U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10 - KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD ___ TO ___
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Name of Small Business Issuer 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
Securities Registered Under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 NASDAQ SMALL CAP MARKET
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[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
Issuer's consolidated revenue for its most recent fiscal year was
$23,478,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the price at which shares of common stock closed on March
16, 1999 was $23,037,048. Determination of stock ownership by non-affiliates is
made solely for purposes of responding to the requirements of the form and the
registrant is not bound by this determination for any other purpose.
As of March 16, 1999, there were outstanding 8,824,800 shares, (excluding
375,000 shares held in escrow as security for loans), of the issuer's Common
Stock.
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PART I
ITEM 1. BUSINESS
GENERAL
ORGANIZATIONAL HISTORY. The Registrant, NeoMedia Technologies, Inc.
("NeoMedia"), was incorporated under the laws of the State of Delaware on July
29, 1996, to acquire by tax-free merger Dev-Tech Associates, Inc. ("Dev-Tech"),
NeoMedia's predecessor, which 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. On August 5, 1996, NeoMedia acquired all of
the shares of Dev-Tech in exchange for the issuance of shares of NeoMedia's
common stock to Dev-Tech's stockholders ("Dev-Tech Merger"). Each stockholder of
Dev-Tech received one share of NeoMedia's common stock in exchange for one share
of Dev-Tech's common stock. The Dev-Tech Merger was effected under applicable
provisions of the Internal Revenue Code as a tax-free transaction to the
corporations and stockholders. As a result of the Dev-Tech Merger, holders of
options and warrants to purchase Dev-Tech's common stock have the right to
purchase NeoMedia's common stock. As an additional result of the Dev-Tech
Merger, NeoMedia is the successor to the business and operations of Dev-Tech. In
November, 1996, a reverse stock split was effected whereby each NeoMedia
shareholder received .90386 shares of common stock for each one share of common
stock then owned.
In November, 1996, Dev-Tech Migration, Inc., an Illinois corporation
("DTM") and an affiliate of Dev-Tech, was merged into a subsidiary of NeoMedia.
DTM 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"), to operate with most, if not all
brands of hardware and operating software (called an "open system platform" or
an "open system environment"). Management determined that DTM's services
complimented Dev-Tech's services as a systems integrator, and that the synergies
between the two companies would be beneficial. Accordingly, on November 20,
1996, DTM was merged ("Migration Merger") into NeoMedia Migration, Inc.
("Migration"), a wholly-owned subsidiary of NeoMedia in exchange for the
issuance of shares of NeoMedia's common stock to Charles W. Fritz, the sole
stockholder of DTM and a principal shareholder, officer and director of
NeoMedia. Mr. Charles Fritz received an aggregate of 827,525 shares of common
stock on the basis of one share of DTM's common stock for .90386 share of
NeoMedia's Common Stock. As a result of the Migration Merger, holders of options
to purchase DTM common stock have the right to purchase NeoMedia's common stock.
The Migration 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 Migration Merger, Migration is the successor to the
business and operations of DTM.
These two mergers were 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.
In August, 1996, Distribuidora Vallarta, S.A., a Guatemalan corporation was
formed where by NeoMedia employs computer software developers and system
integrators. Distribuidora Vallarta, S.A. is 80% owned by NeoMedia Technologies,
Inc. and 20% owned by NeoMedia Migration, Inc.
On September 25, 1997, in accordance with a Stock Purchase Agreement (the
"Allegiant Merger") entered into between the parties, NeoMedia acquired from
George G. Luntz and Gerald L. Willis all of the stock in Allegiant Legacy
Solutions, Inc. ("Allegiant"), which was founded on February 16, 1996. Allegiant
primarily sells licenses to proprietary software tools (including "ADAPT/2000")
that identify, seek and automatically correct date data that is stored in
various formats across both program code and specific data files.
Mr. Luntz and Mr. Willis received an aggregate of 1,070,000 shares of
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. Mr.
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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. On December 22, 1997, Allegiant was dissolved and merged into NeoMedia.
During 1998 NeoMedia formed the following wholly-owned subsidiaries:
NeoMedia Technologies of Canada, Inc., incorporated in Canada; NeoMedia Tech,
Inc., incorporated in Delaware; NeoMedia EDV GMBH, incorporated in Austria;
NeoMedia Technologies Holding Company B.V., incorporated in the Netherlands;
NeoMedia Technologies de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia
Migration de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia Technologies
do Brazil Ltd., incorporated in Brazil, and NeoMedia Technologies UK Limited,
incorporated in the United Kingdom. All significant intercompany accounts and
transactions have been eliminated in the preparation of the consolidated
financial statements.
Unless the context indicates otherwise, all references herein to "NeoMedia"
or the "Company" mean and refer to the Registrant and its wholly-owned
subsidiaries.
As of December 31, 1998 the Company had accumulated losses from operations
of $22,000,000, had a working capital deficit of approximately $453,000 and
approximately $600,000 in unrestricted cash balances. In order to sustain
operations, the Company will need to continue to raise additional capital. As a
result of this situation, the Company's Independent Auditors have issued an
opinion that states there is substantial doubt about the Company's ability to
continue as a going concern. During the first quarter of 1999, the Company has
successfully obtained approximately $900,000 of equity financing and
approximately $1,000,000 of convertible debt financing. The Company will
continue to attempt to obtain additional financing, however, no assurances can
be made that additional financing will be obtained. (See Liquidity and Capital
Resources Section).
INITIAL PUBLIC OFFERING. On November 25, 1996, NeoMedia completed an
initial public offering of 1,700,000 units at $6.00 per unit (the "IPO"). Each
unit consisted of one share of common stock, $.01 par value, and one five-year
redeemable common stock purchase warrant ("Warrant"). The common stock trades on
The Nasdaq Stock MarketSM under the symbol "NEOM," and until December 18, 1997,
the warrants were traded under the symbol "NEOMW." Of the 1,700,000 units of
NeoMedia offered, 1,235,000 shares of common stock and 1,700,000 warrants were
sold by NeoMedia and 465,000 shares of common stock were sold by certain
stockholders of NeoMedia (the "Bridge Financing Selling Stockholders"). NeoMedia
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 NeoMedia upon the exercise by Joseph Charles & Associates, Inc.,
the representative of the underwriters in the IPO ("Joseph Charles"), of its
option to cover over-allotments in the IPO.
On November 10, 1997, NeoMedia announced the redemption of all of its
outstanding publicly-traded warrants. The warrant holders had until December 18,
1997 to convert each warrant to a share of common stock at an exercise price of
$7.375 or to sell the warrant. Any warrants outstanding on December 18, 1997
were redeemed by NeoMedia for $.05 per warrant. Of the 2,700,938 warrants
outstanding, 1,662,633 warrants were exercised for total proceeds to NeoMedia of
$12.3 million, and 1,038,305 warrants were redeemed by NeoMedia at $.05 per
warrant, or a total of $52,000.
POST INITIAL PUBLIC OFFERING. As of December 31, 1998 the Company had
accumulated losses from operations of approximately $22,000,000, had a working
capital deficit of approximately $453,000, and approximately $600,000 in
unrestricted cash balances. In order to sustain operations, the Company will
need to raise additional capital (see Management's Discussion and Analysis -
Liquidity and Capital Resources).
BUSINESS OVERVIEW
NeoMedia provides the following computer software and consulting services:
o INTELLIGENT DOCUMENT(TM) SOLUTIONS ("IDOCS(TM)") which incorporate
active data elements into standard printed documents or on physical
objects for the purpose of launching computer programs, creating
automated links to the World Wide Web, embedding machine readable
information and securing print document based transactions. Through
December 31, 1998, the Company had not generated any significant
revenues through the sale of IDOCs(TM) products.
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o DOCUMENT SYSTEMS SOLUTIONS which assists clients in optimizing the
creation, production and management of printed documents and printed
document processes.
o MASS CHANGE / MIGRATION SOLUTIONS which enables and assists clients
in implementing broad changes in computer software and hardware
systems, including (i) identifying, seeking and automatically
correcting restrictive source and application fields which store
data, including including Year 2000 remediation, and (ii) conversions
of legacy computer systems and applications to open system
implementations.
NeoMedia currently offers its services and products through its two
principal business units - NeoMedia Systems Integration (NeoMedia/SI) and
NeoMedia Tech which, although separate in name, often function as a team in
providing solutions for its customers. NeoMedia/SI focuses on providing project
based systems integration solutions for contract customers including Document
System Solutions, Mass Change/Migration remediation and custom IDOCs(TM)
implementations. The role of NeoMedia Tech is to develop and commercialize
proprietary software products and related technology and to promote and enable
wide-scale IDOCs(TM) solutions with key strategic partners.
As part of the services provided in connection with the solutions it
offers, NeoMedia often recommends, specifies, supplies and installs equipment
and software products from third-party suppliers, many of whom have strategic
alliances with NeoMedia. NeoMedia acts as a re-marketer of equipment and
software products for a number of suppliers, such as IBM Corporation, Oracle
Corporation, Sun Microsystems Computer Company, Symbol Technologies, Inc., Xerox
Corporation, and has generated the largest portion of its revenue to date from
these activities.
INTELLIGENT DOCUMENT(TM) (IDOCS(TM)) SOLUTIONS
NEOMEDIA'S IDOCS(TM) TECHNOLOGY LINKS THE WORLDS OF PRINT AND ELECTRONIC MEDIA.
The print medium is probably the most pervasive form of written
communication in the world. Despite the introduction of electronic storage and
information creation, paper will continue to be prominent, because of its
convenience, familiarity and universal acceptance. Even as the electronic world
expands, the volume of print media also grows. Printed documents are limited
though since they only have a finite space for information and support only
two-dimensional, static words and images.
Electronic information, on the other hand, is up-to-the-minute,
interactive, easily linked to other data sources, virtually unlimited in size,
capable of audio and video display, and even capable of performing processing
tasks for the reader. By developing the innovative Intelligent Documents
(IDOCs(TM)) technology, NeoMedia integrates the worlds of print and electronic
media, opening up a new world of opportunity. Management believes its
Intelligent Documents(TM) technology has the potential to provide the industry
standard for linking the worlds of print and electronic media.
There are three key proprietary technologies currently in the IDOCs(TM)
portfolio or under development: (i) NeoLink(TM) (web threading); (ii)
PaperData(TM) (print modulation/demodulation); and (iii) NeoSure(TM) (secure
documents).
NEOLINK(TM) ("WEB-THREADING")
NeoLink(TM) is based on the web threading model, a distinct third model of
web information access. In contrast to search engines and push technologies,
which are essentially navigation aides to users who are already online, web
threading links printed documents and physical objects, such as hard good
products, credit cards and ID cards, directly to information through the
Internet. The user connects to this information by either scanning a barcode on
a document or object, or entering a few digits or a short character string using
a keyboard or remote control. A computer or web-enabled television then acts as
a conduit to connect the user to related Web information. The "thread" also
conveys information identifying the document or object being scanned as well as
information regarding the demographics and
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psychographics of the user making the inquiry. This allows the responding Web
site to finely tailor their response for true one-to-one marketing and also
opens opportunity for portals to extend the brand of their fullfillment channel
to catalogs, print information and consumer goods.
NeoLink(TM) has been successfully piloted in several sectors and a pilot is
presently underway with a major European technical trade publisher. Commercial
roll-out is underway with a major multi-level marketing company, and additional
prospects in these and other markets are in various stages of development.
PAPERDATA(TM) (PRINT MODULATION/DEMODULATION)
Conventional printing and scanning technologies are designed to faithfully
represent the aesthetic appearance of documents. During the process of
converting a digital file to a print image, valuable information regarding
attributes of the data itself are lost, such as font specifications, file
identifiers, spreadsheet formulas and database references. Although scanners can
be used to capture a digital image of a print document, these tacit attributes
cannot be recovered. Essentially, conventional print relegates documents to the
role of a display channel for human readable information. In order to access an
original digital document, the reader must either copy the original file to
digital media and then distribute it, or transfer the file over a data network.
NeoMedia has developed proprietary software that allows users to directly
embed a digital data file in a conventionally printed document and then recover
that file from the document's digitized print image using conventional document
scanners. The process is achieved by modulating non-human readable elements of
the print image and then demodulating these same elements, thereby turning
printers and scanners into literal "modems for print". The PaperData(TM)
software that embodies this technology also contains powerful proprietary error
correction and compression capabilities that make it suitable for both
industrial and consumer applications. In addition to supporting on-document file
transfer, PaperData(TM) can also be used to embed HTML and Java applets in
printed documents for retrieval and automated activation with desktop scanners.
The preproduction design of PaperData(TM) is complete and intellectual
property rights have been obtained or are in the process of being obtained.
NEOSURE(TM) (SECURE DOCUMENTS)
NeoMedia has developed a proprietary system and method for protecting
negotiable printed commercial documents, such as checks, money orders, coupons,
food stamps and gift certificates, from counterfeit and forgery. This
patent-pending technology incorporates NeoMedia's NeoLink(TM) and PaperData(TM)
technologies with U.S. Checks' patented UV-Smart(TM) paper stock identification
techniques and an on-line registration database. When used concurrently, this
system verifies that a document is authentic, has not been modified and that the
transaction has not been duplicated. The system can also be used to automate the
processing of printed transactional documents, such as checks and gift
certificates, as well as link documents to specific individuals for specific
transactions in order to prevent unauthorized use. NeoMedia has filed several
extensive patent applications on the use of NeoSure(TM) and other related
technologies for linking, securing and promoting web-commerce from print media,
such as coupons, catalogs and direct mail.
Preproduction design of NeoSure(TM) is complete and intellectual property
rights have been obtained or are in the process of being obtained.
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SERVICES AND PRODUCTS. NeoMedia either currently provides or is developing
and plans to provide the following Intelligent Document(TM) service and software
products:
o TECHNOLOGY AND SOLUTIONS CONSULTING are engagements where NeoMedia
consults with clients to advise them on general capabilities of
Intelligent Document(TM) technology and specific advantages and
limitations of different implementations, including custom solution
designs and impact studies to assist them in their businesses.
o SYSTEMS DEVELOPMENT AND INTEGRATION is the design, development,
implementation and service of Intelligent Document(TM) 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 NeoMedia. In addition to these
services, NeoMedia plans to, in the design and development of
proprietary applications, enhance ported systems. 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.
o 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(TM) applications.
NeoMedia believes that it is currently the leading provider of high
capacity, two dimensional symbology print drivers to the high speed
printing environment. NeoMedia has provided such services to various
customers, such as UPS and Symbol Technologies, Inc.
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o INTELLIGENT DOCUMENT(TM) APPLICATIONS includes specific applications
software which apply Intelligent Document(TM) technology and
principles to provide specific commercial solutions, including
NeoLink(TM), and other future products in development, including
PaperData(TM) and NeoSure(TM) and MedThread(TM).
Since the Intelligent Document(TM) Solutions has only been introduced
recently, to date NeoMedia/SI and NeoMedia Tech have provided only limited
software and consulting services in several pilots. However, due to the rapidly
emerging era of electronic commerce fostered by the proliferation of the
Internet and the World Wide Web, NeoMedia anticipates that the large number of
potential Intelligent Document(TM) applications will, in terms of revenue, make
this a fast growing unit of NeoMedia, although to date this has not occurred and
no assurances can be given that this will occur in the future.
DOCUMENT SYSTEM SOLUTIONS
Document System Solutions assist clients in optimizing their document
creation, production and management processes. These efforts have historically
focused on designing and providing complete, client specific, high speed and
high volume document formatting and printing solutions. In 1997 Document System
Solutions was expanded to include Integrated Document Factories ("IDF's"), a
complete, client specific system solution for automating, monitoring and
managing print-to-mail processes. IDF's incorporate manufacturing principles and
IDOCs(TM) technology, enabling clients not only to achieve maximum efficiencies
in their print processes, but to also ensure document integrity and
traceability. Also included in Document System Solutions is NeoMedia's value
added reseller business.
NeoMedia is a supplier of proprietary and third-party software and
third-party equipment to which NeoMedia helps its customers integrate and
install this hardware and software. The companies represented by NeoMedia in the
re-marketing of software and equipment include IBM Corporation, Oracle
Corporation, Sun Microsystems Computer Company, Symbol Technologies, and Xerox
Corporation.
NeoMedia's customers currently using their Document Systems Solution
services and product include Principal Financial Group, Fidelity Investments,
Discover Card Services, Inc., Charles Schwab & Co., Inc. and the State of
Wisconsin, where they are used to reduce costs by introducing production
efficiencies by generating on demand customized forms from standard stock in
lieu of using more expensive pre-printed form stock, and by enabling
implementation of automated printing systems using lower-cost distributed
client-server platforms.
