 1996. This increase in the cost of sales as a
percentage of related sales was primarily due to the discontinuation of PRS
software sales with its lower costs as a percentage of sales and the increase
in resales of software for micro-mainframe with its higher cost as a percentage
of sales.
EQUIPMENT RESALES. Equipment resales increased by $3.5 million, or
68.8%, to $8.6 million for the six months ended June 30, 1997, as compared to
$5.1 million for the six months ended June 30, 1996. This increase primarily
resulted from equipment resales related to Sun Microsystems workstations and
servers which increased $3.4 million (primarily due to increased resales to
NeoMedia's largest customer - see Note 2 of the Unaudited Notes to Consolidated
Financial Statements -- Concentrations of Credit Risk) and IBM Corporation
equipment which increased $591,000 (primarily due to IBM enhancing its line of
390 micro-mainframe computers to include the S390). These increases were
partially offset with a $500,000 one-time shipment of desktop printers to a
major customer in 1996. Cost of sales as a percentage of related sales was 86.9%
during 1997, compared to 86.4% during 1996.
SERVICE FEES. NeoMedia's service fees decreased by $218,000, or 17.5%,
to $1.0 million for the six months ended June 30,1997, compared to $1.2 million
for the six months ended June 30, 1996. This decrease was primarily due to the
$472,000 decrease in services supplied in conjunction with the sales of existing
software transition tools, partially offset with $261,000 increase in consulting
fees for assisting companies to integrate printers. Cost of service fees as a
percentage of related sales increased to 88.7% during 1997 from 74.1% during
1996 primarily due to reduction in the utilization of NeoMedia's system
integrators.
AMORTIZATION OF SOFTWARE. Amortization of software for the six months
ended June 30, 1997, as compared to the six moths ended June 30, 1996, increased
$26,000 as a result of the amortization of software costs capitalized during
1997 and 1996, and, as a percentage of total net sales, decreased to 2.6% during
1997 from 3.2% during 1996 due to the increase in net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $781,000, or 97.5%, to $1.6 million for the six months ended June 30,
1997, from $802,000 for the six months ended June 30, 1996. This increase was
due mainly to NeoMedia building its administrative infrastructure, including
compensation and related expenses and legal and professional fees, to manage
current and expected future growth.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature, and the rest of this
compensation is directly related to sales volume. Sales and marketing expenses
increased $886,000, or 90.8%, to $1.9 million for the six months ended June 30,
1997 from $973,000 for the six months ended June 30, 1996, as a result
27
<PAGE>
primarily of hiring managers to direct current and expected future growth.
NeoMedia anticipates that sales and marketing costs will increase as NeoMedia
grows.
RESEARCH AND DEVELOPMENT. During the six months ended June 30, 1997,
NeoMedia charged to expense 3.5% of total net sales in research and development
expenses as compared to 1.4% during the six months ended June 30, 1996. This
percentage increase was due to an increase in the number of software developers
employed by NeoMedia to expand its product lines. NeoMedia currently intends to
contiue to make significant investments in research and development.
INTEREST EXPENSE, NET. Interest expense consists primarily of interest
paid to creditors as part of financed purchases, capitalized leases and
NeoMedia's asset-based collateralized line of credit. Interest expense decreased
by $164,000, or 75.9%, to $52,000 for the six months ended June 30, 1997 from
$216,000 for the six moths ended June 30, 1996, due to the repayemnt of debt in
the fourth quarter of 1996 and interest income earned on the proceeds from the
Public Offering.
BENEFIT FOR INCOME TAXES. The benefits for income taxes recorded during
the six months ended June 30, 1997 and 1996 represented the recovery of income
taxes paid in prior years from the carryback of operating losses.
FOR THE YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
1995
GENERAL. Loss before income taxes for the year ended December 31, 1996
was $2.9 million as compared to $1.3 million during the year ended December 31,
1995. During the first quarter of 1996, NeoMedia decided to invest in the
infra-structure needed to manage current and expected future growth. The 1996
loss resulted primarily from increased general, administration, sales and
marketing expenses associated with NeoMedia investing in expanding its
infra-structure by hiring management, sales and other personnel to develop,
market and sell new products. Using a portion of the proceeds from the Public
Offering, NeoMedia intends to continue to expand its development, sales and
marketing positions to increase revenue in each of its three business units:
Document Systems Solutions Unit, Systems Transition Solutions Unit and
Intelligent Document Solutions Unit. To a lesser extent, the increased loss was
due to an increase in net interest expense, including expense associated with
NeoMedia's private placement during the third quarter of 1996 of its 10%
uncollateralized subordinated convertible promissory notes, due September 30,
1997.
LICENSE FEES. NeoMedia's license fees are derived from licensing
NeoMedia's internally developed and purchased software tools. During 1994,
NeoMedia purchased the intellectual property rights to certain software tools
which support migrations from proprietary computer environments to multiple
varieties of UNIX systems. Additionally, NeoMedia developed its own proprietary
software products for high speed printing and migration services. License fees
for the year ended December 31, 1996 were $775,000 compared to $276,000 for the
year ended December 31, 1995, an increase of $499,000 or 180.8%. This increase
resulted primarily from $88,000 of initial sales of newly developed software and
the $411,000 increase in sales of existing software transition tools. Cost of
sales for license fees consisted primarily of fees paid to an independent
software developer. Cost of sales as a percentage of related sales increased to
40.8% during 1996
28
<PAGE>
from 30.1% during 1995 primarily due to the increased sales where fees were paid
to an independent software developer.
SOFTWARE RESALES. NeoMedia's software resales are derived from
NeoMedia's strategic alliances with independent manufacturers of client/server
computer equipment and independent developers of software applications and
tools. Software resales increased by $1.0 million, or 87.2%, from $1.2 million
for the year ended December 31, 1995 to $2.2 million for the year ended December
31, 1996. Reselling of UNIX client server administrative software began during
1996 and contributed $631,000 of sales for 1996. NeoMedia also began selling
newly introduced micro-mainframe computers, which contributed $245,000 of sales
for 1996. Cost of sales as a percentage of related sales increased to 63.0%
during 1996 from 39.7% during 1995. This increase resulted primarily from the
cost of the newly introduced products being 68.6% on average of related sales,
while the cost of the existing software products resold being 59.4% on average
of related sales. In addition, cost of sales for 1996 were affected by certain
inventory received in 1994 at approximately $135,000 less than its estimated
fair market value of $260,000 in exchange for an agreement with the vendor to
pay the vendor royalties based on future sales. The inventory received was
recorded at NeoMedia's estimated obligation under this royalty agreement. This
inventory was depleted during 1995 resulting in an increase in the cost of sales
during 1996.
EQUIPMENT RESALES. NeoMedia's equipment resales are also derived from
NeoMedia's strategic alliances with independent manufacturers of client/server
computer equipment, including IBM Corporation and Sun Microsystems Computer
Company. These alliances provide marketing support and sales leads in the
client/server marketplace. Equipment resales increased by $3.9 million, or
45.7%, to $12.4 million for the year ended December 31, 1996, as compared to
$8.5 million for the year ended December 31, 1995 primarily as the result of an
expanded customer base. For the year ended December 31, 1996, increased
equipment resales related to IBM RS/6000 workstations totaled $2.2 million
principally as a result of changes in a vendor's sales incentive programs. Also,
additional sales of Sun Microsystems workstations and servers were $1.7 million,
while sales of mid-range printers decreased $176,000. Cost of sales as a
percentage of related sales increased to 85.7% during 1996 from 83.3% during
1995 primarily due to a $500,000 one-time shipment of desktop printers to a
major customer at cost.
SERVICE FEES. NeoMedia's service fees consisting of sales from
consulting, education and postcontract support services decreased by $721,000,
or 25.8%, to $2.1 million for the year ended December 31, 1996, as compared to
$2.8 million for the year ended December 31, 1995. A customer specific
development project was completed during 1995, which contributed service fees of
$133,000 during 1995. Moreover, NeoMedia's focus changed during 1995 to
providing services using NeoMedia's proprietary software tools and licensing
software rather than through service fees. Cost of services as a percentage of
related sales increase to 91.9% during 1996 from 86.4% during 1995 primarily due
to an increase in compensation expenses.
AMORTIZATION OF SOFTWARE. Amortization of software for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, increased
$84,000 as a result of the amortization of software costs capitalized during
1996; however, as a percentage of total net sales decreased to 3.7% during 1996
from 4.5% during 1995 due to the increase in net sales.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $1.4 million, or 152.3%, to $2.3 million for the year ended December
31, 1996, from $907,000 in the year ended December 31, 1995. This increase was
due mainly to an increase in the provision for bad debts, rent expenses,
professional fees and compensation as NeoMedia builds an administration
infra-structure to manage current and expected future growth.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature, while the rest of
this compensation is directly related to sales volume. Sales and marketing
expenses have increased $500,000, or 27.4%, to $2.3 million for the year ended
December 31, 1996 from $1.8 million for the year ended December 31, 1995, as a
result of the increase in net sales. NeoMedia anticipates that sales and
marketing costs will increase as NeoMedia grows.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 1996,
NeoMedia charged to expense 1.9% of total net sales in research and development
expenses as compared to 3.4% during the year ended December 31, 1995. This
percentage decrease was due to an increase in total net sales. NeoMedia
currently intends to continue to make significant investments in research and
development.
INTEREST EXPENSE, NET. Interest expense consists primarily of interest
paid to creditors as part of financed purchases, capitalized leases, the bridge
loan received by NeoMedia in August, 1996 in a private placement and NeoMedia's
asset-based collateralized line of credit. Interest expense increased by
$260,000, or 92.9%, to $540,000 for the year ended December 31, 1996 from
$280,000 for the year ended December 31, 1995, due to an increase in debt
outstanding during 1996 over 1995.
PROVISION (BENEFIT) FOR INCOME TAXES. During 1996, NeoMedia established
in its provision for income taxes a valuation allowance for all of the net
deferred income tax assets. As of December 31, 1996, NeoMedia had a $1.6 million
net operating loss carryforward which does not include the net operating losses
of DTM prior to the Migration Merger. Until the Migration Merger, DTM was
treated as an S Corporation for federal and state income tax purposes.
Accordingly, federal income taxes on any earnings of DTM were payable by DTM's
shareholder rather than by NeoMedia. With the Migration Merger, the S
Corporation status of Migration was terminated and Migration became subject to
statutory corporate income taxes. Consequently, the benefit for income taxes
differs from the amount computed by applying the statutory federal rate of 34%
primarily because of the net losses incurred by Migration.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operation through
shareholder loans and borrowings from a commercial bank and under a line of
credit. In December, 1995 and in January, 1996, in several series of
transactions between affiliates, funds were loaned and borrowed pursuant to
promissory notes bearing interest at the rate of 8% per annum. In June, 1996, a
shareholder lent additional funds to the Company. In October, 1996, this
shareholder contributed $738,000 of these notes to additional paid-in capital.
In December, 1996 and February, 1997, the Company repaid in
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full the balance of all of these related party loans. Also, in January, 1996,
the Company borrowed $250,000 from a commercial bank bearing interest at the
bank's prime rate plus 0.5%.
During 1995, the Company had available a line of credit with a
commercial bank that permitted borrowings up to the lesser of $2.0 million or
80% of eligible accounts receivable, as defined in the financing agreement. The
line of credit had an interest rate equal to the bank's prime rate plus 1.0%.
The line of credit was collateralized by accounts receivable and inventories,
and required the Company to maintain certain financial ratios. The Company used
this facility for funding its operations during 1995 and through the closing of
the Public Offering shortly after which the Company repaid in full the line of
credit with its commercial bank.
In November, 1996, the Company completed its Public Offering receiving
net proceeds of $5.7 million. In January, 1997, the Company closed the Public
Offering's over-allotment and received net proceeds of $1.3 million. As of June
30, 1997, the Company's working capital was $2.5 million which represented a
$2.4 million decrease from December 31, 1996. The Company is currently in
discussions with a number of financial institutions for a line of credit to
replace the bank line repaid in November, 1996, and enhance the line of credit
with a commercial finance company.
Net cash used in operating activities for the six months ended June 30,
1997 and 1996, was $1.9 million and $151,000, respectively. During 1997, trade
accounts receivable increased $1.5 million, while accounts payable increased
$1.6 million. During 1996, trade accounts receivables increased $795,000, while
accounts payables increased $884,000.
The Company's net cash flow used in investing activities for the six
months ended June 30, 1997 and 1996, was $1.0 million and $53,000, respectively.
Net cash provided by financing activities for the six months ended June 30, 1997
and 1996, was $1.2 million and $526,000, respectively. During January 1997, the
Company sold the over-allotment of its Public Offering receiving net cash
proceeds of $1.3 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which becomes effective for the Company for the year ended December 31,
1997. FAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share which excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share is computed similarly to fully diluted
earnings per share pursuant to Accounting Principles Board Opinion No. 15,
"Earnings Per Share." FAS 128 also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structure and requires a reconciliation of the numerator
and denominator of the basic earnings per share computation to the numerator and
denominator of the
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diluted earnings per share computation. For the six months ended June
30, 1997, basic and diluted earnings per share would have been $(.47).
In addition, during 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("FAS 129"), No 130, "Reporting
Comprehensive Income" ("FAS 130"), and No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131"). FAS 129 consolidates the
existing requirements relating to disclosure of certain information about an
entity's capital structure. FAS 130 establishes standards for reporting
comprehensive income to present a measure of all changes in equity that result
from renegotiated transactions and other economic events of the period other
than transactions with owners in their capacity as owners. Comprehensive income
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources and
includes net income. FAS 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. FAS 131 requires that management identify operating segments based
on the way that management disaggregates the entity for making internal
operating decisions. These financial accounting standards are effective for
fiscal years beginning after December 31, 1997. Management has not determined
what impact these standards, when adopted, will have on the Company's financial
statements.
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BUSINESS
GENERAL
COMPANY'S ORGANIZATIONAL HISTORY. Dev-Tech Associates, Inc.
("Dev-Tech"), the Company's predecessor, was organized in Illinois in December,
1989. In March, 1996, Dev-Tech's Common Stock was split, with an aggregate of
2,551,120 shares of Common Stock being issued in exchange for the 164 then
issued and outstanding shares of Common Stock. NeoMedia Technologies, Inc. (the
"Company") was incorporated under the laws of the State of Delaware on July 29,
1996, under the name DevSys, Inc. On August 5, 1996, as the result of a tax-free
merger, the Company acquired all of the shares of Dev-Tech in exchange for the
issuance of shares of the Company's Common Stock to the stockholders of
Dev-Tech. Each stockholder of Dev-Tech received one share of the Company's
Common Stock in exchange for one share of Dev-Tech's common stock. The merger
was effected under applicable provisions of the Internal Revenue Code as a
tax-free transaction to the corporations and stockholders. The former
stockholders of Dev-Tech received an aggregate of 2,551,120 shares of the
Company's Common Stock in the merger. As a result of the merger, holders of
options to purchase Dev-Tech common stock have the right to purchase the
Company's Common Stock. As an additional result of the merger, the Company is
the successor to the business and the operations of Dev-Tech. In October, 1996,
the Company's name was changed to NeoMedia Technologies, Inc., and in November,
1996, a reverse stock split was effected whereby each shareholder received
.90386 shares of Common Stock for each one share of Common Stock then owned.
Dev-Tech Migration, Inc., an Illinois corporation ("Migration") and an
affiliate of Dev-Tech, provided migration services. Migration services consist
of adapting computer software that operates only with a specific brand of
hardware and operating and data base software (called a "legacy system"), such
as Wang, to operate with most, if not all brands of hardware and operating
software (called an "open system platform" or an "open system environment").
Management of the Company determined that Migration's services complimented the
Company's services as a systems integrator, and that the synergies between the
two companies would be beneficial. Accordingly, immediately prior to the date of
the Public Offering in November, 1996, Migration was merged into NeoMedia
Migration, Inc., a wholly-owned subsidiary of the Company in exchange for the
issuance of shares of the Company's Common Stock to Charles W. Fritz, the sole
stockholder of Migration and a principal shareholder, officer and director of
the Company. See "Principal Stockholders" and "Certain Transactions". Mr. Fritz
received an aggregate of 827,525 shares of Common Stock on the basis of one
share of Migration's common stock for .90386 share of the Company's Common
Stock. As a result of the merger, holders of options to purchase Migration
common stock have the right to purchase the Company's Common Stock. Accordingly,
an aggregate of 323,132 shares of Common Stock have been reserved for issuance
upon exercise of such options. As with the merger of the Company and Dev-Tech,
this merger was also effected under applicable provisions of the Internal
Revenue Code as a tax free transaction to the corporations and Mr. Fritz. As a
result of this merger, the Company's subsidiary is the successor to the business
and operations of Migration.
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As a result of the Company's reverse stock split in November, 1996, and
following the merger with Migration, prior to the Public Offering, there were
3,133,378 shares of Common Stock issued and outstanding.
In August, 1996, Migration formed a wholly-owned subsidiary,
Distribuidora Vallarta, S.P.A., a Guatemalan corporation where the Company
employs computer developers and system integrators.
BUSINESS OVERVIEW
The Company provides computer software and consulting services:
/asterisk/ to link printed documents to computers, the Internet and the World
Wide Web,
/asterisk/ to assist clients in the creation, production and management of
printed documents, and
/asterisk/ to enable clients to update their computer software that operates
only with a specific brand of hardware such as Wang, to operate
with most, if not all, brands of hardware and, optionally, to
convert such software so that it will function properly with data
having dates subsequent to the year 2000, commonly referred to as
the "Year 2000" or "Millenium" problem.
The Company's predecessor, Dev-Tech, was organized in 1989 to provide
consulting, software and systems integration services for printing and document
processing applications. The Company provides these solutions using its own
proprietary software products, and equipment and software of third parties, such
as IBM Corporation, Xerox Corporation, Sun Microsystems Computer Company, and
Oracle Corporation. These products and services enable their customers, such as
Fidelity Investments, Discover Card Services, Inc., Charles Schwab & Co., Inc.
and the State of Wisconsin, to reduce their costs by using computer technology
to produce on demand customized forms instead of using more expensive
pre-printed stock forms. These products and services also allow the Company's
customers to customize the data contained in these forms on demand for marketing
and communications purposes. In addition, they also allow them to implement
their high speed production printing systems on lower cost distributed
client-server platforms. The Company places special emphasis on applications
that involve both print and electronic media.
Such solutions often require the Company to recommend, specify, supply
and install equipment and software products from third party suppliers, many of
whom have associations with the Company. The Company acts as a re-marketer of
equipment and software products for a number of suppliers and, to date, has
generated substantial revenue from these activities.
As the result of a merger in November, 1996, the Company's former
affiliate, Dev-Tech Migration, Inc., is now a wholly-owned subsidiary. This
subsidiary provides consulting and systems integration services to facilitate
the migration of business applications running on legacy systems, such as the
Wang environment, to open-system platforms, such as Unix. Such migrations can
reduce customer capital, training and operating costs as well as improve
performance and increase functionality in the new system environment. Migration
has a group of proprietary programs
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("tools") which facilitate this process and reduce the time, cost and risk
involved in such development efforts. The products and services offered by
Migration complement the Company's more general systems integration products and
services, which Management believes provide clear synergies with the Company's
other commercial activities.
The Company currently offers its services and products through the
following three principal business units, which although separate in name,
operate under common management and often function as a team in providing
solutions for its customers:
/bullet/ DOCUMENT SYSTEM SOLUTIONS UNIT assists clients in optimizing
their document creation, production and management processes.
These efforts have historically focused on designing and
providing high speed and high volume document formatting and
printing solutions. This recently has been expanded to
include document management, scanning and archive management,
as well as automated format conversion for alternative
electronic distribution channels, such as the Internet and
World Wide Web. The revenue recognized by the Document System
Solutions Unit represents 7% of the Company's total sales for
the six months ended June 30, 1997.
/bullet/ SYSTEMS TRANSITION SOLUTIONS UNIT enables clients to migrate
software currently running on legacy systems, such as Wang,
to more cost effective and extendable open systems platforms,
such as Unix. Such migration allows the continued use of
existing software resulting in little or no retraining. In
addition, the Company also provides proprietary tools and
services to render both migrated and non-migrated software in
the Wang, IBM DOS/VSE and HP 3000 systems to be in compliance
with data and operations having dates subsequent to the Year
2000. The Company provides strategic consulting, systems
design and development, systems integration and support
services to provide these solutions. The Company has a
comprehensive set of proprietary software tools to accelerate
such conversions, which Management believes provides it with
a competitive advantage in the marketplace. In addition,
after the Company has completed the migration of a client's
legacy software to an open system, this software can be
modernized (i.e., updated) to take advantage of modern
technologies to improve system performance, enhance user
interfaces and generally to bring the system into an
"up-to-date" condition. The Company's "migration and
modernization" approach allows for fast, cost effective
migration with a minimum of disruption to the client's
business operations. The revenue recognized by the Systems
Transition Solutions Unit represents 93% of the Company's
total sales for the six months ended June 30, 1997.
/bullet/ INTELLIGENT DOCUMENT SOLUTIONS UNIT -- The Company has
developed its own technology, and has rights to use the
technology of others, to generate printed documents which can
be automatically "read" by machines, such as computers
equipped with scanners and appropriate software. These
"machine readable" documents incorporate printed codes which
contain thousands of bytes of information, including computer
programs rendering them functionally equivalent
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to a computer floppy disk with a limited capacity to hold
information. These codes are referred to in the industry as
"high capacity symbologies" and "multi-dimensional" or "two-
dimensional" bar codes. Any printed document incorporating
such codes is referred to by the Company as an "Intelligent
Document".
Management believes that Intelligent Document technology can
be used to increase operational efficiencies in a business by
reducing the labor currently required to manually re-enter
data conveyed by computer generated print documents into data
processing systems for transaction, document and record
management purposes. In contrast to traditional "first
generation" linear bar codes which, due to space limitations,
only hold less than 40 characters, the high capacity
symbologies used in Intelligent Documents convey
significantly greater amounts of information; up to 2,000
characters in single symbols and tens of thousands when
multiple symbols are used. In addition, unlike traditional
linear bar codes, high capacity symbologies are not limited
to representing solely character information but can also
convey pure binary data including formatting information,
charts and graphs, multi-media elements such as color
photographs and audio and fully executable programs and
macros. High capacity symbologies, in conjunction with other
Intelligent Document software technology that the Company has
developed, can also be used to automatically link any printed
document, such as books, newspapers, magazines, invoices and
cards, to on-line sources of computer information including
those available through the Internet and the World Wide Web.
The Company has also developed, filed for patents on, and
hopes to introduce products based on what it believes to be a
proprietary technology which enables such linkage with
conventional linear or "one-dimensional" bar codes
incorporating data compression. The Company refers
collectively to these applications as "net-thread"
applications.
The Company believes that its Intelligent Document technology
is broad and generally innovated which can be applied in a
variety of industries including information management
services, banking and financial services, health care,
government services, publishing, advertising, gaming and
entertainment. The Company's Intelligent Document Solutions
Unit provides software, systems and services which enable
clients to embed and extract data and executable programs in
printed documents when used in conjunction with conventional
document printing and scanning equipment. Since the
Intelligent Document Solutions Unit has only been formed
recently and has only recently completed development of its
initial products, to date it has provided only limited
software and consulting services. Due to the rapidly emerging
era of electronic commerce fostered by the proliferation of
the Internet and the World Wide Web, the Company anticipates
that the large number of potential Intelligent Document
applications will, in terms of revenue, make this the fastest
growing unit of the Company, although no assurances can be
given that this will occur.
As part of the services provided in connection with the solutions it
offers, the Company often recommends, specifies, supplies and installs equipment
and software products from third party
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suppliers, many of whom have associations with the Company. The Company acts as
a re-marketer of equipment and software products for a number of suppliers and,
to date, has generated the largest portion of its revenue from these activities.
The Company renders its services to all sizes and types of
organizations, from the small, privately-owned company to large, multi-national
organizations, and has performed services for many customers, such as Discover
Card Services, Inc., SunTrust Bank, Inc., Charles Schwab & Co., Inc., Fidelity
Investments and the State of Wisconsin. In addition, the Company currently has
strategic business relationships with many industry leaders, such as IBM
Corporation, Sun Microsystems Computer Company, Xerox Corporation, Symbol
Technologies, Inc., Oracle Corporation and Netscape. See "Business - Customers."
DOCUMENT SYSTEMS SOLUTIONS UNIT
The function of the Document Systems Solutions Unit is to assist
clients in optimizing their document creation, production and management
processes. These efforts have historically focused on designing and providing
high speed document formatting and printing solutions, although services of this
unit have recently been expanded to include document management, scanning and
archive management, as well as automated format conversion for alternative
electronic distribution channels, such as the Internet. In connection with the
services of this unit, the Company is a supplier of proprietary and third party
software and third party equipment. The companies represented by the Company in
the sale of software and/or equipment include Oracle Corporation, IBM
Corporation, Xerox Corporation, Symbol Technologies, Elixir and I-Data.
The services of this unit are directed principally to firms which
operate high speed and large volume printing operations. The development of
reliable high speed laser printers not only resulted in the creation of large
print-to-mail operations, it also facilitated the production and delivery of
large volumes of documents in relatively short time frames, permitting printing
and mailing of as many as 30 million documents in a month. The United States
Postal Service ("USPS") has encouraged the production of high speed computer
generated mail by providing postage discounts to those companies which produce
their mail in a manner that assists the USPS routing and delivery process. Large
volume mailers have been able to reduce their postage expenses significantly by
using computers to prepare and print mail in USPS specified delivery sequence.
There are now many print-to-mail sites in the United States generating enormous
volumes of documents per month. The Document Systems Solutions Unit provides
services and products to these high volume printing operations to automate and
control their document production process.
SERVICES
The Company provides services in this market as both a consultant and
systems integrator, consisting of the following:
/bullet/ ENTERPRISE OUTPUT STRATEGIES are consulting engagements in
which Company professionals analyze customer business
requirements and design comprehensive document systems
solutions to resolve business problems. The Company has
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rendered services to a number of Fortune 100 and 500 clients
since its inception in 1989, which typically have focused on
business enablement and market share growth through enhanced
document solutions. Recent emphasis has focused on the design
of systems that provide a technology bridge from paper to
electronic media.
