U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10 - QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21743
NEOMEDIA TECHNOLOGIES, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified In Its Charter)
DELAWARE 36-3680347
- ------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2201 SECOND STREET, SUITE 600, FORT MYERS, FLORIDA 33901
- -------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (Including Area Code) 941-337-3434
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1997, there were outstanding 6,916,079 shares of the
issuer's Common Stock and 3,071,118 warrants.
<PAGE>
PART I -- FINANCIAL INFORMATION
RECENT DEVELOPMENTS
In addition, on November 10, 1997, NeoMedia announced the hiring of BT
Alex Brown, Incorporated, a subsidiary of Bankers Trust New York Corporation, as
a financial advisor to advise NeoMedia and its Board of Directors during the
process of redeeming the outstanding warrants, as well as for mergers and
acquisitions. BT Alex Brown, Incorporated, provides investment banking and
advisory services to a variety of companies including technology, media and
communications and other growth industries.
On November 10, 1997, NeoMedia announced the redemption of all of its
outstanding publicly-traded warrants and the warrants issued to Dominick &
Dominick, Incorporated, a consultant to NeoMedia. Each warrant entitles the
holder to purchase one share of NeoMedia common stock at an exercise prices of
$7.375. Warrant holders have until December 18, 1997 to convert the warrant to a
share of common stock or to sell the warrant. Warrants that are not exercised by
December 18, 1997 will be redeemed by NeoMedia at 5 cents per warrant. As of
October 31, 1997, NeoMedia had 2,412,118 outstanding publicly-traded warrants
and 375,000 warrants issued to Dominick & Dominick, Incorporated. As of October
31, 1997, 288,820 warrants had been exercised voluntarily.
On September 25, 1997, in accordance with a Stock Purchase Agreement
(the "Allegiant Merger") entered into between the parties, NeoMedia
Technologies, Inc. ("NeoMedia") purchased all of the stock in Allegiant Legacy
Solutions, Inc. ("Allegiant"), which was founded on February 16, 1996, from
George G. Luntz and Gerald L. Willis. Allegiant primarily sells licenses to
proprietary software tools (including "ADAPT2000") that identify, seek and
automatically correct date data that is stored in various formats across both
program code and specific data files. In addition to converting legacy systems
written in COBOL computer language to comply with the Year 2000 requirements,
ADAPT2000 works to convert other restrictive source and application code, such
as telephone area codes and monetary systems such as the impending European
Economic Community's Eurodollar. Mr. Luntz and Mr. Willis received an aggregate
of 1,070,000 shares of authorized, but unissued common stock of NeoMedia. The
number of shares of NeoMedia's common stock received by Mr. Luntz and Mr. Willis
was determined through arms-length negotiations between the parties. Mr. Luntz
entered into an employment agreement with NeoMedia and Mr. Willis entered into a
consulting agreement with NeoMedia. The Allegiant Merger was accounted for as a
pooling of interests, and accordingly, all financial information has been
restated as if the entities were combined for all prior periods.
1
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER DECEMBER
ASSETS 30, 1997 31, 1996
--------- --------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 2,061 $ 4,209
Trade accounts receivable, net of allowance for doubtful
accounts of $383 and $221 ............................. 3,676 5,040
Amounts due from related parties .......................... 5 496
Inventories ............................................... 67 105
Prepaid expenses and other ................................ 942 588
-------- --------
Total current assets .................................. 6,751 10,438
-------- --------
Property and equipment, net of accumulated depreciation ........ 624 298
Capitalized software costs, net of accumulated amortization .... 1,177 657
-------- --------
Total assets .............................................. $ 8,552 $ 11,393
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 2,972 $ 3,836
Accrued expenses .......................................... 943 1,055
Current portion of long-term debt ......................... 239 262
Other ..................................................... 291 266
-------- --------
Total current liabilities ............................. 4,445 5,419
-------- --------
Long-term debt, net of current portion ......................... 942 1,589
-------- --------
Total liabilities ..................................... 5,387 7,008
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized,
6,696,631 and 6,184,316 shares outstanding ............ 67 62
Additional paid-in capital ................................ 12,155 8,849
Accumulated deficit ....................................... (9,057) (4,526)
-------- --------
Total shareholders' equity ............................ 3,165 4,385
-------- --------
Total liabilities and shareholders' equity ................ $ 8,552 $ 11,393
======== ========
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
2
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
(Dollars in thousands,
except per share data)
NET SALES:
License fees ............................... $ 1,381 $ 638
Software product resales ................... 1,957 2,112
Technology equipment resales ............... 11,288 8,358
Service fees ............................... 1,847 1,695
----------- -----------
Total net sales ........................ 16,473 12,803
----------- -----------
COST OF SALES:
License fees ............................... 190 231
Software product resales ................... 1,696 1,367
Technology equipment resales ............... 9,838 7,166
Service fees ............................... 1,547 1,560
Amortization of capitalized software costs . 481 400
----------- -----------
Total cost of sales .................... 13,752 10,724