In providing complete document system solutions and IDF's, NeoMedia often
"partners" with companies such as Xerox Corporation and IBM Corporation. These
arrangements often result (i) in the "partner" introducing to NeoMedia customers
which purchase NeoMedia's and the business partner's services and products, (ii)
in the use by the partner of NeoMedia as a subcontractor, (iii) in the
re-marketing by NeoMedia of the business partner's hardware and software
products, and (iv) in the sharing of the responsibility with the business
partner. Depending upon the product or service involved, the association with
the business partner may be on an exclusive basis.
SERVICES. NeoMedia provides services in this market as both a consultant
and systems integrator. These services consist of the following:
o ENTERPRISE OUTPUT STRATEGIES are consulting engagements in which
NeoMedia professionals analyze customer business requirements and
design comprehensive document systems solutions to resolve business
problems. NeoMedia has 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.
o INTEGRATED DOCUMENT FACTORY 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
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operations. However, unlike successful manufacturing operations,
print-to-mail operations typically lack control systems, such as
those to ensure quality. NeoMedia actively consults in these areas
and is currently developing customized versions of established
manufacturing execution systems for the document generation
environment.
o INTELLIGENT DOCUMENT(TM) SOLUTIONS, in the context of the Document
Systems Solutions, are the consulting and systems integration of
IDOCs(TM) software products and applications as related to the
document production process. NeoMedia's proprietary IDOCs(TM)
technology can be used to control such processes and facilitate
document return processing and archive retrieval, both through
conventional and web mediated channels.
o MICRO-MAINFRAME PORTS. In 1996, IBM introduced their IBM S390
processors, which allow users to run mainframe applications on
downsized air-cooled platforms. 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. NeoMedia,
as an authorized re-marketer for IBM, offers these new systems and
provides migration services in connection with their installation.
o 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 two decades. 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. NeoMedia offers services in this arena, which
include:
o Implementation of new Internet compatible systems through open
systems integration products and services.
o Migrations of existing proprietary legacy applications and
databases to open system platforms compatible with
modernization to the Internet environment.
o Porting of IBM mainframe applications to air cooled micro-frames
which bridge both legacy and open system environments.
SOFTWARE PRODUCTS. NeoMedia offers a variety of third-party and proprietary
software products to be used in connection with its document systems solutions,
including custom software and proprietary PDF417 and Maxicode encoders which run
on multiple platforms.
Document System Solutions services represented 80.0% and 87.2% of
NeoMedia's total sales for the year ended December 31, 1998 and December 31,
1997, respectively.
MASS CHANGE/ MIGRATION SOLUTIONS
NeoMedia's Mass Change / Migration Solutions rely on proprietary and
third-party software tools and custom services to assist clients in (i)
identifying and automatically correcting software programs and/or data with the
"Year 2000 problem," and (ii) converting ("migrating") from closed legacy
systems to more cost effective and functional open system environments.
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The "Year 2000 problem" refers to the use of a two-digit date field
primarily found in legacy software programs. For example, "89" represents the
calendar year "1989." Programs using such two-digit year codes may become
invalid on January 1, 2000, as they may read "00" as "1900". As a result,
serious errors may occur in calculations dependent upon dates, such as mortgage
calculations, in particular, and calculations used throughout financial and
industries in general.
NeoMedia licenses its proprietary software tools (including "ADAPT/2000")
which, unlike many other competitive tools, not only identify occurrences of the
date code problem in software programs, but automatically correct ("remediate")
potentially 90% of such occurrences. NeoMedia's ADAPT/2000 tool, unlike other
competitive tools, works across various hardware platforms and remediates legacy
programs written in COBOL and new IBM COBOL ("MLE") computer languages.
In 1998, Adapt-PC/2000 was added to NeoMedia's suite of tools designed to
manage and identify Year 2000 problems in PC and distributed client-server
networks within the corporate enterprise environment. Adapt-PC/2000 is an
easy-to-use program that searches databases, spreadsheets and other file types
on PCs across a network, and identifies and catalogs any data that appears to
contain dates that are not Year 2000 compliant.
Prior to the late 1980's, software and hardware manufacturers developed
business software that would only run on their proprietary systems in an attempt
to "lock in" existing customers. These "closed" systems and applications are
referred to in the industry as "legacy systems." In the late 1980's and early
1990's, technological advances resulted in widespread development of software
and hardware in standard computer languages that could be installed in a variety
of systems. Subsequently, these "open" systems have generated price and
performance advantages and greater functionality.
NeoMedia provides consulting and systems integration services to facilitate
the migration of business applications running on legacy systems, such as Wang
environments, 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. NeoMedia's Migration
Solutions Unit has a group of proprietary programs ("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 NeoMedia's
more general systems integration products and services, which management
believes provide clear synergies with NeoMedia's other commercial activities.
Since technology in the computer industry changes so rapidly, the "new and
improved" system of today is the legacy system of tomorrow. Consequently,
NeoMedia believes that there is a substantial and continuing market for
transition services.
SERVICES. NeoMedia presently offers two Year 2000 / Migration Solutions
approaches to assist clients to implement business applications in open
computing environments:
o OPEN SYSTEM DEVELOPMENT. This approach is employed when an
application must be written or rewritten for use on an open systems
platform. NeoMedia 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 NeoMedia believes will be increasingly competitive during
the latter half of this decade.
o 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
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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 NeoMedia. NeoMedia's migration-development tools
and application products are based on the widely used technology and
products of Informix, Microsoft Corporation, IBM, Hewlett Packard,
Oracle Corporation, Sun Microsystems, Micro Focus Cobol and
AccuCobol.
PROPRIETARY MIGRATION SOFTWARE TOOLS AND PRODUCTS. NeoMedia has acquired
and developed a line of proprietary products and software tools utilized in its
migrations services solutions, including WISP, WISP NT, WISP/UNIX, CoStar for
WISP, PacePort and Legacy Liberator.
In each of these areas of service, NeoMedia 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. The services performed under the Year 2000 / Migration Solutions
group represented 20.0% and 12.8% of NeoMedia's total sales for the year ended
December 31, 1998 and December 31, 1997, respectively.
CUSTOMERS
Although NeoMedia 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, 1998 and 1997, one customer, Ameritech
Services, Inc. ("Ameritech"), accounted for 24.8% and 38.7%, respectively, of
NeoMedia's revenue. NeoMedia expects sales to Ameritech as a percentage of total
sales to decline in the future. Furthermore, NeoMedia does not have a written
agreement with Ameritech and, therefore, there are no contractual provisions to
prevent Ameritech from terminating its relationship with NeoMedia at any time.
Accordingly, the loss of this customer, or a significant reduction by it in
buying the products and services offered by NeoMedia, absent diversification,
would materially and adversely affect NeoMedia'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 NeoMedia. For these reasons, NeoMedia
is seeking, and continues to seek, to diversify its sources of revenue.
SALES AND MARKETING
NeoMedia 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
was composed of 28 personnel as of December 31, 1998. NeoMedia currently
maintains domestic sales offices in four states. The Company also has four
foreign sales offices. The sales organization is responsible for achieving
quarterly and annual sales quotas. NeoMedia 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.
Representatives of NeoMedia also attend seminar and trade shows, both as
speakers and participants, to help market its products and services.
In addition, NeoMedia has an indirect sales channel of agents, value added
resellers and independent distributors in the United States and in foreign
countries, for its products and services. NeoMedia anticipates that the indirect
sales channel will account for an increasingly significant portion of NeoMedia's
total revenue in future periods. There is no assurance that NeoMedia will be
successful in further developing such channels, that such relationships will
result in significant additional sales or that any sales through such channels
will have the same profitability, if any, of sales obtained through NeoMedia's
direct sales force. In addition, NeoMedia expects its direct and indirect sales
channels to compete with each other. Successful indirect sales efforts depend on
the abilities, resources, reputations, motivations and strategies of third
parties over which NeoMedia has little control. NeoMedia does not sell all its
products and services through each distribution channel. If NeoMedia's efforts
at further developing these indirect sales channels are unsuccessful, if such
channels are unproductive or if NeoMedia were to lose one or more of its
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value added resellers, agents, or distributors, there could be a material
adverse effect on NeoMedia's results of operations or financial position.
During 1998, NeoMedia acquired a customer list for total consideration of
$1,155,000, including 120,000 shares of NeoMedia common stock valued at $827,000
(giving effect to the common stock being unregistered and "restricted"
securities as such term is defined in Rule 144 of the rules and regulations
promulgated under the Securities Act of 1933, as amended) and cash of $292,000.
Additionally, there were legal and other expenses of $36,000 that were related
to this transaction. The customer list is intended to be used to develop
relationships for the sale of the Company's IDOC's products. The cost of the
customer list is being amortized on the straight-line method over its estimated
useful life of five years.
In February 1999, the Company entered into a binding term sheet with A.T.
Cross Company ("Cross"). The term sheet contemplates an agent agreement by and
between the Company and Cross related to the distribution of the Company's
NeoLink software with Cross' pen/scan device.
CUSTOMER SUPPORT ORGANIZATION
NeoMedia believes that strong customer support is crucial to both the
initial marketing of its products and maintenance of customer satisfaction,
which in turn, enhances NeoMedia's reputation and generates repeat orders. In
addition, NeoMedia believes that the customer interaction and feedback involved
in its ongoing support functions provide NeoMedia with information on market
trends and customer requirements that is critical to future product development
efforts.
Pre-sales support is provided by sales personnel and post-sales support is
provided by NeoMedia's customer support organization pursuant to renewable
annual maintenance contracts. NeoMedia maintains toll-free telephone support
during regular business hours to current users and potential customers
evaluating NeoMedia's products. Maintenance contracts provide for technical and
emergency support, as well as software upgrades, on an if and when available
basis.
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. NeoMedia, therefore, believes that its success depends upon
its ability continuously to 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 NeoMedia's ability to
develop new software products and services related to high capacity symbologies.
NeoMedia employed 19 and 15 persons in the area of product development as of
December 31, 1998 and December 31, 1997, respectively. During the years ended
December 31, 1998 and 1997, NeoMedia incurred total research and development
costs of $1,968,000 and $1,180,000, respectively, of which $899,000 and
$428,000, respectively, were capitalized as software development costs and
$1,069,000 and $752,000, respectively, were expensed as research and development
costs.
INTELLECTUAL PROPERTY RIGHTS
In 1998, NeoMedia was given notification of allowable claims by the U.S.
Patent and Trademark Office on a patent filing covering certain of its
proprietary technology related to Intelligent Documents(TM). NeoMedia received
formal notice of allowance on their first patent in early 1999. Although
NeoMedia has a number of patents pending, no assurances can be given that
additional patent protection will be granted, and if granted, that it will be
adequate to protect NeoMedia's rights. In addition, NeoMedia relies upon
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions, all of which afford only limited protection, to protect
its proprietary technology and products. Although
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NeoMedia takes steps to protect its trade secrets, such as requiring employees
with access to NeoMedia'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 NeoMedia's proprietary technology
and products. Furthermore, just as there can be no assurance that a
misappropriation of NeoMedia'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 NeoMedia's rights. In
addition, although the laws of the United States may protect NeoMedia's
proprietary rights in its technology and products, the laws of foreign countries
where NeoMedia'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.
During December 1998, the Company acquired the rights to certain patent
filings currently pending. The Company paid a total of $125,000 in cash along
with a warrant to purchase shares of the Company's common stock at a negligible
value (such warrant was valued at approximately $432,000, the trading price of
the underlying common stock). The Company is contingently liable to pay the
seller of the pending patent applications an additional amount six months from
the date that the first U.S. patent application is granted. The contingent
purchase price is approximately $1,862,000. This obligation, when and if due,
may be settled by the Company either in cash or through the issuance of
additional warrants to purchase Company common stock at negligible values. The
Company anticipates that the first patent application may be approved during
1999. Based upon currently available working capital, the Company currently
anticipates that any obligation would be settled through the issuance of
additional warrants.
NeoMedia 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
NeoMedia. Similarly, infringement claims could be asserted against products and
technologies which NeoMedia licenses from third parties.
NeoMedia 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. NeoMedia generally does not make source codes
available for NeoMedia's products.
Due to the difficulty of doing so, NeoMedia has never policed, nor has it
ever attempted to police, the unauthorized use of its products. Even though
piracy of NeoMedia's proprietary rights could materially adversely affect it,
NeoMedia believes that the threat of piracy, or the unavailability of protection
under applicable laws, is less significant to its competitive and financial well
being than its ability to respond to the rapid change in technology which
characterizes the computer industry.
COMPETITION
The markets in which NeoMedia competes are highly competitive, and NeoMedia
believes that such competition is likely to intensify. Many of NeoMedia's
competitors have substantially greater financial resources, larger research and
development and sales staffs and greater name recognition than NeoMedia 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 NeoMedia. NeoMedia 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
NeoMedia.
Since NeoMedia 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. A large number of companies
act as re-marketers of another party's products, and therefore, the competition
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in this area is intense. In some instances, NeoMedia, in acting as a
re-marketer, may compete with the original manufacturer.
There are a number of companies that compete with NeoMedia 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 NeoMedia's open
systems services and products, the competitors for transition services business
range from small to large companies. NeoMedia believes, however, that not a
significant number of its competitors for the transition services business use
automated tools to facilitate the migration.
Since the development of high capacity symbologies 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 NeoMedia will
be able to compete successfully in this area should this occur.
Within the Year 2000 marketplace, it is NeoMedia's aim to distinguish
itself from most of the competition by offering quality services at competitive
prices. Some of NeoMedia's competitors are more established, benefit from
greater name recognition and have substantially greater financial, technical and
marketing resources than NeoMedia. Moreover, other than the need for technical
expertise, there are no significant proprietary or other barriers to entry in
the millennium consulting industry. As a result, there can be no assurance that
one of the Company's competitors will not develop a millennium consulting
methodology which achieves greater market acceptance than NeoMedia's.
New or improved products and services can be expected from NeoMedia'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. NeoMedia 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. NeoMedia'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 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 NeoMedia will be able to compete
successfully or develop competitive products and services in the future.
PRODUCT LIABILITY INSURANCE
NeoMedia has never had any product liability claim asserted against it.
However, NeoMedia could be subject to product liability claims in connection
with the use of the products and services that it sells. There can be no
assurance that NeoMedia would have sufficient resources to satisfy any liability
resulting from these claims or would be able to have its customers indemnify or
insure NeoMedia against such claims. Although NeoMedia maintains insurance
against such claims, there can be no assurance that such coverage will be
adequate in terms and scope to protect NeoMedia against material adverse effects
in the event of a successful claim.
GOVERNMENT REGULATION
NeoMedia has no knowledge of any government regulation to which it is
subject or which would materially adversely affect its business operations.
ENVIRONMENTAL PROTECTION COMPLIANCE
NeoMedia has no knowledge of any federal, state or local environmental
compliance regulations which affect its business activities. NeoMedia 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.
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EMPLOYEES
As of December 31, 1998, NeoMedia employed 123 persons. Of the 123
employees, 44 are located at the Company's headquarters in Fort Myers, FL, 56 at
other domestic locations and 23 are located outside the United States. None of
NeoMedia's employees are represented by a labor union or bound by a collective
bargaining agreement. NeoMedia believes that its employee relations are good.
NeoMedia's success depends to a significant extent on the performance of
its senior management and certain key employees. Competition for highly skilled
employees, including sales, technical and management personnel, is intense in
the computer industry. NeoMedia's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
affect NeoMedia's business.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995
NeoMedia operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for software products is
generally characterized by rapidly changing technology, frequent new product
introductions and changes in customer requirements which can render existing
products obsolete or unmarketable. The statements contained in Item 1 (Business)
and Item 6 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) that are not historical facts may be forward-looking
statements (as such term is defined in the rules promulgated pursuant to the
Securities Exchange Act of 1934) that are subject to a variety of risks and
uncertainties more fully described in NeoMedia's filings with the Securities and
Exchange Commission including, without limitation, those described under "Risk
Factors" in NeoMedia's Prospectus dated August 25, 1997. The forward-looking
statements are based on the beliefs of the management of NeoMedia, as well as
assumptions made by, and information currently available to, NeoMedia's
management. Accordingly, these statements are subject to significant risks,
uncertainties and contingencies which could cause NeoMedia's actual growth,
results, performance and business prospects and opportunities in 1999 and beyond
to differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited to, NeoMedia's limited operating history on which
expectations regarding its future performance can be based, competition from,
among others, national and regional software developers and software/hardware
sellers that have greater financial, technical and marketing resources and
distribution capabilities than NeoMedia, the availability of sufficient capital,
NeoMedia's ability to identify the right product mix, NeoMedia's ability to
successfully acquire and integrate the operations of additional businesses,
NeoMedia's ability to operate effectively in geographical areas in which it has
no prior experience, the maturation and success of NeoMedia's strategy to
develop, market and sell its products and services, risks inherent in conducting
international business, risks associated with selling proprietary licenses and
conducting a consulting services business, changes in NeoMedia's product and
service mix and product and service pricing, the effectiveness of NeoMedia's
efforts to control operating expenses, general economic and business conditions
affecting NeoMedia and its customers in the United States and other countries in
which NeoMedia sells and anticipates to sell its products and services, charges
and costs related to acquisitions, and NeoMedia's ability to: (i) obtain
additional financing on terms acceptable to the Company, or at all, to allow the
Company to continue its operations as currently proposed; (ii) develop, market
and sell existing and acquired products for the Intelligent Document(TM), Year
2000 and other software markets; (iii) successfully integrate its acquired
products, services and businesses and continue its acquisition strategy; (iv)
adjust to changes in technology, customer preferences, enhanced competition and
new competitors in the Intelligent Document(TM), Year 2000 and other software
markets; (v) protect its proprietary software rights from infringement or
misappropriation; (vi) maintain or enhance its relationships with business
partners and vendors; (vii) attract and retain key employees; and (viii)
implement changes in NeoMedia's business strategy or minimize an inability to
execute its strategy due to unanticipated changes in the millennium software and
consulting market. There can be no assurance that NeoMedia will be able to
identify, develop, market, sell or support new products or enhancements
successfully, that any such new products or enhancements will gain
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market acceptance, or that NeoMedia will be able to respond effectively to
technological changes. There can be no assurance that NeoMedia will not
encounter technical or other difficulties that could delay introduction of new
products in the future. If NeoMedia is unable to introduce new products or
enhancements and respond to industry changes on a timely basis, its business
could be materially adversely affected. NeoMedia is not obligated to update or
revise these forward-looking statements to reflect new events or circumstances.