/bullet/ DOCUMENT MANUFACTURING EXECUTION SYSTEMS is the application
of technology used in the typical manufacturing operation to
the document production process. Large scale print-to-mail
operations are essentially manufacturing operations. However,
unlike successful manufacturing operations, print-to-mail
operations typically lack control systems, such as those to
ensure quality. The Company actively consults in these areas
and is currently developing customized versions of
established manufacturing execution systems for the document
generation environment.
/bullet/ INTELLIGENT DOCUMENT SOLUTIONS, in the context of the
Document Systems Solutions Unit, are the consulting and
systems integration of the software products and applications
provided by the Intelligent Document Solutions Unit. As
related to the document production process, Intelligent
Documents can also be used to control such processes and
facilitate document return processing and archive retrieval.
SOFTWARE PRODUCTS
RAPID APPLICATION DEVELOPMENT ("RAD") TOOLS. These involve the delivery
of software tools (programs) that enhance the development of print application
programs. In the past, computer programmers spent considerable time writing
software programs that controlled the "look" of documents printed off computers.
The Company's RAD tools, however, allow technicians to do this in significantly
less time than previously was required. These tools also provide solutions for
firms that want to move their applications to UNIX or other client server
technologies. Currently, the RAD tools are organized into two product groupings,
Elixir and the ToolKit Series. Elixir tools are offered through distribution
agreements with its developer. The ToolKit Series is a Company product series.
The RAD tools are essential to firms that are attempting to use
documents that are more personalized to the receiver of the document than a
generic one sent in a blanket mailing. An example of such a personalized
document is the statement used by Sears with its Discovercard. This statement,
which contains individualized coupons based upon the customer's buying patterns,
is a sophisticated example of this. The Company helped to develop the software
which produces this statement. These RAD tools provide a wide range of data
driven functions so that in a customer statement, for example, the information,
formatting, market messages and color of the document can vary with each
customer based on such things as their account balance, interest rate, length of
time as a customer or buying habits. All of this individualization is
accomplished without any mainframe programming changes, since RAD tools are
installed between the computer and the high speed printing systems, thereby
resulting in significant savings to the customer.
ELIXIR PRODUCTS. Elixir is a turn-key systems solution of the Company
which includes a personal computer and third-party Elixir software provided
through a non-exclusive third party
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licensing agreement. This system is used to create fonts, forms and graphics
needed to print applications on IBM, Siemens and Xerox high speed laser
printers. In the computer industry, the fonts, forms and graphics are referred
to as "functions", and the manner in which they are contained in a document is
referred to as the "presentation" of the document. Software containing
sophisticated functions are referred to as "advanced". The Elixir sub-systems
provide the user with advanced function presentation ("AFP"), and are so
powerful and cost effective that in many cases they have replaced an entire
inventory of mainframe print application development tools. Application
development for AFP applications is provided in full WYSIWYG (What You See Is
What You Get), which dramatically reduces the time required for application
development.
NEOMEDIA TOOLKIT SERIES. The NeoMedia ToolKit Series is an evolving
family of proprietary programmer productivity tools which provide enhanced
resource conversion, testing and debugging features that reduce the time needed
to successfully create and test AFP applications. Recent versions fully map the
AFP object structure and allow interactive inspection of AFP code which provides
great functional utility to AFP novices and casual users. The ToolKit Series is
sold as stand-alone software.
DOCUMENT MANUFACTURING EXECUTION SYSTEM COMPONENTS. As described above,
with respect to its Document Manufacturing Executions Systems services, the
Company offers a series of software programs to support the implementation of
integrated print-to-mail solutions.
Standard modules include front-end scheduling and modeling software
customized from a third party product pursuant to a exclusive licensing
agreement and a proprietary production management application.
Optional Modules include a variety of proprietary applications and
utilities mostly used to implement Intelligent Document technology solutions in
the document manufacturing execution system environment. They also include a
variety of nonproprietary industry standard utilities and applications including
relational data base management systems, network management and print formatting
software.
STRATEGIC PARTNERS
In providing Document Systems Solutions to customers, the Company often
"partners" with companies such as Dazel Corporation, Baan, ICS, Elixir
Technologies, Xerox Corporation, IBM and I-Data. These arrangements often result
in the "partner" introducing customers to the Company, that purchase the
Company's and/or the "partner's" services and/or products, the use by the
partner of the Company as a subcontractor, the re-marketing by the Company of
the "partner's" products, and the sharing of responsibility with the partner.
Depending upon the product or service involved, the association with the partner
may be on an exclusive basis.
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SYSTEMS TRANSITION SOLUTIONS UNIT
LEGACY ENVIRONMENT AND OPEN SYSTEMS DEVELOPMENT. Prior to the late
1980s, mid-sized to large companies relied upon either a mainframe or
minicomputers to perform critical business functions, such as inventory and
production control, financial reporting, document generation and mailing and
administrative support functions. Each manufacturer of these computers sought to
differentiate and gain competitive advantage by developing "closed" environments
which would work only with that manufacturer's proprietary equipment and
software products. This approach effectively "locked" a customer into a given
supplier for equipment and systems software including data-communications
networks, databases and application development environments. This in turn
resulted in the development of business software which would run only on these
closed proprietary systems. These closed, proprietary systems and applications
are referred to in the industry as "legacy systems".
In the late 1980's and early 1990's, widespread technological advances
in microprocessors and memory devices, communications networks, peripheral
storage devices and system software made practical the implementation of
enterprise wide distributed computing environments which offered
price/performance advantages over traditional closed systems. It became possible
to connect large numbers of personal computers ("PCs") via local area networks
("LANs"). Even though the operating systems for these PCs and LANs were
generally proprietary (e.g., MS DOS, Novell, branded-UNIX), they were "open" in
that they could be installed on equipment from a variety of manufacturers and
allowed widespread software development in standard computer languages. The
result was rapid proliferation of these "open system platforms" solutions, and
market competition led to rapid improvements in price/performance for open
systems.
In addition to price/performance benefits, software written for use
with these open systems also provided functionality which was largely absent
from traditional legacy systems. A significant innovation was the widespread
implementation of graphical user interfaces ("GUIs") - "point and click"
applications - on networked PCs and workstations, which greatly improved ease of
use and training and increased productivity. Another advantage of using open
systems is the ability to facilitate cooperative work among users by managing
the distribution of data and applications in a networked client-server
environment. In addition, client-server systems are scalable in that additional
capacity can be added in small increments, essentially on an individual
workstation basis, as compared to the major investment required to add
incremental capacity to traditional mainframe and minicomputer systems.
MIGRATION TO OPEN SYSTEM ENVIRONMENT. As a result of these developments
and the cost and productivity advantages of the open system environment, many
business users employing legacy systems desired to convert their systems to the
open system environment. However, in many cases, the applications used on the
legacy systems could not be moved directly from their "closed" environment to
the open, client-server system. Two solutions typically used to implement this
conversion have been (1) to move directly to a client-server application,
resulting in the loss of use of the existing applications on the legacy system,
incurring the consequent loss of specific functionality and increase in
training, or (2) to rewrite the existing application in the open systems
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environment, which was expensive, time-consuming and often not entirely
effective in transferring functionality.
A third approach to this conversion, and the one employed by the
Company, is to employ migration "tools" (programs) which translate legacy
application programs and databases from their closed proprietary form to
equivalent source code and record structures which can be run directly in the
open client-server environment. The advantages of this migration approach is
that (1) most, if not all, of the functionality of the original legacy
application is maintained in the new open environment, (2) the conversion
entails less time, resources and risk than other methods, and (3) the conversion
provides a base for modernization of the legacy application in the new open
environment.
Since technology in the computer industry changes so rapidly, the "new
and improved" system of today is the legacy system of tomorrow. Consequently,
the Company believes that there is a substantial and will continue to be a
continuing market for transition services.
THE NEOMEDIA SOLUTION. In 1994, Migration acquired and has since
further developed a group of automated legacy conversion tools. These
proprietary tools support migrations from proprietary Wang VS and Hewlett
Packard HP3000 to multiple varieties of UNIX systems.
The Company takes an evolutionary, rather than a revolutionary,
approach to migration. When assisted by the Company, the client takes smaller,
safer and more manageable steps toward its conversion objective. At the
completion of each "migration" stage, the client evaluates a variety of
"modernization" paths which may be available to it, such as running Microsoft
Windows interfaces to their applications, taking advantage of special features
of a new database or development environment, integrating their custom
application with third-party applications or enhancing their abilities to create
custom form documents from their internal applications.
The "modernization" aspect of the Company's migration services
highlights the synergies that exist with the Company's expertise in providing
products and services for open systems. After the Company has completed the
migration of the client's legacy software to an open system, this software can
be modernized (i.e. updated) to take advantage of modern technologies to improve
system performance, enhance user interfaces and generally bring the system into
an up-to-date condition. The Company's "migration and modernization" approach
allows for fast, cost effective migration of legacy software with a minimum of
disruption to the client's business operations, coupled with controlled
modernization projects that, in a well-planned and logical manner, result in the
legacy software having the latest technology. Since the Company has the
expertise to accomplish both the migration from the legacy platform to the open
system and to modernize the software, it acts as "one-stop shopping" for all of
its client's needs. The Company believes that since it has the capability to be
a single source of solutions for its customers, it has a competitive advantage.
YEAR 2000 OR MILLENNIA ISSUES. Computer programs for the past
thirty-five years have relied on the assumption that the dates used in their
calculations occur within the twentieth century. For example, in these programs
the year "1901" is often represented only by its last two digits ("01") with the
"19" being assumed. This method of programming allowed programmers to make
optimal
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use of memory resources which, until fairly recently, were limited.
Unfortunately, at the fast approaching turn of the century, programs that have
not been corrected and are still relying on these methods will introduce errors
into processes that rely upon date calculations. For example, unless corrected,
the date "2001" will be interpreted by an affected computer as "1901",
introducing critical errors in a variety of financial processes, such as
mortgage calculations. This is commonly referred to as the Year 2000 or
"Millennia" problem. The Company is actively involved in developing, marketing
and applying proprietary tools targeted for specific system platforms that are
expected to be affected. The Company believes that it will enjoy a competitive
advantage in these markets since it is well positioned to provide both Year 2000
conversions alone, as well as in conjunction with system migrations, which
provides the additional advantage of reduced systems operations costs over time.
Toward that end, the Company has introduced, and plans to continue to introduce,
suites of software tools that provide Year 2000 program and database conversion
capabilities expressly targeted for legacy systems using HP 3000, Wang, AS/400,
VSE and other mid-range systems platforms.
SERVICES
The Systems Transition Solutions Unit of the Company presently offers
four approaches to assist clients to implement business applications in open
computing environments:
/bullet/ OPEN SYSTEM DEVELOPMENT. This approach is employed when an
application must be written or rewritten for use on an open
systems platform. The Company provides consulting services
for technology assessment, systems analysis and design as
well as full systems integration and support services. These
services include mainframe and workstation integration,
application program selection and design, custom program
development, equipment and software installation, customer
training and acceptance testing. The initial focus of these
services was on the Unix workstation and server environment
due to its "open" nature and ability to support enterprise
database applications on workstation environments. These
services have broadened to include other platforms, including
Windows NT, which the Company believes will be increasingly
competitive during the latter half of this decade.
/bullet/ TOTAL ASSISTED MIGRATION. This approach is employed when the
legacy application effectively can be converted and "ported"
(moved) to the open system environment using largely
automated processes with minimal custom development. This
approach is superior to the Open System Development in time,
cost and development risk. Consequently, it is usually
preferred. Conversion and porting of the legacy application
is accomplished by the use of the proprietary migration tools
employed by the Company. The Company's migration-development
tools and application products are based on the technology of
widely used Informix, Microsoft Corporation, IBM, Hewlett
Packard, Oracle Corporation, Sun Microsystems Computer
Company, Micro Focus Cobol and Accucobol.
/bullet/ MICRO-MAINFRAME PORTS. In 1997, IBM introduced a family of
products (IBM S390 processors), which allows users to run
mainframe applications on a downsized air
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cooled platform. In contrast to former IBM P390 and R390
products, the S390 is a fully functional mainframe that does
not rely on an ancillary control processor using another
operating system. It is, therefore, a preferred platform for
the Company's micro-mainframe ports. On these new systems,
users can run and maintain the integrity of existing and
proven mainframe systems at a price and support cost
comparable to the cost of an open system. While the transfer
of applications to these new processors is not a conversion,
it does involve migration services since special expertise is
required in the configuration and tuning of the new
processors in order to host proprietary IBM applications. The
Company, as an authorized re-marketer for IBM, offers these
new systems and provides migration services in connection
with their installation.
/bullet/ INTERNET EXTENSIONS. Information currently on the Internet is
predominately housed in open system environments, primarily
UNIX servers which have become the machine of choice in
academic and other distributed computing environments during
the past decade. The vast majority of new information
currently being formatted for the World Wide Web is also
hosted in open system environments. However, the majority of
corporate information is housed in legacy mainframe and
mini-computer environments which are not connected to the
Internet, primarily for security reasons. This condition is
the major barrier to the application of Internet technology
to inter and intra enterprise communications and applications
often referred to as Intranet solutions. The Company now
offers services in this arena, which include:
/asterisk/ Implementation of new Internet compatible systems
through open systems integration products and services.
/asterisk/ Migrations of existing proprietary legacy applications
and databases to open system platforms compatible with
modernization to the Internet environment.
/asterisk/ Porting of IBM mainframe applications to air cooled
micro-frames which bridge both legacy and open system
environments.
/bullet/ MILLENNIA CONVERSION TOOLS AND SERVICES. The Company uses its
expertise to advise clients as to the extent of their Year
2000 problem for their particular computer system and
software. The Company has developed a proprietary line of
tools and services to assess and correct the Millennia
problems. These tools automate both the diagnostic and
correction processes and are used by both the Company systems
integrators and licensed third party resellers. The Company
has determined to primarily focus its efforts in this area in
the markets in which it performs migration and modernization
services, and in particular to users of Wang, IBM DOS/VSE,
AS/400, HP 3000 systems and other mid-range systems. This
will allow the Company to specialize on a specific market,
and will also afford it additional opportunity to sell its
migration and modernization services. Thus, by assisting in
the Year 2000 problem, the Company is cross-marketing its
services.
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In addition to these services, the Company plans to engage in the
design and development of proprietary applications to enhance ported systems
when the migration is complete. These proprietary systems will include the
support of Virtual Private Networks which emulate local area network access via
the Internet using secure encryption methods to route data traffic. The result
will be a Virtual Private Web which will allow computers within companies to be
networked via the Internet, with the assurance of security so that there would
not be any unauthorized use.
In each of these areas of service, the Company provides consulting
services which include strategic consulting, analysis and evaluation of user
applications, systems analysis, design, implementation, integration and support
services and client training and configuration, installation and maintenance of
equipment.
For the fiscal years ended December 31, 1994, 1995 and 1996 and the
six months ended June 30, 1997, revenues recognized from the Company's migration
business represented approximately 1%, 11%, 8% and 4%, respectively, of the
Company's total revenue.
As a systems integrator, the Company supplies and installs, as a
re-marketer for a number of companies, a variety of computer and related
products. For fiscal years ended December 31, 1994, 1995 and 1996, and the six
months ended June 30, 1997, revenues from this activity represented
approximately 74%, 67%, 71% and 73%, respectively, of the Company's total
revenue.
BUSINESS RELATIONSHIPS
As part of the services provided in connection with the Systems
Transition Solutions Unit, the Company acts as a re-marketer of equipment in
connection with open systems development and migrations. The Company has
maintained relationships with a number of major companies under which the
Company re-markets the equipment and software products of those companies. These
relationships include those identified with respect to the Document Systems
Solutions Unit.
PROPRIETARY MIGRATION SOFTWARE TOOLS AND PRODUCTS
The Company has acquired and developed a line of proprietary products
and software tools utilized in its migrations services solutions, including:
/bullet/ OPEN BASIC 2000. A development and run-time environment to
migrate legacy applications written in proprietary Wang VS
Basic to "C" source code. The conversion maintains the basic
"look and feel" of the Wang application environment thereby
reducing or eliminating user retraining following migration.
/bullet/ WISP. A development and run-time environment to migrate
legacy applications written in proprietary Wang VS COBOL to
most UNIX and PC DOS platforms.
/bullet/ OPEN 3000. A development and run-time environment to migrate
legacy applications written in proprietary Hewlett Packard
HP3000 COBOL to most UNIX and PC DOS platforms.
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/bullet/ COSTAR FOR WISP. A terminal emulator which allows direct
conversion of Wang and Hewlett Packard "green screen"
character based user interfaces to a fully functional Windows
environment.
/bullet/ VS EDIT. A full screen editor which emulates those routinely
used for development in the legacy environment. By providing
the functionality, look and feel of the legacy environment
editor, VS Edit significantly reduces the time required to
develop and maintain applications in the new environment. The
VS Edit is sold as an integral part of all WISP migration
solutions.
/bullet/ PACEPORT. A suite of automated tools to migrate legacy
applications developed for the proprietary Wang VS PACE
database to most UNIX platforms in a native Oracle or
Informix relational data base management systems environment.
Following migration, client applications can either maintain
the original Wang look and feel minimizing retraining or
adopt the graphical user interface of the target data base
environment.
/bullet/ ABSOLUT. A powerful 4GL development tool primarily used for
the development and support of migrated Wang PACE
applications.
In addition, the Company has the right or exclusive right from third
parties to use the following software product:
/bullet/ UNIQUE. A print server providing the features and
functionality found in a mature Wang legacy server
environment, provided as part of all Wang migrations.
PROPRIETARY YEAR 2000 TOOLS AND PRODUCTS
The Company owns WISP/2000 and VSE/2000 which are millennium conversion
tool sets for automating source code analysis, data conversion and source code
modification for Wang VS COBOL and IBM VSE COBOL applications, respectively.
WISP/2000 and VSE/2000 provide the analysis, control and automation for Wang VS
systems and VSE systems, respectively, to become Year 2000 compliant, and
greatly reduce costs in the process. Although not every aspect of a Year 2000
project can be fully automated, the rules-based paradigm, powerful code
parsing/generating capabilities and library of date processing routines of both
WISP/2000 and VSE/2000 greatly reduce the need for manual intervention.
Furthermore, the code converter of each tool leaves a complete audit trail of
the changes made in the conversion.
INTELLIGENT DOCUMENT SOLUTIONS UNIT
THE LIMITATIONS OF PRINTED DOCUMENTS. Printed documents constitute the
principal means by which information has been transmitted and exchanged in
recorded form for hundreds of years. As such, they have provided the basis and
infrastructure for formal communication and commerce worldwide.
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During the past half century, electronic data processing systems have
played an increased role in the distribution and storage of information and are
rapidly supplanting the use of printed information as the standard for
communication. However, even in today's world of electronic "information on
demand", it is useful, and often necessary, to transfer computer based
information into printed form since paper continues to be an inexpensive,
portable and non-volatile display and storage media ideally suited for
computer-to-human communications. The result, therefore, has been that instead
of decreasing the number of documents generated, the adoption of electronic data
processing has actually increased the volume of computer generated print
documents.
Unfortunately, the conversion of information to print has traditionally
been a one way street -- from electronic media to a printed form. Although it is
now easier to convert information from electronic media ("machine readable
information") to printed human readable information through "print-on-demand",
it is exceedingly difficult, and often impossible, to reverse this process and
convert information in printed form back into a machine readable format. This is
not a trivial problem. For example, it is common in business and government
operations to take information stored in an electronic media format and print it
into human readable form and then re-enter the same information back into
electronic format. This process of printing and re-entering into electronic
format often occurs multiple times since the information in the electronic
format must be available for multiple parties or business departments in
traditional human readable print in addition to its original electronic format.
Text conversion from printed "human readable" form to a machine readable format
can be accomplished through either manual re-entry or through the use of optical
character recognition ("OCR") software contained in scanning devices. Neither
manual transcription nor the use of scanning devices are an efficient or
effective method of conversion. Manual transcription is both labor intensive and
error prone. Scanning devices are, at best, 98% efficient which is not suitable
for transcription of un-proofed text and is potentially disastrous for the
conversion of documents containing numerical information. Furthermore, neither
method can fully restore a print document to its original machine readable form
which often contains non-printable "latent" information, such as spreadsheet
formulas, database references, embedded programs and multi-media data.
PRESERVING MACHINE READABLE INFORMATION IN HUMAN READABLE PRINT
DOCUMENTS. The use of high capacity symbologies is today the most effective and
efficient means of transmitting printed information between computers. High
capacity symbologies are data communications protocols which allow the
preservation and communication of virtually all machine readable data
represented as highly structured patterns on conventional print media. These
patterns can be decoded using conventional document scanning devices and
appropriate software. The result is a system which literally functions as a
"modem" for print, virtually eliminating the need for manual or OCR conversion
while providing 100% accuracy and preserving the "latent" elements previously
available only in the electronic data processing environment. This technology
has been thoroughly designed, developed and tested during the past decade, and
has resulted in its recent commercial introduction in a variety of applications,
such as shipping documents and identification cards, in the United States and
abroad.
The Company is developing and is currently introducing properietary
software which implements and substantially enhances the application of this
technology including: compression
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and decompression, encryption and decryption, encoders and decoders for specific
printing and scanning hardware and classes of printing and scanning hardware, as
well as installable utilities and functional end-user applications . Most of
this technology has or is being developed by the Company; however, some has been
licensed from third parties to reduce development cost and time to market. In
addition to the technology and applications themselves, the Company has applied
and will continue to apply for patents and other intellectual property coverage
in these and related areas.
LINKING PRINTED MATERIAL AND OBJECTS TO ELECTRONIC SOURCES OF
INFORMATION. In addition to embedding machine readable information in human
readable print, as described above, the Company is also actively engaged in
developing technology and software which link printed documents and marked
objects to electronic sources of information, such as computer data records and
on-line databases and services, such as the Internet and the World Wide Web. The
Company's goal is to provide greatly simplified methods to access print or
object related information which require little, if any, training and thereby
greatly simplify operation. One such method embeds information identifying the
source document or object, the address of the related electronic information,
and demographic information regarding the user in either a two-dimensional or
one-dimensional barcode, the latter using proprietary compression methods. When
scanned and decoded with proprietary software, the user is automatically linked
to on-line information, such as specific web content, without the need for
search engines or keyboard entry. In addition, the on-line service receives
demographic characteristics of the user, which can then be used for a variety of
purposes, such as marketing by the on-line service. Other techniques are also
being developed which use greatly simplified keyboard input. The Company refers
to this as a "threaded" information access method, since it directly links the
document or other object to its related information without the need for search
engines or pre-configured programs which selectively capture and display
categorized information. The Company has been, and continues to be, engaged in
developing technology, software and hardware products to support this access
method, as well as intellectual property to cover the base technology, systems,
and applications.
The Company refers to documents that incorporate high capacity
symbologies or threaded information as "Intelligent Documents", and intends to
offer systems that incorporate this technology, including those containing
proprietary components and configurations. Management believes that the Company
has the expertise, and is positioned, to commercially link the worlds of print
and electronic media through this technology.
SERVICES AND PRODUCTS
The Company either currently provides or plans to provide the following
Intelligent Document service and software products:
/bullet/ TECHNOLOGY AND SOLUTIONS CONSULTING are engagements where the
Company consults with clients to advise them on general
capabilities of Intelligent Document technology and specific
advantages and limitations of different implementations,
including custom solution designs and impact studies to
assist them in their businesses.
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/bullet/ SYSTEMS DEVELOPMENT AND INTEGRATION is the design,
development, implementation and service of Intelligent
Document systems and applications for client purposes. It is
anticipated that these systems will incorporate both
equipment and software available from third party suppliers,
as well as proprietary components and licenses developed by
and controlled by the Company.
/bullet/ INTELLIGENT DOCUMENT MIDDLEWARE includes multi-platform
utility software products, such as print drivers, symbology
encoders and decoders, compaction modules and application
engines which support and enable Intelligent Document
applications.
The Company believes that it is currently one of the leading
providers of high capacity symbology print drivers to the
high speed printing environment. The Company has provided
such services to various customers, such as UPS and Symbol
Technologies, Inc. and their customers, such as J.C, Penney,
Amway, various state departments of motor vehicles, and the
country of Bahrain.
/bullet/ INTELLIGENT DOCUMENT APPLICATIONS includes specific
applications software which apply Intelligent Document
technology and principles to provide specific commercial
solutions.
Applications currently in development include:
/bullet/ WEBDISPATCH(TM). WebDispatch(TM) is a set of
proprietary software products which allow licensed
resellers and Company systems integrators to
develop and implement threaded Intelligent
Documents systems which link printed information
and objects to on-line sources of information.
WebDispatch(TM) is currently in alpha release and
is currently being used to develop beta
applications for the financial services market.
/bullet/ PAPERDATA(TM). PaperData(TM) is a set of
proprietary software products which allow licensed
resellers and Company systems integrators to
develop and implement Intelligent Document systems
which embed and retrieve machine readable
information and programs from printed documents.
The PaperData(TM) product currently under
development is based on proprietary technology
licensed from Symbol Technologies, Inc., and it is
currently contemplated that it will also contain
considerable enhancements and application specific
elements proprietary to the Company.
/bullet/ SECURE DOCUMENTS. The Company has recently entered
into a worldwide exclusive agreement for a ten-year
term with United States Check Company, Inc. ("U.S.
Check") to market their patented UV Smart(R)
enhanced documents for non-check applications,
including money orders, gift certificates and
coupons. UV Smart(R) allows automated detection of
fraudulent documents and augments detailed
processing of human readable
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information in document image processing equipment.
This provides protection against "convenience
counterfeiting" of negotiable items using color
copiers and imaging printers. In addition, the
Company and U.S. Check are jointly developing
technology to incorporate the Company's proprietary
Intelligent Document technology into checks and
other negotiable documents to enhance systems which
also incorporate the UV Smart(R) technology.
/bullet/ USPS INFORMATION BASED INDICIA PROGRAM ("IBIP").