----------- -----------
GROSS PROFIT .................................... 2,721 2,079
General and administrative expenses ............. 3,294 1,747
Sales and marketing expenses .................... 3,253 1,679
Research and development costs .................. 638 213
----------- -----------
Loss from operations ............................ (4,464) (1,560)
Interest expense, net ........................... 112 403
----------- -----------
LOSS BEFORE INCOME TAXES ........................ (4,576) (1,963)
Benefit for income taxes ........................ (45) (80)
----------- -----------
NET LOSS ........................................ $ (4,531) $ (1,883)
=========== ===========
PER SHARE DATA:
Net loss per share ......................... $ (0.62) $ (0.38)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding ......... 7,359,446 4,963,040
=========== ===========
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
NET SALES:
License fees ............................................... $ 492 $ 225
Software product resales ................................... 115 (81)
Technology equipment resales ............................... 2,659 3,086
Service fees ............................................... 672 421
----------- -----------
Total net sales ........................................ 3,938 3,651
----------- -----------
COST OF SALES:
License fees ............................................... 28 91
Software product resales ................................... 87 (63)
Technology equipment resales ............................... 2,346 2,631
Service fees ............................................... 599 620
Amortization of capitalized software costs ................. 174 119
----------- -----------
Total cost of sales .................................... 3,234 3,398
----------- -----------
GROSS PROFIT .................................................... 704 253
General and administrative expenses ............................. 1,517 905
Sales and marketing expenses .................................... 1,215 696
Research and development costs .................................. 192 90
----------- -----------
Loss from operations ............................................ (2,220) (1,438)
Interest expense, net ........................................... 59 188
----------- -----------
LOSS BEFORE INCOME TAXES ........................................ (2,279) (1,626)
Benefit for income taxes ........................................ -- --
----------- -----------
NET LOSS ........................................................ $ (2,279) $ (1,626)
=========== ===========
PER SHARE DATA:
Net loss per share ......................................... $ (0.30) $ (.32)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding................. 7,510,390 5,141,373
=========== ===========
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(4,531) $(1,883)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts ...................................... 315 317
Depreciation and amortization ........................................ 623 543
Non-cash administrative expenses ..................................... -- 59
Changes in current assets and liabilities:
Trade accounts receivable ........................................ 1,049 (1,193)
Other current assets ............................................. (297) (467)
Accounts payable and accrued expenses ............................ (976) 1,401
Other current liabilities ........................................ 25 43
------- -------
Net cash used in operating activities ............................ (3,792) (1,180)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development costs and purchased software ....... (970) (231)
Acquisition of property and equipment ..................................... (499) (108)
------- -------
Net cash used in investing activities ............................ (1,469) (339)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of units ....................................... 1,295 --
Exercise of stock warrants ................................................ 2,003 --
Exercise of stock options ................................................. 13 --
Repayment of advance to shareholder ....................................... 472 --
Proceeds from advance to shareholder ...................................... -- (472)
Borrowings under notes payable and long-term debt ......................... -- 3,225
Repayments on notes payable and long-term debt ............................ (198) (592)
Borrowings from shareholders and related parties .......................... -- 1,123
Repayments to shareholders and related parties ............................ (472) (405)
------- -------
Net cash provided by financing activities ........................ 3,113 2,879
------- -------
NET INCREASE (DECREASE) IN CASH ........................................... (2,148) 1,360
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 4,209 11
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 2,061 $ 1,371
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................ $ 233 $ 396
Income taxes paid .................................................... -- 65
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
5
<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:
As previously reported ............ $ 51 $ 8,801 $ (4,525) 5,114,316
Pooling of interests merger with
Allegiant Legacy Solutions, Inc. .. 11 48 (1) 1,070,000
--------- --------- --------- ---------
As restated ....................... 62 8,849 (4,526) 6,184,316
Exercise of stock options .............. -- 13 -- 15,115
Exercise of stock warrants ............. 2 2,001 -- 242,200
Proceeds from issuance of 255,000 units,
net of $235 of issuance costs ..... 3 1,292 -- 255,000
Net loss ............................... -- -- (4,531) --
--------- --------- --------- ---------
Balance, September 30, 1997 ............ $ 67 $ 12,155 $ (9,057) 6,696,631
========= ========= ========= =========
</TABLE>
The accompanying unaudited notes are an integral part of these unaudited
consolidated financial statements.