ITEM 2. DESCRIPTION OF PROPERTIES
NeoMedia's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. NeoMedia
occupies approximately 15,000 square feet under terms of a written lease from an
unaffiliated party expiring on January 31, 2000. NeoMedia has a sales facility
at 2150 Western Court, Suite 230, Lisle, Illinois 60532, where NeoMedia occupies
approximately 6,000 square feet under the terms of a written lease from an
unaffiliated party expiring on April 30, 2000.
NeoMedia also leases space, where the principal sales facility was formerly
located, at 280 West Shuman Boulevard, Suite 100, Naperville, Illinois 60563.
This lease in Naperville covers approximately 9,300 square feet under the terms
of a written lease from an unaffiliated party expiring on December 31, 2000.
NeoMedia subleases all of the space in the Naperville facility under the terms
of a written sublease to an unaffiliated party expiring on December 31, 2000.
NeoMedia maintains a sales office located at 11025 Reed Hartman Highway,
Cincinnati, Ohio 45242. NeoMedia occupies approximately 2,000 square feet under
terms of a written lease from GEDA, Inc., which is a corporation owned by Gerald
Willis who is a shareholder in and consultant to NeoMedia and is a former owner
of Allegiant. This lease of space in Cincinnati expires in January, 2000.
The Company also leases office space in two other domestic locations and
four international locations. These offices are primarily used for its sales
efforts.
NeoMedia leases from Charles W. Fritz (NeoMedia's President) and his wife,
pursuant to a verbal, month-to-month lease, space at 6054 Timberwood Circle,
#240, Fort Myers, Florida 33908, which it currently uses as temporary housing
for employees relocating to Fort Myers. Although this lease is between
affiliated parties, NeoMedia believes that it is on terms no less favorable to
it than could be obtained from unaffiliated parties.
NeoMedia believes that its existing office space is adequate to meet its
current and short-term requirements.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, NeoMedia is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of NeoMedia security holders during the
fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. NeoMedia's common stock and warrants began trading
on The Nasdaq Stock MarketSM under the symbol "NEOM" and "NEOMW," respectively,
on November 25, 1996, the date of its initial public offering. Prior to such
time there was no established public trading market for NeoMedia's common stock
or
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warrants. On November 10, 1997, NeoMedia announced the redemption of all of its
outstanding publicly-traded warrants. The warrant holders had until December 18,
1997 to convert each warrant to a share of common stock at an exercise price of
$7.375 or to sell the warrant. Any warrants outstanding on December 18, 1997
were redeemed by NeoMedia for $.05 per warrant. Of the 2,700,938 warrants
outstanding, 1,662,633 warrants were exercised for total proceeds to NeoMedia of
$12.3 million, and 1,038,305 warrants were redeemed by NeoMedia at $.05 per
warrant, or a total of $52,000.
Set forth below is the range of high and low sales prices for the common
stock and warrants for the periods indicated 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 March 31, 1997 $ 6.31 $4.75
June 30, 1997 $ 9.13 $4.19
September 30, 1997 $11.50 $6.75
December 31, 1997 $11.25 $7.38
March 31, 1998 $ 9.13 $6.06
June 30, 1998 $10.13 $4.50
September 30, 1998 $ 6.00 $2.44
December 31, 1998 $ 3.00 $1.50
Warrants March 31, 1997 $ 1.75 $1.00
June 30, 1997 $ 2.00 $1.00
September 30, 1997 $ 3.94 $1.63
December 18, 1997(1) $ 3.56 $0.03
- -----------------------------
(1) Includes only the period October 1, 1997 through December 18, 1997.
(b) HOLDERS. As of March 16, 1999, there were 144 holders of record of
NeoMedia's common stock. NeoMedia believes that it has a greater
number of shareholders because management believes that a substantial
number of NeoMedia's common stock are held of record in street name by
broker-dealers for their customers.
(c) DIVIDENDS. As of March 16, 1999, NeoMedia has not paid any dividends
on its common stock and does not expect to pay a cash dividend in the
foreseeable future, but intends to devote all funds to the operation
of its businesses. As of March 16, 1999, NeoMedia has a letter of
credit with First National Bank of Chicago, Chicago, Illinois, the
terms of which require First National Bank of Chicago's written
permission prior to the declaration of cash dividends.
NeoMedia's stock price has been and will continue to be subject to
significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on NeoMedia's
stock price. In addition, NeoMedia's stock price may be affected by broader
market trends that may be unrelated to NeoMedia's performance.
On May 1, 1997, for services, the Company issued to an investment banking
firm a warrant to purchase 375,000 shares of the Company's Common Stock, at an
exercise price of $7.375 per share, expiring November 25, 2001.
On May 1, 1997, for services, the Company issued to another investment
banking firm a warrant to purchase
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65,000 shares of the Company's Common Stock, at an exercise price of $10.125 per
share, expiring November 25, 2001.
On December 11, 1997, for services, the Company issued to outside
consultants three warrants to purchase 408,332 shares of the Company's Common
Stock, at an exercise price of $8.85 for 173,332 shares, $7.50 for 135,000
shares and $10.00 for 100,000 shares, expiring December 11, 2002.
In November 1998, the Company obtained a loan of $500,000 from an unrelated
party. The note has a term of one year, and is secured by a pledge of 375,000
shares of the Company's Common Stock. In consideration for the loan the Company
issued a warrant to purchase 37,500 shares of the Company's Common Stock at an
exercise price of $2.00 per share, expiring November 2002.
In January, 1999, the Company issued 82,372 shares of the Company's Common
Stock to a related party at a price of $3.03 per share.
In January, 1999, the Company issued 145,000 shares of the Company's Common
Stock at a price of $3.50 per share to unrelated parties.
In January, 1999, the Company issued 42,857 shares of the Company's Common
Stock at a price of $3.50 per share to a related party.
The above issuances of securities were made by the Company in reliance on
an exemption from registration contained in Section 4(2) of the Securities Act
of 1933, as amended, as offerings not involving a public offering.
ITEM 6. 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. Through the year ended December 31, 1998, a substantial part of
NeoMedia's revenue was derived from resales of software and technology
equipment. 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 (i) software
license fees, (ii) resales of software and technology equipment from independent
vendors and (iii) service fees, including consulting and post contract software
support.
As of December 31, 1998 the Company had accumulated losses from operations
of $22,000,000, had a working capital deficit of approximately $453,000 and
approximately $600,000 in unrestricted cash balances. In order to sustain
operations, the Company will need to continue to raise additional capital.
NeoMedia's strategy is to increase licenses of its proprietary software
transition tools and applications as a percentage of total sales. License fees
for the year ended December 31, 1998 increased 18.5% from the year ended
December 31, 1997, and, as a percentage of total sales, increased to 10.0% of
total sales during the year ended December 31, 1998 from 8.2% during the year
ended December 31, 1997. NeoMedia has built and intends to continue to build an
infrastructure that assumes this strategy will succeed. NeoMedia's inability to
achieve expected revenue growth in license fee revenues in connection with this
strategy, contributed significantly to its inability to achieve profitable
operations in 1998. Therefore, any continued failure to achieve this strategy
will 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
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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. NeoMedia's inability
to achieve revenue growth expectations in 1998 had an adverse effect on its
results of operations.
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.
NeoMedia's quarterly operating results have been subject to variation and
will continue to be subject to variation, depending upon factors, such as the
mix of business among NeoMedia's services and products, the cost of material,
labor and technology, particularly in connection with the delivery of business
services, the costs associated with initiating new contracts, the economic
condition of NeoMedia's target markets, and the cost of acquiring and
integrating new businesses.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1997
NET SALES. Total net sales for the year ended December 31, 1998 were $23.5
million, which represented a $.9 million, or 3.9%, decrease from $24.4 million
for the year ended December 31, 1997. This decrease primarily resulted from (i)
a $3.6 million decrease in equipment resales to a NeoMedia customer in the
telecommunications industry, (ii) a $1.2 million decrease in sales of IBM
software due to an IBM change of how resellers are compensated on software
resales in 1998, and (iii) a $1.2 million increase in sales of Year 2000
services, and (iv) a $1.3 million increase in equipment resales to new
customers.
LICENSE FEES. License fees for the year ended December 31, 1998 were $2.4
million compared to $2.0 million for the year ended December 31, 1997, an
increase of $.4 million or 18.5%. This increase resulted primarily from the
increase in sales of licenses of NeoMedia's Year 2000 software. Cost of sales as
a percentage of related sales was 11.6% during 1998 compared to 16.2% during
1997. This decrease in the cost of sales as a percentage of related sales was
primarily due to the increased sales of software without royalties.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT. Resales of software and
technology equipment decreased by $2.3 million, or 12.1%, to $16.9 million for
the year ended December 31, 1998, as compared to $19.2 million for the year
ended December 31, 1997. This decrease primarily resulted from equipment resales
to Ameritech, NeoMedia's largest customer, which decreased $3.6 million. These
decreases were partially offset with a $1.3 million increase in sales to new
customers. Cost of sales as a percentage of related sales was 86.6% during 1998,
compared to 89.5% during 1997. This decrease in the cost of sales as a
percentage of related sales was primarily due to the sales of more IBM S390
computers that have a higher profit margin.
SERVICE FEES. NeoMedia's service fees increased by $1.0 million, or 30.4%,
to $4.3 million for the year ended December 31, 1998, compared to $3.3 million
for the year ended December 31, 1997. This increase was primarily due to a $1.2
million increase in the Year 2000 services and a $500,000 increase in consulting
fees for integrated document factory services. This increase was partially
offset with a $500,000 decrease in Xerox referral fees. Cost of service fees as
a percentage of related sales increased to 86.4% during 1998 from 61.1% during
1997 primarily due to lower margins on Year 2000 services and an under
utilization of consultants during the first half of the year.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses increased $5.0 million, or 99.8%, to $10.0
million for the year ended
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December 31, 1998 from $5.0 million for the year ended December 31, 1997, as a
result primarily of hiring additional direct sales personnel intended for future
revenue growth. The increase in sales personnel and marketing expenses did not
lead to an increase in revenues due in part to a weak market for Year 2000
products. As a result, the Company reduced its sales and marketing personnel in
late 1998 and early 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$819,000, or 20.1%, to $4.9 million for the year ended December 31, 1998, from
$4.1 million for the year ended December 31, 1997. This increase was due mainly
to NeoMedia building its administrative infra-structure to manage current and
expected future growth.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 1998, NeoMedia
charged to expense $1,069,000 of research and development expenses, an increase
of $317,000 or 42% compared to $752,000 charged to expense for the year ended
December 31, 1997. This increase was due to adding additional employees to
further develop the IDOCs(TM) product line. To the extent the Company can obtain
additional capital, it will continue to make significant investments in research
and development.
FAIR VALUE OF OPTIONS AND WARRANTS GRANTED TO CONSULTANTS. During the years
ended December 31, 1998 and 1997, NeoMedia issued common stock purchase options
and warrants to consultants to purchase an aggregate of 30,000 shares of common
stock in 1998 and 848,332 shares of NeoMedia common stock in 1997. Using the
Black-Scholes model, the fair value of these warrants was computed to be $25,000
in 1998 and $716,000 in 1997. The $25,000 was charged to expense in 1998, while
in 1997, $461,000 was charged to expense and $255,000 was charged to the
proceeds of the publicly traded warrants called on December 18, 1997.
INTEREST EXPENSE (INCOME), 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 net of interest earned on
cash equivalent investments. Interest (income)/expense decreased by $268,000, or
182.3%, to $(121,000) for the year ended December 31, 1998 from $147,000 for the
year ended December 31, 1996, due to the interest income earned on the proceeds
from common stock purchase warrants exercised in the fourth quarter of 1997.
INCOME TAX BENEFIT. The $78,000 benefit for income taxes recorded during
the year ended December 31, 1997 represented the recovery of income taxes paid
in prior years from the carry back of operating losses. There were no income tax
carrybacks in 1998.
NET LOSS. The net loss for the year ended December 31, 1998 was $11.5
million, which represented a $5.5 million, or 92.4% increase from a $6.0 million
loss for the year ended December 31, 1997. The increase in the net loss
primarily resulted from NeoMedia's failure to generate the revenue growth
expected in the Year 2000 market. The Company increased its sales and marketing
efforts in anticipation of a strong market for its Year 2000 products that it
licenses, however, due to general market conditions, this revenue growth was
never achieved. In late 1998 and early 1999, the Company reduced its fixed
expenses related to the Year 2000 product line.
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LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1998 and 1997 the Company's net loss
totaled approximately $11,495,000 and $5,973,000, respectively. As of December
31, 1998 the Company had accumulated losses from operations of approximately
$21,994,000, had a working capital deficit of approximately $453,000, and
approximately $600,000 in unrestricted cash balances.
Management believes it will need to raise additional capital as well as
reduce expenses, and meet revenue growth targets to sustain the Company's
operations in 1999. The failure of management to accomplish these initiatives
will adversely effect the Company's business, financial conditions, and results
of operations and its ability to continue as a going concern.
Subsequent to December 31, 1998, the Company has undertaken the following:
o During January 1999, the Company issued approximately 270,000
previously unissued shares of its common stock at a price of between
$3.03 and $3.50 per share. Gross proceeds from these transactions were
approximately $900,000, approximately $400,000 of which was from
related parties.
o In February 1999, the Company entered into a binding term sheet with
A.T. Cross Company ("Cross"). The term sheet contemplates an agent
agreement by and between the Company and Cross related to the
distribution of the Company's NeoLink(TM) software with Cross'
pen/scan device. During the first quarter of 1999, the Company
received from Cross $1,000,000 in the form of a convertible promissory
note. This one year note is convertible during its term into shares of
the Company's common stock at $4.00 per share, or if unconverted may
be repaid by the Company in shares of its common stock at $4.00 per
share, assuming certain conditions are met. The note bears interest at
a rate of 1% per annum and was accompanied by warrants issued to Cross
to acquire 100,000 shares of common stock at $5.00 per share and
100,000 shares of common stock at $7.00 per share. The Company
anticipates receiving an additional $1,000,000 from Cross on
substantially consistent terms during the second quarter of 1999 upon
execution of the agent agreement.
o In late 1998 and 1999, the Company reduced its sales and marketing
staff and related expenses. The Company will attempt to further adjust
its expenses in 1999 as needed.
Net cash used in operating activities for the year ended December 31, 1998
and 1997, was $7.0 million and $6.2 million, respectively. During 1998, trade
accounts receivable decreased $744,000, while accounts payable and accrued
expenses increased $2.1 million. During 1997, trade accounts receivables
increased $1.7 million, while accounts payable and accrued expenses increased
$359,000. NeoMedia's net cash flow used in investing activities for the year
ended December 31, 1998 and 1997, was $2.4 million and $1.7 million,
respectively. This increase resulted from the increased acquisition of property
and equipment, as well as the increase in purchases of intangible assets.