The United States Postal Service ("USPS") IBIP
program, announced in 1996 and currently under
development, is a standard for a mail franking
method which will print postage directly on
documents and envelopes using conventional imaging
printers employing high capacity symbology print
drivers, custom software and USPS approved postal
security devices to store and manage funds. The
placing of postage directly on the envelope while
it is in the print process eliminates the step of
taking the envelope to another site for postage
marking, as is currently required with conventional
postage meters. In a large volume mailing center,
such as those in which the Company currently
operates, this can save considerable time and
expense. Guidelines outlining qualifications,
rights and responsiblities of manufacturers and
users and design have been published, and the
Company does not know when these guidelines will be
finalized; however, when finalized, private
companies will be able to apply to be approved for
commercial use of their technology as meeting the
final qualifications. Since the Public Offering,
progress toward formal adoption by the USPS has
slowed and, until the guidelines are adopted, the
Company has decided to direct its resources to more
imminent market opportunities while continuing to
develop technology needed to meet IBIP standards
when approved, since much of the technology needed
to implement an IBIP solution is common to other
Intelligent Document applications.
The Company believes that the market for these products and services
will grow dramatically during the next few years as evidenced by recent
widespread adoption of a variety of Intelligent Document related standards for
domestic and international shipping and logistics applications, government
documents and material inventory and process control in manufacturing and asset
management.
The Company currently plans to aggresively market Intelligent Document
solutions for electronic data processing environments including archive document
indexing, security and computer mediated transaction applications, including
applications which incorporate electronic commerce on the World Wide Web.
Management intends to attempt to secure intellectual property rights covering a
variety of these applications and their unique aspects. As electronic commerce
migrates from PC based solutions to "web aware" interactive television, the
Company anticipates the demand for Intelligent Documents will continue to grow
for use with the "web aware" interactive television due to their unique
user-friendliness as an interface between print media and the electronic
environment.
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CUSTOMERS
Although the Company provides services and products to a spectrum of
customers, ranging from closely-held companies to Fortune 100 and 500 companies,
for the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997, one customer, Ameritech Services, Inc. ("Ameritech"), accounted
for approximately 62%, 49%, 40% and 34%, respectively, of the Company's revenue.
The Company expects sales to Ameritech as a percentage of total sales to
continue to decline. Furthermore, the Company does not have a written agreement
with Ameritech and, therefore, there are not any contractual provisions to
prevent Ameritech from terminating its relationship with the Company at any
time. Accordingly, the loss of this customer, or a significant reduction by it
in buying the products and services offered by the Company, absent
diversification, would materially and adversely affect the Company's revenues
and results of operations. In addition, the equipment and software which is
re-marketed to this customer is supplied by a single supplier. Accordingly, the
loss of this supplier would materially adversely affect the Company. For these
reasons, the Company is seeking, and continues to seek, to diversify its sources
of revenue.
SALES AND MARKETING
The Company markets its products, as well as those for which it acts as
a re-marketer, and its services primarily through its direct sales force, which
is currently composed of 16 full-time and 2 part-time personnel. The Company
currently maintains sales locations in 4 states. The sales organization is
responsible for achieving annual sales quotas, and, to a significant extent, is
compensated based upon the profitability of their efforts. The Company also
relies upon its strategic alliances with industry leaders to help market its
products and services, provide lead referrals and establish informal
co-marketing arrangements. Although the Company in the past has engaged in
limited telemarketing activities, it may in the future expand such marketing
activities. Representatives of the Company also attend seminar and trade shows,
both as speakers and participants, to help market its products and services.
The Company currently has arrangements with independent distributors to
promote their products and services outside of the United States. The Company
currently has representation in England, the Netherlands, Canada, Central
America, South America and Singapore, although its revenue from sales outside
the United States is insignificant.
RESEARCH AND DEVELOPMENT
The computer industry is characterized by rapid technological change,
frequent new product and service introductions, evolving industry standards and
changes in customer demands. The introduction of products and services embodying
new technologies and the emergence of new industry standards can, in a
relatively short period of time, render existing products and services obsolete
and unmarketable. The Company, therefore, believes that its success depends upon
its ability to continuously develop new products and services, as well as
enhancements to its existing products, and to introduce them promptly into the
market. Research and development is especially critical to the Company's
intention to develop new software products and services related to high
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capacity symbologies. The Company currently employs nine persons in the area of
product development.
The Company presently has patent applications pending with respect to
certain of its proprietary technology; however, no assurances can be given that
any patent for such technology will be granted. Furthermore, if there are other
patents or patents pending by competitors for technology similar to the
Company's, this would materially adversely affect the business of the Company's
Intelligent Document Solutions Unit and the Company's competitive position, and
would materially adversely effect the Company's operating results and financial
condition. The Company currently relies upon copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary technology, all of which afford only limited protection. Although
the Company takes steps to protect its trade secrets, such as requiring
employees with access to the Company's proprietary information to execute
confidentiality and non-disclosure agreements, it may be possible for
unauthorized parties to copy or reverse engineer all or part of any one of the
Company's proprietary technology and products. Furthermore, just as there can be
no assurance that a misappropriation of the Company's proprietary technology and
products will not occur, there can be no assurance that copyright, trademark and
trade secret laws will be available in all circumstances to protect the
Company's rights. In addition, although the laws of the United States may
protect the Company's proprietary rights in its technology and products, the
laws of foreign countries where the Company's products may be used may not
protect its proprietary rights at all or to the same extent as the laws of the
United States.
The Company currently has applied for patent protection for certain of
its proprietary technology related to Intelligent Documents; however, no
assurances can be given that such protection or copyright or trademark
protection will be granted, and if granted, that it will be adequate to protect
the Company's rights.
The Company believes that its proprietary technology and products do
not infringe upon the rights of any third parties; however, there can be no
assurance that a third party will not in the future claim infringement by the
Company. Similarly, infringement claims could be asserted against products and
technologies which the Company licenses from third parties. The Company has
never received notification that any of its products, products it licenses or
the technology of such products infringe upon the proprietary rights of third
parties.
The Company may provide some of its products to end users using
non-exclusive, non-transferable licenses which provide that the licensee may use
the software solely for internal operations on designated computers at specific
sites or by a specified number of users. The Company generally does not make
source codes available for the Company's products.
Due to the difficulty of doing so, the Company has never policed, nor
has it ever attempted to police, the unauthorized use of its products. Even
though piracy of the Company's proprietary rights could materially adversely
affect it, the Company believes that the threat of piracy, or the unavailability
of protection under applicable laws, is less significant to its competitive and
fiscal well being than its ability to respond to the rapid change in technology
which characterizes the computer industry.
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COMPETITION
The markets in which the Company competes are highly competitive, and
the Company believes that such competition is likely to intensify. Many of the
Company's competitors have substantially greater financial resources, larger
research and development and sales staffs and greater name recognition than the
Company and, therefore, can respond more quickly and efficiently to changing
technology and user needs. As usually occurs when competition increases, there
is corresponding downward pressure on prices and profit margins, either of which
could materially and adversely affect the Company. The Company believes that a
potential source of competition is from its present customers who could choose
to develop and produce products and render services in-house similar to those
provided by the Company.
Since the Company offers a variety of products and services, no
generalities can be made as to its competitors, all of which differ depending
upon the product or service offered.
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 the
local, small privately held company to the large national and international
organizations, including the large consulting firms, such as Andersen
Consulting. 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, the Company, in acting as a re-marketer, may compete with the
original manufacturer.
There are a number of companies that compete with the Company for
customers wishing to migrate from a legacy to an open systems environment. In
addition, there are different competitors, depending upon the platform from
which the migration is being done. Generally, as with competitors for the
Company's open systems services and products, the competitors for transition
services business range from small to large companies. The Company believes,
however, that not a significant number of its competitors for the transition
services business use automated tools to facilitate the migration. This, the
Company believes, gives it a competitive advantage in this area.
Since the development of high capacity technologies and document
linkage and Internet access methods are in their relative infancy, at the
current time there is very little competition. However, it can be expected that
as this area develops, competitors will appear and competition will be
significantly increased. No assurances can be given that the Company will be
able to compete successfully in this area should this occur.
New or improved products and services can be expected from the
Company's competitors in the future. Market participants must compete on many
fronts, including development time, engineering expertise, product quality,
performance and reliability, price, name recognition, customer support and
access to distribution channels. The Company believes that it has been able to
compete to date primarily through product quality, technical excellence,
customer service and its ability to achieve desired results. The Company's
ability to compete in the future will depend upon many factors, including the
ability to attract new customers and to diversify its customer base and products
and services so as not to be dependent upon any one or several customers or
product or
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service, to attract and retain qualified management, sales and technical
personnel, to develop new products and services and to respond quickly and
efficiently to new technology. There is no assurance that the Company will be
able to compete successfully or develop competitive products and services in the
future.
LIABILITY INSURANCE
The Company has never had any liability claim asserted against it.
However, the Company could be subject to liability claims in connection with the
use of the products and services that it sells. There can be no assurance that
the Company would have sufficient resources to satisfy any liability resulting
from these claims or would be able to have its customers indemnify or insure the
Company against such claims. The Company currently maintains product liability
and errors and omission insurance; however, there can be no assurance that such
coverage will be adequate in terms and scope to protect the Company against
material adverse effects in the event of a successful claim.
GOVERNMENT REGULATION
The Company has no knowledge of any government regulation to which it
is subject or which would materially adversely affect its business operations.
ENVIRONMENTAL PROTECTION COMPLIANCE
The Company has no knowledge of any federal, state or local
environmental compliance regulations which affect its business activities. The
Company has not expended any capital to comply with any environmental protection
statutes and does not anticipate that such expenditures will be necessary in the
future.
EMPLOYEES
As of the date hereof, the Company employs 63 full-time and 4 part-time
employees, located in 8 states and two foreign countries, which include
15 full-time employees and 2 part-time employee in systems integration, 9
full-time employees in product development, 16 full-time employees and 2
part-time employees in sales, 10 full-time employees in marketing and 13
full-time employees in executive and administrative positions. None of the
Company's employees are represented by a labor union or bound by a collective
bargaining agreement. The Company believes that its employee relations are good.
FACILITIES
The Company's principal executive, marketing, development and support
facility was moved in December, 1996, from Naperville, Illinois, and is
currently located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901,
where the Company occupies approximately 10,615 square feet under the terms of a
lease from an unaffiliated party expiring on February 11, 2000.
The Company also leases, from unaffiliated parties, the following:
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(1) approximately 6,050 square feet of office space, pursuant
to a written lease terminating April 30, 2000, at the Lisle Business
Center, 2150 Western Court, Lisle, Illinois 60532-1898.
(2) approximately 880 square feet of office space, pursuant
to a written lease terminating January 31, 1998, at 12 Calle 1-25 Zona
10, Edificio Geminis, Torre Norte Oficina 1006, Guatemala City,
Guatemala 01010.
(3) approximately 9,324 square feet under the terms of
written lease expiring on December 31, 2000 at 280 West Shuman,
Naperville, Illinois. The Company subleases to an unaffiliated party
all of the space under the terms of a written sub-lease expiring on
December 31, 2000.
The Company also leases from Charles W. Fritz (the Company's President)
and his wife, pursuant to a verbal, month-to-month lease, space at 6054
Timberwood Circle, #240, Ft. Myers, Florida 33908, at $950 per month. Although
this lease is between affiliated parties, the Company believes that it is on
terms no less favorable to it than could be obtained from unaffiliated parties.
See "Certain Transactions".
The Company believes that its existing office space is adequate to meet
its current and short-term requirements.
FINANCIAL CONSULTANTS
In addition to the Representative and Compass Capital, Inc., each of
which the Company has retained as a financial consultant, see "Recent
Underwriting", in March, 1997, the Company also retained Dominick & Dominick
Incorporated ("Dominick"), as a non-exclusive financial advisor to advise the
Company on, among other things, mergers, acquisitions, joint ventures, potential
public and private financings, bank borrowings, licensing and other business
arrangements. For its advisory services, Dominick received a $15,000 engagement
fee and receives a $15,000 quarterly retainer fee, in addition to any additional
fees paid to it for transactions and financings entered into by the Company and
to which Dominick is entitled to fees in accordance with its agreement with the
Company. For a nominal consideration, the Company also sold Dominick a warrant,
exercisable until November 25, 2001, to purchase 375,000 shares of Common Stock
at $7.375 a share.
LEGAL MATTERS
The Company is currently not a defendant in any legal proceedings.
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<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors are:
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Charles W. Fritz 41 President, Chief Executive Officer, Director and Chairman of
the Board
William E. Fritz 67 Secretary and Director
Charles T. Jensen 53 Chief Financial Officer, Vice-President and Treasurer and
Director
Robert T. Durst, Jr. 44 Chief Technical Officer, Vice-President of Technology and
Director
Dan Trampel 44 Senior Vice-President -- Sales
A. Hayes Barclay 66 Director
James J. Keil 69 Director
Paul Reece 60 Director
</TABLE>
CHARLES W. FRITZ is a founder of the Company and has served as its
President and a Director since its inception, and as Chief Executive Officer and
the Chairman of the Board of Directors since August 6, 1996. Prior to founding
the Company, Mr. Fritz was an Account Executive with IBM Corporation from 1979
to 1988, Director of Marketing and Strategic Alliances for the Information
Consulting Group from 1988-1989, and a Consultant for McKinsey & Company. 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
the Company and its Secretary. Mr. Fritz is a member of the Company's
Compensation Committee.
WILLIAM E. FRITZ is a founder of the Company and has served as
Secretary and a Director of the Corporation since its inception. He also served
as Treasurer of the Company from its inception until May 1, 1996. Mr. Fritz, who
has over thirty-two years in establishing and operating privately owned
companies, 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
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<PAGE>
companies formerly in the business of railroad freight car equipment
manufacturing. Mr. Fritz also has ownership interests and executive positions in
several other 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, the Company's President, Chief Executive Officer and Chairman
of the Board.
CHARLES T. JENSEN has been Chief Financial Officer, Treasurer and Vice
President of the Company since May 1, 1996. He has been a Director since August
6, 1996. Prior to joining the Company in November, 1995, Mr. Jensen, who has
over 27 years of audit, finance and business experience, including audit
experience with Price Waterhouse & Co., 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, a manufacturer of 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. Mr. Jensen is a member of the
Company's Compensation Committee.
ROBERT T. DURST, JR. has been Chief Technical Officer and
Vice-President of Technology since April 1, 1996. In addition, from April, 1996,
to April, 1997, Mr. Durst served as Vice-President of Business Development. He
has been a Director since August 6, 1996. Prior to joining the Company, Mr.
Durst held management positions with Symbol Technologies, Inc., Bohemia, New
York, from February, 1992 to March, 1995 where, among other things, he worked
extensively on two dimensional bar code technology. From March, 1986 to
February, 1992, Mr. Durst was employed as a Technical Director by Pitney Bowes,
Inc., Stamford, Connecticut. Mr. Durst holds a M.A. in Cognitive Psychology from
the University of Illinois and a B.A. from Allegheny College.
DAN TRAMPEL has been Senior Vice-President of Sales since July 3, 1996.
Mr. Trampel has approximately twenty years of experience in sales, marketing,
sales management and general management. Prior to joining the Company, from
September, 1993 to May, 1994, Mr. Trampel was Vice-President of Sales for the
Great Lakes region for Hitachi Data Systems, a California based company which
markets mainframe computers and peripherals to Fortune 500 companies. From July,
1991, to August, 1993, Mr. Trampel was Vice-President of Sales, Marketing and
Customer Support for Data-Link Systems, Incorporated, an Indiana based company
which acts as a data servicer and software development concern to large banks
and mortgage servicers. From February, 1989 to January, 1991, Mr. Trampel was
Vice-President of Sales for the Central Region for Network Equipment
Technologies, Incorporated, a California based company which provides high-speed
hardware and software to Fortune 500 companies desiring to install and operate
their own private data networks. From July, 1974 to February, 1989, Mr. Trampel
worked for IBM Corporation where he worked in its Data Processing Division and
National Accounts Division until 1985, when he became the Branch Manager of its
Midtown Branch in Chicago, Illinois. Mr. Trampel holds a B.A. in Economics and
Public Administration from Drake University.
A. HAYES BARCLAY has been a Director of the Company since August 6,
1996. Mr. Barclay has practiced law for approximately 33 years and since 1985,
has been an officer, owner and employee of the law firm of Barclay & Damisch,
Ltd. and its predecessor, with offices in Chicago, Wheaton, and
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<PAGE>
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. Mr. Barclay is a member
of the Company's Stock Option Committee.
JAMES J. KEIL has been a Director of the Company since August 6, 1996.
He is founder and president of Keil & Keil Associates, a business and marketing
consulting firm located in Washington, D.C., specializing in marketing, sales
and document technology projects. Prior to forming Keil & Keil Associates in
1990, Mr. Keil worked for approximately thirty-eight years at IBM Corporation
and Xerox Corporation in various marketing and sales positions. From 1989-1995,
Mr. Keil was on the Board of Directors of Elixir Technologies 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. Mr. Keil is a member of the
Company's Stock Option and Compensation Committees.
PAUL REECE has been a Director of the Company since August 6, 1996.
From 1987 until 1994, when he retired from Pitney Bowes, Inc., Stamford,
Connecticut, Mr. Reece served at various times as its Vice-President of
Operations and Technology Division, Vice-President of Technical Systems and
Advanced Products and Vice-President of Corporate Engineering and Technology.
Prior to joining Pitney Bowes, Inc., Mr. Reece worked for nineteen years at
General Electric Company in various technical, marketing and engineering
positions. Mr. Reece holds a B.S., M.S. and Ph.D. in electronics and engineering
from the University of Manchester, England. Mr. Reece is a member of the
Company's Compensation Committee.
CERTAIN SIGNIFICANT EMPLOYEES
KEVIN E. LEININGER was in charge of managing the Company's systems
transition solutions business from May, 1996 to April, 1997, when he was
promoted to Vice-president of Business Development. From 1991 to 1996, he
managed the Company's open systems development services, which currently are
part of the Company's systems transition solutions services. From 1987 to 1991,
prior to joining the Company, Mr. Leininger held a Group Leadership Position
with Fermi National Accelerator Laboratories. To date, Mr. Leininger has
authored or co-authored six books on UNIX and the Internet, three of which have
been McGraw Hill Book of the Month selections. Mr. Leininger holds a M.B.A. from
the University of Chicago and a B.S. in Physics and Math from Iowa State
University.
RICK D. HOLLINGSWORTH has been Vice President of Technical Operations
since August 19, 1996. Mr. Hollingsworth has twenty years of experience in
software development. Prior to joining the Company, from December, 1994 to
August, 1996, Mr. Hollingsworth served as a consultant for a number of
organizations in Southwest Florida. From June, 1992, to November, 1994, he was
with Allen Systems Group as Chief Technical Officer. Prior to serving in this
position, he served as its Executive Vice President for product development.
From May, 1986 to June, 1992, he served as Executive Vice President of Master
Control Systems where he coordinated the development and marketing of new
products. Mr. Hollingsworth holds a Bachelor of Business Administration from
Baylor University.
Directors are elected on an annual basis. Each director of the Company
holds office until the next annual meeting of the shareholders or until that
director's successor has been elected and qualified. At
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<PAGE>
present, the Company's by-laws provide for not less than one director nor more
than ten. Currently, there are seven directors. The Company's by-laws permit the
Board of Directors to fill any vacancy and such director may serve until the
next annual meeting of shareholders or until his successor is elected and
qualified. Officers of the Company are elected by the Board of Directors on an
annual basis and serve until the next annual meeting of the Board of Directors
and until their successors have been duly elected and qualified.
The Company has agreed, for a period of four years from the
consummation of this offering, if so requested by the Representative, to
nominate a designee of the Representative as a director of the Company, and if
the Company is unable to obtain directors and officers liability insurance, the
Representative has the right to designate a consultant to the Company's Board of
Directors, who has the right to attend directors' meetings and will be
compensated on the same basis as non-employee members of the Board of Directors.
DIRECTOR COMPENSATION
Directors are reimbursed for expenses actually incurred in connection
with attending meetings of the Board of Directors and non-employee directors
receive options to purchase 3,000 shares of the Company's Common Stock when
first becoming a director and options to purchase 1,000 shares when re-elected,
if such person is re-elected. See "Management - Stock Option Plan". The Company
anticipates that the Board of Directors will meet at least five times a year.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Audit Committee, Compensation
Committee and a Stock Option Committee. The Board of Directors does not have a
Nominating Committee, and the functions of such committee are performed by the
Board of Directors.
AUDIT COMMITTEE. The Company's Board of Directors will act as the Audit
Committee, which is responsible for nominating the Company's independent
accountants for approval by the Board of Directors, reviewing the scope, results
and costs of the audit with the Company's independent accountants, and reviewing
the financial statements, audit practices and internal controls of the Company.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of the Company
to the Board of Directors and for administering the Company's Incentive Plan for
Management. See "Management - Incentive Plan for Management". Charles W. Fritz,
Charles T. Jensen, James J. Keil and Paul Reece are the current members of the
Company's Compensation Committee.
STOCK OPTION COMMITTEE. The Stock Option Committee, which is comprised
of non-employee directors, is responsible for administering the Company's Stock
Option Plan. See "Management - Stock Option Plan". A. Hayes Barclay and James J.
Keil are the current members of the Company's Stock Option Committee.
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its 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 the Company 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 in
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) 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
the Company 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 the Company provide
that the Company is required and permitted to indemnify its officers and
directors, employees and agents under certain circumstances. In addition, if
permitted by law, the Company is required to advance expenses to its 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, the Company is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of the Company in which indemnification would be required or permitted. In
accordance with its agreement with the Representative, the Company has obtained
directors and officers liability insurance. The Company believes that its
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors and officers 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 ("Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid to (i) the Company's Chief Executive Officer and (ii) each of
the Company's other executive officers who received aggregate cash compensation
in excess of $100,000 for services rendered to the Company (collectively, "the
Named Executive Officers") during the years ended December 31, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
SECURITIES
ANNUAL COMPENSATION (1) UNDERLYING
----------------------------- WARRANTS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS COMPENSATION
- --------------------------- ---- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Charles W. Fritz 1996 $146,666 $ 36,667 260,000(3) $5,486(4)
President and Chief Executive Officer 1995 110,000 ---
1994 145,000 230,000
Charles T. Jensen 1996 95,000 50,782 90,386(5) $3,780(4)
Chief Financial Officer,Vice-President 1995(6) 10,833 ---
and Treasurer 1994(7) --- ---
Robert T. Durst, Jr. 1996 104,994 22,967 153,657(5) $4,704(4)
Chief Technical Officer and Vice-President 1995(7) --- ---
of Technology and Business Development 1994(7) --- ---
<FN>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission
("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) The 1996 bonuses were paid in February, 1997, except $30,000 of the bonus
to Mr. Jensen which was paid in August, 1996. The 1994 bonus was paid in
December, 1994.
(3) Represents a warrant, exercisable for a period of four years commencing
November 25, 1997, to purchase up to 260,000 shares of common stock at an
exercise price of $8.85.
(4) Includes life insurance premiums and the corresponding income tax effects.
(5) Represents options granted under the Company's Stock Option Plan.
(6) Amounts cover the period from date of employment by the Company in
November, 1995 until December 31, 1995.
(7) Was not employed by the Company during this year.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into five year employment agreements ending April
30, 2001, with each of Charles W. Fritz, its President and Chief Executive
Officer and Charles T. Jensen, its Chief Financial Officer and Treasurer, and
with Robert T. Durst, Jr., its Chief Technical Officer and Vice-President of
Technology, ending March 31, 2001. The employment agreements for Messrs. Fritz,
Durst and Jensen provide for an annual salary of $170,000, $140,000 and
$110,000, respectively, subject to annual review
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<PAGE>
by the Board of Directors which may increase but not decrease, such salary, and
participation in all benefits and plans available to executive employees of the
Company. Effective April 1, 1997. Mr. Durst's annual salary was increased to
$154,000, and Messrs. Fritz and Jensen's annual salaries were increased to
$187,000 and $121,000, respectively, effective May 1, 1997. Each employment
agreement terminates upon the employee's death or retirement, and may be
terminated by the Company upon the employee's total disability, as defined in
the agreement, or for cause which is defined, among other things, as the willful
failure to perform duties, embezzlement or conviction of a felony. In addition,
Messrs. Fritz, Durst and Jensen participate in a special insurance disability
plan and receive life insurance benefits not generally offered to other
employees and are entitled to certain severance benefits. These severance
benefits vary depending upon whether termination occurs prior to or after the
date of the Public Offering, the reason for termination and whether there has
been a change in control of the Company. Since none of Messrs. Fritz, Durst and
Jensen were terminated from their employment with the Company prior to the
Public Offering, the provisions relating to severance benefits payable if
termination occurs prior to the Public Offering are no longer applicable. If
termination occurs following the Public Offering by the Company (except for
cause or total disability) or by the employee for good reason, as defined in the
employment agreement, the agreement provides that the Company will pay to the
terminated employee (i) his salary through the date of termination, (ii) any
deferred and unpaid amounts due under the Company's Incentive Plan for
Management, (iii) any accrued deferred compensation, (iv) an amount equal to two
times the sum of his annual base salary plus his highest incentive compensation
for the last two years, (v) unpaid incentive compensation including a pro rata
amount of contingent incentive compensation for uncompleted periods, (vi) in
lieu of any stock options granted whether under the Stock Option Plan or
otherwise (which are canceled upon the following payment) a cash amount equal to
the aggregate spread between the exercise prices of all options held at such
time by such terminated employee and the higher of the highest bid price of the
Common Stock during the twelve months immediately preceding the date of
termination, or the highest price per share of Common Stock actually paid in
connection with any change in control (as defined in the employment agreement)
of the Company provided that such payments do not violate the provisions of any
option or the Stock Option Plan or other plan then in effect, (vii) an amount
equal to any taxes payable on these payments, (viii) all relocation expenses if
he moves his principal residence more than 50 miles within one year from the
date of termination, and (ix) all legal fees and expenses incurred as a result
of the termination. In addition, unless termination is for cause, the Company
must continue to fund through the terminated employee's normal retirement age
any key man insurance that is in effect on the date of termination, or make a
lump sum payment necessary to continue to pay such premiums and, for a period of
two years following termination, maintain in effect for the benefit of the
terminated employee all employee benefit plans, programs or arrangements in
effect immediately prior to the date of termination. If the terminated
employee's continued participation under such plan and programs is not
allowable, the Company is obligated to provide him with similar benefits. Each
employment agreement provides that services may be performed for companies,
other entities and individuals whether or not affiliated with the Company
provided that the performance of such services does not prevent the employee
from attending to the affairs of the Company and such companies are not in
competition with the Company. The employment agreements of Messrs. Fritz and
Durst contain provisions prohibiting their competing with the Company both
during and, depending upon the reason for such termination, for one year
following the termination of their employment.