6
<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. See note 5 for information on the merger with
Allegiant Legacy Solutions, Inc.
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 September 30, 1997 and
December 31, 1996, and the results of operations for the nine and three months
ended September 30, 1997 and 1996, and cash flows for the nine months ended
September 30, 1997 and 1996. The results of operations for the nine and three
months ended September 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.
7
<PAGE>
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. 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. See Note 5 for information on the merger with Allegiant Legacy Solutions,
Inc.
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, Ohio, 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 nine and three months ended September 30,
1997 and 1996, the computation of the weighted average number of common shares
and common share equivalents outstanding was as follows:
1997 1996
---------------------- ----------------------
NINE THREE NINE THREE
MONTHS MONTHS MONTHS MONTHS
--------- --------- --------- ---------
Common stock .......... 6,438,564 6,474,101 4,025,045 4,203,378
Effect of stock options 920,882 1,036,289 937,995 937,995
--------- --------- --------- ---------
Total ................. 7,359,446 7,510,390 4,963,040 5,141,373
========= ========= ========= =========
8
<PAGE>
For the nine and three months ended September 30, 1997 and 1996,
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:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
NINE THREE NINE THREE
MONTHS MONTHS MONTHS MONTHS
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss per share ....................... $ (0.70) $ (0.35) $ (0.47) $ (0.39)
========== ========= ========= =========
Weighted average common shares outstanding 6,438,564 6,474,101 4,025,045 4,203,378
========== ========= ========= =========
</TABLE>
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. For the nine and
three months ended September 30, 1997, basic and diluted earnings per share
would have been $(.70) and $(.35), respectively.
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 $383,000 and $221,000 in
its September 30, 1997 and December 31, 1996 consolidated balance sheets,
respectively. NeoMedia had net sales to one major customer in the
telecommunications industry of $5,507,000 and $3,676,000 during the nine months
ended September 30, 1997 and 1996, respectively, resulting in trade accounts
receivable of $1,236,000 and $2,507,000 as of September 30, 1997 and December
31, 1996, respectively. Revenue generated from the remarketing of computer
equipment has accounted for a significant percentage of NeoMedia's revenue. Such
sales accounted for 68.5% and 65.3% of NeoMedia's revenue for the nine months
ended September 30, 1997 and 1996, respectively.
3. FINANCING AGREEMENTS
NeoMedia 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 September 30, 1997 and December 31,
1996, amounts due under this financing agreement included in accounts payable
were $1,840,000 and $2,275,000, respectively.
4. BENEFIT FOR INCOME TAXES
The benefits for income taxes recorded during the nine and three months
ended September 30, 1997 and 1996 represented the recovery of income taxes paid
in prior years from the carry back of operating losses.