Net cash provided by financing activities for the year ended December 31,
1998 and 1997, was $544,000 and $14.0 million, respectively. In January, 1997,
NeoMedia consummated the IPO's over-allotment and received net proceeds of $1.3
million. 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. On November 10, 1997, NeoMedia
announced the redemption of all of its outstanding publicly-traded warrants. The
warrant holders had until December 18, 1997 to convert each warrant to a share
of common stock at an exercise price of $7.375 or to sell the warrant. Any
warrants outstanding on December 18, 1997 were redeemed by NeoMedia at $.05 per
warrant. Of the 2,700,938 warrants outstanding, 1,662,633 warrants were
exercised for net proceeds to NeoMedia of $11.6 million, and 1,038,305 warrants
were redeemed by NeoMedia at $.05 per warrant, or a total of $52,000.
In November 1998, NeoMedia borrowed $500,000, in two separate notes from
unrelated third parties. These notes are due in November, 1999 and bears an
interest rate of 20%. These notes are secured by 375,000 shares of NeoMedia's
common stock. As part of obtaining the financing, 37,500 stock warrants,
exercisable at $2.00 per share, were issued to the lender.
The Company has entered into a migration contract (specifically Year 2000
remediation) with a Colombian customer related to the remediation of certain of
the customer's computer systems to be Year 2000 compliant. The total contract is
approximately $1 million, of which approximately $157,000 has been recognized as
revenue by the Company as of December 31, 1998. As an element to the contract
the Company has guaranteed its work product and resulting Year 2000 compliance
of the customer. To this end, during 1999 the Company established bank
guarantees in the form of certificates of deposit totaling approximately
$150,000 in favor of the customer. The Company believes that it has the ability
and intent to complete such remediation in a satisfactory manner and is
accounting for this project on a percentage of completion basis.
YEAR 2000 ISSUES
In the next year, many companies, including NeoMedia, will face potentially
serious issues associated with the inability of existing data processing
hardware and software to appropriately recognize calendar dates beginning in the
year 2000. Many computer programs that can only distinguish the final two digits
of the year entered may read entries for the year 2000 as the year 1900. In
1996, NeoMedia began the process of identifying the many software applications
and hardware devices used internally expected to be impacted by this issue.
NeoMedia's analysis encompasses its (i) applications software; (ii) hardware;
and (iii) data residing in programs. The software programs used internally by
NeoMedia (primarily its general ledger accounting package) were purchased from
third party vendors. In assessing its risk of non-compliance, the Company's
internal systems department classified vital and non-vital production systems.
NeoMedia has completed the analysis of over 70% of all production systems
software (representing virtually all of the "vital" systems comprising the
corporate backbone), including verification by third party vendors that the
programs are Year 2000 compliant, as well as internal testing which confirms
readiness of those programs. NeoMedia incurred costs of approximately $1,000 in
upgrading the operating system, and about $3,500 in upgrading the application
program, for its existing accounting general ledger program. In addition, the
Company has purchased a new general ledger accounting package which is Year 2000
compliant according to the vendor. The Company is currently developing the
environment for this new system, and plans to begin installation in 1999. The
Company expects to maintain the existing accounting package for archival and
contingency purposes. As an additional
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measure of security, routine back-ups of data are performed to preserve
information in various vital systems, and manual or paper files are maintained
if other measures fail with regard to the most vital accounting functions. The
remaining 30% of the application software is considered either non-vital or
capable of compliance with a vendor-provided "patch" on an as-needed basis.
NeoMedia expects to test virtually all remaining application programs in 1999.
NeoMedia believes that the hardware devices supporting production systems which
were not year 2000 compliant have been replaced with those which are year 2000
compliant. The few remaining PC's which are not now compliant are scheduled for
routine replacement during 1999 with compliant hardware, thereby eliminating the
year 2000 concern. Although prudent measures have been taken, there can be no
assurance that NeoMedia will not be adversely affected by the failure of the
upgraded package to be fully year 2000 compliant as represented by the vendor.
With hardware and software matters nearing completion in 1999, NeoMedia plans to
utilize its proprietary software tools to analyze vital data residing in
application programs, such as accounting spreadsheets, for non-complaint data.
Vital data will be remediated. NeoMedia believes that its proprietary software,
for which it is currently selling licenses, is year 2000 compliant. Remaining
year 2000 remediation costs are anticipated to be insignificant.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements to this Form 10-KSB are attached commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NeoMedia did not have any disagreements on accounting and financial
disclosures with its accountants in the years ended December 31, 1998 or 1997.
20
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
As of March 16, 1999, NeoMedia's directors and executive officers were:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
<S> <C> <C>
Charles W. Fritz 42 President, Chief Executive Officer, Director and Chairman of
the Board
William E. Fritz 68 Secretary and Director
Charles T. Jensen 55 Chief Financial Officer, Vice-President and Treasurer and
Director
Robert T. Durst, Jr. 46 Chief Technical Officer, Executive Vice-President and
Director
James M. Marshall 46 Executive Vice President of Sales and Marketing
A. Hayes Barclay 68 Director
James J. Keil 71 Director
Paul Reece 62 Director
John A. Lopiano 60 Director
</TABLE>
CHARLES W. FRITZ is a founder of NeoMedia 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
NeoMedia, Mr. Fritz was an Account Executive with IBM Corporation from 1986 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
NeoMedia and its Secretary.
WILLIAM E. FRITZ is a founder of NeoMedia and has served as Secretary and a
Director since its inception. He also served as Treasurer of NeoMedia from its
inception until May 1, 1996. Mr. Fritz, who has over thirty-two years in
establishing and operating privately owned companies, currently is, and for at
least the past ten years has been, an officer and either the sole stockholder or
a majority stockholder, of G. T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.
M., Inc. (formerly Dev-Mark, Inc.) and EDSCO, three railroad freight car
equipment manufacturing companies. Mr. Fritz 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, NeoMedia's President, Chief Executive Officer
and Chairman of the Board.
CHARLES T. JENSEN has been Chief Financial Officer, Treasurer and Vice
President of NeoMedia since May 1, 1996. He has been a Director since August 6,
1996. Prior to joining NeoMedia 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,
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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.
ROBERT T. DURST, JR. has been Chief Technical Officer and Executive Vice
President since April 1, 1996. He has been a Director since August 6, 1996.
Prior to joining NeoMedia, 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.
JAMES M. MARSHALL became Executive Vice-President of Sales and Marketing
effective January 26, 1998. Mr. Marshall has approximately twenty years of
experience in sales, marketing, sales management and general management. Prior
to joining NeoMedia, Mr. Marshall held various management positions with Oracle
Corporation, including most recently Senior Director of Marketing and Business
Development for Americas, from 1995 to January, 1998. Prior to joining Oracle
Corporation, Mr. Marshall was Director of Operations - Americas International
Group for Tandem Computers, where he worked from 1986 to 1995. Mr. Marshall
holds a Bachelor of Business Administration, Management and a Bachelor of
Science, General Sciences, both of which are from the University of South
Florida.
A. HAYES BARCLAY has been a Director of NeoMedia 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 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.
JAMES J. KEIL has been a Director of NeoMedia 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 (a
non-public corporation), and from 1990-1992 was the Chairman of its Board of
Directors. From 1992-1996, Mr. Keil served on the board of directors of Document
Sciences Corporation. Mr. Keil holds a B.S. degree from the University of
Dayton.
PAUL REECE has been a Director of NeoMedia 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.
JOHN A. LOPIANO, has been a Director of NeoMedia since July 29, 1998. He
recently retired as Senior Vice President of Xerox Corporation and President of
its Production Systems Group. Prior to joining Xerox in April, 1990, Mr. Lopiano
was employed for approximately 25 years by IBM Corporation serving in various
management, marketing and product development positions. Mr. Lopiano holds a
B.S. degree from the United States Military Academy and a Master of Business
Administration from New York University. Mr. Lopiano is a member of Xerox's
Operations Committee, Management Audit Committee, The Xerox Foundation and the
Business Development Forum (of which he is a co-chairman). In addition, since
July, 1995, Mr. Lopiano has been a trustee of the Rochester Institute of
Technology, Rochester, New York, and is currently chairman of its Education
Committee. Since March, 1998, he has been a director of Interleaf, Inc., a
company listed on the NASDAQ National Market System.
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<PAGE>
Directors are elected on an annual basis. Each director of NeoMedia holds
office until the next annual meeting of the shareholders or until that
director's successor has been elected and qualified. At present, NeoMedia's
by-laws provide for not less than one director nor more than ten. Currently,
there are eight directors. NeoMedia's by-laws permit the Board of Directors to
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers of
NeoMedia 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.
NeoMedia has agreed, for a period of four years from November 25, 1996, if
so requested by the Joseph Charles & Associates, Inc. ("Joseph Charles") the
representative of the several underwriters of NeoMedia's IPO, to nominate a
designee of Joseph Charles as a director of NeoMedia.
DIRECTOR COMPENSATION
Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. Until February 19, 1998,
non-employee directors received options to purchase 3,000 shares of NeoMedia's
common stock under the 1996 Stock Option Plan upon election as a director and
received additional options to purchase 1,000 shares of NeoMedia's common stock
under the 1996 Stock Option Plan as of the date of each annual meeting at which
such person is re-elected and continues to serve as director. On February 19,
1998, the Board of Directors approved the payment to non-employee directors of
director fees of $2,000 per meeting attended and granted options to each
non-employee director to purchase 14,000 shares of NeoMedia's common stock under
the 1998 Stock Option Plan. "See "Executive Compensation - Stock Option Plan".
In addition, upon election as a director or re-election, each non-employee
director will receive options to purchase 15,000 shares of NeoMedia's common
stock under the 1998 Stock Option Plan. NeoMedia anticipates that the Board of
Directors will meet at least five times a year. Effective October 27, 1998, a
resolution was passed to grant 3,000 stock options to each non-employee director
in lieu of the $2,000 director fee per meeting. These options are immediately
vested.
COMMITTEES OF THE BOARD OF DIRECTORS
NeoMedia's Board of Directors has an Audit Committee, Compensation
Committee and a Stock Option Committee. The Board of Directors does not have a
Nominating Committee, and the functions of such committee are performed by the
Board of Directors.
AUDIT COMMITTEE. Until February 19, 1998, NeoMedia's Board of Directors
acted as the Audit Committee, which is responsible for nominating NeoMedia's
independent accountants for approval by the Board of Directors, reviewing the
scope, results and costs of the audit with NeoMedia's independent accountants,
and reviewing the financial statements, audit practices and internal controls of
NeoMedia. On February 19, 1998, the Board of Directors elected James J. Keil, A.
Hayes Barclay and Charles T. Jensen to be the sole members of the Audit
Committee, which now is composed of a majority of non-employee directors.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of Directors and for administering NeoMedia's Incentive Plan for
Management. Charles W. Fritz, Charles T. Jensen, James J. Keil and Paul Reece
are the current members of NeoMedia's Compensation Committee.
STOCK OPTION COMMITTEE. The Stock Option Committee, which is comprised of
non-employee directors, is responsible for administering NeoMedia's Stock Option
Plan. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's
Stock Option Committee.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid to (i) NeoMedia's Chief Executive Officer and (ii) each of
NeoMedia's four other executive officers who received aggregate cash
compensation in excess of $100,000 for services rendered to NeoMedia
(collectively, "the Named Executive Officers") during the years ended December
31, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
--------------------------------------
SECURITIES
OTHER UNDER-
ANNUAL LYING ALL OTHER
NAME AND COMPEN- WARRANTS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY SATION BONUS OPTIONS SATION
- ------------------ ---- ------ ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Fritz 1998 $253,131 ----- ----- 400,000(7) $55,659(11)
President and Chief 1997 181,333 ----- ----- 300,000(3) 9,010(11)
Executive Officer 1996 146,666 ----- $ 36,667(2) 260,000(4) 5,486(5)
Charles T. Jensen 1998 $157,648 ----- ----- 180,000(7) $30,965(11)
Chief Financial Officer and 1997 117,333 ----- ----- ----- 21,960(11)
Vice-President and 1996 95,000 ----- $ 50,782(2) 90,386(6) 3,780(5)
Treasurer
Robert T. Durst, Jr. 1998 $174,531 ----- ----- 180,000(7) $8,897(11)
Executive Vice-President 1997 150,500 $25,405(8) ----- ----- 8,432(11)
and Chief Technical Officer 1996 104,994 ----- $ 22,967(2) 153,657(6) 4,704(5)
James Marshall 1998 $169,493 ----- $28,960(10) 230,000(7) $2,578(12)
Executive Vice-President 1997(9) ----- ----- ----- ----- -----
of Sales and Marketing 1996(9) ----- ----- ----- ----- -----
</TABLE>
- --------------------------------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total of annual salary and bonuses for the Named
Executive Officer for such year.
(2) The 1996 bonuses were paid in February, 1997, except $30,000 of the bonus
to Mr. Jensen, which was paid in August, 1996.
(3) Represents a warrant, exercisable for a period of five years commencing
December 11, 1997, to purchase up to 300,000 shares of Common Stock at an
exercise price of $7.875.
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<PAGE>
(4) Represents a warrant, exercisable until November 25, 2001 to purchase up to
260,000 shares of Common Stock at an exercise price of $8.85 per share. In
September, 1997, an aggregate of 146,000 shares were purchased upon partial
exercise of this warrant. Up to 114,000 shares may still be purchased in
accordance with the provisions of this Warrant.
(5) Includes life insurance premiums where policy benefits are payable to
beneficiary of the Named Executive Officer and the corresponding income tax
effects.
(6) Represents options granted under NeoMedia's 1996 Stock Option Plan.
(7) Represents options granted under NeoMedia's 1998 Stock Option Plan.
(8) Represents relocation and automobile expenses attributable to personal use
of $15,713 and $9,692, respectively.
(9) Was not employed by NeoMedia during this year.
(10) Represents sales bonus paid.
(11) Includes life insurance premiums where policy benefits are payable to
beneficiary of the Named Executive Officer, automobile expenses
attributable to personal use and the corresponding income tax effects.
(12) Automobile expenses attributable to personal use and the corresponding
income tax effects.
EMPLOYMENT AGREEMENTS
NeoMedia 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 Vice President, Chief Financial Officer and
Treasurer, and with Robert T. Durst, Jr., its Executive Vice-President and Chief
Technical Officer, 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 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 NeoMedia. Effective as of May 1, 1997,
the Board of Directors increased the annual salary of Messrs. Fritz and Jensen
to $187,000 and $121,000, respectively, and increased the annual salary of Mr.
Durst to $154,000 effective as of April 1, 1997. Effective as of January 1,
1998, the Board of Directors increased the annual salary of Messrs. Fritz, Durst
and Jensen to $250,000, $170,000 and $150,000, respectively. In addition, the
Board of Directors granted to Messrs. Fritz, Durst and Jensen options to
purchase 400,000, 180,000 and 180,000, respectively, shares of NeoMedia common
stock under the 1998 Stock Option Plan. Each employment agreement terminates
upon the employee's death or retirement, and may be terminated by NeoMedia 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 also
entitled to certain severance benefits. These severance benefits vary depending
upon the reason for termination and whether there has been a change in control
of NeoMedia. If termination occurs by NeoMedia (except for cause or total
disability) or by the employee for good reason, as defined in the employment
agreement, the agreement provides that NeoMedia will pay to the terminated
employee (i) his salary through the date of termination, (ii) any deferred and
unpaid amounts due under NeoMedia'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 NeoMedia's Stock Option Plans 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 NeoMedia, provided
that such payments do not violate the provisions of any option or the 1996 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 the terminated
employee 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,
NeoMedia 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, 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
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<PAGE>
employee's continued participation under such plan and programs is not
allowable, NeoMedia 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 NeoMedia)
provided that the performance of such service does not prevent the employee from
attending to the affairs of NeoMedia, and such companies are not in competition
with NeoMedia. The employment agreements of Messrs. Fritz and Durst contain
provisions prohibiting their competing with NeoMedia both during and, depending
upon the reason for such termination, for one year following the termination of
their employment.
On January 26, 1998, NeoMedia hired Mr. James M. Marshall as Executive Vice
President of Sales and Marketing. Mr. Marshall's annual salary is $163,000 plus
a $40,000 annual bonus to be paid in quarterly installments if quarterly sales
goals are met. In addition, upon execution of his employment agreement, the
Board of Directors granted to Mr. Marshall options to purchase 70,000 shares of
NeoMedia common stock under the 1998 Stock Option Plan. Mr. Marshall also
participates in all benefits and plans available to executive employees of
NeoMedia. The Board also granted to Mr. Marshall additional options to purchase
90,000 shares under the 1998 Stock Option Plan in 1998.
INCENTIVE PLAN FOR MANAGEMENT
Effective as of January 1, 1996, NeoMedia 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 NeoMedia's management to achieve these growth and
profitability goals. Participation in the Incentive Plan is limited to those
employees holding positions assigned to incentive eligible salary grades and
whose participation is authorized by NeoMedia's Compensation Committee which
administers the Incentive Plan, including determination of employees eligible
for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.
To be eligible for consideration for inclusion in the Incentive Plan, an
employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and 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.