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<PAGE>
INCENTIVE PLAN FOR MANAGEMENT
Effective as of January 1, 1996, the Company adopted an Annual Incentive
Plan for Management ("Incentive Plan"), which provides for annual cash bonuses
to eligible employees based upon the attainment of certain corporate and
individual performance goals during the year. The Incentive Plan is designed to
provide additional incentive to the Company'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 the Company'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 on January 1.
To be eligible for consideration for inclusion in the Incentive Plan, an
employee must be on the Company'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 the Company 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 the Company's and 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 PLAN
Effective as of February 1, 1996 (and amended and restated effective July
18, 1996 and further amended through November 18, 1996), the Company adopted its
1996 Stock Option Plan ("Stock Option Plan"), the purpose of which is to retain
the services of selected employees and attract new employees, consultants and
directors by providing them with the opportunity to acquire a proprietary
interest in the Company and thus share in its growth and success. The 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. Incentive stock options may be granted only to
employees of the Company or its subsidiaries. Stock options, other than
incentive stock options, may be granted to any employee, officer or consultant.
An employee may receive more than one grant of a stock option, including
simultaneous grants of different forms of stock options. Options to purchase up
to 3,000 shares of Common Stock are granted to non-employee directors on the
date that such person first becomes a member of the Board of Directors. In
addition, beginning with the Company's first annual stockholder's meeting
following the date of the Public Offering, options to purchase up to an
additional 1,000 shares of Common Stock will automatically be granted to each
non-employee director as of the date of each annual meeting at which such person
is re-elected or continues to serve as a director. Accordingly, since Messrs.
Barclay, Keil and Reece were re-elected as directors of the Company at the first
annual
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<PAGE>
stockholder's meeting in July, 1997, they each were issued options to purchase
1,000 shares of the Company's Common Stock.
The Stock Option Plan is currently administered by the Stock Option
Committee of the Board of Directors and is currently composed of Messrs. A.
Hayes Barclay and James J. Keil. An officer or employee of the Company may not
serve on this Committee. No member of the Committee is eligible to receive stock
options under the Stock Option Plan while serving on the Committee other than
the automatic grant of options to non-employee directors. Subject to the
provisions of the Stock Option Plan, the Committee has exclusive authority to
interpret and administer the Stock Option Plan, to select the persons to whom
stock options are granted, to determine the number of shares to be covered by
each stock option and whether the option granted is an incentive stock option or
a non-qualified stock option, to determine whether the shares covered by the
option are restricted as to transferability and to determine the terms and
conditions upon which each stock option may be exercisable. No stock options
under the Stock Option Plan can be granted after January 31, 1999, and the
maximum term of an option is ten years from the date of its grant. Upon the
occurrence of certain transactions, including a sale, transfer or other
disposition resulting in Charles W. Fritz, William E. Fritz and their affiliates
owning less than a specified percentage of the voting stock of the Company or
the execution of a definitive agreement for the sale of all or substantially all
of the Company's assets or its consolidation or merger (except for the merger of
Dev-Tech Associates, Inc. into the Company) where the Company is not the
surviving entity, each then outstanding option immediately becomes exercisable.
Under certain circumstances, the shares of Common Stock issuable upon exercise
of the options may be increased or decreased.
The exercise price of each option is determined by the Committee and must
be either the fair market value of each share subject to the option on the date
the option is granted, or at such other price as the Committee determines, but
not less than 100% of the fair market value on the date of the grant.
In lieu of tendering a cash payment to satisfy the option price, the
optionee may, in the Committee's discretion, satisfy all or a portion of such
option price by delivering shares of the Company's Common Stock. Such shares of
Common Stock are valued at their fair market value at the time of exercise.
Options under the Stock Option Plan are non-transferable other than by
will, the laws of descent or distribution or pursuant to a qualified domestic
relations order. Options may be exercised only during the lifetime of the
optionee and, except as may otherwise be provided, only by such individual. The
Committee, in its discretion, may provide that an option is exercisable in
installments and at specified times, and, at any time after the granting of an
option, may accelerate the installment exercise dates. Each grant of an option
is confirmed by an agreement ("Stock Option Agreement") between the Company and
the optionee, which provides, among other things, that shares received upon
exercise of the option cannot be sold, transferred or otherwise disposed of for
at least six months from the date of the Stock Option Agreement, none of the
outstanding options can be exercised by the optionee thereof unless such
optionee has been in the continuous employ of the Company to the date of
exercise, subject to termination of employment, death and disability and gives
the Company the right, under certain circumstances, to suspend an optionee's
right to exercise an option.
For options granted prior to July 18, 1996, depending upon the
circumstances of an optionee's termination of employment, such optionee's stock
options may be exercisable following such termination
63
<PAGE>
for up to three months, which is extended to twelve months from the date of
death if the optionee dies during such three month period. If the termination is
due to death, the option is exercisable for twelve months following the date of
death. If the optionee's employment with the Company is terminated without the
consent of the Company (other than due to the optionee's death) or for cause, as
determined by the Committee, then such optionee's right to exercise the
then-outstanding stock options terminates immediately. Options granted
subsequent to July 18, 1996, terminate on the earlier of an optionee's
termination of employment for any reason or the expiration of the term of the
option, although the Committee, in its sole discretion, may allow the option to
be exercised for any period following such termination but no longer than the
expiration of the term. If at any time after termination an optionee engages in
"detrimental activity", as defined in the Stock Option Plan, the Committee, in
its discretion, may cause the optionee's right to exercise the option to be
forfeited. Options then exercisable held by a non-employee director when such
person ceases being a director must be exercised within twelve months following
the date such person is no longer serving as a director, unless such termination
of service as a director is due to such person's death, permanent disability or
retirement pursuant to a Company policy, in which case, such options are
exercisable during their remaining terms. The employment agreements of Messrs.
Fritz, Durst and Jensen each provide that upon termination of employment by the
Company, other than for cause, death or retirement, or by the employee for "Good
Reason" as defined in the employment agreement, any time following the Public
Offering, any options granted to the terminated employee are canceled and, in
lieu thereof, such terminated employee is to receive a cash amount equal to the
aggregate spread between the exercise prices of all options held at such time by
such terminated employee and the higher of the highest bid price of the Common
Stock during the twelve months immediately preceding the date of termination, or
the highest price per share of Common Stock actually paid in connection with any
change in control of the Company (as defined), provided that such payments do
not violate the provisions of any option or the Stock Option Plan or other plan
then in effect.
As of the date hereof, options to purchase an aggregate of 679,728 shares
of Common Stock, at an exercise price of $.84, were granted and are outstanding
under the Company's Stock Option Plan, including options to Charles T. Jensen,
its Chief Financial Officer, and to Robert T. Durst, Jr., its Vice-President of
Technology, to purchase 90,386 and 153,657 shares of Common Stock, respectively.
In addition, as of July 31, 1997, options to purchase an aggregate of 349,407
shares of Common Stock in a range of $4.19 to $9.25 have also been granted to
employees, directors and consultants and are outstanding.
Effective February 1, 1996 (and amended and restated effective July 18,
1996), Migration adopted a 1996 stock option plan providing for the issuance of
a maximum of 400,000 shares of Migration common stock and identical in all other
material respects to the Company's Stock Option Plan. As a result of the merger
of Migration into the Company's wholly-owned subsidiary, the Migration stock
option plan is no longer in effect, no further options under the Migration stock
option plan will be issued and holders of options to purchase shares of
Migration common stock will, in lieu thereof, receive shares of the Company's
Common Stock upon exercise of their options. As of the date hereof, options to
purchase 323,132 shares of Migration common stock, at an exercise price of $.84
per share have been granted and are outstanding.
Following the merger of Migration into the Company's wholly-owned
subsidiary, the aggregate number of shares of Common Stock issuable under the
Company's Stock Option Plan was not increased
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<PAGE>
by the number of shares of stock issuable under the Migration stock option plan
but remains at a maximum of 1,500,000 shares, including options granted under
the Migration stock option plan. As of the date of this Prospectus, of the
1,500,000 options issuable under the Company's Stock Option Plan, there are
currently options granted to purchase an aggregate of 1,352,267 shares of Common
Stock (including 323,132 options granted under Migration's stock option plan),
and 135,348 options reserved for future issuance under the Stock Option Plan.
The Company has agreed with the Representative that except with respect to
options granted as of the date of this Prospectus and the grant of options under
the Stock Option Plan, it will not, for a period of one year from the date of
this Prospectus, issue any options without its approval.
The Company's Board of Directors has authorized Management to explore the
possibility of establishing a second stock option plan.
The following presents certain information on stock options and warrants
for the Named Executive Officers of the Company for the Year Ended December 31,
1996:
OPTION/WARRANT GRANTS IN 1996
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS/
UNDERLYING WARRANTS
OPTIONS/ GRANTED TO
WARRANTS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED 1996 PRICE DATE
---- ----------- ------------- -------- ----------
Charles W. Fritz 260,000(1) 100.0% $8.85 11/25/01
Charles T. Jensen 90,386(2) 6.4% $ .84 02/01/06
Robert T. Durst, Jr. 153,657(2) 10.8% $ .84 04/01/06
- ------------------------------------------------
(1) Represents a warrant ("Principal Stockholder's Warrant"), exercisable for
four years commencing November 25, 1997, granted in consideration of loans
made to the Company. Since this was the only warrant granted, it represents
100% of all warrants of this kind granted. When combined with all options
granted under the Company's 1996 Stock Option Plan, the Principal
Stockholder's Warrant represents 14.3% of all options and warrants granted
by the Company in 1996.
(2) Represents options granted under the Company's 1996 Stock Option Plan.
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<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth options exercised by the Company's Named
Executive Officers during fiscal 1996, and the number and value of all
unexercised options at fiscal year end. The value of "in-the-money" options
refers to options having an exercise price which is less than the market price
of the Company's stock on December 31, 1996.
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
SECURITIES DECEMBER 31,
UNDERLYING 1996
OPTIONS AT (BASED ON
DECEMBER 31, $4.785
1996 PER SHARE)
SHARES ACQUIRED VALUE #EXERCISABLE/ #EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- ------------- -------------
Charles W. Fritz -- -- 0/260,000 $0/$0
Charles T. Jensen -- -- 0/90,386 $0/$432,497
Robert T. Durst, Jr. -- -- 0/153,657 $0/$735,249
For the year ended December 31, 1996, there have not been any long term
incentive plan awards made to a Named Executive Officer.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan"). All employees of the Company 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 $9,500 for 1997) 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 the Company. To date, the Company has not made any such
contributions.
NONSOLICITATION AND CONFIDENTIALITY AGREEMENT
All of the Company's employees have signed a Nonsolicitation and
Confidentiality Agreement. This Agreement requires the employee both during and
following employment with the Company to keep confidential, and not disclose,
the confidential information of the Company, which is defined to include
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<PAGE>
all product drawings, technological information, sales and marketing data,
account names and data, customer lists, margin and pricing data and all other
materials or data not otherwise generally available to the public. In addition,
the employee is prohibited from soliciting the Company's customers upon
termination of employment. Even though the Company has all employees sign this
Agreement, a court may refuse to enforce it, either fully or even partially.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, (i)
by each person or entity known by the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) by each of the Company's directors,
(iii) by each executive officer of the Company named in the Summary Compensation
Table and (iv) by all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF OWNER OWNED(1) OWNED(1)
- ------------------------- ------------ ------------
<S> <C> <C>
Charles W. Fritz (2)(3)...................... 1,446,569 26.9%
Fritz Family Limited
Partnership (2)(4)........................... 1,511,742 28.1%
Chandler T. Fritz
1994 Trust(2)(5)(6).......................... 58,489 1.1%
Charles W. Fritz
1994 Trust(2)(5)(7).......................... 58,489 1.1%
Debra F. Schiafone
1994 Trust(2)(5)(8).......................... 58,489 1.1%
Charles T. Jensen(2)(9)...................... 90,386 1.7%
Robert T. Durst, Jr.(2)(9)................... 153,657 2.8%
Dan Trampel(2)(9)............................ 90,386 1.7%
A. Hayes Barclay(10)......................... 1,000 *
James J. Keil(11)............................ 5,000 *
Paul Reece(12)............................... 4,000 *
All executive officers and
directors as a group (8 persons)(13)........ 3,478,207 60.8%
<FN>
- ---------------------------------
* Less than one percent.
</FN>
</TABLE>
Footnotes are on the following page.
68
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of common stock subject to options
currently exercisable or exercisable within sixty days of July 31, 1997 are
deemed outstanding for computing the beneficial ownership percentage of the
person holding such options but are not deemed outstanding for computing
the beneficial ownership percentage of any other person. Options granted
under the Company's 1996 Stock Option Plan to Messrs. Barclay, Keil and
Reece and warrants (the "Principal Stockholder's Warrants") granted to
Charles Fritz are not currently exercisable or exercisable within sixty
days from July 31, 1997. Accordingly, the number of shares of common stock
issuable upon the exercise of any option or warrant owned by such person or
entity are not included in this table. Except as indicated by footnote, to
the knowledge of the Company, the persons named in the table above have the
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
(2) c/o NeoMedia Technologies, Inc.
2201 Second Street, Suite 600
Fort Myers, Florida 33901
(3) Mr. Charles Fritz may be deemed to be a parent and promoter of the Company,
as those terms are defined in the Securities Act. Shares beneficially owned
(i) include 200 shares of Common Stock (50 shares owned by each of Mr.
Charles Fritz's four minor children for an aggregate of 200 shares), (ii)
include 200 five-year redeemable publicly traded warrants to purchase
Common Stock at a price of $7.375 (50 warrants owned by each of Mr. Charles
Fritz's four minor children for an aggregate of 200 warrants), and (iii) do
not include the Principal Stockholder's Warrants to purchase 260,000 shares
of common stock at $8.85 per share after November 25, 1997.
(4) William E. Fritz, Secretary of the Company, and his wife, Edna Fritz, are
the general partners of this 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 T. 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 the Company
held in each trust. Accordingly, Mr. William E. Fritz is deemed to be the
beneficial owner of an aggregate of 1,687,209 shares (175,467 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, and 1,511,742 shares as
a result of being co-general partner of the Fritz Family Partnership). Mr.
William E. Fritz may be deemed to be a parent and promoter of the Company,
as those terms are defined in the Securities Act.
(5) William E. Fritz is the Trustee of this Trust and therefore is deemed to be
the beneficial owner of such shares.
(6) Chandler T. Fritz, son of William E. Fritz, is primary beneficiary of this
trust.
(7) Charles W. Fritz, son of William E. Fritz and President and Chief Executive
Officer of the Company, is primary beneficiary of this trust.
(8) Debra F. Schiafone, daughter of William E. Fritz, is primary beneficiary of
this trust.
(9) Represents options granted under the the Company's Stock Option Plan which
can be exercised, but cannot be sold until after November 25, 1997 in
accordance with an agreement made with the Representative.
(10) c/o Barclay & Damisch Ltd
115 West Wesley Street
Wheaton, Illinois 60187
Does not include 1,000 shares of common stock owned by Mr. Barclay's adult
child living at Mr. Barclay's home, beneficial ownership of which is
disclaimed.
69
<PAGE>
(11) c/o Keil & Keil Associates
733 15th Street, N.W.
Washington, D.C. 20005
(12) 380 Gulf of Mexico Drive
Long Boat Key, Florida 34228
Includes 2,000 Warrants owned by Mr. Reece.
(13) Includes an aggregate of 334,429 options granted under the Company's 1996
Stock Option Plan and 2,200 Warrants.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
In its Certificate of Incorporation, the Company elected not to be subject
to the provisions of Section 203 of the DGCL, which provides, with certain
exemptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person, or affiliate or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless certain conditions
are satisfied. An "interested stockholder" is defined to include any person, and
the affiliates and associates of such person, that is the owner of 15% or more
of the outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
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<PAGE>
BRIDGE FINANCING PRIVATE PLACEMENT
In August, 1996, the Company consummated the sale of an aggregate of
$2,975,000 principal amount of 10% Unsecured Subordinated Convertible Promissory
Notes, due September 30, 1997 (the "Bridge Promissory Notes"), in a private
placement to certain investors (the "Bridge Financing Private Placement"). In
November, 1996, prior to the Public Offering, the Company prepaid an aggregate
of $262,500 principal amount of the Bridge Promissory Notes. Upon consummation
of the Public Offering, the Bridge Promissory Notes were automatically converted
for each $50,000 principal amount into 13,750 shares of Common Stock and 13,750
Warrants. Since $2,712,500 aggregate principal amount of the Bridge Promissory
Notes were outstanding following such prepayment, upon the consummation of the
Public Offering, the Bridge Promissory Notes were automatically converted into
an aggregate of 745,938 shares of Common Stock of the Company (the "Converted
Shares") and 745,938 Warrants, and the Bridge Promissory Notes were no longer
outstanding. All of the Converted Shares and the Warrants were registered
pursuant to the Registration Statement for the Public Offering and 465,000
Converted Shares were sold in the Public Offering and 280,938 Converted Shares
may be sold from time to time in the open market by the holders of the Converted
Shares (the "Bridge Financing Selling Stockholders"), at any time after November
25, 1997, one year from the consummation of the Public Offering. The Warrants
owned by the Bridge Financing Selling Stockholders are not subject to any
restrictions on sale and may be sold at any time; however, the Common Stock
received by a Bridge Financing Selling Stockholder upon exercise of such a
Warrant may not be sold by a Bridge Financing Selling Stockholder until November
25, 1997, one year from the consummation of the Public Offering. See "Bridge
Financing Selling Stockholders" and "Additional Registered Securities".
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<PAGE>
BRIDGE FINANCING SELLING STOCKHOLDERS
The following table sets forth information with respect to the Bridge
Financing Selling Stockholders, who owned an aggregate of 745,938 shares of
Common Stock and 745,938 Warrants which were issued upon conversion of the
Bridge Promissory Notes, and all of which were registered in the Registration
Statement for the Public Offering. Of the Common Stock received upon conversion,
an aggregate of 465,000 of such shares were sold in the Public Offering by the
Bridge Financing Selling Stockholders. See "Bridge Financing Private Placement".
The Company did not receive any proceeds from the sale of these shares. With
respect to these shares, the Representative received from the Company a
non-accountable expense allowance equal to two and one-half percent of the total
proceeds from the sale of those shares. The cost of qualifying these shares
under federal and state securities laws, together with other costs in connection
with their offering and sale, was paid by the Company. The remainder of the
shares of Common Stock owned by the Bridge Financing Selling Stockholders may be
sold at any time after November 25, 1997, one year from the consummation of the
Public Offering. The Warrants are exercisable and may be sold at any time after
November 25, 1996; however, the Common Stock received by a Bridge Financing
Selling Stockholder upon exercise of such a Warrant may not be sold by a Bridge
Financing Selling Stockholder until November 25, 1997, one year from the
consummation of the Public Offering. See "Additional Registered Securities".
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
--------------------------------------------- WARRANTS
RECEIVED ON RECEIVED ON
CONVERSION OWNED CONVERSION OF
OF BRIDGE OFFERED AFTER BRIDGE PROMISSORY
NAME PROMISSORY NOTES HEREBY OFFERING NOTES
- ---- ---------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Allen, Howard L., BSSC
Master Def. Contribution
Profit Sharing Plan 6,875 4,285 2,590 6,875
Almeida, Donald F. 6,875 4,285 2,590 6,875
Arvay, Drew 3,438 2,143 1,295 3,438
Atkinson, Catherine S. 6,875 4,285 2,590 6,875
Atlantis Capital Partners 6,875 4,285 2,590 6,875
Baron, Hazen J. 6,875 4,285 2,590 6,875
Baxter, John F. 11,000 6,857 4,143 11,000
Bianchini, Peter J. & Gloria M. 19,250 12,001 7,249 19,250
Bixler, Marvin 6,875 4,285 2,590 6,875
Campos, J. Felix 5,500 3,428 2,072 5,500
Caribou Bridge Fund LLC 20,625 12,858 7,767 20,625
Dancer, Gordon A. 5,500 3,428 2,072 5,500
DiPasquale, John 2,750 1,714 1,036 2,750
Duchoissois, Craig J. 27,500 17,144 10,356 27,500
Dukes, LeRoy A. 6,875 4,285 2,590 6,875
Fefferman, Valerie R. 4,125 2,571 1,554 4,125
Fischman, Irwin 9,625 6,000 3,625 9,625
Frank, Stephen A. 13,750 8,572 5,178 13,750
Friedman, Jack 13,750 8,572 5,178 13,750
Friedman, Neil R. 5,500 3,428 2,072 5,500
Friedman, Richard 13,750 8,572 5,178 13,750
Generation Capital 13,750 8,572 5,178 13,750
Gennace, Timothy, IRA 11,000 6,857 4,143 11,000
Gorter, David F. 6,875 4,285 2,590 6,875
Greenberg, Ray and Nancy 3,438 2,143 1,295 3,438
Greenberg, Robert S. & Debra A. 2,750 1,714 1,036 2,750
Hall, James M. 27,500 17,144 10,356 27,500
Hanfling, Robert 13,750 8,572 5,178 13,750
Homburger, John 20,625 12,858 7,767 20,625
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
--------------------------------------------- WARRANTS
RECEIVED ON RECEIVED ON
CONVERSION OWNED CONVERSION OF
OF BRIDGE OFFERED AFTER BRIDGE PROMISSORY
NAME PROMISSORY NOTES HEREBY OFFERING NOTES
- ---- ---------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Ingles, Eugene F. 27,500 17,144 10,356 27,500
Kahn, Sanford & Judy 11,000 6,857 4,143 11,000
Karabetsos, Tom 6,875 4,285 2,590 6,875
Kiawah Capital Partners 6,875 4,285 2,590 6,875
Levenreich, David C. 17,188 10,715 6,473 17,188
Lewis, Michael S. 4,125 2,571 1,554 4,125
Linden, David & Fran 5,500 3,428 2,072 5,500
Lindvall, Jon 8,250 5,142 3,108 8,250
Lyons, Allan R. 3,437 2,142 1,295 3,437
Markowitz, Jeffrey 13,750 8,572 5,178 13,750
Morton, Keith 2,750 1,714 1,036 2,750
Mulvaney, Larry 5,500 3,428 2,072 5,500
Neider, Robert M. 10,312 6,428 3,884 10,312
Pannu, Jaswant S. & Debra B. 5,500 3,428 2,072 5,500
PGS Enterprises 3,437 2,142 1,295 3,437
Quad Capital Partners 13,750 8,572 5,178 13,750
Rainbow International Ltd. Ptns. 13,750 8,572 5,178 13,750
Regan, Michael A. & Jean H. 82,500 51,432 31,068 82,500
Retis, James A. 13,750 8,572 5,178 13,750
RF Corporation, c/o CIBC
Trust Co. Ltd., Bahamas 20,625 12,858 7,767 20,625
Ritchie, James E. 55,000 34,289 20,711 55,000
Ritchie, Mark 13,750 8,572 5,178 13,750
Rosenbaum, Alan J. 3,438 2,143 1,295 3,438
Rothstein, Paul L. 6,875 4,285 2,590 6,875
Schlacter, Harvey 6,875 4,285 2,590 6,875
Schwartzberg, Debbie 13,750 8,572 5,178 13,750
Sesso, FBO Ralph, IRA 5,500 3,428 2,072 5,500
Shladovsky, David 2,750 1,714 1,036 2,750
Simms, Clifford M. & Pamela J. 5,500 3,428 2,072 5,500
Thomas, Robert W. 6,875 4,285 2,590 6,875
Vecchione, Fred and Hillary 6,875 4,285 2,590 6,875
Wauterlak, Anthony 9,625 6,000 3,625 9,625
Wauterlak, John 11,000 6,857 4,143 11,000
Willeke, Renee L. 6,875 4,285 2,590 6,875
Williams, Justin C. 11,000 6,857 4,143 11,000
------ ----- ----- ------
Totals 745,938 465,000 280,938 745,938
======= ======= ======= =======
</TABLE>
73
<PAGE>
ADDITIONAL REGISTERED SECURITIES
Upon conversion of the Bridge Promissory Notes, the Bridge Financing
Selling Stockholders received 745,938 shares of Common Stock and 745,938
Warrants. Of such 745,938 shares of Common Stock, 465,000 were sold in the
Public Offering by the Bridge Financing Selling Stockholders and 280,938 shares
of Common Stock were not offered or sold in the Public Offering. Such 280,938
shares and the 745,938 Warrants were registered simultaneously with the Public
Offering for resale by the Bridge Financing Selling Stockholders; however, sales
of such shares of the Common Stock cannot be made until after November 25, 1997,
twelve months from the consummation of the Public Offering. The Warrants owned
by the Bridge Financing Selling Stockholders are not subject to any restriction
on sale and may be sold at any time following the Public Offering; however, the
Common Stock received by a Bridge Financing Selling Stockholder upon exercise of
such a Warrant may not be sold by a Bridge Financing Selling Stockholder until
after November 25, 1997, one year from the consummation of the Public Offering.
There are no material relationships between any of the Bridge Financing
Selling Stockholders and the Company, nor have any such material relationships
existed within the past three years. Other than the shares of Common Stock sold
by the Bridge Financing Selling Stockholders, at the time of the Public
Offering, the Company was informed by the Representative and the other
underwriters that there were no agreements between any of the Representative and
the other underwriters and any of the Bridge Financing Selling Stockholders
regarding the distribution of their respective Common Stock or Warrants. At the
time of the Public Offering, the Company was further advised by the
Representative that to its knowledge none of the Bridge Financing Selling
Stockholders had any current plan or other arrangement or commitment with
respect to the sale of their respective Common Stock or Warrants. The
Representative is a market maker in the Company's Securities. The Representative
could discontinue such market making activities at any time.
The sale of the Common Stock or Warrants by the Bridge Financing Selling
Stockholders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Bridge Financing Selling
Stockholders) in the over-the-counter market or in negotiated transactions, a
combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. Sales by the Bridge Financing Selling Stockholders, or
even the potential of such sales, would likely have an adverse effect on the
market prices of the Common Stock or Warrants. Bridge Financing Selling
Stockholders may effect such transactions by selling directly to purchasers,
through broker/dealers acting as the seller's agents or to broker/dealers who
may purchase such securities as principals and thereafter sell the securities
from time to time in the over-the-counter market, in negotiated transactions or
otherwise. Such broker/dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the sellers and/or the purchasers
from whom such broker/dealer may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker/dealer may
exceed customary commissions).