9
<PAGE>
5. MERGER WITH ALLEGIANT LEGACY SOLUTIONS, INC.
On September 25, 1997, in accordance with a Stock Purchase Agreement (the
"Allegiant Merger") entered into between the parties, NeoMedia purchased all of
the stock in Allegiant Legacy Solutions, Inc. ("Allegiant"), which was founded
on February 16, 1996, from George G. Luntz and Gerald L. Willis. Allegiant
primarily sells licenses to proprietary software tools (including "ADAPT2000")
that identify, seek and automatically correct date data that is stored in
various formats across both program code and specific data files. In addition to
converting legacy systems written in COBOL computer language to comply with the
Year 2000 requirements, ADAPT2000 works to convert other restrictive source and
application code, such as telephone area codes and monetary systems such as the
impending European Economic Community's Eurodollar. Mr. Luntz and Mr. Willis
received an aggregate of 1,070,000 shares of authorized, but unissued common
stock of NeoMedia. The number of shares of NeoMedia's common stock received by
Mr. Luntz and Mr. Willis was determined through arms-length negotiations between
the parties. Mr. Luntz entered into an employment agreement with NeoMedia and
Mr. Willis entered into a consulting agreement with NeoMedia. The Allegiant
Merger was accounted for as a pooling of interests, and accordingly, all
financial information has been restated as if the entities were combined for all
prior periods. For the nine months ended September 30, 1996, total net sales as
historically reported for NeoMedia and Allegiant were $12,433,000 and $370,000,
respectively, and net income (loss) was $(1,904,000) and $21,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
GENERAL. Total net sales for the nine months ended September 30, 1997 were
$16.5 million, which represented a $3.7 million, or 28.7%, increase from $12.8
million for the nine months ended September 30, 1996. This increase primarily
resulted from (i) the $1.8 million increase in resales of the IBM 390 series of
micro-mainframe computers, (ii) the $1.8 million increase in resales of
equipment to NeoMedia's largest customer, and (iii) the $1.2 million increase in
sales by Allegiant (including licenses of Year 2000 products), partially offset
with the $1.7 million decrease in sales in the document and migration business
units as NeoMedia refocused from resales to licensing.
The net loss for the nine months ended September 30, 1997 was $4.5 million,
which represented a $2.6 million, or 140.6%, increase from $1.9 million for the
nine months ended September 30, 1996. The increase in the net loss primarily
resulted from NeoMedia continuing to invest in the infrastructure needed to
manage current and expected future growth, reduced by the increased income from
the net sales increase. The increase in resales of the IBM 390 series and
resales of software and equipment to NeoMedia's largest customer improved the
net loss by $300,000 during 1997 as compared to 1996, while the increase in
sales of the Year 2000 products improved the net loss by $900,000. These
improvements were partially offset with the $500,000 additional net loss
resulting from the lower sales in the document and migration business units.
The total of general, administrative, sales, marketing, research and
development expenses increased $3.6 million to $7.2 million for the nine months
ended September 30, 1997 from $3.6 million during the nine months ended
September 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. 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.
LICENSE FEES. License fees for the nine months ended September 30, 1997
were $1.4 million compared to $638,000 for the nine months ended September 30,
1996, an increase of $743,000 or 116.3%. This increase resulted primarily from
the increase in sales of licenses by Allegiant. Cost 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
10
<PAGE>
percentage of related sales was 13.8% during 1997 compared to 36.2% during 1996,
This decrease in the cost of sales as a percentage of related sales was
primarily due to the increased sales of ADAPT2000, which is proprietary
software.
SOFTWARE RESALES. Software resales decreased by $155,000, or 7.3%, from
$2.1 million for the nine months ended September 30, 1996 to $2.0 million for
the nine months ended September 30, 1997. This decrease primarily resulted from
the discontinuation at the end of 1996 of PRS software sales which contributed
$784,000 to sales for the nine months ended September 30, 1996 and the $537,000
decrease in resales of UNIX client server administrative software, partially
offset with the $1.1 million increase in resales of software for micro-mainframe
computers. Cost of sales as a percentage of related sales was 86.6% during 1997
compared to 64.7% 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 cost 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 $2.9 million, or 35.0%,
to $11.3 million for the nine months ended September 30, 1997, as compared to
$8.4 million for the nine months ended September 30, 1996. This increase
primarily resulted from equipment resales related to Sun Microsystems
workstations and servers which increased $2.7 million (primarily due to
increased resales to NeoMedia's largest customer - see Note 2 of Unaudited Notes
to Consolidated Financial Statements -- Concentrations of Credit Risk) and IBM
Corporation equipment which increased $968,000 (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 87.2%
during 1997, compared to 85.7% during 1996.
SERVICE FEES. NeoMedia's service fees increased by $152,000, or 9.0%, to
$1.8 million for the nine months ended September 30, 1997, compared to $1.7
million for the nine months ended September 30, 1996. This increase was
primarily due to the $288,000 increase in the Year 2000 services and the
$361,000 increase in consulting fees for assisting companies to integrate
printers, partially offset with the $462,000 decrease in services supplied in
conjunction with the sales of existing software transition tools. Cost of
service fees as a percentage of related sales decreased to 83.8% during 1997
from 92.1% during 1996 primarily due to higher margin on Year 2000 services.