No bonuses were paid to or earned by employees pursuant to the Incentive
Plan for Management, for the years ended December 31, 1998 and December 31,
1997.
STOCK OPTION PLANS
Effective as of February 1, 1996 (and amended and restated effective July
18, 1996 and further amended through November 18, 1996), NeoMedia adopted its
1996 Stock Option Plan ("1996 Stock Option Plan"). The 1996 Stock Option Plan
provides for the granting of non-qualified stock options and "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and provides for the issuance of a maximum of 1,500,000 shares of
common stock.
As of March 16, 1999, options to purchase an aggregate of 702,614 shares of
common stock, at an exercise price of $.84, were granted and are outstanding
under NeoMedia's 1996 Stock Option Plan, including options to Charles
26
<PAGE>
T. Jensen, its Chief Financial Officer, and to Robert T. Durst, Jr., its
Executive Vice-President, to purchase 90,386 and 153,657 shares of common stock,
respectively. In addition, options to purchase an aggregate of 446,868 shares of
common stock in a range of $4.19 to $10.88 per share have also been granted to
employees, directors and consultants and are outstanding.
Effective February 1, 1996 (and amended and restated effective July 18,
1996), DTM adopted a 1996 stock option plan providing for the issuance of a
maximum of 400,000 shares of DTM common stock and identical in all other
material respects to NeoMedia's 1996 Stock Option Plan. As a result of the
Migration Merger, the DTM stock option plan is no longer in effect, no further
options under the DTM stock option plan will be issued and holders of options to
purchase shares of DTM common stock will, in lieu thereof, receive shares of
NeoMedia's Common stock upon exercise of their options.
Following the Migration Merger, the aggregate number of shares of common
stock issuable under NeoMedia's Stock Option Plan was not increased by the
number of shares of stock issuable under the DTM stock option plan but remains
at a maximum of 1,500,000 shares, including options granted under the DTM stock
option plan.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan
("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting
of non-qualified stock options and provides for the issuance of a maximum of
8,000,000 shares of common stock. As of March 16, 1999, there are currently
options granted to purchase an aggregate of 2,837,000 shares of common stock
under this plan.
Shares of Common Stock underlying options granted or to be granted under
the 1998 Stock Option Plan have not been registered. As a result, shares of
Common Stock received upon the exercise of the options will be restricted
securities, and will not be able to be sold unless such shares are registered or
are sold pursuant to an exemption from registration. Under Rule 144,
non-affiliates of the Company may sell restricted shares of Common Stock after a
one year holding period, provided the sales are made in accordance with certain
restrictions contained in the Rule, and after a two year holding period may sell
such shares without restriction.
401(K) PLAN
NeoMedia maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan"). All employees of NeoMedia who are 21 years of age and who have completed
three months of service are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may make elective contributions of up
to 20% of such participant's pre-tax salary (up to a statutorily prescribed
annual limit, which is $10,000 for 1998) to the 401(k) Plan, although the
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The 401(k)
Plan also provides for matching and discretionary contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.
OPTIONS GRANTED IN THE LAST FISCAL YEAR
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 1998:
27
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE EXPIRATION
NAME GRANTED(1) EMPLOYEES PRICE DATE
- ---- ------- --------- -------- --------
<S> <C> <C> <C> <C>
Charles W. Fritz 200,000 8.7% 7.31 3/27/08
100,000 4.3% 2.91 7/31/08
100,000 4.3% 2.63 10/30/08
Charles T. Jensen 90,000 3.9% 7.31 3/27/08
45,000 2.0% 2.91 7/31/08
45,000 2.0% 2.63 10/30/08
Robert T. Durst, Jr. 90,000 3.9% 7.31 3/27/08
45,000 2.0% 2.91 7/31/08
45,000 2.0% 2.63 10/30/08
James Marshall 70,000 3.0% 7.31 3/27/08
35,000 1.5% 3.41 7/30/08
55,000 2.4% 2.63 10/30/08
</TABLE>
- ------------------------------
(1) Options granted under the 1998 Stock Option Plan.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth options exercised by NeoMedia's Named
Executive Officers during fiscal 1998, and the number and value of all
unexercised options at fiscal year end.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
SECURITIES IN-THE-MONEY
SHARES UNDERLYING OPTIONS/SARS OPTIONS/SARS AT
ACQUIRED VALUE AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --- ----------- -------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Fritz (2) --- --- 494,000 320,000 $ 5,000 $ 20,000
Charles T. Jensen 1,000 $ 1,940 125,386 144,000 $ 184,597 $ 9,000
Robert T. Durst, Jr. --- --- 207,657 126,000 $ 315,710 $ 9,000
James Marshall --- --- 32,000 128,000 $ 2,750 $ 11,000
</TABLE>
(1) The value of the "in the money" options is calculated by the difference
between the market price of the stock at December 31, 1998 and the exercise
price of the options.
28
<PAGE>
(2) Includes stock options and warrants.
For the year ended December 31, 1998, there have not been any long term
incentive plan awards made to a Named Executive Officer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of March 16, 1999, (i) by each person or
entity known by NeoMedia to own beneficially more than five percent of
NeoMedia's Common Stock, (ii) by each of NeoMedia's directors, (iii) by each
executive officer of NeoMedia named in the Summary Compensation Table and (iv)
by all executive officers and directors of NeoMedia as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(1)
- ------------------------ ---------------------- -------------------
<S> <C> <C>
Charles W. Fritz(2)(3) ..................................... 2,151,969 21.6%
William E. Fritz/Fritz Family Limited Partnership(2)(4) .... 1,812,438 18.2%
Chandler T. Fritz 1994 Trust(2)(5)(6) ...................... 58,489 *
Charles W. Fritz 1994 Trust(2)(5)(7) ....................... 58,489 *
Debra F. Schiafone 1994 Trust(2)(5)(8) ..................... 58,489 *
Charles T. Jensen(2)(9) .................................... 162,386 1.6%
James Marshall ............................................. 64,000 *
John Lopiano ............................................... 37,200 *
Robert T. Durst, Jr.(2)(9) ................................. 228,657 2.3%
A. Hayes Barclay(10) ....................................... 16,800 *
James J. Keil(11) .......................................... 16,800 *
Paul Reece(12) ............................................. 16,800 *
Gerald L. Willis (13) ...................................... 503,900 5.1%
All executive officers and
directors as a group (9 persons)(14) ..................... 4,445,513 44.7%
</TABLE>
- ------------------------------------------------------------
* less than one percent of issued and outstanding shares of Common Stock of
NeoMedia
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Options to purchase
shares of Common Stock currently exercisable or exercisable within sixty
days of March 16, 1999 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. Except as indicated by footnote, to the knowledge of NeoMedia, 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.
29
<PAGE>
(2) c/o NeoMedia Technologies, Inc.
2201 Second Street, Suite 600
Fort Myers, FL 33901
(3) Mr. Fritz may be deemed to be a parent and promoter of NeoMedia, as those
terms are defined in the Securities Act of 1933, as amended. Shares
beneficially owned include (i) 400 shares of Common Stock (100 shares owned
by each of Mr. Fritz's four minor children for an aggregate of 400 shares)
and (ii) 414,000 shares of Common Stock issuable upon exercise of two
separate warrants to purchase Common Stock which are currently exercisable
(4) William E. Fritz, Secretary of NeoMedia, 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 R. Fritz 1994 Trust,
Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust, William E.
Fritz is deemed to be the beneficial owner of the shares of NeoMedia held
in each trust. Accordingly, Mr. William E. Fritz is deemed to be the
beneficial owner of an aggregate of 1,812,438 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, 1,511,742 shares as a
result of being co-general partner of the Fritz Family Partnership and
125,224 shares owned by Mr. Fritz or his spouse). Mr. William E. Fritz may
be deemed to be a parent and promoter of NeoMedia, as those terms are
defined in the Securities Act.
(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 NeoMedia, 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 NeoMedia's 1996 and 1998 Stock Option
Plans which are currently exercisable.
(10) c/o Barclay & Damisch Ltd.
115 West Wesley Street
Wheaton, IL 60187
(11) c/o Keil & Keil Associates
733 15th Street, N.W.
Washington, DC 20005
(12) c/o 380 Gulf of Mexico Drive
Long Boat Key, FL 34228
(13) 11025 Reed Hartman Highway
Cincinnati, Ohio 45242
(14) Includes an aggregate of 438,335 currently exercisable options to purchase
shares of Common Stock granted under NeoMedia's 1996 Stock Option Plan and
414,000 currently exercisable warrants to purchase shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June, 1996, in consideration of loans made by Charles W. Fritz to it,
NeoMedia granted to him a warrant (the "Principal Stockholder's Warrant") to
purchase up to 260,000 shares of common stock at an exercise price $8.85. This
warrant is exercisable for a period of four years commencing on November 25,
1997 and contains anti-dilution
30
<PAGE>
provisions. In September, 1997, pursuant to a resolution adopted by the board of
directors authorizing the acceleration of the exercise date of the warrant to
September 16, 1997, Mr. Fritz exercised warrants to purchase 146,000 shares of
common stock. In December, 1997, the Board of Directors granted to Mr. Fritz an
additional warrant to purchase up to 300,000 shares of common stock at an
exercise price of $7.875. This warrant is exercisable over a period of four
years commencing on December 11, 1998 and was granted in consideration of the
accelerated exercise of the warrant for 260,000 shares which provided capital to
NeoMedia on a more favorable basis to NeoMedia than obtaining other capital
funds.
NeoMedia leases approximately 2,000 square feet under terms of a written
lease from GEDA, Inc. which is a corporation owned by Gerald L. Willis who is a
shareholder in and consultant to NeoMedia and a former owner of Allegiant. The
lease expires in January, 2000. During 1998, NeoMedia made lease payments in
accordance with this lease totaling approximately $65,000.
Charles W. Fritz, Gen-Tech and Dev-Mark have each guaranteed NeoMedia's
obligations to IBM Credit Corporation ("ICC") under credit and financing
accommodations granted by ICC to NeoMedia. In addition, each guarantor
subordinated to ICC any liabilities and obligations owed to them by NeoMedia. If
any guarantor breaches the guaranty, ICC has the right, among other things, to
require immediate payment of all indebtedness of NeoMedia. In February, 1997,
Gen-Tech and Dev-Mark were released from the guarantees to ICC.
In November 1996, NeoMedia entered into a lease with a William E. Fritz
whereby Mr. Fritz leased to NeoMedia an exhibition booth which cost $85,435. The
lease is for 36 months with monthly payments of $2,858.
In December 1998, the Company issued 30,000 options to buy shares of the
Company's common stock to a director at a price of $2.00 per share for
consulting services rendered.
In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372
shares of the Company's Common Stock from NeoMedia at a price of $3.03 per
share.
In January 1999, William Fritz purchased 42,857 shares of the Company's
Common Stock from NeoMedia at a price of $3.50 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) The following exhibits required by Item 601 of Regulation S-B to be
filed herewith are hereby incorporated by reference:
3.1 Articles of Incorporation of Dev-Tech Associates, Inc. and amendment
thereto (Incorporated by reference to Exhibit 3.1 to NeoMedia's
Registration Statement No. 333-5534 (the "Registration Statement")).
3.2 By-laws of Dev-Tech Associates, Inc. (Incorporated by reference to
Exhibit 3.2 to NeoMedia's Registration Statement).
3.3 Restated Certificate of Incorporation of DevSys, Inc. (Incorporated
by reference to Exhibit 3.3 to NeoMedia's Registration Statement).
3.4 By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4 to
NeoMedia's Registration Statement).
3.5 Articles of Merger and Agreement and Plan of Merger of DevSys, Inc.
and Dev-Tech Associates, Inc. (Incorporated by reference to Exhibit
3.5 to NeoMedia's Registration Statement).
3.6 Certificate of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.
(Incorporated by reference to Exhibit 3.6 to NeoMedia's Registration
Statement).
3.7 Articles of Incorporation of Dev-Tech Migration, Inc. and amendment
thereto (Incorporated by reference to Exhibit 3.7 to NeoMedia's
Registration Statement).
3.8 By-laws of Dev-Tech Migration, Inc. (Incorporated by reference to
Exhibit 3.8 to NeoMedia's Registration Statement).
3.9 Restated Certificate of Incorporation of DevSys Migration, Inc.
(Incorporated by reference to Exhibit 3.9 to NeoMedia's Registration
Statement).
3.10 Form of By-laws of DevSys Migration, Inc. (Incorporated by reference
to Exhibit 3.10 to NeoMedia's Registration Statement).
31
<PAGE>
3.11 Form of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into
DevSys Migration, Inc. (Incorporated by reference to Exhibit 3.11 to
NeoMedia's Registration Statement).
3.12 Form of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys
Migration, Inc. (Incorporated by reference to Exhibit 3.12 to
NeoMedia's Registration Statement).
3.13 Certificate of Amendment to Certificate of Incorporation of DevSys,
Inc. changing its name to NeoMedia Technologies, Inc. (Incorporated
by reference to Exhibit 3.13 to NeoMedia's Registration Statement).
3.14 Form of Certificate of Amendment to Certificate of Incorporation of
NeoMedia Technologies, Inc. authorizing a reverse stock split
(Incorporated by reference to Exhibit 3.14 to NeoMedia's Registration
Statement).
4.1 Form of Certificate for Common Stock of DevSys, Inc. (Incorporated by
reference to Exhibit 4.1 to NeoMedia's Registration Statement).
4.2 Form of Joseph Charles' Warrant Agreement (Incorporated by reference
to Exhibit 4.2 to NeoMedia's Registration Statement).
4.3 Form of Private Placement Financing Converted Securities Registration
Rights Agreement (Incorporated by reference to Exhibit 4.4 to
NeoMedia's Registration Statement).
4.4 Form of 10% Unsecured Subordinated Convertible Promissory Note
(Incorporated by reference to Exhibit 4.5 to NeoMedia's Registration
Statement).
4.5 Form of Principal Stockholder's Warrant (Incorporated by reference to
Exhibit 4.6 to NeoMedia's Registration Statement).
4.6 Form of Placement Agent's Warrant Registration Rights Agreement
(Incorporated by reference to Exhibit 4.7 to NeoMedia's Registration
Statement).
4.7 Form of Placement Agent's Warrant for the Purchase of Shares of
Common Stock and Warrants (Incorporated by reference to Exhibit 4.8
to NeoMedia's Registration Statement).
4.8 Form of Warrant Agreement and Warrant (Incorporated by reference to
Exhibit 4.9 to NeoMedia's Registration Statement).
4.9 NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated by
reference to Appendix A to NeoMedia's Form 14A Filed on February 18,
1998).
4.10 Form of Warrant to Charles W. Fritz (Incorporated by reference to
Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December
31, 1997)
4.11 Form of Warrant to Dominick & Dominick, Incorporated (Incorporated by
reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year
ended December 31, 1997)
4.12 Form of Warrant to Compass Capital, Inc. (Incorporated by reference
to Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December
31, 1997)
4.13 Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by
reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year
ended December 31, 1997)
4.14 Form of Warrant to Southeast Research Partners, Inc. (Incorporated by
reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year
ended December 31, 1997)
4.15 Form of Warrant to Joseph Charles & Associates, Inc. (Incorporated by
reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year
ended December 31, 1997)
10.1 Form of Nonsolicitation and Confidentiality Agreement (Incorporated
by reference to Exhibit 10.2 to NeoMedia's Registration Statement).
10.2 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
Inc. and Charles W. Fritz (Incorporated by reference to Exhibit 10.3
to NeoMedia's Registration Statement).
10.3 Employment Agreement dated April 1, 1996 between Dev-Tech Associates,
Inc. and Robert T. Durst, Jr. (Incorporated by reference to Exhibit
10.4 to NeoMedia's Registration Statement).
10.4 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
Inc. and Charles T. Jensen (Incorporated by reference to Exhibit 10.5
to NeoMedia's Registration Statement).
10.5 Lease dated August 29, 1995 for premises located at 280 Shuman
Boulevard, Naperville, Illinois (Incorporated by reference to Exhibit
10.8 to NeoMedia's Registration Statement).
10.6 Guaranty (By Individual) dated October 20, 1992, to IBM Credit
Corporation from Charles W. Fritz, as Guarantor (Incorporated by
reference to Exhibit 10.40 to NeoMedia's Registration Statement).
10.7 Dev-Tech Associates, Inc. Annual Incentive Plan for Management
(Incorporated by reference to Exhibit 10.43 to NeoMedia's
Registration Statement).
32
<PAGE>
10.8 Dev-Tech Associates, Inc. 1996 Stock Option Plan (Incorporated by
reference to Exhibit 10.44 to NeoMedia's Registration Statement).
10.9 First Amendment and Restatement of Dev-Tech Associates, Inc. 1996
Stock Option Plan (Incorporated by reference to Exhibit 10.45 to
NeoMedia's Registration Statement).