At the time a particular offer of Common Stock or Warrants is made by or on
behalf of a Bridge Financing Selling Stockholder, to the extent required, a
prospectus will be distributed which will set forth
74
<PAGE>
the number of securities being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, if any, the purchase
price paid by any underwriter for such securities purchased from the seller
thereof and any discounts, commissions or concessions allowed or reallowed or
paid to dealers, and the proposed selling price to the public.
If any of the following events occur, the prospectus will be amended to
include additional disclosure before offers and sales of the Common Stock or
Warrants by the Bridge Financing Selling Stockholders are made: (i) to the
extent such securities are sold at a fixed price or by option at a price other
than the prevailing market price, such price would be set forth in the
prospectus; (ii) if the securities are sold in block transactions and the
purchaser wishes to resell, such arrangements would be described in the
prospectus; and (iii) if the compensation paid to broker/dealers is other than
usual and customary discounts, concessions or commissions, disclosure of the
terms of the transaction would be included in the prospectus. The prospectus
would also disclose if there are other changes to the stated plan of
distribution, including arrangements that either individually or as a group
would constitute an orchestrated distribution of the securities.
Under applicable rules and regulations under the Securities Exchange Act of
1934 (the "Exchange Act"), subject to certain exceptions, any person engaged in
the distribution of the securities may not simultaneously engage in market
making activities with respect to any securities of such company for a period
commencing one or five business days prior to the determination of the offering
price or such time that such person becomes a participant in the distribution
and ending upon such person's completion of participation in the distribution.
Accordingly, in the event that the Representative or any of the other
underwriters is engaged in a distribution of the Company's securities, they will
not be able to make a market in the Company's securities during the applicable
restrictive period or during any period that they are engaged in the
distribution except for passive market making in accordance with Commission
Rules. However, neither the Representative nor any of the other underwriters has
agreed to or are any of them obligated to act as broker/dealer in the sale of
the Securities by the Bridge Financing Selling Stockholders and the Bridge
Financing Selling Stockholders may be required, and in the event that any of the
Representative or the other underwriters is a market maker, will likely be
required, to sell such securities through another broker/dealer. In addition,
each Bridge Financing Selling Stockholder desiring to sell securities will be
subject to the applicable provisions of the Exchange Act and the rules and
regulations thereunder which provisions may limit the timing of the purchases
and sales of the Company's securities by such Bridge Financing Selling
Stockholders.
The Bridge Financing Selling Stockholders and broker/dealers, if any,
acting in connection with such sales might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission received
by them and any profit on the resale of the securities may be deemed
underwriting discounts and commissions under the Securities Act.
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CERTAIN TRANSACTIONS
In 1994, the Company paid to William E. Fritz the aggregate amount of
$390,000 for a series of loans, in the aggregate amount of $803,000, made by him
to the Company in 1993 and 1994. The net result of such transactions was that as
of December 31, 1994, the Company was indebted to Mr. Fritz in the aggregate
amount of $413,000, which was represented by a promissory note, payable within
thirty days of demand, bearing interest at the rate of nine percent payable on
the last day of each calendar month. As described below, in the series of
transactions occurring in December, 1995, and January, 1996, this loan was
repaid in full, with $230,000 and $183,000 of this loan being repaid in
December, 1995 and January, 1996, respectively.
At various times, D.M., Inc. ( formerly Dev-Mark, Inc.), ("Dev-Mark"), an
Illinois corporation, solely owned by William E. Fritz, and G.T. Enterprises,
Inc. (formerly Gen-Tech, Inc.), ("Gen-Tech"), an Illinois corporation, owned by
William E. Fritz (or a limited partnership of which Mr. Fritz is a general
partner) and three minority stockholders, each of which is a separate trust,
with William E. Fritz, as trustee, and one of his three children (including
Charles W. Fritz) as the primary beneficiary of one of the trusts, loaned money
to the Company and Migration. Until March 13, 1996, Dev-Mark and Gen-Tech were
shareholders of the Company, at which time the respective stock ownership in the
Company of such corporations was distributed to their respective stockholders.
In 1994, Dev-Mark, in several transactions loaned to the Company the
aggregate principal amount of $255,000, $180,000 of which was repaid within
approximately one week. The remaining $75,000 was represented by a promissory
note, payable within thirty days of demand, bearing interest at the rate of nine
percent payable on the last day of each calendar month. As set forth below, in
the series of transactions occurring in December, 1995, and January, 1996, this
loan was paid in full in January, 1996.
In November, 1994, the Company borrowed from Charles W. Fritz the principal
sum of $45,000, which was repaid in less than one week.
In 1994, Charles W. Fritz loaned Migration the principal sum of $10,000,
represented by a promissory note, payable within thirty days of demand, bearing
interest at the rate of nine percent payable on the last day of each calendar
month. This loan was paid in full in February, 1997.
In December, 1994, William E. Fritz loaned Migration the principal sum of
$90,000, represented by a promissory note, payable within thirty days of demand,
bearing interest at the rate of nine percent, payable on the last day of each
calendar month. As described below, in the series of transactions occurring in
December, 1995, and January, 1996, $70,000 and $20,000 of this loan were repaid
in December, 1995, and January, 1996, respectively.
In August, 1995, Gen-Tech loaned Migration the principal sum of $150,000,
represented by a promissory note, payable within thirty days of demand, bearing
interest at nine percent payable on the last day of each calendar month. As
described below in the series of transactions occurring in December, 1995, and
January, 1996, this loan was paid in full in December, 1995.
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In December, 1994 and throughout 1995, the Company loaned to Migration the
aggregate principal amount of approximately $600,000, represented by a $500,000
promissory note, payable within five days of demand, bearing interest at the
prime rate of interest announced from time to time by NBD Bank, plus one
percent, payable on the last day of each calendar month. This loan was paid in
full in the series of transactions described below occurring in December, 1995,
and January, 1996, with $230,000 being repaid in December, 1995, and $370,000
being repaid in January, 1996.
DECEMBER, 1995 AND JANUARY, 1996 TRANSACTIONS
In December, 1995 and January, 1996, in a series of transactions between
affiliates, monies were loaned and borrowed between Charles W. Fritz, William E.
Fritz, Gen-Tech, Dev-Mark, Migration and the Company.
In the transactions occurring in December, 1995: (1) Charles W. Fritz
loaned $450,000 to Migration, which used such monies to pay existing
indebtedness of $230,000, $150,000 and $70,000 to the Company, Gen-Tech and
William E. Fritz, respectively, and (2) the Company paid $230,000 to William E.
Fritz in partial payment of existing indebtedness.
In the transactions occurring in January, 1996: (1) Charles W. Fritz loaned
$750,000 to Migration, which used such monies to pay existing indebtedness of
$20,000 and $370,000 to William E. Fritz and the Company, respectively, (2)
Migration loaned $360,000 to the Company, (3) the Company paid $183,000 and
$75,000 to William E. Fritz and Dev-Mark, respectively, for existing
indebtedness, and (4) the Company loaned William E. Fritz $472,000.
The result of such transactions occurring in December, 1995, and January,
1996, with respect to the Company was that (1) the Company and Migration paid in
its entirety any indebtedness owed by them to William E. Fritz, (2) the Company
loaned to William E. Fritz the principal sum of $472,000, represented by a note
payable within 30 days of demand, bearing interest at eight percent per annum,
(3) the Company paid in its entirety any indebtedness owed by it to Dev-Mark,
(4) Charles W. Fritz loaned to Migration the aggregate principal sum of
$1,200,000, represented by notes payable within thirty days of demand, bearing
interest at eight percent per annum, (5) Migration paid to William E. Fritz, the
Company and Gen-Tech, in their entirety, any indebtedness existing prior to or
incurred as a result of such transactions, and (6) Migration loaned to the
Company the principal sum of $360,000, which is represented by a note payable
within 30 days of demand, bearing interest at eight percent per annum. The
$472,000 loan receivable from William E. Fritz was repaid in full in February,
1997.
Following these series of transactions occurring in December, 1995 and
January, 1996, Migration was indebted to Charles W. Fritz in the aggregate
principal amount of $1,210,000, which was comprised of the $1,200,000 resulting
from these transactions and a $10,000 loan in 1994 described above. This
$1,210,000 principal amount remained unpaid until October, 1996, at which time
Mr. Fritz contributed $738,000 of such indebtedness to additional paid-in
capital of Migration, thus reducing such aggregate principal indebtedness to him
from Migration to $472,000. This loan was repaid in full in February, 1997.
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Past transactions between the Company and related parties may not have been
transacted on an arm's length basis. The terms of the Company's loan to William
E. Fritz may not have been on as favorable terms as could have been negotiated
with an independent third party. Any future transactions between the Company and
any executive officer, director, five percent beneficial owner of the Company's
Common Stock or any member of the immediate family of any of the foregoing in
which one or more of the foregoing individuals or entities has a material
interest will be on terms no less favorable to the Company than can be obtained
from unaffiliated parties. Any such transaction is subject to approval by a
majority of the board of directors, including a majority of the independent,
disinterested directors.
In December, 1994, and in June, 1995, Brandon Edenfield, then the Chief
Operating Officer of Migration, loaned Migration the principal sums of $46,748
and $20,000, respectively, each represented by a promissory note, payable within
thirty days of demand, bearing interest at the rate of nine percent payable on
the last date of each calendar month. Part of the proceeds of the Public
Offering were used to pay these loans.
In March, 1996, Dev-Mark loaned to the Company the principal sum of
$135,000, represented by a promissory note, payable within thirty days of
demand, bearing interest at the rate of eight percent payable on the last day of
each calendar month. This loan was repaid in full in December, 1996.
In March, 1996, Charles W. Fritz loaned the Company the principal sum
of $35,958.19, represented by a promissory note, payable within thirty days of
demand, bearing interest at the rate of eight percent payable on the last day of
each calendar month. $6,000 of the principal amount of this loan was repaid in
several days from the date of the loan. The remaining principal amount of
$29,958.19 was paid in full in August, 1996 with proceeds received from the
Bridge Financing Private Placement.
In June, 1996, Charles W. Fritz loaned the Company the principal sum of
$200,000, represented by a promissory note, payable within thirty days of
demand, bearing interest at the rate of eight percent payable on the last day of
each calendar month. This loan was repaid in full in December, 1996.
In June, 1996, in consideration of loans made by Charles W. Fritz to it,
the Company granted to him a warrant (the "Principal Stockholder's Warrant") to
purchase up to 260,000 shares of Common Stock at an exercise price of $8.85,
150% of the initial public offering price of the Common Stock. This warrant is
exercisable for a period of four years commencing one year after the date of the
Public Offering and contains anti-dilution provisions.
In connection with the extension of credit facilities by NBD Bank to the
Company in 1994, and in connection with the renewal of such credit facility (1)
Gen-Tech (with respect to the first renewal in 1995 of the facility) and
Dev-Mark (with respect to the initial facility) guaranteed the Company's
obligations to the Bank; (2) William E. Fritz pledged to the lender, as
collateral for the loan, all shares of Gen-Tech stock owned by him until the
second renewal in August, 1996, when such stock was released; (3) the Company
assigned to the Bank all of its rights in the demand promissory note for
$500,000 from Migration to the Company, and the security agreement between the
Company and Migration until the second renewal in August, 1996, when the Company
and Migration became co-borrowers; and (4) William E. Fritz (and Dev-Mark and
Gen-Tech with respect to the first renewal of the facility) subordinated rights
to the Bank. In February, 1997, William E. Fritz, Dev-Tech and Gen-Tech
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were released from the guarantees on the NBD Credit facility, including the
$750,000 letter of credit which William E. Fritz had pledged a $750,000
certificate of deposit which was in his name
In July, 1995, the Company purchased from the estate of a deceased
stockholder of the Company, 36 shares (560,161 shares on a post-exchange basis)
of the Company's Common Stock for $450,000. The purchase price, which was
arrived at through negotiations between Management and the estate of the
deceased stockholder, is evidenced by a non-interest bearing promissory note
payable in 36 equal installments of $12,500 each. Such shares were all of the
shares of Common Stock owned by such deceased stockholder and represented 18% of
the then issued and outstanding shares of Common Stock of the Company.
During the years ended December 31, 1996 and 1995, the Company performed
administrative services for Migration in the amount of $1,800 and $18,000,
respectively. Since Migration has merged into a wholly-owned subsidiary of the
Company, these amounts were eliminated.
During the years ended December 31, 1996, 1995 and 1994, the Company
performed administrative services for Gen-Tech in the amount of $6,838, $3,500
and $4,010, respectively, and for Dev-Mark in the amount of $11,363, $27,364 and
$127,065, respectively. During the six months ended June 30, 1997, the Company
did not perform administrative services for Gen-Tech or Dev-Mark.
During the years ended December 31, 1996, 1995 and 1994, the Company
performed administrative services for Storage 2000, Inc., an affiliated company,
in the amount of $9,048, $8,400 and $2,000, respectively, and for The Loop
Group, Inc., an affiliated company, in the amount of $-0-, $3,000 and $1,225,
respectively. In addition, for the years ended December 31, 1996 and 1995, the
Company received rental payments from Storage 2000, Inc. in the amount of
$10,912 and $2,748, respectively. During the six months ended June 30, 1997, the
Company did not perform administrative services for Storage 2000, Inc. and the
Loop Group, Inc. and did not receive rental payments from Storage 2000, Inc.
From July 15, 1995 to February 15, 1996, Charles W. Fritz and his wife,
pursuant to a verbal lease, leased space owned by them at 6054 Timberwood
Circle, #240, Ft. Myers, Florida 33908, to the Company for use as an office at a
monthly rental of $350. During this period, the condominium was also used by
several employees as their personal living quarters, who paid Mr. Fritz monthly
rental of $500. Since February 15, 1996, the space has been leased exclusively
to the Company at a monthly rental of $950.
Charles W. Fritz, Gen-Tech and Dev-Mark each previously guaranteed the
Company's obligations to IBM Credit Corp. ("ICC") under credit and financing
accommodations granted by ICC to the Company. In addition, each guarantor
subordinated to ICC any liabilities and obligations owed to them by the Company.
If any guarantor breached the guaranty, ICC had the right, among other things,
to require immediate payment of all indebtedness of the Company. In February,
1997, Gen-Tech and Dev-Mark were released from the guarantees to ICC.
In November, 1996, the Company entered into a lease with William E. Fritz
whereby Mr. Fritz leased to the Company an exhibition booth which cost $85,435.
The lease is for 36 months with monthly payments of $2,858.
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DESCRIPTION OF SECURITIES
UNITS
Each Unit sold in the Public Offering consisted of one share of Common
Stock and one Warrant which entitles the holder thereof to purchase one share of
Common Stock. The Common Stock and the Warrant constituting a Unit were
immediately separately transferable. The Units are not traded on NASDAQ or
elsewhere.
COMMON STOCK
The Company is authorized to issue 15,000,000 shares of Common Stock, $.01
par value, of which 5,381,701 shares are currently outstanding, including an
aggregate of 745,938 shares of Common Stock which were issued upon conversion of
the Bridge Promissory Notes, see "Bridge Financing Private Placement", assuming
no exercise of the Warrants, the Representative's Options, the Dominick's
Warrant, the Principal Stockholder's Warrant or any of the remaining unexercised
outstanding options under the Company's Stock Option Plan.
Holders of Common Stock are entitled to dividends when, as and if declared
by the Board of Directors out of funds available therefor, subject to any
priority as to dividends for any preferred stock that may be outstanding. There
currently is no preferred stock authorized or outstanding. Holders of Common
Stock are entitled to cast one vote for each share held at all stockholder
meetings for all purposes, including the election of directors. Cumulative
voting for the election of directors is not permitted. The holders of more than
thirty-three and one-third percent of the Common Stock issued and outstanding
and entitled to vote, present in person or by proxy, constitute a quorum at
meetings of stockholders and the vote of the holders of a majority of Common
Stock present at such a meeting will decide any question brought before such
meeting, except for certain actions such as amendments to the Company's
Certificate of Incorporation, mergers or dissolutions, all of which require the
vote of the holders of a majority of the outstanding Common Stock. Upon
liquidation or dissolution, the holder of each outstanding share of Common Stock
will be entitled to share ratably in the net assets of the Company legally
available for distribution to such stockholder after the payment of all debts
and other liabilities and after distributions to preferred stockholders, if any,
legally entitled hereto. No holder of Common Stock has any preemptive or
preferential rights to purchase or subscribe for any part of any unissued or any
additional authorized stock or any securities of the Company convertible into
shares of its stock, nor does any holder of Common Stock have redemption or
conversion rights. The outstanding shares of Common Stock are, and the Common
Stock offered hereby will be when issued and paid, fully paid and nonassessable.
Prior to the Public Offering, there were five holders of record, and there
are currently approximately 59 holders of record of the Common Stock. Management
of the Company believes that it has a greater number of shareholders because
Management believes that a substantial number of the Common Stock is held of
record in street name by broker/dealers for their customers.
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WARRANTS
Other than the Warrants, the Principal Stockholder's Warrant, see "Certain
Transactions", and the Dominick's Warrant, there currently are no warrants
issued by the Company. There are currently 2,700,938 Warrants issued and
outstanding (consisting of 1,955,000 Warrants sold by the Company in the Public
Offering and upon exercise of the Over-allotment Option and the 745,938 Warrants
issued to the 64 Bridge Financing Selling Stockholders upon consummation of the
Public Offering). Each Warrant entitles the holder to purchase one share of
Common Stock at an exercise price equal to $7.375 (125% of the initial offering
price of a share of the Common Stock in the Public Offering), subject to
adjustment, for a period of five years ending November 25, 2001. No holder of
Warrants, as such, will be entitled to vote or receive dividends or be deemed
the holder of shares of Common Stock for any purpose whatsoever until such
Warrants have been duly exercised and the purchase price has been paid in full.
Each Warrant is redeemable by the Company for $.05 per Warrant at any time one
year after November 25, 1996, the effective date of the Public Offering
("Effective Date") (which such period may be reduced or waived by the
Representative in its sole discretion), upon thirty days' prior written notice,
at any time if the closing price per share of Common Stock for twenty
consecutive trading days within the thirty-day period prior to the date notice
of redemption is given equals or exceeds $8.85, 150% of the Public Offering
price of a share of Common Stock, and at such time there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. The Company presently expects to call all of the Warrants for
redemption as soon as the trading price of its Common Stock meets the minimum
amount for the specified number of days provided it is one year from the
Effective Date (or such earlier date as may be determined by the Representative)
and a current Prospectus relating to the Common Stock underlying such Warrants
is then in effect. In the event the Company gives notice of its intention to
redeem, a holder would be forced to exercise such holder's Warrants within the
period set forth in the notice of redemption and pay the exercise price at a
time when it may be disadvantageous for such holder to do so, to sell the
Warrants at the current market price when such holder might otherwise wish to
hold them or to accept the redemption price which will be substantially less
than the market value of the Warrants at the time of redemption. The Warrants
will be entitled to the benefit of adjustments in the exercise price of the
Warrants and in the number of shares of Common Stock and/or other securities
delivered upon the exercise thereof upon the occurrence of certain events, such
as stock dividends, stock splits, recapitalizations, consolidations or mergers.
The Warrants will be exercisable only when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement, the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Because the Warrants may be
transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered or is exempt from
registration, such that the shares of Common Stock underlying the Warrants may
not be sold or transferred upon exercise of the Warrants. Warrant holders
residing in those states would have no choice but to attempt to sell their
Warrants or let them expire unexercised.
Holders of the Warrants will be able to sell the Warrants if a market
exists rather than exercise them. However, there can be no assurance that a
market will continue as to such Warrants.
Each Warrant is exercisable by surrendering the Warrant certificate, with
the formal subscription form on the reverse side of the Warrant certificate
properly completed and executed, together with
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payment of the exercise price to the Warrant Agent. Prior to their expiration or
redemption by the Company, the Warrants will be exercisable in whole or, from
time to time, in part. If less than all of the Warrants evidenced by a Warrant
certificate are exercised, a new Warrant certificate will be issued for the
remaining number of Warrants.
OPTIONS
As of the date hereof, options to purchase an aggregate of 1,352,267 shares
of Common Stock (including options granted under Migration's stock option plan)
have been granted and are outstanding. Options to purchase an aggregate of
135,348 shares of Common Stock are reserved for future issuance under the Stock
Option Plan. See "Management - Stock Option Plan". Shares of Common Stock
received upon the exercise of such options are subject to the provisions of
Commission Rule 144.
REPRESENTATIVE'S OPTIONS
At the closing of the Public Offering, the Company sold to the
Representative, for an aggregate purchase price of $170, a warrant (the
"Representative's Options") to purchase up to 170,000 Units (each Unit
consisting of one share of Common Stock and one Warrant, each identical to the
shares of Common Stock and Warrants sold in the Public Offering). The
Representative's Options are exercisable for a period of four years commencing
November 25, 1997, one year after the Effective Date at $8.85, 150% of the
Public Offering Price, and contains anti-dilution provisions satisfactory to the
Representative.
The Representative has certain registration rights with respect to the
Representative's Options and the Warrants and Common Stock underlying such
Representative's Options for a period of four years commending one year after
the date of the Public Offering. The exercise of such registration rights by the
Representative may result in dilution in the interests in the Company of
then-present stockholders, hinder efforts by the Company to arrange future
financings of the Company and/or have an adverse effect on the market price of
the Company's Common Stock and Warrants. See "Underwriting - Representative's
Options".
TRADING SYMBOL
The Common Stock and Warrants are listed for quotation on NASDAQ under the
symbols "NEOM" and "NEOMW", respectively. Prior to the Public Offering, there
was no public trading market for any such Securities. Although there currently
is a public trading market for these securities, there can be no assurance that
it will be maintained. Although it has no legal obligation to do so, the
Representative from time to time may act as a market maker and otherwise effect
transactions for its own account, or for the account of others, in the Company's
Securities. The Representative, if it so participates, may be a dominating
influence in any market that may develop for any of the Company's Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Company's Common Stock and the Warrant Agent for
the Company's Warrants is American Stock Transfer and Trust Company, New York,
New York.
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SHARES ELIGIBLE FOR FUTURE SALE
There are currently 5,381,701 shares of Common Stock outstanding, including
745,938 shares issued upon conversion of the Bridge Promissory Notes, out of a
total of 15,000,000 shares of Common Stock authorized, not including up to (i)
2,700,938 shares of Common Stock issuable upon exercise of the Warrants
(including 745,938 Warrants issued to the Bridge Financing Selling
Stockholders), (ii) 170,000 shares of Common Stock issuable upon exercise of the
Representative's Options, (iii) 170,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Representative's Options, (iv) 375,000
shares of Common Stock issuable upon exercise of the Dominick's Warrant, (v)
1,487,615 shares reserved for issuance under the Company's Stock Option Plan and
(vi) 260,000 shares of Common Stock issuable upon exercise of the Principal
Stockholder's Warrant. Of the 5,381,701 shares of Common Stock outstanding, the
1,490,000 shares of Common Stock sold in the Public Offering by the Company
(including 255,000 shares sold upon exercise of the Over-allotment Option) and
the 465,000 shares of Common Stock sold in the Public Offering by the Bridge
Financing Selling Stockholders are freely tradeable without restriction or
further registration under the Securities Act, except for any shares purchased
by an affiliate of the Company (in general, a person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144 under the Securities Act. In addition to the 465,000
shares of Common Stock sold in the Public Offering by the Bridge Financing
Selling Stockholders, an additional 280,938 shares of Common Stock issuable upon
conversion of the Bridge Promissory Notes were registered simultaneously with
the Public Offering for resale by the holders thereof from time to time after
November 25, 1997. When sold, such shares will be freely tradable without
restriction or further registration under the Securities Act. See "Additional
Registered Securities". The remaining 3,145,763 shares of Common Stock
outstanding are deemed to be "restricted securities", as the term is defined
under Rule 144 promulgated under the Securities Act, in that such shares were
purchased by the stockholders of the Company prior to the offering (3,133,378
shares) or upon exercise of options granted under the Company's Stock Option
Plan (12,385 shares) in transactions not involving a public offering and as such
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. Of such 3,145,763 restricted shares of
Common Stock, all are currently eligible for sale under Rule 144, subject to the
volume limitations prescribed by Rule 144 and to the contractual restrictions
described below, from time to time. Rule 144 provides, in essence, that a person
(including a group of persons whose shares are aggregated) and including any
person who may be deemed an "affiliate" of the Company, as that term is defined
under the Securities Act, who has satisfied a one-year holding period for such
restricted securities may sell within any three-month period, under certain
circumstances, an amount of restricted securities which does not exceed the
greater of 1% of that class of the company's outstanding securities or the
average weekly trading volume of that class of securities during the four
calendar weeks prior to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. In addition, pursuant to Rule 144,
persons who are not affiliated with the Company and who have held their
restricted securities for at least three years are not subject to the quantity
limitations or the manner of sale restrictions of the rule. As of the date
hereof, all of the 3,145,763 shares of Common Stock are available for resale
pursuant to Rule 144; however, pursuant to an agreement with the Representative,
the holders of all of such shares are restricted from selling them for a period
of twelve months from the Effective Date. See "Underwriting - Lock-Up
Agreement". A sale of shares by the Company's current stockholders, whether
pursuant to Rule 144 or otherwise, may have a depressing effect
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upon the market price of the Securities in any market for them that may develop.
To the extent that these shares enter the market, the value of the Common Stock
in the over-the-counter market may be reduced. See "Risk Factors".
Commission Rule 144A permits unlimited resales of restricted securities of
any issuer provided that the purchaser is a qualified institutional buyer (as
that term is defined therein) that at the end of its most recent fiscal year has
assets invested in securities of non-affiliated entities that were purchased for
a total of more than $100 million. Rule 144A allows holders of restricted shares
of the Company to sell such shares to such institutions without regard to any
volume or other restrictions.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon with respect to the resale of Common Stock originally purchased from
the Company, or issuable upon exercise of options originally granted by the
Company to its employees, directors, officers, consultants or advisers before
the date the Company becomes subject to the reporting requirements of the
Exchange Act, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. Beginning 90 days after
the date of the Public Offering (subject to the one year restriction on the sale
of stock received upon the exercise of the options), Common Stock issued in
reliance on Rule 701 may be sold by persons other than affiliates subject only
to the manner-of-sale provisions of Rule 144 and by affiliates under Rule 144
without compliance with its one-year minimum holding period requirements. See
"Management - Stock Option Plans" and "Underwriting - Lock-Up Agreements".