AMORTIZATION OF SOFTWARE. Amortization of software for the nine months
ended September 30, 1997, as compared to the nine months ended September 30,
1996, increased $81,000 as a result of the amortization of software costs
capitalized during 1997 and 1996, and, as a percentage of total net sales,
decreased to 2.9% during 1997 from 3.1% during 1996 due to the increase in net
sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.6 million, or 88.5%, to $3.3 million for the nine months ended September 30,
1997, from $1.7 million for the nine months ended September 30, 1996. This
increase was due mainly to NeoMedia building its administrative infra-structure,
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 $1.6 million, or 93.7%, to $3.3 million for the nine months ended
September 30, 1997 from $1.7 million for the nine months ended September 30,
1996, as a result 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 nine months ended September 30, 1997,
NeoMedia charged to expense 3.9% of total net sales in research and development
expenses as compared to 1.7% during the nine months ended September 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 continue to make significant investments in research and development.
11
<PAGE>
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
$291,000, or 72.3%, to $112,000 for the nine months ended September 30, 1997
from $403,000 for the nine months ended September 30, 1996, due to the repayment
of debt in the fourth quarter of 1996 and interest income earned on the proceeds
from the Initial Public Offering ("IPO").
BENEFIT FOR INCOME TAXES. The benefits for income taxes recorded during the
nine months ended September 30, 1997 and 1996 represented the recovery of income
taxes paid in prior years from the carry back of operating losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
GENERAL. Total net sales for the three months ended September 30, 1997 were
$3.9 million, which represented a $287,000 or 7.9%, increase from $3.7 million
for the three months ended September 30, 1996. This increase primarily resulted
from (i) the $444,000 increase in sales by Allegiant (including licenses of Year
2000 products) and (ii) the $448,000 increase in resales of the IBM 390 series
of micro-mainframe computers, partially offset with the $534,000 decrease in
resales of hardware (including the $411,000 decrease in resales to NeoMedia's
largest customer).
The net loss for the three months ended September 30, 1997 was $2.3
million, which represented a $653,000, or 40.2%, increase from $1.6 million for
the three months ended September 30, 1996. The increase in sales of Year 2000
products improved net loss by $300,000 during 1997 as compared to 1996, while
the increase in resales of the IBM 390 series improved net loss by $100,000.
These improvements were partially offset with the $100,000 additional loss
resulting from the lower resales of hardware.
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 $1.2 million to $2.9 million for the three months ended September 30,
1997 from $1.7 million for the three months ended September 30, 1996. This
increase primarily resulted from NeoMedia's investing in the expansion of its
infra-structure by hiring management, sales and other personnel to develop,
market and sell new products.
LICENSE FEES. License fees for the three months ended September 30, 1997
were $492,000 compared to $225,000 for the three months ended September 30,
1996, an increase of $267,000 or 118.5%. This increase resulted primarily from
the increase in sales of licenses by Allegiant. Cost 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 5.8% during 1997 compared to 40.4% during 1996. This decrease in the
cost of sales as a percentage of related sales was primarily due to the
increased sales of ADAPT2000, which is proprietary software.
SOFTWARE RESALES. Software resales increased by $196,000, or 241.6%, from
$(81,000) for the three months ended September 30, 1996 to $115,000 for the
three months ended September 30, 1997. The negative sales during the three
months ended September 30, 1996 primarily resulted from returns of software sold
in prior quarters. Cost of sales as a percentage of related sales was 75.7%
during 1997 compared to 77.6% during 1996.
EQUIPMENT RESALES. Equipment resales decreased by $427,000, or 13.8%, to
$2.7 million for the three months ended September 30, 1997, as compared to $3.1
million for the three months ended September 30, 1996. This decrease primarily
resulted from equipment resales related to Sun Microsystems work stations and
servers which decreased $783,000 (primarily due to decreased resales to
NeoMedia's largest customer), partially offset with the increase in resales of
IBM Corporation equipment which increased $249,000. Cost of sales as a
percentage of related sales was 88.2% during 1997, compared to 85.3% during
1996.
12
<PAGE>
SERVICE FEES. NeoMedia's service fees consisting of sales from consulting,
education and post contract support services increased by $251,000, or 59.6%, to
$672,000 for the three months ended September 30, 1997, compared to $421,000 for
the three months ended September 30, 1996. This increase primarily resulted from
the $155,000 increase in Year 2000 services and the $100,000 increase in
consulting fees for assisting companies to integrate printers. Cost of service
fees as a percentage of related sales decreased to 89.1% during 1997 from 147.3%
during 1996 primarily due to the higher margin on Year 2000 services.