10.10 Form of Stock Option Agreement - Dev-Tech Associates, Inc.
(Incorporated by reference to Exhibit 10.46 to NeoMedia's
Registration Statement).
10.11 Dev-Tech Migration, Inc. 1996 Stock Option Plan (Incorporated by
reference to Exhibit 10.47 to NeoMedia's Registration Statement).
10.12 First Amendment and Restatement of Dev-Tech Migration, Inc. 1996
Stock Option Plan (Incorporated by reference to Exhibit 10.48 to
NeoMedia's Registration Statement).
10.13 Form of Stock Option Agreement - Dev-Tech Migration, Inc.
(Incorporated by reference to Exhibit 10.49 to NeoMedia's
Registration Statement).
10.14 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto
(Incorporated by reference to Exhibit 10.50 to NeoMedia's
Registration Statement).
10.15 Mutual General Release and Stock Purchase Agreement with the Estate
of Thomas Ruberry (Incorporated by reference to Exhibit 10.52 to
NeoMedia's Registration Statement).
10.16 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) (Incorporated by reference to
Exhibit 10.60 to NeoMedia's Registration Statement).
10.17 Agreement of Lease Between First Union National Bank of Florida and
NeoMedia Technologies, Inc. Dated November 27, 1996 (Incorporated by
reference to Exhibit 10.43 to NeoMedia's Form 10-KSB for the year
ended December 31, 1996).
10.18 Sublease Agreement Between NeoMedia Technologies, Inc. and Lancaster
Annuity Services Company Dated November 8, 1996 (Incorporated by
reference to Exhibit 10.44 to NeoMedia's Form 10-KSB for the year
ended December 31, 1996).
10.19 Master Lease Between William E. Fritz and NeoMedia Technologies, Inc.
Dated November 6, 1996 (Incorporated by reference to Exhibit 10.46 to
NeoMedia's Form 10-KSB for the year ended December 31, 1996).
10.20 Agreement for Wholesale Financing (Security Agreement) Between IBM
Credit Corporation and NeoMedia Technologies, Inc. Dated February 20,
1997 (Incorporated by reference to Exhibit 10.47 to NeoMedia's Form
10-KSB for the year ended December 31, 1996).
10.21 Collateralized Guaranty Between IBM Credit Corporation and NeoMedia
Migration, Inc. Dated February 20, 1997 (Incorporated by reference to
Exhibit 10.48 to NeoMedia's Form 10-KSB for the year ended December
31, 1996).
10.22 Lease By and Between American National Bank and Trust Company of
Chicago and NeoMedia Technologies, Inc. Dated February 25, 1997
(Incorporated by reference to Exhibit 10.50 to NeoMedia's Form 10-QSB
for the quarter ended March 31, 1997).
10.23 Letter Agreement by and between Dominick & Dominick, Incorporated and
NeoMedia Technologies, Inc. Dated March 20, 1997 (Incorporated by
reference to Exhibit 10.51 to NeoMedia's Form 10-QSB for the quarter
ended June 30, 1997).
10.24 Stock Purchase Agreement Dated August 30, 1997 By and Between
NeoMedia Technologies, Inc. and George Luntz and Gerald L. Willis
(Incorporated by reference to Exhibit 99.1 to NeoMedia's Form 8-K
dated September 25, 1997).
10.25 Registration Rights Agreement Dated September 25, 1997 By and Between
NeoMedia Technologies, Inc. and Gerald L. Willis and George G. Luntz
(Incorporated by reference to Exhibit 99.2 to NeoMedia's Form 8-K
dated September 25, 1997).
10.26 Consulting Agreement Dated August 30, 1997 By and Between NeoMedia
Technologies, Inc. and Gerald L. Willis. (Incorporated by reference
to Exhibit 99.3 to NeoMedia's Form 8-K dated September 25, 1997).
10.27 Employment Agreement Dated January 26, 1998 By and Between NeoMedia
Technologies, Inc. and James Marshall (Incorporated by reference to
Exhibit 10.28 to NeoMedia's Form 10-QSB for the quarter ended June
30, 1998).
21 Subsidiaries (Incorporated by reference to description of Company's
subsidiaries contained in Part I, Item I of this form 10-KSB.
(2) The following exhibits required by Item 601 of Regulation S-B are
hereby filed herewith:
33
<PAGE>
10.29 Purchase Agreement dated December 31, 1998, by and between NeoMedia
Technologies, Inc. and Solar Communications, Inc.
23.1 Consent of KPMG LLP
27.1 Article 5 Financial Data
- --------------------------------------------
(b) Reports on Form 8-K
On January 20, 1999, the Company filed a Form 8-K Report, which (1)
announced the allowance of the first patent for the Company's Intelligent
Documents(TM) (IDOCs(TM)) technology and (2) announced the acquisition of a body
of domestic and international patent filings from Solar Communications, of
Naperville, Illinois.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 29th day of March, 1999.
NEOMEDIA TECHNOLOGIES, INC.
Registrant
By: /s/ CHARLES W. FRITZ
-----------------------------------------------
Charles W. Fritz, President, Chief Executive
Officer and Chairman of the Board
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 1999.
SIGNATURES TITLE
- ----------- ------
/s/ CHARLES W. FRITZ President, Chief Executive Officer,
- ---------------------------- Chairman of the Board and Director
Charles W. Fritz
/s/ WILLIAM E. FRITZ Secretary and Director
- ----------------------------
William E. Fritz
/s/ CHARLES T. JENSEN Chief Financial Officer,
- ---------------------------- Treasurer and Director
Charles T. Jensen
/s/ ROBERT T. DURST, JR. Director
- ----------------------------
Robert T. Durst, Jr.
/s/ A. HAYES BARCLAY Director
- ----------------------------
A. Hayes Barclay
/s/ JAMES J. KEIL Director
- ----------------------------
James J. Keil
/s/ PAUL REECE Director
- ----------------------------
Paul Reece
/s/ JOHN A. LOPIANO Director
- ----------------------------
John A. Lopiano
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
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 (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows and
shareholders' equity for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a significant accumulated deficit, and a working capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
- -------------------
KPMG LLP
Miami, Florida
March 12, 1999
F-1
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
-------- --------
(Dollars in thousands
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted amounts of $750 in 1998
and 1997 .............................................................................. $ 1,350 $ 10,283
Trade accounts receivable, net of allowance for doubtful
accounts of $225 in 1998 and $191 in 1997 ............................................. 5,912 6,656
Amounts due from related parties .......................................................... 4 6
Inventories ............................................................................... -- 363
Prepaid expenses and other current assets ................................................. 849 562
-------- --------
Total current assets .................................................................. 8,115 17,870
-------- --------
Property and equipment, net .................................................................... 786 651
Intangible assets, net ......................................................................... 3,729 1,278
-------- --------
Total assets ................................................................................... $ 12,630 $ 19,799
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................... $ 5,898 $ 4,320
Accrued expenses .......................................................................... 1,000 522
Current portion of long-term debt ......................................................... 577 201
Sales taxes payable ....................................................................... 430 409
Deferred revenues ......................................................................... 656 117
Other ..................................................................................... 7 189
-------- --------
Total current liabilities ............................................................. 8,568 5,758
-------- --------
Long-term debt, net of current portion ......................................................... 801 915
-------- --------
Total liabilities ..................................................................... 9,369 6,673
-------- --------
Commitments, contingencies, and related party transactions
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued or outstanding ............................................................ -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
9,074,080 shares issued in 1998 (8,699,080 outstanding) and
8,295,291 shares issued and outstanding in 1997 ....................................... 87 83
Additional paid-in capital ................................................................ 25,168 23,542
Accumulated deficit ....................................................................... (21,994) (10,499)
-------- --------
Total shareholders' equity ............................................................ 3,261 13,126
-------- --------
Total liabilities and shareholders' equity ..................................................... $ 12,630 $ 19,799
======== ========
</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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997
----------- -----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
NET SALES:
License fees ......................................................... $ 2,362 $ 1,994
Resales of software and technology equipment ......................... 16,854 19,172
Service fees ......................................................... 4,262 3,268
----------- -----------
Total net sales .................................................. 23,478 24,434
----------- -----------
COST OF SALES:
License fees ......................................................... 275 324
Resales of software and technology equipment ......................... 14,596 17,154
Service fees ......................................................... 3,682 1,998
Amortization of capitalized software costs ........................... 596 594
----------- -----------
Total cost of sales .............................................. 19,149 20,070
----------- -----------
GROSS PROFIT .............................................................. 4,329 4,364
Sales and marketing expenses .............................................. 9,965 4,988
General and administrative expenses ....................................... 4,886 4,067
Research and development costs ............................................ 1,069 752
Fair value of options and warrants granted to consultants ................. 25 461
----------- -----------
Loss from operations ...................................................... (11,616) (5,904)
Interest expense (income), net ............................................ (121) 147
----------- -----------
LOSS BEFORE INCOME TAXES .................................................. (11,495) (6,051)
Income tax benefit ........................................................ -- (78)
----------- -----------
NET LOSS .................................................................. $ (11,495) $ (5,973)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED .................................... $ (1.34) $ (0.90)
=========== ===========
Weighted average number of common shares-basic and diluted ................ 8,560,849 6,615,107
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................. $(11,495) $ (5,973)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................................ 1,081 771
Provision for doubtful accounts ...................................................... 547 155
Fair value of stock based compensation granted for professional services ............. 91 461
Changes in operating assets and liabilities
Trade accounts receivable ........................................................ 197 (1,770)
Other current assets ............................................................. 76 (214)
Accounts payable and accrued expenses ............................................ 2,056 359
Other current liabilities ........................................................ 378 41
-------- --------
Net cash used in operating activities ............................................ (7,069) (6,170)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets .................... (1,980) (1,155)
Acquisition of property and equipment ..................................................... (428) (591)
-------- --------
Net cash used in investing activities ............................................ (2,408) (1,746)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of units ....................................................... -- 1,295
Net proceeds from exercise of stock warrants .............................................. -- 12,914
Net proceeds from exercise of stock options ............................................... 280 44
Repayment from shareholder ................................................................ 2 472
Borrowings under notes payable and long-term debt, net of $36 of issue costs .............. 464 --
Repayments on notes payable and long-term debt ............................................ (202) (263)
Payments to shareholders .................................................................. -- (472)
-------- --------
Net cash provided by financing activities ........................................ 544 13,990
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... (8,933) 6,074
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .............................................. 10,283 4,209
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................................... $ 1,350 $ 10,283
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Restricted cash balances at December 31 .............................................. $ 750 $ 750
Interest paid during the year ........................................................ 156 196
Non-cash investing and financing activities:
Fair value of shares issued to acquire customer list ............................. 827 --
Fair value of warrants granted in conjunction with acquisition
of patents ................................................................. 432 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUM- TOTAL
----------------------- PAID-IN MULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ................................ 6,184,316 $ 62 $ 8,849 $ (4,526) $ 4,385
Proceeds from issuance of 255,000 units,
net of $235 of issuance costs ........................ 255,000 3 1,292 -- 1,295
Exercise of employee options .............................. 47,342 -- 44 -- 44
Exercise of public warrants, net of
$641 of issuance costs ............................... 1,662,633 17 11,605 -- 11,622
Exercise of Fritz warrants ................................ 146,000 1 1,291 -- 1,292
Fair value of warrants granted for professional
services rendered .................................... -- -- 461 -- 461
Net loss .................................................. -- -- -- (5,973) (5,973)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ................................ 8,295,291 83 23,542 (10,499) 13,126
Exercise of employee options .............................. 273,789 3 277 -- 280
Fair value of shares issued in conjunction with
the acquisition of a customer list ................... 120,000 1 826 -- 827
Fair value of shares and options issued for
professional services rendered ....................... 10,000 -- 54 -- 54
Fair value of warrants granted in conjunction
with the acquisition of patents ...................... -- -- 432 -- 432
Fair value of warrants granted in conjunction
with financing, net of $47 of issuance costs ......... -- -- 37 -- 37
Net loss .................................................. -- -- -- (11,495) (11,495)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ................................ 8,699,080 $ 87 $ 25,168 $ (21,994) $ 3,261
========= ========= ========= ========= =========
</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
The consolidated financial statements include the financial statements of
NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia
Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A.
incorporated in Guatemala; Allegiant Legacy Solutions, Inc. ("Allegiant")(which
was merged into NeoMedia Technologies, Inc. in December 1997); NeoMedia
Technologies of Canada, Inc. incorporated in Canada; NeoMedia Tech, Inc.
incorporated in Delaware; NeoMedia EDV GmbH incorporated in Austria; NeoMedia
Technologies Holding Company B.V. incorporated in the Netherlands; NeoMedia
Technologies de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Migration
de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Technologies do Brasil
Ltd. incorporated in Brazil and NeoMedia Technologies UK Limited incorporated in
the United Kingdom, and are collectively referred to as "NeoMedia" or the
"Company". The consolidated financial statements of NeoMedia are presented on a
consolidated basis for all periods presented. The merger with Allegiant on
September 25, 1997 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. All significant intercompany accounts and transactions have
been eliminated in preparation of the consolidated financial statements.
On September 25, 1997, in accordance with a Stock Purchase Agreement (the
"Allegiant Merger") entered into between the parties, NeoMedia acquired all of
the stock in Allegiant Legacy Solutions, Inc. ("Allegiant"), which was founded
on February 16, 1996. Allegiant primarily sells licenses to proprietary software
tools (including "ADAPT/2000") that identify, seek and automatically correct
date data that is stored in various formats across both program code and
specific data files. The previous shareholders of Allegiant 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 the
previous shareholders of Allegiant was determined through arms-length
negotiations between the parties. One former shareholder entered into an
employment agreement with NeoMedia and the other former shareholder 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 six
months ended June 30,1997, total unaudited net sales as historically reported
for NeoMedia and Allegiant were $11,825,000 and $710,000, respectively, and
unaudited net income (loss) was $(2,499,000) and $248,000, respectively.
NATURE OF BUSINESS OPERATIONS
NeoMedia provides the following computer software and consulting services:
o INTELLIGENT DOCUMENT(TM) SOLUTIONS ("IDOCS(TM)") which incorporate
active data elements into standard printed documents or on physical
objects for the purpose of launching computer programs, creating
automated links to the World Wide Web, embedding machine readable
information and securing print document based transactions. To date,
the Company has not generated any significant revenue from the sale
of it's IDOCs(TM) products.
o DOCUMENT SYSTEMS SOLUTIONS which assists clients in optimizing the
creation, production and management of printed documents and printed
document processes
o MASS CHANGE / MIGRATION SOLUTIONS which enables and assists clients
in implementing broad changes in computer software and hardware
systems, including (i) identifying, seeking and automatically
correcting restrictive source and application fields which store
data, including including year 2000 remediation, and (ii) conversions
of legacy computer systems and applications to open system
implementations.
NeoMedia currently offers its services and products through its two
principal business units - NeoMedia Systems Integration (NeoMedia/SI) and
NeoMedia Tech which, although separate in name, often function as a team in
providing solutions for its customers. NeoMedia/SI focuses on providing project
based systems integration solutions for contract customers including Document
System Solutions, Mass Change/Migration remediation and custom
F-6
<PAGE>
IDOCs(TM) implementations. The role of NeoMedia Tech is to develop and
commercialize proprietary software products and related technology and to
promote and enable wide-scale IDOCs(TM) solutions with key strategic partners.
As part of the services provided in connection with the above solutions it
offers, NeoMedia often recommends, specifies, supplies and installs equipment
and software products from third-party software and hardware vendors, leading
consulting firms and major system integrators, many of whom have strategic
alliances with NeoMedia. 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 and
Latin America which have not generated material sales), and currently has U. S.
district offices located in Florida, California, Illinois, New York and Ohio.
2. LIQUIDITY AND SUBSEQUENT EVENTS
During the years ended December 31, 1998 and 1997 the Company's net loss
totaled approximately $11,495,000 and $5,973,000, respectively. As of December
31, 1998 the Company had accumulated losses from operations of approximately
$21,994,000, had a working capital deficit of approximately $453,000, and
approximately $600,000 in unrestricted cash balances.
Management believes it will need to raise additional capital as well as
reduce expenses and meet revenue growth targets to sustain the Company's
operations in 1999. The failure of management to accomplish these initiatives
will adversely effect the Company's business, financial conditions, and results
of operations and its ability to continue as a going concern.