In the event that shares of Common Stock which are not currently saleable
become saleable by means of registration, eligibility for sale under Rule 144 or
otherwise and the holders of such shares of Common Stock elect to sell such
shares of Common Stock in the public market, there is likely to be a negative
effect on the market price of the Company's Securities and on the ability of the
Company to obtain additional equity financing. No predictions can be made as to
the effect, if any, that sales of the Common Stock or the availability of the
Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, the foregoing could adversely affect
prevailing market prices.
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RECENT UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Joseph Charles & Associates,
Inc. acted as representative (the "Representative"), purchased from the Company
and the Bridge Financing Selling Stockholders, and the Company and the Bridge
Financing Selling Stockholders sold to the Underwriters named below, the
aggregate number of Units set forth opposite their respective names in the table
below at $5.46 per Unit. The Units were resold in November, 1996 to the public
by the Underwriters at a price of $6.00 per Unit. The Units were sold on a firm
commitment basis.
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
Joseph Charles & Associates, Inc. 900,000
Cohig & Associates, Inc. 200,000
Kashner Davidson Securities Corp. 200,000
Neidiger/Tucker/Bruner, Inc. 200,000
Shepherd Financial Group, Inc. 200,000
---------
Total 1,700,000
=========
OVER-ALLOTMENT OPTION
The Company granted to the Representative an option, exercisable for sixty
days after November 25, 1997, the effective date of the Public Offering, to
purchase up to a maximum of 255,000 Units (each Unit consisting of one share of
Common Stock and one Warrant) at the Public Offering Price, less the
underwriting discounts. The Representative could exercise such option only to
cover over-allotments made in connection with the sale of the Common Stock and
Warrants offered the Public Offering.
In January, 1997, the Representative exercised the Over-allotment Option
and an additional 255,000 Units were sold by the Company to the public.
NON-ACCOUNTABLE EXPENSE ALLOWANCE
The Company paid to the Representative a non-accountable expense allowance
equal to two and one-half percent of the total proceeds of the Public Offering,
or $186,413 (based upon a Public Offering Price of $6.00). The Representative's
expenses in excess of the non-accountable expense allowance were borne by the
Representative. To the extent that the expenses of the Representative were less
than the non-accountable expense allowance, the excess is deemed to be
underwriting compensation. In addition to the Underwriter's discount and the
non-accountable expense allowance, the Company paid the costs of qualifying the
Securities under federal and state securities laws, together with legal and
accounting fees, printing and other costs in connection with the Public
Offering.
85
<PAGE>
The Company also paid to the Representative a non-accountable expense
allowance equal to two and one-half percent of the total proceeds of the sale by
the Bridge Financing Selling Stockholders of their 465,000 shares of Common
Stock sold in the Public Offering, or $68,588 (based upon a Public Offering
Price of $6.00 per Unit and attributing $5.90 thereof to the offering price of a
share of Common Stock). In addition, the Bridge Financing Selling Stockholders
sold such shares to the Underwriter less a discount equal to nine percent of the
offering price. The costs of qualifying these shares under federal and state
securities laws, together with legal and accounting fees, printing and other
costs in connection with the offering, were paid by the Company.
REPRESENTATIVE'S FINANCIAL CONSULTANT AGREEMENT
The Company retained the Representative as a financial consultant for a
period of two years from the date of the Public Offering for a fee of $2,500 per
month which was paid in advance at the closing of the Public Offering. The
financial consulting services to be provided by the Representative include
assisting in the development of a long-term financial strategy and working with
financial analysts.
DESIGNEE TO THE BOARD OF DIRECTORS
The Company has agreed, for a period of four years from the date of the
Public Offering, at the option of the Representative, to nominate a designee of
the Representative, reasonably acceptable to the Company, for election to the
Company's Board of Directors or, at the option of the Representative, if the
Company is unable to obtain directors and officers insurance satisfactory to the
Representative, to designate a consultant to the Board of Directors who will
have the right to attend all Board and Board committee meetings and will be
compensated on the same basis as non-employee members of the Board.
WARRANT SOLICITATION
The Company has agreed with the Representative not to solicit Warrant
exercises other than through the Representative. Upon exercise of any Warrants,
commencing November 25, 1997, one year from the effective date of the Public
Offering, the Company will pay the Representative a fee of 3% of the aggregate
exercise price, if (i) the market price of the Company Common Shares on the date
the Warrant is exercised is greater than the then exercise price of the Warrant;
(ii) the exercise of the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc. who is so designated in writing by the
holder exercising the Warrant; (iii) the Warrant is not held in a discretionary
account except where prior specific written approval for the exercise has been
received; (iv) disclosure of compensation arrangements was made both at the time
of the offering and at the time of exercise of the Warrant; (v) the solicitation
of the exercise of the Warrant was not in violation of Commission Rules; and
(vi) the Representative provides bona fide services in connection with the
solicitation of the Warrant. No solicitation fee will be paid to the
Representative on Warrants exercised within one year from November 25, 1996, of
the date of the Public Offering or on Warrants voluntarily exercised at any time
without solicitation. In addition, unless granted an exemption by the Commission
from its Rules under the Exchange Act, the Representative will be prohibited
from engaging in any market making activities or solicited brokerage activities
until the later of the termination of such solicitations activity or the
termination by waiver or otherwise of any right the Representative may have to
receive a fee for the exercise of the Warrants following such solicitation. Such
a prohibition, while in effect, could impair the liquidity and market price of
the Securities.
86
<PAGE>
CONSULTANT'S FEE
For services rendered by it to the Company, Compass Capital, Inc.
("Compass") was paid by the Company, a fee of $102,000, which was equal to one
percent of the gross proceeds in the Public Offering. Compass is a Washington
corporation which provides general corporate and financial consulting services
to companies. It is not a broker-dealer and has no affiliation or association
with the National Association of Securities Dealers, Inc. No principal of
Compass is affiliated with the Company. Compass has rendered general corporate
and financial consulting services to the Company, such as reviewing the
Company's corporate structure, its strategies and financial needs, assistance in
retaining a chief financial officer, advice and assistance regarding private and
public offerings, including advice and assistance in selecting the underwriters
in the Public Offering and assisting Company personnel during the underwriting
process of the Public Offering. Compass continues to provide general corporate
and financial consulting services to the Company following the Public Offering.
REPRESENTATIVE'S OPTIONS
The Company sold to the Representative, for an aggregate purchase price of
$170, as additional compensation in connection with the Public Offering,
warrants (the "Representative's Options") to purchase up to 170,000 Units (each
consisting of one share of Common Stock and one Warrant). The Units and the
shares of Common Stock in the Representative's Options are identical to the
Units sold in the Public Offering, and the Warrants underlying the
Representative's Options have an exercise price and other terms identical to the
Warrants sold in the Public Offering except that such Warrants are not
redeemable. The Representative's Options are exercisable for a four-year period
commencing November 25, 1997, one year from the effective date of the Public
Offering, and entitles the Representative to purchase up to 170,000 Units at an
exercise price of $8.85, 150% of the Public Offering Price of the Units, subject
to adjustment in certain events. The Representative's Options are restricted
from sale, transfer, assignment or hypothecation for a period of one year from
the effective date of the Public Offering except to officers or partners of the
Representative, other Underwriters, and members of the selling group and/or
their officers or partners. The Representative's Options contain anti-dilution
provisions providing for adjustment of the exercise prices as well as the number
of shares of Common Stock and Warrants issuable upon the occurrence of certain
events, including the issuance of shares of Common Stock or Warrants at a price
per share or per Warrant less than the exercise price or the market price of the
security, or in the event of any recapitalization, reclassification, stock
dividend, stock split, stock combination, or similar transaction. The
Representative's Options grant to the holders thereof certain piggyback and
demand registration rights as described below.
If the holders of at least a majority of the Representative's Options or
the securities underlying them wish to register the Representative's Options or
any of the securities underlying them during the period commencing November 25,
1997, one year following the effective date of the Public Offering and ending
four years thereafter, the Company has agreed to register or qualify such
shares, one time only, upon the request of the holders of at least a majority of
such Representative's Options or the securities underlying them ("Demand
Registration Right"). The Company will bear the full expense of such
registration, which may be substantial. If the Demand Registration Right is
exercised, the Company at its option may purchase the Representative's Options
for the difference between their exercise price and fair market value. In
addition, the Company has also agreed for a period of five years commencing on
November 25, 1996 to give notice to the holder or holders of the
Representative's Options, or the
87
<PAGE>
Common Stock and Warrants underlying the Representative's Options, of its
intention to file a registration statement under the Securities Act, and in that
event the holders of the Representative's Options or the Securities underlying
such options shall have the right to request the Company to include the
Representative's Options and such Securities underlying them in such
Registration Statement. The Representative's Options and the Securities
underlying it were registered as part of the Registration Statement for the
Public Offering.
The holders of the Representative's Options have no voting, dividend or
other rights as shareholders of the Company with respect to the shares of Common
Stock underlying the Representative's Options until the Representative's Options
have been exercised. The Company is obligated at all times to set aside and have
available sufficient number of authorized but unissued shares of Common Stock
and Warrants to be issued upon exercise of the Representative's Options.
It may be expected that the Representative's Options will be exercised only
if it is advantageous to the holders thereof. It may also be expected that if
the Representative's Options are exercised, the value of the Company's Common
Stock and Warrants held by public investors will be diluted if the value of such
stock immediately prior to the exercise exceeds the exercise price. Therefore,
for the life of the Representative's Options, the holders thereof are given, at
a nominal cost, the opportunity to profit from a rise in the market price of the
Company's Common Stock. Further, the terms upon which the Company could obtain
additional capital during such period may be adversely affected, since the
holders of the Representative's Options might be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain additional
needed capital on terms more favorable than those provided for by the
Representative's Options. Any gain realized on any resale of the
Representative's Options and/or underlying shares may be deemed additional
underwriting compensation.
LOCK-UP AGREEMENT
Except in connection with acquisitions or the exercise of options and
warrants that have been previously granted and the grant of options under the
Company's Stock Option Plan, the Company has agreed, for a period of one year
from the closing of the Public Offering, not to issue, sell or purchase any
shares of Common Stock or other equity securities of the Company without the
prior written consent of the Representative. The holders of the shares not sold
in the Public Offering and the officers, directors and present stockholders
agreed that they will not offer, sell or otherwise dispose of any shares of the
Company owned by them to the public for a period of at least twelve months from
the closing of the Public Offering. The Representative may, in its discretion,
waive such restrictions with respect to the officers, directors and present
stockholders and permit such holders otherwise agreeing to restrict their shares
to sell any or all of their shares.
In addition, grantees of options to purchase Common Stock who are eligible
to resell the Common Stock issuable upon exercising the option under Rule 701 of
the Securities Act have agreed (i) not to sell such Common Stock until November
25, 1997, one year from the date of the Public Offering and (ii) following such
period, to sell in accordance with the volume limitations of Rule 144(e)(1) of
the Securities Act which limits the number of shares that may be sold by such
person during any three month period to no more than the greater of (a) one
percent of the Company's then outstanding shares of Common Stock or (b) the
average weekly trading volume of the Common Stock during the four calendar
88
<PAGE>
weeks preceding the filing of notice of sale with the Commission, or if no
notice is required to be filed, the date of receipt by a broker to sell or the
date of execution of the sale.
INVESTORS RELATIONS
In accordance with its agreement with the Representative, the Company
engaged the services of an investor relations advisory firm, acceptable to the
Representative, for at least one year following the consummation of the Public
Offering.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
In accordance with its agreement with the Representative, the Company
acquired a reasonable amount of directors and officers liability insurance.
RECIPROCAL INDEMNIFICATION
The Underwriting Agreement with respect to the Public Offering provided for
reciprocal indemnification between the Company, the Bridge Financing Selling
Stockholders and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act or to
contribute to payments that may be required to be made. Insofar as
indemnification for liabilities arising under the Securities Act may be provided
to directors, officers and controlling persons of the Company, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
DETERMINATION OF OFFERING PRICE
Prior to the Public Offering, there was no public market for the Common
Stock or Warrants. The purchase price for the Common Stock and Warrants and the
exercise price and other terms of the Warrants and the Representative's Options
were determined by negotiations between the Company and the Representative, are
not necessarily related to the assets, book value, earnings or net worth of the
Company or any other established criteria of value, and should in no event be
regarded as an indication of any future market price of these securities. Among
the factors considered in determining the initial public offering price and the
exercise price of the Warrants were the prospects for the Company, an assessment
of the industry in which the Company operates, the assessment of management, the
number of Common Stock and Warrants offered, the price that purchasers of such
securities might be expected to pay given the nature of the Company and the
general condition of the securities markets at the time of the Public Offering.
Accordingly, the initial public offering price of the Common Stock and of the
Warrants and the exercise price of the Warrants should not be considered an
indication of the actual value of such Securities. The price of the Common Stock
is subject to change as a result of market conditions and the price of the
Securities is subject to change due to other factors, and no assurance can be
given that the Common Stock received upon exercise of the Warrants can be resold
at its exercise price.
89
<PAGE>
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, the Company, the Securities and Exchange
Commission, Washington, D.C., and the Chicago Regional Office of the Securities
and Exchange Commission, Chicago, Illinois. See "Additional Information".
In connection with the Bridge Financing Private Placement (see "Bridge
Financing Private Placement"), the Company paid the Representative a commission
in the amount of $277,500 and reimbursed the Representative for its
non-accountable expenses relating to the Bridge Financing Private Placement in
the amount of $25,000, including fees and expenses of its counsel. In addition,
the Company issued warrants to the Representative which were canceled upon the
effective date of the Public Offering.
A significant amount of Securities offered hereby were sold to customers of
the Representative or the other Underwriters and the concentration of customers
of the Representative or the other Underwriters may adversely affect the market
for and liquidity of the Company's Securities. Such customers subsequently may
engage in transactions for the sale or purchase of such Securities through or
with the Representative or the other Underwriters. Although they have no
obligation to do so, the Representative or the other Underwriters may make a
market in the Company's Securities and may otherwise effect transactions in such
Securities. If it or the other Underwriters participates in the market, the
Representative or the other Underwriters may exert a dominating influence on the
market for the Securities described in this Prospectus. Such market activity may
be discontinued at any time. The price and liquidity of the Securities may be
significantly affected by the degree, if any, of the Representative's or the
other Underwriter's participation in such market.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996, and the
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years then-ended included in this Prospectus have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Fishman & Merrick, P.C., 30 North LaSalle Street, Chicago, Illinois 60602
has acted for the Company in connection with this offering. Krys Boyle Golz
Freedman & Scott, P.C., Dominion Plaza, Suite 2700, South Tower, 600 Seventeenth
Street, Denver, Colorado 80202-5427, acted as counsel to the Representative in
connection with the Public Offering.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
registration statement under the Securities Act on Form SB-2 ("Registration
Statement") with respect to Common Stock offered hereby. No distribution of the
Common Stock will be made until the Registration Statement, as it may
90
<PAGE>
be amended, has been declared effective. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and the exhibits thereto. All of these documents may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at
the prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C.
91
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NEOMEDIA TECHNOLOGIES, INC. AND
SUBSIDIARIES
PAGE(S)
-------
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996 F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1995 and 1996 F-5
Notes to Consolidated Financial Statements F6 to F-17
Interim Consolidated Balance Sheet as of June 30, 1997 (UNAUDITED) F-18
Interim Consolidated Statements of Operations for the six months ended
June 30, 1996 and 1997 (UNAUDITED) F-19
Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1997 (UNAUDITED) F-20
Interim Consolidated Statement of Shareholders' Equity for the six months ended
June 30, 1997 (UNAUDITED) F-21
Interim Notes to Consolidated Financial Statements (UNAUDITED) F-22 to F-24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of NeoMedia Technologies, Inc.
We have audited the accompanying consolidated balance sheets of NeoMedia
Technologies, Inc. and subsidiaries ("NeoMedia") as of December 31, 1995 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the NeoMedia's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial position of NeoMedia as of
December 31, 1995 and 1996, and the consolidated results of operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 14, 1997
F - 1
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
ASSETS 1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 11 $ 4,159
Trade accounts receivable, net of allowance for doubtful
accounts of $311 and $216 ................................... 3,473 4,983
Amounts due from related parties ................................ 58 496
Inventories ..................................................... 129 105
Costs and estimated earnings in excess of billings on uncompleted
contracts ................................................... 127 40
Deferred income taxes ........................................... 193 --
Deposits ........................................................ 203 19
Prepaid expenses and other ...................................... 340 529
-------- --------
Total current assets ........................................ 4,534 10,331
-------- --------
Property and equipment, net of accumulated depreciation .............. 269 278
Capitalized software costs, net of accumulated amortization .......... 1,030 657
-------- --------
Total assets .................................................... $ 5,833 $ 11,266
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,041 $ 3,800
Accrued expenses ................................................ 670 1,043
Bank financing .................................................. 1,625 --
Notes payable to related parties ................................ 352 --
Current portion of long-term debt ............................... 245 262
Other ........................................................... 518 245
-------- --------
Total current liabilities ................................... 5,451 5,350
-------- --------
Long-term debt, net of current portion ............................... 1,830 1,589
-------- --------
Total liabilities ........................................... 7,281 6,939
-------- --------
Shareholders' equity (deficit):
Common stock, $.01 par value, 15,000,000 shares authorized,
3,639,539 and 5,114,316 shares outstanding .................. 36 51
Additional paid-in capital ...................................... (34) 8,801
Accumulated deficit ............................................. (1,059) (4,525)
-------- --------
Subtotal .................................................... (1,057) 4,327
Less treasury stock, at cost .................................... (391) --
-------- --------
Total shareholders' equity (deficit) ........................ (1,448) 4,327
-------- --------
Total liabilities and shareholders' equity ...................... $ 5,833 $ 11,266
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 2
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996
----------- -----------
(Dollars in thousands,
except per share data)
NET SALES:
License fees ............................. $ 276 $ 775
Software product resales ................. 1,192 2,231
Technology equipment resales ............. 8,538 12,438
Service fees ............................. 2,795 2,074
----------- -----------
Total net sales ...................... 12,801 17,518
----------- -----------
COST OF SALES:
License fees ............................. 83 316
Software product resales ................. 473 1,406
Technology equipment resales ............. 7,112 10,665
Service fees ............................. 2,414 1,906
Amortization of capitalized software costs 571 655
----------- -----------
Total cost of sales .................. 10,653 14,948
----------- -----------
GROSS PROFIT .................................. 2,148 2,570
General and administrative expenses ........... 907 2,288
Sales and marketing expenses .................. 1,826 2,326
Research and development costs ................ 436 335
----------- -----------
Loss from operations .......................... (1,021) (2,379)
Interest expense, net ......................... 280 540
----------- -----------
LOSS BEFORE INCOME TAXES ...................... (1,301) (2,919)
Provision (Benefit) for income taxes .......... (170) 156
----------- -----------
NET LOSS ...................................... $ (1,131) $ (3,075)
=========== ===========
PER SHARE DATA:
Net loss per share ....................... $ (0.26) $ (0.72)
=========== ===========
Weighted average common and common
equivalent shares outstanding ....... 4,362,420 4,266,753
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(1,131) $(3,075)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts ...................................... 311 431
Depreciation and amortization ........................................ 679 797
Gain on sale of property and equipment ............................... 4 --
Deferred income taxes provision (benefit) ............................ (139) 193
Changes in operating assets and liabilities:
Trade accounts receivable ........................................ 1,704 (1,941)
Other current assets ............................................. (353) (161)
Accounts payable and accrued expenses ............................ (2,155) 1,759
Other current liabilities ........................................ 143 100
------- -------
Net cash used in operating activities ............................ (937) (1,897)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development costs and purchased software ....... (278) (293)
Proceeds from sales of property and equipment ............................. 19 --
Acquisition of property and equipment ..................................... (185) (140)
------- -------
Net cash used in investing activities ............................ (444) (433)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of units ....................................... -- 5,701
Advance to shareholders ................................................... -- (472)
Borrowings under notes payable and long-term debt ......................... 3,554 3,225
Repayments on notes payable and long-term debt ............................ (2,311) (2,283)
Borrowings from shareholders and related parties .......................... 140 1,123
Repayments to shareholders and related parties ............................ (42) (816)
------- -------
Net cash provided by financing activities ........................ 1,341 6,478
------- -------
NET INCREASE (DECREASE) IN CASH ........................................... (40) 4,148
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .............................. 51 11
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................... $ 11 $ 4,159
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................ $ 134 $ 566
Income taxes paid .................................................... 58 65
Non-cash investing and financing activities:
Conversion of bridge loan to common stock ........................ -- 2,411
Capital contribution from related party .......................... -- 738
Retirement (Acquisition) of treasury stock for a note payable .... (391) 391
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED NUMBER
COMMON PAID-IN- EARNINGS TREASURY OF
STOCK CAPITAL (DEFICIT) STOCK SHARES
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............ $ 36 $ (34) $ 72 $ -- 3,639,539
Acquisition of treasury stock, at cost -- -- -- (391) --
Net loss .............................. -- -- (1,131) -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ............ 36 (34) (1,059) (391) 3,639,539
Retirement of treasury stock, at cost . (5) 5 (391) 391 (506,161)
Capital contribution from related party -- 738 -- -- --
Proceeds from issuance of 1,700,000
units, net of $1,756 of
issuance costs ................... 17 5,684 -- -- 1,700,000
Conversion of bridge loan to
common stock ..................... 3 2,408 -- -- 280,938
Net loss .............................. -- -- (3,075) -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ............ $ 51 $ 8,801 $ (4,525) $ -- 5,114,316
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 5
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
NeoMedia Technologies, Inc. ("Technologies") was incorporated under the
laws of the state of Delaware in July 1996 to acquire by merger Dev-Tech
Associates, Inc. ("Dev-Tech"), an Illinois corporation, which was incorporated
in December 1989. On August 5, 1996, Technologies acquired all of the shares of
Dev-Tech in exchange for the issuance of shares of Technologies' common stock to
the shareholders of Dev-Tech. Dev-Tech Migration, Inc. ("DTM") was incorporated
in June 1994 in Illinois. On November 20, 1996, DTM was merged into NeoMedia
Migration, Inc. ("Migration"), a Delaware corporation and a wholly owned
subsidiary of Technologies, in exchange for the issuance of 827,525 shares of
Technologies' common stock to the shareholder of DTM (the "Migration Merger").
Technologies and Migration (collectively, "NeoMedia" or the "Company"), since
Migration's inception, have shared certain management and were controlled by
common shareholders. These transactions have been accounted for in a manner
similar to the pooling of interests method of accounting using historical book
values rather than fair market value as all entities involved were under common
control. Distribuidora Vallarta, S.P.A. is a wholly-owned subsidiary of
Migration and was incorporated in Guatemala in August, 1996, to employ computer
software developers and system integrators. As these transactions were completed
as of December 31, 1996, the financial statements of NeoMedia have been
presented on a consolidated basis for all periods presented. The financial
position and results of NeoMedia as of and for the periods prior to these
mergers have been combined in a manner consistent with NeoMedia's consolidation
principles as of December 31, 1996. All significant intercompany accounts and
transactions have been eliminated in preparation of the consolidated financial
statements.
The historical number of shares of common stock have been restated to give
effect to a stock split in March, 1996, whereby each holder of common stock
received 15,555.60975 shares of common stock for each share of common stock then
owned and to a reverse stock split on November 1, 1996, whereby each holder of
common stock received .90386 shares of common stock for each one share then
owned. The reverse stock split applied to all outstanding stock options as of
November 1, 1996.
In July, 1995, Dev-Tech purchased 36 shares of its common stock in exchange
for a non-interest bearing uncollateralized note payable for $450,000. The note
payable is due in 36 monthly installments of $12,500 commencing August, 1995. As
of December 31, 1995, the acquired shares were recorded in treasury stock in the
consolidated balance sheet at cost of $391,000 which equals the carrying value
of the note discounted at Dev-Tech's incremental borrowing rate of 10%. The
discount is being accreted to interest expense over the term of the note. In
May, 1996, Dev-Tech filed an amendment to its Articles of Incorporation to
retire these 36 shares (506,161 shares on a post-exchange and reverse stock
split basis) of common stock.
The effect of this exchange and reverse stock split has been incorporated
into the consolidated financial statements and notes of NeoMedia for all periods
presented as follows:
SHARES ISSUED
-----------------------
SUBSEQUENT
PRIOR TO TO
EXCHANGE EXCHANGE
AND SPLIT AND SPLIT
--------- ---------
Dev-Tech:
Shares outstanding 164 2,305,853
Shares in treasury 36 506,161
Migration ....................................... 1,000 827,525
---------
Total shares issued as of December 31, 1995 ..... 3,639,539
=========
F - 6
<PAGE>
NATURE OF BUSINESS OPERATIONS
NeoMedia operates in one business segment which is comprised of three
principal applications markets: (i) Intelligent Document Solutions, (ii)
Document Systems Solutions and (iii) Systems Transition Solutions.
The INTELLIGENT DOCUMENT SOLUTIONS UNIT was established to assist clients
in linking printed material to electronic media. NeoMedia has developed its own
technology, and has rights to use the technology of others, to generate printed
documents which can be automatically "read" by machines, such as computers
equipped with scanners and appropriate software. These "machine readable"
documents incorporate printed codes which contain thousands of bytes of
information, including computer programs rendering them functionally equivalent
to a computer floppy disk with a limited capacity to hold information. These
codes are referred to in the industry as "high capacity symbologies" and
"multi-dimensional" or "two-dimensional" bar codes. NeoMedia refers to documents
that incorporate high capacity symbologies as "Intelligent Documents," and
currently provides software and services to support the application of this
technology.
The DOCUMENTS SYSTEMS SOLUTIONS UNIT was established to assist clients in
definition, design, implementation and management of their document system
environments. These services include strategic consulting to define and optimize
enterprise wide documents strategies, as well as systems integration and
development to implement effective document generation, archive and management
systems. NeoMedia specializes in the technical areas of electronic forms
management, document production systems and intelligent document solutions
incorporating multi-dimensional bar code technologies. The document system
process provided by NeoMedia also includes electronic media alternatives such as
Internet and Intranet channels.