AMORTIZATION OF SOFTWARE. Amortization of software for the three months
ended September 30, 1997, as compared to the three months ended September 30,
1996, increased $55,000 as a result of the amortization of software costs
capitalized during 1997 and 1996, and, as a percentage of total net sales,
increased to 4.4% during 1997 from 3.3% during 1996 due to the increase in net
sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$612,000, or 67.5%, to $1.5 million for the three months ended September 30,
1997, from $905,000 for the three months ended September 30, 1996. This increase
was due mainly to NeoMedia building its administrative infra-structure,
including compensation and related expenses and legal and professional fees, to
manage current and expected future growth.
SALES AND MARKETING. Sales and marketing expenses have increased $519,000,
or 74.6%, to $1.2 million for the three months ended September 30, 1997 from
$696,000 for the three months ended September 30, 1996, as a result 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 three months ended September 30, 1997,
NeoMedia charged to expense 4.9% of total net sales in research and development
expenses as compared to 2.5% during the three months ended September 30, 1996.
This percentage increase was due to an increase in the number of software
developers employed by NeoMedia to expand its product line. NeoMedia currently
intends to continue to make significant investments in research and development.
INTEREST EXPENSE, NET. Interest expense decreased by $129,000, or 68.2%, to
$59,000 for the three months ended September 30, 1997 from $188,000 for the
three months ended September 30, 1996, due to the repayment of debt in the
fourth quarter of 1996 and interest income earned on the proceeds from the IPO.
BENEFIT FOR INCOME TAXES. No benefit for income taxes was recorded during
the three months ended September 30, 1997 and 1996, because NeoMedia has net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, NeoMedia 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 September, 1996, a shareholder lent
additional funds to NeoMedia. In October, 1996, this shareholder contributed
$738,000 of these notes to additional paid-in capital. In December, 1996 and
February, 1997, NeoMedia repaid in full the balance of all of these related
party loans. Also, in January, 1996, NeoMedia borrowed $250,000 from a
commercial bank bearing interest at the bank's prime rate plus 0.5%. During the
three months ended September 30, 1996, NeoMedia closed the private placement of
bridge financing receiving net cash proceeds of $2.7 million.
During 1995, NeoMedia 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
NeoMedia to maintain certain financial ratios. NeoMedia used this facility
13
<PAGE>
for funding its operations during 1995 and through the closing of the IPO
shortly after which NeoMedia repaid in full the line of credit with its
commercial bank.
In November, 1996, NeoMedia completed its IPO receiving net proceeds of
$5.7 million. In January, 1997, NeoMedia closed the IPO's over-allotment and
received net proceeds of $1.3 million. As of September 30, 1997, NeoMedia's
working capital was $2.3 million which represented a $2.7 million decrease from
December 31, 1996. In September, 1997, Charles W. Fritz, NeoMedia's President
and Chief Executive Officer and a principal shareholder, exercised warrants to
purchase 146,000 shares of common stock for $1.3 million and certain holders of
publicly traded warrants exercised warrants to purchase 96,200 shares of common
stock for $709,000. In October, 1997, certain holders of publicly traded
warrants exercised warrants to purchase an additional 192,620 shares of common
stock for $1.4 million.
Net cash used in operating activities for the nine months ended September
30, 1997 and 1996, was $3.8 million and $1.2 million, respectively. During 1997,
trade accounts receivable decreased $1.0 million, while accounts payable and
accrued expenses decreased $1.0 million. During 1996, trade accounts receivables
increased $1.2 million, while accounts payable and accrued expenses increased
$1.4 million.
NeoMedia's net cash flow used in investing activities for the nine months
ended September 30, 1997 and 1996, was $1.5 million and $339,000, respectively.