Subsequent to December 31, 1998, the Company has undertaken the following:
o During January 1999, the Company issued approximately 270,000
previously unissued shares of its common stock at a price of between
$3.03 and $3.50 per share. Gross proceeds from these transactions were
approximately $900,000, approximately $400,000 of which was from
related parties.
o In February 1999, the Company entered into a binding term sheet with
A.T. Cross Company ("Cross"). The term sheet contemplates an agent
agreement by and between the Company and Cross related to the
distribution of the Company's NeoLink(TM) software with Cross'
pen/scan device. During the first quarter of 1999, the Company
received from Cross $1,000,000 in the form of a convertible promissory
note. This one year note is convertible during its term into shares of
the Company's common stock at $4.00 per share, or if unconverted may
be repaid by the Company in shares of its common stock at $4.00 per
share, assuming certain conditions are met. The note bears interest at
a rate of 1% per annum and was accompanied by warrants issued to Cross
to acquire 100,000 shares of common stock at $5.00 per share and
100,000 shares of common stock at $7.00 per share. The Company
anticipates receiving an additional $1,000,000 from Cross on
substantially consistent terms during the second quarter of 1999 upon
execution of the agent agreement.
o In late 1998 and 1999, the Company reduced its sales and marketing
staff and related expenses. The Company will attempt to further adjust
its expenses in 1999 as needed.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated balance sheets and consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents. Included in cash
equivalents as of December 31, 1998 and 1997 are approximately $750,000 in
restricted amounts (Note 6).
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.
REVENUE RECOGNITION
License revenues 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 and technology equipment resales
represent revenue from the resale of purchased third party hardware and software
products. Service fees represent revenue from consulting, education and post
contract customer support services. Effective January 1, 1998, NeoMedia adopted
the software license revenue recognition provisions of the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2 "Software
Revenue Recognition" ("SOP 97-2"), as amended. Specifically, license revenue is
recognized if persuasive evidence of an agreement exists, delivery has occurred,
pricing is fixed and determinable, and collectibility is probable. The impact of
the adoption of SOP 97-2 was not material to NeoMedia's consolidated financial
statements. The substantial majority of software license revenue from the
Company's Year 2000 remediation business has been recognized on a percentage of
completion basis, along with the associated services being provided.
Software and technology equipment resale revenue is recognized when all of
the components necessary to run software or hardware have been shipped and only
insignificant post-delivery obligations remain. 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 are recognized over the life of the contract. Other
service revenues, including training and consulting, are recognized as the
services are performed.
COMPREHENSIVE INCOME
NeoMedia adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Accounting Standards No. 130 "Reporting Comprehensive
Income" ("FAS 130") effective January 1, 1998. FAS 130 requires companies to
report comprehensive income. Comprehensive income is defined as the change in
equity of a business during a period from transactions and other events and
circumstances from nonowner sources. For the years ended December 31,1998 and
1997, changes in NeoMedia's shareholders' equity consisted of its net loss,
stock based compensation, certain equity offerings, along with the exercise of
stock options. Accordingly, comprehensive income (loss) as defined by FAS 130
was the net loss in the accompanying consolidated statement of operations.
F-7
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market and in 1997 were
comprised of purchased computer technology resale 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. Leasehold improvements are amortized over the shorter of the life of
the lease or the useful lives of the related assets. Upon retirement or sale,
cost and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in the statement of operations.
INTANGIBLE ASSETS
Intangible assets consist of capitalized software costs, patents, and an
acquired customer list.
Software development costs are accounted for in accordance with FASB
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 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. Once a product is made available for sale, capitalization is
stopped unless the related costs are associated with a technologically feasible
enhancement to the product. Amortization of purchased and developed software is
provided on a product-by-product basis over the estimated economic life of the
software, generally not exceeding three years, using the straight-line method.
Patents (including patents pending and intellectual property) and acquired
customer lists are stated at cost, less accumulated amortization. The acquired
customer list is being amortized over a five year period. Patents are generally
amortized over periods ranging from five to seven years.
The Company periodically performs an evaluation of the carrying value of
its intangible assets. This evaluation consists primarily of a comparison to the
future undiscounted net cash flows from the associated assets in comparison to
the carrying value of the assets. As of December 31, 1998, the Company is of the
opinion that no impairment of the intangible assets exists.
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.
The Company is currently in a loss position for income taxes, and
accordingly, no such amounts were paid during the years ended December 31, 1998
and 1997.
F-8
<PAGE>
COMPUTATION OF LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. As a
result of the net loss reported by the Company, no exercise of stock options and
warrants were assumed and basic and diluted loss per share amounts are
identical.
FINANCIAL INSTRUMENTS
The Company believes that the fair value of its current assets and current
liabilities approximate carrying value. Certain of the Company's long-term
obligations are non-interest bearing and were discounted at an assumed interest
rate of approximately 9% when the obligation was entered into during 1994 (see
note 5). As a result of the Company's losses from operations and current
financial position, the terms and assumed discount rates of this obligation may
not be indicative of terms and rates currently available to the Company.
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 $225,000 and $191,000 in
its December 31, 1998 and 1997 consolidated balance sheets, respectively.
NeoMedia had net sales to one major customer in the telecommunications industry
(Ameritech Services, Inc.) of $5,825,000 and $9,447,000 during the years ended
December 31, 1998 and 1997, respectively, resulting in trade accounts receivable
of $1,352,000 and $3,116,000 as of December 31, 1998 and 1997, respectively.
Revenue generated from the remarketing of computer software and technology
equipment has accounted for a significant percentage of NeoMedia's revenue. Such
sales accounted for approximately 72% and 79% of NeoMedia's revenue for the
years ended December 31, 1998 and 1997, 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 years
ended December 31, 1998 and 1997 for stock-based employee compensation. Had
compensation cost for NeoMedia's stock-based compensation plan been determined
using the fair-value method of accounting, NeoMedia's net loss and loss per
share would have been increased to $13,070,000, or $(1.53) per share in 1998,
and $6,364,000 or ($.96) per share, in 1997.
For grants in 1998 and 1997, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 5% for 1998 and 6% for
1997; (iii) expected volatility of 50% for 1998 and 37% for 1997 and (iv) an
expected life of 4 years for options granted in 1998 and 3 years for options
granted in 1997. The fair-value was determined using the Black-Scholes
option-pricing model. The volatility percentages used by the Company represent
management's estimate of reasonable volatility based primarily upon an average
of select industry competitors. The Company's actual stock price volatility was
approximately 111% and 59% during the years ended December 31, 1998 and 1997,
respectively. Management believes that the average volatility percentages are
more appropriate given the relatively short trading history of the Company's
common stock.
F-9
<PAGE>
The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements.
4. PROPERTY AND EQUIPMENT
As of December 31, 1998 and 1997, property and equipment consisted of the
following:
1998 1997
------- -------
(In thousands)
Furniture and fixtures ............................. $ 451 $ 339
Leasehold improvements ............................. 124 62
Equipment .......................................... 1,164 910
------- -------
Total ......................................... 1,739 1,311
Less accumulated depreciation ...................... (953) (660)
------- -------
Total property and equipment, net .................. $ 786 $ 651
======= =======
5. INTANGIBLE ASSETS
As of December 31, 1998 and 1997, intangible assets consisted of the
following:
1998 1997
------- -------
(In thousands)
Capitalized and purchased software costs ........... $ 4,482 $ 3,013
Customer list ...................................... 1,155 --
Patents (including patents pending and
intellectual property) and related costs ......... 615 --
------- -------
Total ......................................... 6,252 3,013
Less accumulated amortization ...................... (2,523) (1,735)
------- -------
Total intangible assets, net ....................... $ 3,729 $ 1,278
======= =======
In October 1994, the Company 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 payable, without interest, in an amount equal to the greater of: (i) 5%
of the collected gross revenues of NeoMedia Migration for the preceding month;
or (ii) the minimum installment payment as defined, until paid in full. The
minimum installment payment is the amount necessary to provide an average
monthly payment for the most recent twelve month period of $16,000 per month.
The present value of $2,000,000 discounted at 9% (the Company's then incremental
borrowing rate) for 125 months was approximately $1,295,000, the capitalized
cost of the assets acquired. The discount is being accreted to interest expense
over the term of the note. The software acquired was amortized over its
estimated useful life of three years. As of December 31, 1998 and 1997, the
balance of the note payable, net of unamortized discount, was $931,000 and
$1,016,000, respectively.
During 1998, NeoMedia acquired a customer list for total consideration of
$1,155,000, including 120,000 shares of NeoMedia common stock valued at $827,000
(giving effect to the common stock being unregistered and "restricted"
securities as such term is defined in Rule 144 of the rules and regulations
promulgated under the Securities Act of 1933, as amended) and cash of $292,000.
Additionally, there were legal and other expenses of $36,000 that were related
to this transaction. The customer list is intended to be used to develop
relationships for the sale of the Company's IDOC's products. The cost of the
customer list is being amortized on the straight-line method over its estimated
useful life of five years.
F-10
<PAGE>
During December 1998, the Company acquired the rights to certain patent
filings currently pending. The Company paid a total of $125,000 in cash along
with a warrant to purchase shares of the Company's common stock at a negligible
value (such warrant was valued at approximately $432,000, the trading price of
the underlying common stock). The Company is contingently liable to pay the
seller of the pending patent applications an additional amount six months from
the date that the first patent application is granted. The contingent purchase
price is approximately $1,862,500. This obligation, when and if due, may be
settled by the Company either in cash or through the issuance of additional
warrants to purchase Company common stock at negligible values. The Company
anticipates that the first patent application may be approved during early 1999.
Based upon currently available working capital, the Company currently
anticipates that any obligation would be settled through the issuance of
additional warrants.
6. FINANCING AGREEMENTS
The Company has 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. In addition, as of December 31,
1998, a $750,000 letter of credit was issued to the benefit the commercial
finance company. NeoMedia collateralized this letter of credit with a $750,000
certificate of deposit. As of December 31, 1998 and 1997, amounts due under this
financing agreement included in accounts payable were $2,835,000 and $2,651,000,
respectively.
7. LONG-TERM DEBT
As of December 31, 1998 and 1997, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Note payable to IDSI, non-interest bearing with interest
imputed at 9%, due with minimum monthly installments
of $16,000 through December 2005 .......................................... $ 1,216 $ 1,392
Note payable, interest bearing at 20% per annum, due November 1999.
Secured by 375,000 shares of previously unissued Company
common stock placed in escrow ............................................. 500 --
Other amounts, repaid during 1998 .............................................. -- 100
------- -------
Subtotal .................................................................. 1,716 1,492
Less: unamortized discount .................................................... (338) (376)
------- -------
Total long-term debt ...................................................... 1,378 1,116
Less: current portion ......................................................... (577) (201)
------- -------
Long-term debt, net of current portion ......................................... $ 801 $ 915
======= =======
</TABLE>
The long-term debt repayments for each of the next five fiscal years ending
December 31 are as follows:
(IN THOUSANDS)
1999 ..................................... $ 708
2000 ..................................... 192
2001 ..................................... 192
2002 ..................................... 192
2003 ..................................... 192
Thereafter ............................... 240
------
Total .................................... $1,716
======
F-11
<PAGE>
8. INCOME TAXES
For the years ended December 31, 1998 and 1997, the components of income
tax expense (benefit) were as follows:
1998 1997
------- -------
(In thousands)
Current ................................................ $ -- $ (78)
Deferred ............................................... -- --
------- -------
Income tax expense (benefit) ........................... $ -- $ (78)
======= =======
For the years ended December 31, 1998 and 1997, the significant components
of the deferred tax provision were as follows:
1998 1997
------- -------
(in thousands)
Deferred tax benefit, exclusive of the components
listed below ......................................... $(3,983) $(2,226)
Increase in valuation allowance ........................ 3,983 2,226
------- -------
Total ............................................. $ -- $ --
======= =======
As of December 31, 1998 and 1997, 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:
1998 1997
------- -------
(In thousands)
Accrued employee benefits ............................ $ 30 $ 23
Provisions for uncollectible accounts ................ 90 76
Deferred revenue ..................................... 386 76
Capitalized software development costs ............... 600 406
Net operating loss carryforwards ..................... 6,466 2,985
Other ................................................ -- 23
Alternative minimum tax credit carryforward .......... 47 47
------- -------
Total deferred tax assets ............................ 7,619 3,636
Valuation allowance .................................. (7,619) (3,636)
------- -------
Net deferred income tax asset ........................ $ -- $ --
======= =======
For the years ended December 31, 1998 and 1997, income tax expense
(benefit) differed from the amount computed by applying the statutory federal
rate of 34% as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
AMOUNT % AMOUNT %
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Benefit at federal statutory rate ....................... $(3,908) (34)% $(2,057) (34)%
S-corporation income of Allegiant allocated
directly to shareholders ........................... -- -- (45) (1)
Permanent and other, net ................................ (75) (1) (202) (3)
Change in valuation allowance ........................... 3,983 35% 2,226 37
------- ------- ------- -------
Income tax expense (benefit) ............................ $ -- ---% $ (78) (1)%
======= ======= ======= =======
</TABLE>
F-12
<PAGE>
As of December 31, 1998, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $16.2 million which may be used to
offset future taxable income, or, if unused approximately $1.6 million will
expire in 2011, approximately $5.5 million will expire in 2012, and
approximately $9.1 million will expire in 2018. As a result of certain of
NeoMedia's equity activities occurring during the year ended December 31, 1997,
NeoMedia anticipates that the annual usage of its pre 1998 net operating loss
carryforwards may be further restricted pursuant to the provisions of Section
382 of the Internal Revenue Code. Because the realization of NeoMedia's net
operating losses carryforwards is uncertain, a valuation allowance has been
established against it and other deferred income tax assets.
9. TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1998 and 1997, NeoMedia leased office
and residential facilities from related parties for rental payments totaling
$13,000 and $12,000, 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.
On December 11,1997, the Board of Directors granted a warrant to purchase
up to an additional 300,000 shares of NeoMedia's common stock at an exercise
price of $7.875 to NeoMedia's Chief Executive Officer and a principal
shareholder. This warrant is exercisable until December 11, 2002 and was granted
in consideration of the accelerated exercise of the warrant for 260,000 shares
which provided capital to NeoMedia on a more favorable basis to NeoMedia than
obtaining other capital funds. Assuming a risk-free interest rate of 6.0%, an
expected life of 1.5 years, an expected volatility of 37% and no expected
dividends, the Black-Scholes model computed a fair value of approximately
$515,000.
In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372
shares of the Company's common stock from NeoMedia at a price of $3.03 per
share. In January 1999, William Fritz purchased 42,857 shares of the Company's
common stock from NeoMedia at a price of $3.50 per share.
10. COMMITMENTS AND CONTINGENCIES
NeoMedia leases its office facilities and certain office and computer
equipment under various operating leases. These leases provide for minimum rents
and generally include options to renew for additional periods. For the years
ended December 31, 1998 and 1997, NeoMedia's rent expense was $1,057,000 and
$628,000, respectively. Beginning December 1, 1996, NeoMedia subleased a portion
of its office facilities until the lease expires.
The following is a schedule of the future minimum lease payments and
receipts under noncancelable operating leases as of December 31, 1998:
PAYMENTS RECEIPTS
------ ------
(In thousands)
1999 ................................... $ 964 $ 179
2000 ................................... 391 183
2001 ................................... 30 --
2002 ................................... 23 --
2003 ................................... 4 --
Thereafter ............................. 1 --
------ ------
Total .................................. $1,413 $ 362
====== ======
The Company has entered into a migration contract (specifically Year 2000
remediation) with a Colombian customer related to the remediation of certain of
the customer's computer systems to be Year 2000 compliant. The total contract is
approximately $1 million, of which approximately $157,000 has been recognized as
revenue by the
F-13
<PAGE>
Company as of December 31, 1998. As an element to the contract the Company has
guaranteed its work product and resulting Year 2000 compliance of the customer.
To this end, during 1999 the Company established bank guarantees in the form of
certificates of deposit totaling approximately $150,000 in favor of the
customer. The Company believes that it has the ability and intent to complete
such remediation in a satisfactory manner and is accounting for this project on
a percentage of completion basis.
The Company is party to certain litigation in the normal course of
business. Management of the Company, after consultation with legal counsel, is
of the opinion that the ultimate resolution of these matters will have no
material adverse impact on the Company's consolidated financial statements.
NeoMedia has entered into various employment and consulting agreements
which require an aggregate of approximately $2.2 million in annual payments.
These employment and consulting agreements extend to various dates through 2001.
These agreements also provide for the payment of severance and other benefits
under certain conditions.
11. 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.
12. 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 1998 and
1997 were granted at an exercise price equal to fair market value on the date of
grant. 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.
Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
8,000,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price may be less than the fair market value per share of NeoMedia's
common stock on the date of grant. Options granted during 1998 were granted at
an exercise price equal to fair market value on the date of grant. Options
generally vest 20% upon grant and 20% per year thereafter. The options expire
ten years from the date of grant.