The SYSTEMS TRANSITION SOLUTIONS UNIT was established to enable clients to
migrate applications on closed, proprietary ("legacy") systems to more cost
effective and extendable open systems platforms. NeoMedia has acquired and
developed a line of proprietary products and tools utilized in its migration
services. NeoMedia also provides strategic consulting, systems development,
systems engineering and support services in connection with its systems
transition solutions.
As part of the services provided in connection with system transition
solutions service engagements, NeoMedia acts as a reseller of purchased hardware
in connection with open systems development and migrations. NeoMedia maintains
relationships with a number of major companies under which NeoMedia sells third
party purchased hardware and software products of those companies.
NeoMedia has established several strategic alliances with third party
software and hardware vendors, leading consulting firms and major system
integrators. These alliances are integral to NeoMedia's business operations.
NeoMedia principally markets and distributes its products through
distributors in the United States (although it has distributors in Europe, Asia,
the Middle East, Indonesia and Latin America), and currently has U. S. district
offices located in Illinois, California, Minnesota, and Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
F - 7
<PAGE>
REVENUE RECOGNITION
License fees 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. Software product and technology equipment sales represent
revenue from the resale of purchased third party hardware and software products.
Service fees represent revenue from consulting, education, and post contract
software support services.
NeoMedia recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1, "Software Revenue
Recognition." Software license fees are recognized upon shipment to the customer
to the extent that collection is probable and the remaining obligations of
NeoMedia are insignificant. When all components necessary to run hardware have
been shipped and only insignificant post-delivery obligations remain, revenue
and costs are recognized at the time of shipment, based upon the sales price and
the cost of specific items shipped. Historically, product returns and allowances
have been insignificant.
Service revenues include maintenance fees for providing system updates for
software products, user documentation and technical support, and sales of
NeoMedia's proprietary software which is not bundled with hardware or software
of third parties. Hardware maintenance is generally billed to the customers in
advance on a monthly, quarterly or annual basis and recognized as revenue
ratably over the term of the maintenance contract. Other service revenues,
including training and consulting, are recognized as the services are performed.
Revenues related to custom programming and other services provided under fixed
fee contract arrangements are recognized based on the percentage of completion
method, measured by the percentage of direct labor and subcontractor costs
incurred to date in relation to total estimated direct labor and subcontractor
costs for each contract. Unrecognized amounts are recorded as deferred revenue.
Contract costs include all direct material, labor and subcontractor costs
related to contract performance. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determinable. Changes in job
performance, job conditions and estimated profitability, including amounts
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and revenue and are recognized in the period in
which such revisions are determinable. Costs and estimated earnings in excess of
billings on uncompleted contracts, represents revenue recognized in excess of
amounts billed.
INVENTORIES
Inventories are stated at the lower of cost or market and are comprised
principally of purchased computer technology resale products including equipment
and software products. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less allowances 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 up to seven years for furniture and
fixtures. Upon retirement or sale, cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in the statement of
operations.
CAPITALIZED SOFTWARE COSTS
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards 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
F - 8
<PAGE>
necessary to establish technological feasibility, are classified as product
development and expensed as incurred. Once technological feasibility has been
determined, additional costs incurred in development, including coding, testing,
quality assurance and documentation writing, are capitalized.
Amortization of purchased and developed software is provided on a
product-by-product basis over the estimated economic life of the software,
generally not exceeding three years, using the straight-line method.
Amortization commences when a product is available for general release to
customers. Unamortized capitalized costs determined to be in excess of the net
realizable value of a product are expensed at the date of such determination.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"), 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 effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period of
enactment.
DTM, with the consent of its shareholder, elected to be treated as a small
business corporation (S corporation under the Internal Revenue Code) for income
tax purposes. Accordingly, until the Migration Merger, DTM's taxable income and
related tax credits were reportable by the shareholder on the individual's
income tax returns. The pro forma benefit for income taxes, net loss and per
share information for the years ended December 31, 1996 and 1995 of the combined
operations of Dev-Tech and DTM calculated using the statutory tax rates in
effect during the applicable periods, as if DTM were taxable as a C Corporation,
are identical to the historic information presented in NeoMedia's consolidated
financial statements. Such pro forma calculations assume the adoption of FAS 109
by DTM as of June 1994 (date of incorporation of DTM). No income tax benefit
would have been recognized from the net operating losses of DTM as a 100%
valuation allowance would have been recorded against a deferred tax asset as a
result of the uncertainty of DTM's ability to generate future taxable income.
COMPUTATION OF LOSS PER SHARE
The computation of net loss per share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalents consist of outstanding stock options, which pursuant to
Staff Accounting Bulletin No. 83 of the Securities and Exchange Commission, are
included in the weighted average shares as if they were outstanding for the
entire period to the extent granted within the twelve months preceding the
contemplated public offering date, using the treasury stock method until such
time as shares are issued. For the years ended December 31, 1995 and 1996, the
computation of the weighted average number of common shares and common share
equivalents outstanding was as follows:
1995 1996
--------- ---------
Common stock ............................. 3,420,434 3,328,758
Effect of stock options .................. 941,986 937,995
--------- ---------
Total .................................... 4,362,420 4,266,753
========= =========
For the years ended December 31, 1995 and 1996, information regarding loss
per share computed on a historical basis under the provisions of Accounting
Principles Board Opinion No. 15, "Earnings per Share," was as follows:
1995 1996
---------- ----------
Net loss per share ............................ $ (0.33) $ (0.92)
========== ==========
Weighted average common shares outstanding .... 3,420,434 3,328,758
========== ==========
F - 9
<PAGE>
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which becomes effective for NeoMedia for the year ended December 31,
1997. FAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share which excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share is computed similarly to fully diluted
earnings per share pursuant to Accounting Principles Board Opinion No. 15,
"Earnings Per Share." FAS 128 also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structure and requires a reconciliation of the numerator
and denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation. NeoMedia has not yet
determined the impact of implementing FAS 128.
FINANCIAL INSTRUMENTS
The fair value of NeoMedia's debt, current and long-term, is estimated to
approximate the carrying value of these liabilities based upon borrowing rates
currently available to NeoMedia for borrowings with similar terms.
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 $311,000 and $216,000 in
its December 31, 1995 and 1996 consolidated balance sheets, respectively.
NeoMedia had net sales to one major customer in the telecommunications industry
of $6,257,000 and $6,932,000 during the years ended December 31, 1995 and 1996,
respectively, resulting in trade accounts receivable of $1,690,000 and
$2,507,000 as of December 31, 1995 and 1996, respectively. Revenue generated
from the remarketing of computer equipment has accounted for a significant
percentage of NeoMedia's revenue. Such sales accounted for approximately 67% and
71% of NeoMedia's revenue for the years ended December 31, 1995 and 1996,
respectively.
ACCOUNTING FOR STOCK OPTIONS
Effective January 1, 1996, NeoMedia adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") which requires certain disclosures about stock-based employee compensation
arrangements, regardless of the method used to account for them, and 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, FAS 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. Under the fair value method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. Because NeoMedia
elected to continue using the accounting method in APB 25, no compensation
expense was recognized in the consolidated statement of operations for the year
ended December 31, 1996 for stock-based employee compensation. Assuming a
risk-free interest rate of 5.05% with the options granted at $.84 and 6.00% with
the remaining options, an expected life of three years, an expected volatility
of 25.00% and no expected dividends, the effect of using the fair value method
of accounting on net loss for the year ended December 31, 1996 would have
increased net loss to $3,399,000, or $(.80) per share.
F - 10
<PAGE>
CASH AND CASH EQUIVALENTS
For the purposes of the balance sheet and statement of cash flows, all
highly liquid investments with original maturities of three months or less are
considered cash equivalents.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
NeoMedia periodically enters into long-term software development and
consultation agreements with certain customers. As of December 31, 1995 and
1996, certain contracts were not completed and information regarding these
uncompleted contracts was as follows:
1995 1996
---- ----
(In thousands)
Total amount of contracts in progress ...................... $687 $119
==== ====
Costs incurred to date on uncompleted contracts ............ $260 $ 65
Estimated earnings on uncompleted contracts ................ 181 54
---- ----
Subtotal ............................................... 441 119
Less customer billings to date ............................. 314 79
---- ----
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................. $127 $ 40
==== ====
4. PROPERTY AND EQUIPMENT
As of December 31, 1995 and 1996, property and equipment consisted of the
following:
1995 1996
---- ----
(In thousands)
Furniture and fixtures ....................................... $ 130 $ 135
Equipment .................................................... 507 642
----- -----
Total ................................................... 637 777
Less accumulated depreciation ................................ (368) (499)
----- -----
Total property and equipment, net of accumulated depreciation $ 269 $ 278
===== =====
5. CAPITALIZED SOFTWARE COSTS
As of December 31, 1995 and 1996, capitalized software costs consisted of
the following:
1995 1996
------ -------
(In thousands)
Purchased software ....................................... $ 1,567 $ 1,495
Internally developed software ............................ 210 459
------- -------
Total ............................................... 1,777 1,954
Less accumulated amortization ............................ (747) (1,297)
------- -------
Total capitalized software costs, net of accumulated
amortization $ 1,030 $ 657
======= =======
During the years ended December 31, 1995 and 1996, NeoMedia recognized
amortization expense applicable to purchased software of $500,000 and $531,000,
respectively, and amortization expense applicable to internally developed
software of $71,000 and $124,000, respectively.
In October 1994, DTM purchased via seller financing certain computer
software from International Digital Scientific, Inc. ("IDSI"). The aggregate
purchase price was $2,000,000 and was funded by an uncollateralized seller
F - 11
<PAGE>
payable, without interest, in an amount equal to the greater of : (i) 5% of the
collected gross revenues of Migration for the preceding month; or (ii) the
minimum installment payment as defined. 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% (DTM's 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 is being amortized over its estimated useful life of three
years. The balance of the note payable, net of unamortized discount, as December
31, 1995 and 1996 was $1,203,000 and $1,115,000, respectively.
On February 12, 1997, NeoMedia entered into an agreement to purchase
certain computer software from Basic Developments, Inc. for an aggregate
purchase price of $220,000, of which $120,000 was paid at closing and $100,000
is due on February 12, 1998.
6. FINANCING AGREEMENTS
Technologies entered into an agreement with a commercial finance company
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 or 45 days, depending on the vendor used to source the
product. Borrowings are collateralized by accounts receivable generated from the
sales of merchandise to NeoMedia's customers and are personally guaranteed by
certain shareholders of NeoMedia. As of December 31, 1995 and 1996, amounts due
under this financing agreement included in accounts payable were $1,281,000 and
$2,275,000, respectively.
As of December 31, 1995, Technologies had bank notes payable of $1,625,000.
The bank notes payable were under a $2,000,000 revolving line of credit facility
that accrued interest at the bank's prime rate plus 0.5%, or 9.5% as of December
31, 1995. During August 1996, Technologies replaced this facility with a
$2,000,000 promissory note bearing interest at the bank's prime rate plus 1.0%,
which was repaid in full on November 30, 1996. The note was collateralized by
substantially all of NeoMedia's assets and guaranteed by a certain shareholder
and certain affiliated companies.
As of December 31, 1996, the bank had issued a $750,000 letter of credit to
the benefit of the above-mentioned commercial finance company. This letter of
credit was guaranteed by a certain shareholder of NeoMedia. In February, 1997,
NeoMedia pledged a $750,000 certificate of deposit with the bank to
collateralize the letter of credit and the shareholder was released from the
guarantee.
7. NOTES PAYABLE TO RELATED PARTIES
During 1995 and 1996, NeoMedia borrowed and made repayments on various
notes with certain shareholders and affiliates. As of December 31, 1995, notes
payable to related parties consisted of a $277,000 unsecured and subordinated
demand note to a shareholder and a $75,000 unsecured demand note to an
affiliate. Both of these notes bore interest at 9% and were repaid in full
during 1996.
Additionally, as of December 31, 1995, NeoMedia had a $450,000 long-term
note payable to a related party. In January, 1996, NeoMedia borrowed $750,000
(which bore interest at 8% per annum and was payable on demand) from a principal
shareholder, increasing the total notes payable (including a third $10,000 loan
from 1994) to this shareholder to $1,210,000. In October 1996, this shareholder
contributed $738,000 of this note to additional paid-in capital leaving a
balance as of December 31, 1996 of $472,000. In February, 1997, NeoMedia repaid
the note in full.
8. LONG-TERM DEBT
As of December 31, 1995 and 1996, long-term debt consisted of the
following:
F - 12
<PAGE>
1995 1996
------- -------
(In thousands)
Note payable to IDSI, non-interest bearing, due with
minimum monthly installments of $16,000
through December 2005 ............................... $ 1,776 $ 1,584
Note payable to former shareholder, non-interest bearing,
due with minimum monthly installments of $12,500
through July 1998 ................................... 387 237
Note payable to shareholder, 8%, due December 2000 ....... 450 472
Capital leases ........................................... 82 44
------- -------
Subtotal ............................................ 2,695 2,337
Less: unamortized discount .............................. (620) (486)
------- -------
Total long-term debt ................................ 2,075 1,851
Less: current portion ................................... (245) (262)
------- -------
Long-term debt, net of current portion ................... $ 1,830 $ 1,589
======= =======
The long-term debt payments for each of the next five fiscal years ending
December 31 were as follows:
AMOUNT IN
THOUSANDS
---------
1997 ......................................... $ 366
1998 ......................................... 299
1999 ......................................... 192
2000 ......................................... 192
2001 ......................................... 664
Thereafter .................................... 624
------
Total ......................................... $2,337
======
9. INCOME TAXES
For the years ended December 31, 1995 and 1996, the components of the
benefit for income taxes were as follows:
1995 1996
----- -----
(In thousands)
Current ............................................ $ (31) $ (37)
Deferred ........................................... (139) 193
----- -----
Provision (Benefit) for income taxes ............... $(170) $ 156
===== =====
The significant components of the deferred tax provision in 1996 were as
follows:
AMOUNT IN
THOUSANDS
---------
Deferred tax benefit, exclusive of the components listed below ..... $ (826)
Tax effect of change in the status of Migration .................... (391)
Increase in valuation allowance .................................... 1,410
-------
Total ......................................................... $ 193
=======
F - 13
<PAGE>
As of December 31, 1995 and 1996, 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:
<TABLE>
<CAPTION>
1995 1996
-------------------- ---------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
---------- ------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C>
Accrued employee benefits ................. $ 68 $ 27 $ 245 $ 98
Bad debts ................................. 311 124 216 86
Accrued interest payable .................. -- -- 265 106
Deferred revenue .......................... -- -- 234 93
Capitalized software development costs .... -- -- 815 326
Net operating loss carryforwards .......... -- -- 1,644 658
Other ..................................... (14) (5) (11) (4)
Alternative minimum tax credit carryforward 47 47
------- -------
Total deferred tax assets ................. 193 1,410
Valuation allowance ....................... -- (1,410)
------- -------
Net deferred income tax asset ............. $ 193 $ --
======= =======
</TABLE>
For the years ended December 31, 1995 and 1996, the benefit for income
taxes differed from the amount computed by applying the statutory federal rate
of 34% as follows:
1995 1996
---------------- ----------------
AMOUNT % AMOUNT %
------ ------- ------- -----
(Dollars in thousands)
Benefit at federal statutory rate ........ $(442) (34)% $(992) (34)%
Migration S-corporation loss allocated
directly to shareholder ............ 294 23 321 11
State income taxes, net of federal tax
effects ........................... (23) (2) -- --
Permanent differences .................. 8 1 11 --
Change in valuation allowance .......... -- -- 826 28
Other .................................. ( 7) ( 1) (10) (--)
----- ----- ----- -----
Provision (Benefit) for income taxes ... $(170) (13)% $ 156 5%
===== ===== ===== =====
As of December 31, 1996, NeoMedia had net operating loss carryforwards
remaining for federal tax purposes of approximately $1,644,000, which may be
used to offset future taxable income or will expire, if unused, in 2011. Should
certain substantial changes (as defined by the federal income tax code), occur
in NeoMedia's ownership, an annual limitation would be imposed on the amount of
loss which could be utilized in any one year. Because realization of NeoMedia's
net operating losses carried forward is uncertain, a valuation allowance has
been established against the related deferred tax assets.
10. TRANSACTIONS WITH RELATED PARTIES
NeoMedia made advances to various related parties including companies
affiliated through common ownership. These advances arose from expenses paid by
NeoMedia on behalf of the affiliated companies and allocations of certain
F - 14
<PAGE>
administrative costs for services provided by NeoMedia. Total administrative
costs allocated to affiliated companies were $42,000 and $27,000 for the years
ended December 31, 1995 and 1996, respectively. As of December 31, 1995 and
1996, the amounts outstanding totalled $48,000 and $24,000, respectively, and
were classified as amounts due from related parties in the accompanying
consolidated balance sheets. During the years ended December 31, 1995 and 1996,
NeoMedia and certain employees leased office and residential facilities from
related parties for rental payments totalling $5,000 and $11,000, respectively.
On January 2, 1996, NeoMedia provided to one of its principal shareholders
an advance of $472,000 payable within 30 days of demand by NeoMedia. This loan
bore interest at 8% payable on a monthly basis. This loan was repaid in full in
February, 1997.
In March, 1996, NeoMedia borrowed $135,000 from a related entity and
$36,000 from a principal shareholder, payable within thirty days of demand,
bearing interest at 8% per annum. In June, 1996, NeoMedia borrowed $200,000 from
a principal shareholder, payable within thirty days of demand, bearing interest
at 8% per annum. The net proceeds from these financing transactions were used
for general corporate operating purposes. These loans were repaid in full during
1996. In connection with the June, 1996 note, NeoMedia granted a warrant to the
shareholder to purchase up to 260,000 shares of NeoMedia's common stock at an
exercise price of $8.85. This warrant is exercisable for four years commencing
from November 25, 1997. Assuming a risk-free interest rate of 6.25%, an expected
life of three years, an expected volatility of 25.0% and no expected dividends,
the effect of using the fair value method of accounting on net loss for the year
ended December 31, 1996 would have increased net loss to $3,114,000, or $(.73)
per share.
11. LEASES
NeoMedia leases certain office equipment, principally telecommunication
equipment, under leases which are capital in nature. As of December 31, 1995 and
1996, NeoMedia had net assets of $89,000 and $53,000, respectively, under these
capital leases.
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, 1995 and 1996, NeoMedia's rent expense was $325,000 and
$353,000, respectively. Beginning December 1, 1996, NeoMedia subleased a portion
of its office facilities until the lease expires.
The aggregate amount of expected lease payments and receipts under
operating leases for each of the next five years ending December 31 was as
follows:
PAYMENTS RECEIPTS
-------- --------
(In thousands)
1997 ......................................... $ 415 $137
1998 ......................................... 449 173
1999 ......................................... 404 179
2000 ......................................... 229 183
2001 ......................................... 3 --
Thereafter..................................... 2 --
----- ----
Total ......................................... $1,502 $672
====== ====
In November, 1996, NeoMedia entered into a lease with a principal
shareholder whereby the shareholder leased to NeoMedia an exhibition booth which
cost $85,435. The lease is for 36 months with monthly payments of $2,858.
F - 15
<PAGE>
12. DEFINED CONTRIBUTION SAVINGS PLAN
NeoMedia maintains a defined contribution 401(k) savings plan covering
substantially all eligible employees meeting certain minimum age and months of
service requirements, as defined. 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. Options granted during 1996
were granted at an exercise price equal to fair market value on the date of
grant. No options shall be granted subsequent to January 31, 1999 under the
Plan. Options granted can not be exercised during the year following the date of
grant and must be exercised within ten years from the date of grant.
Additionally, in conjunction with the initial public offering, each employee
agreed not to sell any stock obtained by exercising their stock options until
after November 25, 1997. No stock options were exercisable as of December 31,
1996.
NeoMedia's stock options as of December 31, 1996 and changes during the
year ended December 31, 1996 were as follows:
WEIGHTED
AVERAGE NUMBER
EXERCISE OF
PRICE SHARES
--------- ---------
Granted ............................................ $ 1.72 1,555,603
Reverse stock split ................................ 1.57 (135,850)
Exercise ........................................... -- --
Forfeited .......................................... 1.34 (81,581)
-------- ----------
Outstanding as of December 31, 1996 ................ $ 1.76 1,338,172
======== ==========
Available for grant as of December 31, 1996 ........ 161,828
==========
Weighted average fair value at grant date .......... $ .43
========
As of December 31, 1996, NeoMedia's stock options outstanding were as follows:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE
------------------------ ----------- ----------- ----------
$ .84 1,087,552 9.1 years $ .84
$5.50 to $5.90 250,620 9.8 years $ 5.74
F - 16
<PAGE>
14. PUBLIC OFFERING OF COMMON STOCK AND WARRANTS
On November 25, 1996, NeoMedia completed an initial public offering ("IPO")
of 1,235,000 shares of common stock at $5.90 per share and 1,700,000 redeemable
warrants, at $.10 per warrant, to purchase shares of common stock, and an
offering by certain selling security holders of an additional 465,000 shares of
NeoMedia's common stock. The selling security holders also were issued 745,938
warrants upon conversion of the convertible notes from NeoMedia. In addition, on
January 16, 1997, NeoMedia completed the sale of an over-allotment of 255,000
shares of common stock and 255,000 redeemable warrants. The redeemable warrants
may be called by NeoMedia at $.05 per warrant at any time after November 25,
1997, provided that the closing average bid price of the common stock equals or
exceeds $8.85 per share for twenty consecutive trading days ending within thirty
days prior to the date notice of redemption is given.
In connection with the offering, NeoMedia agreed to sell to the
underwriters, for nominal consideration, warrants to purchase up to 170,000
shares of common stock and 170,000 warrants (collectively, the "Underwriters
Warrants"). The Underwriters Warrants are initially exercisable at a price of
$8.85 per share of common stock and warrant for a period of four years after
November 25, 1997, and are restricted from sale, transfer and assignment until
November 25, 1997.
15. BRIDGE FINANCING
During July and August 1996, NeoMedia issued, in a private placement,
convertible promissory notes due in September 1997. Each unit consisted of a
$50,000 10% promissory note convertible into 13,750 shares and 13,750 warrants
of NeoMedia's common stock upon consummation of the IPO valued at an average of
$3.64 per share. NeoMedia received $2,697,000 in cash proceeds from this private
placement, net of $278,000 in expenses. These expenses were amortized to
interest expense over the life of the notes. NeoMedia retired $262,500 of these
notes on November 23, 1996. Of the remaining 745,938 shares available for
conversion, 465,000 were sold by the note holders in connection with the IPO.
F - 17
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30,
1997
--------------
ASSETS
(In thousands)
Current assets:
Cash and cash equivalents .................................. $ 2,403
Trade accounts receivable, net of allowance for doubtful
accounts of $124 ....................................... 6,425
Amounts due from related parties ........................... 7
Inventories ................................................ 67
Prepaid expenses and other ................................. 608
--------
Total current assets ................................... 9,510
--------
Property and equipment, net of accumulated depreciation ......... 548
Capitalized software costs, net of accumulated amortization ..... 1,045
--------
Total assets ............................................... $ 11,103
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 5,251
Accrued expenses ........................................... 1,142
Current portion of long-term debt .......................... 264
Other ...................................................... 315
--------
Total current liabilities .............................. 6,972
--------
Long-term debt, net of current portion .......................... 981
--------
Total liabilities ...................................... 7,953
--------
Shareholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized,
5,378,085 shares outstanding ........................... 54
Additional paid-in capital ................................. 10,120
Accumulated deficit ........................................ (7,024)
--------
Total shareholders' equity ............................. 3,150
--------
Total liabilities and shareholders' equity ................. $ 11,103
========
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
F - 18
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1997
----------- -----------
(Dollars in thousands,
except per share data)
NET SALES:
License fees ................................ $ 460 $ 335
Software product resales .................... 2,059 1,834
Technology equipment resales ................ 5,110 8,624
Service fees ................................ 1,250 1,032
----------- -----------
Total net sales ......................... 8,879 11,825
----------- -----------
COST OF SALES:
License fees ................................ 140 139
Software product resales .................... 1,384 1,608
Technology equipment resales ................ 4,416 7,496
Service fees ................................ 927 915
Amortization of capitalized software costs .. 281 307
----------- -----------
Total cost of sales ..................... 7,148 10,465
----------- -----------
GROSS PROFIT ..................................... 1,731 1,360
General and administrative expenses .............. 802 1,583
Sales and marketing expenses ..................... 973 1,859
Research and development costs ................... 123 410
----------- -----------
Loss from operations ............................. (167) (2,492)
Interest expense, net ............................ 216 52
----------- -----------
LOSS BEFORE INCOME TAXES ......................... (383) (2,544)
Benefit for income taxes ......................... (80) (45)
----------- -----------
NET LOSS ......................................... $ (303) $ (2,499)
=========== ===========
PER SHARE DATA:
Net loss per share .......................... $ (0.07) $ (.40)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding .......... 4,071,373 6,209,597
=========== ===========
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
F - 19
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED JUNE 30,
1996 1997
-------- -------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (303) $(2,499)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts ...................................... -- 60
Depreciation and amortization ........................................ 167 368
Changes in operating assets and liabilities:
Trade accounts receivable ........................................ (795) (1,502)
Other current assets ............................................. 34 35
Accounts payable and accrued expenses ............................ 884 1,550
Other current liabilities ........................................ (138) 70
------- -------
Net cash used in operating activities ............................ (151) (1,918)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development costs and purchased software ....... (26) (713)
Acquisition of property and equipment ..................................... (27) (313)
------- -------
Net cash used in investing activities ............................ (53) (1,026)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of units ....................................... -- 1,315
Exercise of stock options ................................................. -- 7
Repayment of advance to shareholder ....................................... -- 472
Proceeds from advance to shareholder ...................................... (472) --
Borrowings under notes payable and long-term debt ......................... 250 --
Repayments on notes payable and long-term debt ............................ (92) (134)
Borrowings from shareholders and related parties .......................... 1,123 --
Repayments to shareholders and related parties ............................ (283) (472)
------- -------
Net cash provided by financing activities ........................ 526 1,188
------- -------
NET INCREASE (DECREASE) IN CASH ........................................... 322 (1,756)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 11 4,159
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 333 $ 2,403
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................ $ 149 $ 90
Income taxes paid .................................................... 65 --
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
F - 20
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL ACCUMU- NUMBER
COMMON PAID-IN- LATED OF
STOCK CAPITAL DEFICIT SHARES
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ............. $ 51 $ 8,801 $ (4,525) 5,114,316
Exercise of stock options .............. -- 7 -- 8,769
Proceeds from issuance of 255,000 units,
net of $215 of issuance costs ..... 3 1,312 -- 255,000
Net loss ............................... -- -- (2,499) --
--------- --------- --------- ---------
Balance, June 30, 1997 ................. $ 54 $ 10,120 $ (7,024) 5,378,085
========= ========= ========= =========
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
F - 21
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
NeoMedia Technologies, Inc. ("Technologies") was incorporated under the
laws of the state of Delaware in July, 1996, to acquire by merger Dev-Tech
Associates, Inc. ("Dev-Tech"), an Illinois corporation, which was incorporated
in December, 1989. On August 5, 1996, Technologies acquired all of the shares of
Dev-Tech in exchange for the issuance of shares of Technologies' common stock to
the shareholders of Dev-Tech. Dev-Tech Migration, Inc. ("DTM") was incorporated
in June, 1994, in Illinois. On November 20, 1996, DTM was merged into NeoMedia
Migration, Inc. ("Migration"), a Delaware corporation and a wholly owned
subsidiary of Technologies (the "Migration Merger"). Technologies and Migration,
since Migration's inception, have shared certain management and were controlled
by common shareholders. These transactions have been accounted for in a manner
similar to the pooling of interests method of accounting using historical book
values rather than fair market value as all entities involved were under common
control. Distribuidora Vallarta, S.P.A. ("DVSPA") is a wholly-owned subsidiary
of Migration and was incorporated in Guatemala in August, 1996, to employ
computer software developers and system integrators. Technologies, Migration and
DVSPA are collectively referred to as "NeoMedia" or the "Company." As these
transactions were completed as of December 31, 1996, the financial statements of
NeoMedia have been presented on a consolidated basis for all periods presented.