Net cash provided by financing activities for the nine months ended September
30, 1997 and 1996, was $3.1 million and $2.9 million, respectively. During
January, 1997, NeoMedia sold the over-allotment of its Initial Public Offering
receiving net cash proceeds of $1.3 million, and, during September, 1997,
warrant holders, including Mr. Fritz, exercised $2.0 million of warrants to
purchase shares of common stock in NeoMedia.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 17, 1997, NeoMedia held its Annual Meeting of Stockholders at which
the stockholders voted on the election of eight directors to hold office during
the year following the annual meeting or until their successors are elected, and
the ratification of the appointment of Coopers & Lybrand L.L.P. as independent
auditors of NeoMedia for the year ending December 31, 1997. Messrs. Charles
Fritz, William Fritz, Jensen, Durst, Barclay, Keil and Reece were re-elected as
directors and Mr. Hosch was not elected as a director. The appointment of
Coopers & Lybrand L.L.P. was ratified. The number of votes cast was as follows:
FOR AGAINST ABSTAINED
--------- --------- ---------
NOMINEES FOR DIRECTOR
Charles W. Fritz ...................... 5,193,492 10,200 ---
William E. Fritz ...................... 5,193,492 10,200 ---
Charles T. Jensen...................... 5,193,492 10,200 ---
Robert T. Durst, Jr ................... 5,193,492 10,200 ---
A. Hayes Barclay ...................... 5,174,370 29,322 ---
James J. Keil ......................... 5,176,442 27,250 ---
Paul Reece ............................ 5,176,442 27,250 ---
James Hosch ........................... 2,118,603 3,085,089 ---
Coopers & Lybrand L.L.P ............... 5,188,775 6,250 8,667
14
<PAGE>
ITEM 5. OTHER INFORMATION
USE OF PROCEEDS OF IPO
As of September 30, 1997, the net proceeds from the IPO, including the
over-allotment in January, 1997, and net of $1,991,000 of issuance costs, was
$6,996,000 and was used as follows:
(IN
THOUSANDS)
----------
Repayment of certain loans .................. $1,442
Research and development .................... 1,685
Acquisitions ................................ 465
Sales and product management................. 3,213
Patent work ................................. 69
Working capital ............................. 122
------
Total ....................................... $6,996
======
As of September 30, 1997, all of the net proceeds from the IPO have been
applied.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by Item 601 of Regulation S-B to be filed herewith
are as follows:
Articles of Incorporation, By-laws, instruments defining the rights of
holders, including indentures, and material contracts have heretofore been filed
with the Securities and Exchange Commission and are hereby incorporated by
reference to NeoMedia's Registration Statement and Exhibits thereto (SEC
registration number 333-5534), Form 10- KSB for the year ended December 31,
1996, and Forms 10-QSB for the three months ended March 31, 1997 and June 30,
1997.
(b) Reports on Form 8-K
A Form 8-K dated August 30, 1997 was filed by NeoMedia reporting that
NeoMedia entered into a Stock Purchase Agreement to acquire all of the stock of
Allegiant.
A Form 8-K dated September 16, 1997 was filed by NeoMedia reporting that
NeoMedia accelerated to September 16, 1997 from November 25, 1997 the date which
Charles W. Fritz, President and Chief Executive Officer of NeoMedia, could
exercise his 260,000 warrants to purchase shares of common stock in NeoMedia.
A Form 8-K dated September 25, 1997 was filed by NeoMedia reporting that
NeoMedia acquired all of the stock of Allegiant from its two shareholders in
accordance with the Stock Purchase Agreement.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOMEDIA TECHNOLOGIES, INC.
---------------------------
Registrant
Date NOVEMBER 12, 1997 By: /s/ CHARLES W. FRITZ
----------------------------
Charles W. Fritz, President,
Chief Executive Officer
and Chairman of the Board
Date NOVEMBER 12, 1997 By: /s/ CHARLES T. JENSEN
----------------------------
Charles T. Jensen, Vice President,
Chief Financial Officer,
Treasurer and Director
16
<PAGE>
EXHIBIT INDEX
SEQUENTIAL EXHIBIT
PAGE NUMBER NUMBER DOCUMENT
- ----------- ------- --------
18 27.1 Article 5 Financial Data Schedule for
September 30, 1997
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,061
<SECURITIES> 0
<RECEIVABLES> 3,676
<ALLOWANCES> 383
<INVENTORY> 67
<CURRENT-ASSETS> 6,751
<PP&E> 4,214
<DEPRECIATION> 2,413
<TOTAL-ASSETS> 8,552
<CURRENT-LIABILITIES> 4,445
<BONDS> 0
0
0
<COMMON> 12,222
<OTHER-SE> (9,057)
<TOTAL-LIABILITY-AND-EQUITY> 8,552
<SALES> 16,473
<TOTAL-REVENUES> 16,473
<CGS> 13,752
<TOTAL-COSTS> 13,752
<OTHER-EXPENSES> 6,870
<LOSS-PROVISION> 315
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> (4,576)
<INCOME-TAX> (45)
<INCOME-CONTINUING> (4,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,531)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