The financial position and results of NeoMedia as of and for the periods prior
to these mergers have been combined in a manner consistent with NeoMedia's
consolidation principles as of December 31, 1996. All significant intercompany
accounts and transactions have been eliminated in preparation of the
consolidated financial statements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, the 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 June 30, 1997, and the results
of operations for the six months ended June 30, 1996 and 1997, and cash flows
for the six months ended June 30, 1996 and 1997. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the results
which may be expected for the entire fiscal year.
NATURE OF BUSINESS OPERATIONS
NeoMedia operates in one business segment which is comprised of three
principal applications markets: (i) Intelligent Document Solutions, (ii)
Document Systems Solutions and (iii) Systems Transition Solutions.
The INTELLIGENT DOCUMENT SOLUTIONS UNIT was established to assist clients
in linking printed material to electronic media. NeoMedia has developed its own
technology, and has rights to use the technology of others, to generate printed
documents which can be automatically "read" by machines, such as computers
equipped with scanners and appropriate software. These "machine readable"
documents incorporate printed codes which contain thousands of bytes of
information, including computer programs rendering them functionally equivalent
to a computer floppy disk with a limited capacity to hold information. These
codes are referred to in the industry as "high capacity symbologies" and
"multi-dimensional" or "two-dimensional" bar codes. NeoMedia refers to documents
that incorporate high capacity symbologies as "Intelligent Documents," and
currently provides software and services to support the application of this
technology.
The DOCUMENTS SYSTEMS SOLUTIONS UNIT was established to assist clients in
definition, design, implementation and management of their document system
environments. These services include strategic consulting to define and
F - 22
<PAGE>
optimize enterprise wide documents strategies, as well as systems integration
and development to implement effective document generation, archive and
management systems. NeoMedia specializes in the technical areas of electronic
forms management, document production systems and intelligent document solutions
incorporating multi-dimensional bar code technologies. The document system
process provided by NeoMedia also includes electronic media alternatives such as
Internet and Intranet channels.
The SYSTEMS TRANSITION SOLUTIONS UNIT was established to enable clients to
migrate applications on closed, proprietary ("legacy") systems to more cost
effective and extendable open systems platforms. NeoMedia has acquired and
developed a line of proprietary products and tools utilized in its migration
services. NeoMedia also provides strategic consulting, systems development,
systems engineering and support services in connection with its systems
transition solutions. In addition, in June, 1997, NeoMedia added a new set of
Year 2000 Millennium solutions tools for the IBM DOS/VSE environment that
automatically finds and converts two-digit date fields in both data and source
code.
As part of the services provided in connection with system transition
solutions service engagements, NeoMedia acts as a reseller of purchased hardware
in connection with open systems development and migrations. NeoMedia maintains
relationships with a number of major companies under which NeoMedia sells third
party purchased hardware and software products of those companies. NeoMedia has
established several strategic alliances with third party software and hardware
vendors, leading consulting firms and major system integrators. These alliances
are integral to NeoMedia's business operations. NeoMedia principally markets and
distributes its products through distributors in the United States (although it
has distributors in Europe, Asia, the Middle East, Indonesia and Latin America),
and currently has U. S. offices located in Illinois, California, Minnesota, and
Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalents consist of outstanding stock options which, pursuant to
Staff Accounting Bulletin No. 83 of the Securities and Exchange Commission, are
included in the weighted average shares as if they were outstanding for the
entire period to the extent granted within the twelve months preceding the
contemplated public offering date, using the treasury stock method until such
time as shares are issued. For the six months ended June 30, 1996 and 1997, the
computation of the weighted average number of common shares and common share
equivalents outstanding was as follows:
1996 1997
--------- ---------
Common stock ........... 3,133,378 5,351,814
Effect of stock options 937,995 857,783
--------- ---------
Total .................. 4,071,373 6,209,597
========= =========
For the six months ended June 30, 1996 and 1997, information regarding
earnings per share computed on a historical basis under the provisions of
Accounting Principles Board Opinion No. 15, "Earnings per Share," was as
follows:
1996 1997
------------ ----------
Net loss per share ....................... $ (0.10) $ (0.47)
========== ==========
Weighted average common shares outstanding 3,133,378 5,351,814
========== ==========
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards
F - 23
<PAGE>
No. 128, "Earnings Per Share" ("FAS 128"), which becomes effective for NeoMedia
for the year ended December 31, 1997. FAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share which
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted earnings per share is
computed similarly to fully diluted earnings per share pursuant to Accounting
Principles Board Opinion No. 15, "Earnings Per Share." FAS 128 also requires
dual presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structure and requires a
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation. For the six months ended June 30, 1997, basic and diluted earnings
per share would have been $(.47).
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 $216,000 and $124,000 in
its December 31, 1996 and June 30, 1997 consolidated balance sheets,
respectively. NeoMedia had net sales to one major customer in the
telecommunications industry of $2,016,000 and $3,982,000 during the six months
ended June 30, 1996 and 1997, respectively, resulting in trade accounts
receivable of $2,507,000 and $1,869,000 as of December 31, 1996 and June 30,
1997, respectively. Revenue generated from the remarketing of computer equipment
has accounted for a significant percentage of NeoMedia's revenue. Such sales
accounted for 57.5% and 72.9% of NeoMedia's revenue for the six months ended
June 30, 1996 and 1997, respectively.
3. FINANCING AGREEMENTS
Technologies entered into an agreement with a commercial finance company
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 or 45 days, depending on the vendor used to source the
product. Borrowings are collateralized by accounts receivable generated from the
sales of merchandise to NeoMedia's customers and are personally guaranteed by
certain shareholders of NeoMedia. As of December 31, 1996 and June 30, 1997,
amounts due under this financing agreement included in accounts payable were
$2,275,000 and $3,181,000, respectively.
4. BENEFIT FOR INCOME TAXES
The benefits for income taxes recorded during the six months ended June 30,
1996 and 1997 represented the recovery of income taxes paid in prior years from
the carryback of operating losses.
F - 24
<PAGE>
[OUTSIDE BACK COVER]
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus. Any information or representation
not herein contained, if given or made, must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any security other than the securities
offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of an offer to buy the securities by any person in any jurisdiction
where such offer or solicitation is not authorized, or in which the person
making such offer is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. The delivery of this Prospectus
shall not, under any circumstances, create any implication that there has been
no change in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Prospectus Summary...................................... 2
The Company............................................. 2
Risk Factors............................................ 7
Use of Proceeds......................................... 19
Dividend Policy......................................... 19
Price Range of Securities............................... 20
Dilution................................................ 21
Capitalization.......................................... 23
Selected Consolidated Financial Data.................... 24
Management's Discussion & Analysis of Financial
Condition and Results of Operations................... 25
Business................................................ 33
Management.............................................. 55
Principal Stockholders.................................. 68
Bridge Financing Private Placement...................... 71
Bridge Financing Selling Stockholders................... 72
Additional Registered Securities........................ 74
Certain Transactions.................................... 76
Description of Securities............................... 80
Shares Eligible for Future Sale......................... 83
Recent Underwriting..................................... 85
Experts................................................. 90
Legal Matters........................................... 90
Additional Information.................................. 90
Index to Financial Statements........................... F
- --------------------------------------------------------------------------------
NEOMEDIA TECHNOLOGIES, INC.
------------
PROSPECTUS
------------
-----------------
_________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation eliminates the personal
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty to the extent permitted by Delaware law. The
Company's Certificate of Incorporation and By-Laws provide that the Company
shall indemnify its officers and directors to the extent permitted by Subsection
145 of the General Corporation Law of the State of Delaware, which authorizes a
corporation to indemnify directors, officers, employees or agents of the
Corporation in non-derivative suits if such party acted in good faith and in a
manner such party reasonably believed to be in or not opposed to the best
interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection 145 further provides that indemnification shall be provided if the
party in question is successful on the merits or otherwise.
Reference is hereby made to the caption "Management - Limitation of
Liability and Indemnification of Directors" in the Prospectus which is a part of
this Registration Statement for a description of indemnification arrangements
between the Company and its directors.
The form of Underwriting Agreement, included as Exhibit 1.1, provides for
indemnification of the Company and certain controlling persons under certain
circumstances, including liabilities under the Securities Act of 1933, as
amended ("Securities Act"). Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions of the Underwriting Agreement,
the Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and therefore is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the distribution, all of which are to be borne by
the Company, are as follows:
*Accounting Fees and Expenses............................... $ 5,000
*Legal Fees and Expenses.................................... $ 15,000
*Printing and Engraving Expenses............................ $ 5,000
*Miscellaneous Fees and Expenses............................ $ 5,000
---------
Total.................................................. $ 30,000
=========
* All amounts are estimates.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In July, 1996, in a tax-free merger under federal income tax laws and
regulations, Dev-Tech Associates, Inc., an Illinois corporation ("Dev-Tech") was
merged into the Company. In connection with such merger, Charles W. Fritz, the
Fritz Family Partnership, the Chandler T. Fritz 1994 Trust, the Charles W. Fritz
1994 Trust and the Debra F. Schiafone 1994 Trust received 684,447, 1,672,540,
64,711, 64,711 and 64,711 shares of the Company's Common Stock, respectively, in
exchange for their shares of common stock of Dev-Tech. This merger merely
changed the domicile of the Company from Illinois to Delaware, with the existing
stockholders exchanging their shares in the Illinois corporation for the
Delaware corporation. No additional shares of stock were issued and no
consideration was paid by the stockholders or received by the Company in this
exchange. The Company believes that, pursuant to Rule 145, this merger does not
involve a "sale" or "offer" within the meaning of Section 2(3) of the Securities
Act of 1933, as amended (the "Securities Act"). The Company also believes that
this transaction was exempt from registration under Section 4(2) of the
Securities Act as a transaction not involving a public offering since all of the
stockholders involved were sophisticated investors within the meaning of the
exemption.
Immediately prior to the effective date of the Registration Statement, in a
tax-free merger under federal income tax laws and regulations, a wholly-owned
subsidiary of the Company acquired from Charles W. Fritz all of the outstanding
stock of Dev-Tech Migration, Inc., an Illinois corporation ("Migration"). In
connection with such merger, Charles W. Fritz received 915,546 shares of the
Company's Common Stock in exchange for his shares of Migration. This
reorganization also was exempt from registration under Section 4(2) of the
Securities Act as a transaction not involving a public offering. The sole
stockholder of Migration, Charles E. Fritz, is the Company's President, Chief
Executive Officer and Chairman of the Board, had knowledge of the same kind of
information that is specified in this Registration Statement and, therefore, is
a sophisticated investor within the meaning of this exemption.
In July and August, 1996, the Company consummated the sale of an aggregate
of $2,975,000 principal amount of 10% Unsecured Subordinated Convertible
Promissory Notes, due September 30, 1997, in a private placement to 68
investors. The Notes are automatically converted into an aggregate of 818,125
shares of Common Stock, 818,125 five year redeemable common stock purchase
warrants of the Company upon the consummation of the initial public offering, at
which time the Notes will no longer be outstanding. Joseph Charles & Associates,
Inc., received $277,500 in commissions and $25,000 in expenses as placement
agent in such private placement. The sale of these Notes were exempt under Rule
505 of Regulation D of the Securities Act. Each investor purchasing Notes in
this private placement was an "accredited investor" within the definition of
accredited investors contained in Rule 501(a). No person acting on the Company's
behalf offered or sold the Notes by means of any general solicitation or general
advertising. Each investor of the Notes represented in writing that the Notes
were being acquired for such investor's own account and not with a view toward
distribution. Written disclosure was given to each investor prior to sale, and a
legend was placed on each Note, that the Notes had not been registered under the
Securities Act and cannot be resold unless registered under the Securities Act
or unless an exemption from registration is available.
II-2
<PAGE>
<TABLE>
<CAPTION>
ITEM 27. EXHIBITS.
- -------- ---------
<S> <C>
* 1.1 Form of Underwriting Agreement
* 1.2 Form of Selected Dealers Agreement
* 1.3 Form of Agreement Among Underwriters
* 3.1 Articles of Incorporation of Dev-Tech Associates, Inc. and amendment thereto
* 3.2 By-laws of Dev-Tech Associates, Inc.
* 3.3 Restated Certificate of Incorporation of DevSys, Inc.
* 3.4 By-laws of DevSys, Inc.
* 3.5 Articles of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech
Associates, Inc.
* 3.6 Certificate of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.
* 3.7 Articles of Incorporation of Dev-Tech Migration, Inc. and amendment thereto
* 3.8 By-laws of Dev-Tech Migration, Inc.
* 3.9 Restated Certificate of Incorporation of DevSys Migration, Inc.
* 3.10 Form of By-laws of DevSys Migration, Inc.
* 3.11 Form of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys Migration,
Inc.
* 3.12 Form of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc.
* 3.13 Certificate of Amendment to Certificate of Incorporation of DevSys, Inc. changing its name
to NeoMedia Technologies, Inc.
* 3.14 Form of Certificate of Amendment to Certificate of Incorporation of NeoMedia Technologies,
Inc. authorizing a reverse stock split
* 4.1 Form of Certificate for Common Stock of DevSys, Inc.
* 4.2 Form of Representative's Warrant Agreement
* 4.3 Form of Compass Capital, Inc. Warrant
* 4.4 Form of Private Placement Financing Converted Securities Registration Rights Agreement
* 4.5 Form of 10% Unsecured Subordinated Convertible Promissory Note
* 4.6 Form of Principal Stockholder's Warrant
* 4.7 Form of Placement Agent's Warrant Registration Rights Agreement
* 4.8 Form of Placement Agent's Warrant for the Purchase of Shares of Common Stock and
Warrants
* 4.9 Form of Warrant Agreement and Warrant
* 5.1 Opinion, with Consent, of Fishman & Merrick, P.C.
* 10.1 Form of "Lock Up" Agreement to be entered into by the Company and its officers, directors
and shareholders
* 10.2 Form of Nonsolicitation and Confidentiality Agreement
* 10.3 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles
W. Fritz
* 10.4 Employment Agreement dated April 1, 1996 between Dev-Tech Associates, Inc. and Robert
T. Durst, Jr.
* 10.5 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles
T. Jensen
* 10.6 Lease Agreement dated September 1, 1994, for premises located at 112 South Tryon Street,
Charlotte, North Carolina
* 10.7 Lease dated September 7, 1995 for premises located at 937 1st Street, Encinitas, California
II-3
<PAGE>
* 10.8 Lease dated August 29, 1995 for premises located at 280 Shuman Boulevard, Naperville,
Illinois
* 10.9 Promissory Note, dated as of December 31, 1994, in the principal amount of $413,000, from
Dev-Tech Associates, Inc. payable to William E. Fritz
* 10.10 Promissory Note, dated as of December 31, 1994, in the principal amount of $75,000, from
Dev-Tech Associates, Inc., payable to Dev-Mark, Inc.
* 10.11 Promissory Note, dated as of December 31, 1994, in the principal amount of $10,000, from
Dev-Tech Migration, Inc. to Charles W. Fritz
* 10.12 Promissory Note, dated as of December 31, 1994, in the principal amount of $90,000, from
Dev-Tech Migration, Inc. to William E. Fritz
* 10.13 Promissory Note, dated August 15, 1995, in the principal amount of $150,000, from Dev-Tech
Migration, Inc. to Gen-Tech, Inc.
* 10.14 Demand Promissory Note, dated December 9, 1994, in the principal amount up to $500,000,
from Dev-Tech Migration, Inc. to Dev-Tech Associates, Inc.
* 10.15 Promissory Note, dated December 28, 1995, in the principal amount of $450,000, from Dev-
Tech Migration, Inc. to Charles W. Fritz
* 10.16 Promissory Note, dated January 2, 1996, in the principal amount of $360,000, from Dev-Tech
Associates, Inc. to Dev-Tech Migration, Inc.
* 10.17 Promissory Note, dated January 2, 1996, in the principal amount of $472,000, from William
E. Fritz to Dev-Tech Associates, Inc.
* 10.18 Promissory Note, dated January 2, 1996, in the principal amount of $750,000, from Dev-Tech
Migration, Inc. to Charles W. Fritz.
* 10.19 Promissory Note, dated December 31, 1994, in the principal amount of $46,748, from Dev-
Tech Migration, Inc. to Brandon Edenfield.
* 10.20 Promissory Note, dated June 19, 1995, in the principal amount of $20,000, from Dev-Tech
Migration, Inc. to Brandon Edenfield.
* 10.21 Revolving Business Credit Note, dated November 30, 1995, in the sum of $1,500,000, from
Dev-Tech Associates, Inc. to NBD Bank
* 10.22 Line of Credit Agreement, dated November 30, 1995, between Dev-Tech Associates, Inc. and
NBD Bank
* 10.23 Revolving Business Credit Note, dated November 30, 1995, in the principal amount of
$500,000, from Dev-Tech Associates, Inc. to NBD Bank
* 10.24 Letter Agreements, dated November 30, 1995, from Dev-Tech Associates, Inc. to NBD Bank
* 10.25 Unlimited Continuing Guaranty, dated November 30, 1995, from Gen-Tech, Inc., as
Guarantor, to NBD Bank
* 10.26 Subordination Agreement, effective November 30, 1995, from Dev-Mark, Inc. to NBD Bank
* 10.27 Subordination Agreement, effective November 30, 1995, from Gen-Tech, Inc. to NBD Bank
* 10.28 Time Revolving Business Loan Note, dated December 9, 1994, in the amount of $1,500,000,
to NBD Bank from Dev-Tech Associates, Inc.
* 10.29 Subordination Agreement and Assignment, dated December 28, 1995, from Charles W. Fritz
and Dev-Tech Migration, Inc. to NBD Bank
* 10.30 Credit Agreement dated December 9, 1994, from Dev-Tech Associates, Inc. to NBD Bank
* 10.31 Letter Agreement, dated December 9, 1994, from Dev-Tech Associates, Inc. to NBD Bank
* 10.32 Continuing Pledge Agreement, dated December 9, 1994, from William E. Fritz to NBD Bank
* 10.33 Collateral Assignment of Demand Promissory Note and Security Agreement, dated December
9, 1994
II-4
<PAGE>
* 10.34 Security Agreement, dated December 9, 1994, between Dev-Tech Associates, Inc. and Dev-
Tech Migration, Inc.
* 10.35 Agreement for Wholesale Financing (Security Agreement), dated October 20, 1992, to IBM
Credit Corporation from Dev-Tech Associates, Inc.
* 10.36 Guaranty from Gen-Tech, Inc. to IBM Credit Corporation
* 10.37 Guaranty from Dev-Mark, Inc. to IBM Credit Corporation
* 10.38 Amendment to Agreement for Wholesale Financing and to Addendum to Agreement for
Wholesale Financing -- Large Sale Financing Option, dated August 16, 1994, from Dev-Tech
Associates, Inc. to IBM Credit Corporation
* 10.39 Assignment Agreement, dated September 15, 1994, from Dev-Tech Associates, Inc. to IBM
Credit Corporation
* 10.40 Guaranty (By Individual) dated October 20, 1992, to IBM Credit Corporation from Charles
W. Fritz, as Guarantor
* 10.41 Collateralized Guaranty, dated August 16, 1994, to IBM Credit Corporation from Gen-Tech, Inc.
* 10.42 Collateralized Guaranty, dated August 16, 1994, to IBM Credit Corporation from Dev-Mark, Inc.
* 10.43 Dev-Tech Associates, Inc. Annual Incentive Plan for Management
* 10.44 Dev-Tech Associates, Inc. 1996 Stock Option Plan
* 10.45 First Amendment and Restatement of Dev-Tech Associates, Inc. 1996 Stock Option Plan
* 10.46 Form of Stock Option Agreement - Dev-Tech Associates, Inc.
* 10.47 Dev-Tech Migration, Inc. 1996 Stock Option Plan
* 10.48 First Amendment and Restatement of Dev-Tech Migration, Inc. 1996 Stock Option Plan
* 10.49 Form of Stock Option Agreement - Dev-Tech Migration, Inc.
* 10.50 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto
* 10.51 Engagement Letter, dated March 13, 1995, with Compass Capital, Inc. and Amendments
thereto
* 10.52 Mutual General Release and Stock Purchase Agreement with the Estate of Thomas Ruberry.
* 10.53 Form of "Lock-Up" Agreement with Bridge Financing Selling Stockholders and Form of
Addendum to Subscription Agreement
* 10.54 Loan and Security Agreement dated as of August 9, 1996, with The First National Bank of Chicago
and related documents
* 10.55 Letter, dated October 2, 1996 from The First National Bank of Chicago, amending the Loan
and Security Agreement dated as of August 9, 1996
* 10.56 Letter dated October 30, 1996, from McGladrey & Pullen, LLP
* 10.57 Schedules of: Dev-Tech Associates, Discounted Free Cash Flow Approval - Single Period
Gordon Growth and Dev-Tech Migrations, Present Value of Cash Payments under the
Purchase Contract/Estimated Value, prepared by Willamette Management Associates, and
Consent
* 10.58 Forms of Agreements Not to Sell
* 10.59 Letter of Intent dated October 11, 1996 between NeoMedia Technologies, Inc. and E-Stamp
Corporation
* 10.60 First Amendment and Restatement of NeoMedia Technologies, Inc. 1996 Stock Option Plan
(As Established Effective February 1, 1996, and as amended through November 18, 1996)
* 21 Subsidiary
23.1 Consent of Coopers and Lybrand L.L.P.
* 23.2 Consent of Fishman & Merrick, P.C. (included in Exhibit 5.1)
II-5
<PAGE>
* 24.1 Power of Attorney with respect to certain signatures in the Registration Statement (see
signature page to Registration Statement)
<FN>
- --------------------------------------------
* Incorporated by reference from Registration Statement on Form SB-2, SEC
#333-5534, declared effective on November 25, 1996.
</FN>
</TABLE>
Other material contracts and the Company's subsidiaries have heretofore
been filed with the Securities and Exchange Commission and are hereby
incorporated by reference to the Company's Form 10-KSB, as amended, for the year
ended December 31, 1996, and the Company's Form 10-QSB for the periods ended
March 31, 1997 and June 30, 1997.
ITEM 28. UNDERTAKINGS.
1. The Registrant hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(2) that for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form
of prospectus as a new registration statement for the securities offered
in the Registration Statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
(3) to file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereto) that, individually or in
the aggregate, represent a fundamental change in the information
set forth in the Registration Statement;
(iii) to include any additional or changed material information
on the plan of distribution.
(4) to remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
(5) to provide to the Representative of the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the
Representative of the Underwriters to permit prompt delivery to each
purchaser.
II-6
<PAGE>
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (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 Securities Act and will be governed by the final adjudication
of such issue.
II-7
<PAGE>
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 SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Myers, State of Florida, on the 18th day of
August, 1997.
NEOMEDIA TECHNOLOGIES, INC.
By: /s/ CHARLES W. FRITZ
---------------------------
Charles W. Fritz
POWER OF ATTORNEY
In accordance with 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 indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ CHARLES W. FRITZ President, Chief Executive August 18, 1997
- ------------------------------- Officer and Director
Charles W. Fritz
* Secretary and Director August 18, 1997
- --------------------------------
William E. Fritz
* Chief Financial Officer, August 18, 1997
- -------------------------------- Treasurer and Director
Charles T. Jensen
* Director August 18, 1997
- --------------------------------
Robert T. Durst, Jr.
* Director August 18, 1997
- --------------------------------
A. Hayes Barclay
* Director August 18, 1997
- --------------------------------
James J. Keil
* Director August 18, 1997
- --------------------------------
Paul Reece
* By: /s/ CHARLES W. FRITZ
---------------------------------
Charles W. Fritz, under Power of
Attorney heretofore duly executed
and filed
II-8
<PAGE>
Registration No. 333-5534
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
EXHIBITS
TO
POST EFFECTIVE AMENDMENT NO. 1
TO FORM SB-2
REGISTRATION STATEMENT
OF
NEOMEDIA TECHNOLOGIES, INC.
-----------------------------------
As filed with the Securities and Exchange Commission
on August 18, 1997
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
SEQUENTIAL EXHIBIT
PAGE NUMBER NUMBER DOCUMENT
- ----------- ------- --------
23.1 Consent of Coopers & Lybrand, L.L.P.
EXHIBIT 23.1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement on Form SB-2 (File No.
333-5534) of our report dated March 14, 1997, on our audits of the consolidated
financial statements of NeoMedia Technologies, Inc. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND, L.L.P.
Chicago, Illinois
August 18, 1997