F-14
<PAGE>
A summary of the status of NeoMedia's 1996 and 1998 stock option plans as
of and for the years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE (000) EXERCISE
PRICE PRICE
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ........................... 1,405 $ 2.64 1,338 $ 1.76
Granted .................................................... 2,281 5.26 294 7.30
Exercised .................................................. (274) 1.02 (47) .95
Forfeited .................................................. (248) 6.02 (180) 4.15
------ --------- ------ ---------
Outstanding at end of year ................................. 3,164 $ 4.40 1,405 $ 2.64
====== ========= ====== =========
Options exercisable at year-end ............................ 1,483 1,134
Weighted-average fair value of
options granted during the year ....................... $ 2.33 $ 2.35
Available for grant at the end of the year ................. 6,015 48
</TABLE>
The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (000) CONTRACTUAL LIFE PRICE (000) PRICE
- -------------------- ------------- ------------------ ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ --- to $ .84 703 7.1 years $ .84 703 $ .84
1.88 to 2.91 497 9.7 years 2.71 99 2.71
3.00 to 4.88 780 9.5 years 3.55 206 3.91
5.00 to 7.88 772 8.8 years 6.91 330 6.37
8.00 to 10.88 412 9.2 years 9.39 145 9.67
- ------------------ ----- --------- -------- ------ -------
$ .84 to $10.88 3,164 8.8 years $ 4.40 1,483 $ 3.48
================== ===== ========= ======== ====== =======
</TABLE>
13. 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 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. On November 10, 1997,
NeoMedia announced the redemption of all its outstanding publicly-traded
warrants. The warrant holders had until December 18, 1997 to convert each
warrant to a share of common stock at an exercise price of $7.375 or to sell the
warrant. Any warrants outstanding as of December 31, 1997 were redeemed by
NeoMedia for $.05 per warrant. Of the 2,700,938 warrants outstanding, 1,662,633
were exercised for gross proceeds of $12.3 million and 1,038,305 were redeemed
at $.05 per warrant, or a total of $52,000.
In connection with the IPO, 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").
F-15
<PAGE>
The Underwriters Warrants are exercisable at a price of $8.85 per share of
common stock and warrant until November 25, 2001.
On May 1, 1997, NeoMedia issued, to an investment banking firm, a warrant
at an exercise price of $7.375 per share to purchase 375,000 shares of common
stock until November 25, 2001 and to another investment banking firm a warrant
at an exercise price of $10.125 per share to purchase 65,000 shares of common
stock until November 25, 2001. On December 11, 1997, NeoMedia issued to outside
consultants three warrants to purchase 408,332 shares of NeoMedia common stock
until December 11, 2002. Of these 408,332 warrants, 173,332 were issued at an
exercise price of $8.85 per share, 135,000 were issued at an exercise price of
$7.50 per share, and 100,000 were issued at an exercise price of $10.00 per
share. Assuming an expected life of 1.5 years, expected volatilities of 37%, a
risk-free interest rate of 6.0%, and no expected dividends, the fair-values of
these five warrants were calculated using the Black-Scholes model to be $716,000
of which $461,000 was charged to expense in 1997 and $255,000 was charged to the
proceeds of the publicly-traded warrants called on December 18, 1997.
In December 1998, the Company issued 30,000 options to buy shares of the
Company's common stock to a director at a price of $2.00 per share for
consulting services rendered, and recognized $25,000 in expense in its 1998
consolidated financial statements.
F-16
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.30 Purchase Agreement dated December 31, 1998, by and between NeoMedia
Technologies, Inc. and Solar Communications, Inc.
23.1 Independent Auditors' Consent
27.1 Article 5 Financial Data Schedule for December 31, 1998
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT ("AGREEMENT") is entered into as of December 31, 1998
("EFFECTIVE DATE") between Solar Communications, Inc., an Illinois corporation
("SOLAR"), and NeoMedia Technologies, Inc., a Delaware corporation ("NEOMEDIA").
Solar and NeoMedia are sometimes referred to as the ("PARTIES") and individually
as a ("PARTY").
RECITALS:
WHEREAS, Solar is the owner of certain patent applications in the
United States and elsewhere relating to the encoding of network address
information in a bar-code or other machine-readable format and to the use of
standard product identifiers such as UPCs to access network resources such as
offerings on the World Wide Web.
WHEREAS, Solar desires to sell and NeoMedia desires to purchase such
patent applications at a closing to be held on the same date as the Effective
Date of this Agreement.
WHEREAS, the parties desire that the purchase price paid by NeoMedia
include consideration payable at the closing and additional consideration
payable upon issuance of at least one of the patent applications as a patent in
the United States.
WHEREAS, the parties intend that the consideration payable at closing
shall consist of cash and warrants to purchase NeoMedia common stock, and that
the consideration payable upon the issuance of a patent in the United States
shall consist of a second installment of cash and/or warrants to purchase stock.
WHEREAS, the parties intend that NeoMedia's obligation to pay the
second installment of consideration shall be the subject of a security interest
granted by NeoMedia to Solar pursuant to a separate security agreement having
date even herewith. Pursuant to the security agreement, NeoMedia shall grant
Solar an exclusive, world-wide, royalty-free license under the patents issuing
on the patent applications, which license shall be contingent upon NeoMedia
defaulting on its second installment payment obligations under this Agreement
and which license agreement shall automatically terminate when NeoMedia pays the
second installment of the consideration.
WHEREAS, to protect Solar's collateral under the security agreement and
its interest under this Agreement in having the patent applications issue as
patents, the parties desire that Solar should have rights to monitor the
prosecution of the patent applications and, in certain specified circumstances,
to assume control over such prosecution for NeoMedia's benefit at Solar's
expense.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual
covenants and promises herein contained and other good and valuable
consideration the receipt and legal sufficiency of which are hereby
acknowledged, the parties have agreed as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. When used in this Agreement, capitalized terms shall either be
defined in EXHIBIT A or as otherwise set forth herein.
1
<PAGE>
ARTICLE II
ASSIGNMENT OF INTELLECTUAL PROPERTY
2.1 AGREEMENT TO ASSIGN. Subject to the terms and conditions of this Agreement,
Solar agrees to execute and deliver to NeoMedia at the Closing the form of
assignment attached as EXHIBIT B conveying to NeoMedia all right, title and
interest in and to the Intellectual Property, including but not limited to the
right to sue for past infringement.
2.2 PURCHASE PRICE. In consideration of the Assignment of Section 2.1, NeoMedia
shall tender to Solar cash and/or Warrants in accordance with the terms and
conditions of Article IV.
2.3 SUBSEQUENT TRANSACTIONS. Any subsequent assignments, licenses, transfers and
other transactions in which either party grants or conveys any right, lien,
license or other interest in or to the Intellectual Property ("SUBSEQUENT
TRANSACTION") shall be subject to and made in accordance with the terms and
conditions of this Agreement, and no instrument executed by either party in
connection with a Subsequent Transaction shall be inconsistent with the
foregoing. Neither party shall assign or otherwise transfer its interest in the
Intellectual Property, either in whole or in part, to any Person (including a
transfer to any Affiliate but excluding a transfer from one party to the other
party) unless such other Person agrees to assume the obligations of the assignor
under this Agreement. For the purposes of the foregoing sentence, an assignment
or transfer does not include the grant of licenses, distribution or reseller
agreements. A Subsequent Transaction shall not constitute an assignment of this
Agreement. Assignments of this Agreement are subject to Section 11.5.
ARTICLE III
HANDLING OF INTELLECTUAL PROPERTY
3.1 DUTY TO PROSECUTE AND PROTECT PATENTS. From and after the Closing, NeoMedia
shall authorize and instruct Anthony R. Barkume of Sayville, New York, or
another licensed patent attorney selected by NeoMedia, to vigorously prosecute
at NeoMedia's expense the Patent Applications included in the Intellectual
Property in accordance with the following:
(A) BEST EFFORTS TO PROSECUTE. NeoMedia shall use its best efforts to
obtain issued Patents on each Patent Application that include, in NeoMedia's
reasonable judgement, the broadest claim of coverage allowable based on the
prior art actually known by NeoMedia.
(B) NO ABANDONMENT. NeoMedia shall not intentionally allow any pending
Patent Application to become abandoned for any reason, including express
abandonment or failure to file a timely response, pay an issue or other fee, or
take other action, unless with respect to such pending Patent Application
NeoMedia first: (i) prior to the Date of Abandonment, files another Patent
Application that contains all of the disclosure of the pending Patent
Application and that is entitled under applicable law to an effective filing
date no later than the earliest effective filing date to which the pending
Patent Application is entitled; or (ii) notifies Solar at least one (1) month
before the Date of Abandonment of NeoMedia's intention to abandon the pending
Patent Application and allows Solar to prosecute the pending Patent Application
in accordance with the procedures of Section 3.3. For purposes of this
Agreement, "DATE OF ABANDONMENT" means sixty (60) days prior to the last day to
respond to an office action, pay an issue fee, or take other action required to
keep the Patent Application in force taking into account any possible extensions
of time that are available by petition upon payment of any fee. If a Patent
Application is abandoned in violation of this Section 3.1(b), it shall be deemed
"issued" for all other purposes under this Agreement, including Article IV.
Notwithstanding anything contained herein to the contrary, if a Patent
Application becomes unintentionally or unavoidably abandoned without NeoMedia
having complied with either of Subsection 3.1(b)(i) or (ii), then NeoMedia shall
be given reasonable opportunity to petition to revive the abandoned Patent
Application under the applicable patent rules of procedure, and such abandoned
2
<PAGE>
Patent Application, if successfully revived, will not be considered "issued".
(C) PAYMENT OF ISSUE FEES. If a Patent Application is allowed, NeoMedia
shall pay the applicable issue fee and use its best efforts to submit any
required drawings and comply with all other applicable requirements no later
than ten (10) days before the statutory period for response permitted under
applicable law or regulations (taking into account any extensions of time that
may be available upon petition).
3.2 NOTICE AND ACCESS.
(A) NOTICE. NeoMedia shall promptly furnish to Solar copies of the
following documents when received by NeoMedia: any notice of abandonment or
final rejection issued by the U.S. Patent Trademark Office and notice of the
filing by NeoMedia of any patent application that claims priority based on a
Patent Application (including filing date and application serial numbers, when
available).
(B) POWER TO INSPECT. At the Closing, NeoMedia shall execute and
deliver to Solar a power to inspect and make copies in the form attached as
EXHIBIT C duly authorizing Solar or its representatives to inspect and copy
files in the USPTO or any foreign patent office relating to any Patent
Application ("POWER TO INSPECT"). At Solar's request, NeoMedia shall promptly
execute and deliver additional Powers to Inspect expressly referring by serial
number to Patent Applications filed by NeoMedia after the Closing. Any
information or copies made under this paragraph shall be considered Confidential
Information of NeoMedia under Section 6.1.
3.3 ASSUMPTION OF PROSECUTION BY SOLAR.
(A) EVENTS ENTITLING SOLAR TO PROSECUTE. Solar may at its election and
expense assume prosecution of any Patent Application under any of the following
conditions: (i) NeoMedia has tendered prosecution to Solar pursuant to Section
3.1(b)(ii); or (ii) NeoMedia fails to file a response, file a petition for
extension of time, pay an issue fee or take other action due in a Patent
Application before the Date of Abandonment. If either conditions of the
preceding clauses (i) or (ii) arise, NeoMedia will complete, execute and deliver
to Solar within ten (10) days after request by Solar an original power of
attorney in the form of EXHIBIT D authorizing Solar's designated patent attorney
to commence prosecution of the Patent Application at Solar's expense.
(B) CONSTRUCTION. The parties' intention in this Section 3.3 is to
ensure that Solar will have a full and fair opportunity to protect the
Intellectual Property from abandonment or forfeiture in cases where NeoMedia is
unwilling or unable to continue prosecution or pay maintenance or other fees.
Accordingly, the parties stipulate that, in any dispute between the parties, the
provisions of this Section 3.3 should be construed liberally to effectuate this
intention.
(C) EMERGENCY RELIEF. Upon demonstration by Solar to a court of
competent jurisdiction that either of the conditions of clauses 3.3(a)(i) or
3.3(a)(ii) have been met, the parties agree and stipulate that Solar shall be
entitled to emergency and preliminary equitable relief without posting any bond
or showing of irreparable harm. Such relief may include but is not limited to an
order or decree requiring NeoMedia to divulge serial numbers and filing dates of
Patent Applications and authorizing Solar to prosecute such Patent Applications
at Solar's expense on behalf of NeoMedia.
3.4 TERMINATION. Notwithstanding anything in this Agreement to the
contrary, including survival provisions, the obligations of NeoMedia and the
rights of Solar pursuant to this Article III shall terminate upon the issuance
of any Patent in the United States.
3
<PAGE>
ARTICLE IV
CONSIDERATION
4.1 AT CLOSING. At the Closing, NeoMedia shall: (i) pay to Solar one-hundred and
fifty thousand dollars ($150,000.00) cash; and (ii) deliver to Solar duly issued
Warrants in the form of EXHIBIT E entitling Solar to purchase 150,000 shares of
NeoMedia common stock at a price of one cent ($0.01) per share.
4.2 UPON ISSUANCE. Within six (6) months after the date that the first Patent
issues in the United States ("DATE OF FIRST ISSUANCE"), NeoMedia shall pay to
Solar the amount of one million eight hundred sixty two thousand five hundred
dollars ($1,862,500) in cash and/or Warrants in accordance with this Section
4.2:
(A) CASH. Within six (6) months after the Date of First Issuance,
NeoMedia shall pay to Solar in a single installment of cash in the amount equal
to the difference between (i) one million eight hundred sixty two thousand five
hundred dollars ($1,862,500), minus the (ii) the Current Warrant Value (as
defined below and determined as of the date the cash is paid) of the Warrants
actually issued and delivered to Solar pursuant to Section 4.2(b). If, during
the six (6) month period after the Date of First Issuance, the Current Warrant
Value of such issued Warrants reaches one million eight hundred sixty two
thousand five hundred dollars ($1,862,500), then NeoMedia would not be required
to make a cash payment under this Section 4.2(a), and its payment obligations
under this Section 4.2 would be deemed satisfied. Under no circumstances is
Solar required to refund or credit NeoMedia for any amount by which the Current
Warrant Value of such Warrants ever exceeds one million eight hundred sixty two
thousand five hundred dollars ($1,862,500).
(B) WARRANTS. At any time during the six (6) month period following the
Date of First Issuance, NeoMedia may, in partial or total satisfaction of its
obligation under this Section 4.2, duly issue and deliver to Solar Warrants in
the form of EXHIBIT E entitling Solar to purchase a specified number of
additional shares ("ADDITIONAL SHARES") of NeoMedia common stock at a price of
one cent ($0.01) per share; provided, however, that NeoMedia may only elect to
deliver Warrants if, at the time such Warrants are delivered, the common stock
of NeoMedia is listed for trading on a Recognized Exchange. If the common stock
of NeoMedia is not listed, then NeoMedia shall satisfy its entire obligation
under this Section 4.2 in cash. NeoMedia shall have no obligation to register
Warrants or the Shares underlying such Warrants issued pursuant to this Article
IV.
(C) VALUING THE WARRANTS. For purposes of determining the amount of
cash that NeoMedia must pay to Solar within six months after the Date of First
Issuance, the "CURRENT WARRANT VALUE" as of a specified date means, with respect
to the Warrants issued under Section 4.2(b), the Average Market Price of the
Shares that may be acquired upon exercise of the Warrants, less the applicable
exercise price; provided, however, that in no event shall the Current Warrant
Value be less than the Average Market Price of the Shares (less the applicable
exercise price) as of the date that the Warrants are issued. To avoid backdating
of Warrants, NeoMedia must deliver Warrants to Solar within three (3) days of
issuance.
(D) ADDITIONAL SHARES. For purposes of Subsection 4.2(b), the maximum
number of Additional Shares for which NeoMedia may (or may be required to) issue
Warrants shall be equal to the quotient obtained when dividing one million eight
hundred sixty two thousand five hundred dollars ($1,862,500) by the greater of:
(i) the Average Market Price of NeoMedia common stock as of the date the
Warrants are issued; or (ii) four. For example, if the common stock of NeoMedia
were listed for trading on the NASDAQ Stock Exchange and its Average Market
Price as of the date Warrants were to be issued were $10, then the maximum
number of Additional Shares for which NeoMedia could issue Warrants under this
Section 4.2 would be equal to 186,250, which is equal to the quotient of
(1,862,500) divided by 10, the Average Market Price of the Shares which may be
acquired upon exercise of the Warrants. If the Average Market price were $2,
then the maximum number of Additional Shares would be equal to 465,625, which is
the quotient of (1,862,500) divided by 4, the minimum divisor.
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(E) EXAMPLES. Suppose that exactly three (3) months after the Date of
First Issuance, the Average Market Price of NeoMedia common stock is $5.00. On
that date, NeoMedia decides to issue and deliver to Solar Warrants pursuant to
Section 4.2(b) to purchase 200,000 issue shares of NeoMedia Common Stock. On
that date, the Current Warrant Value is $998,000 (calculated under Section
4.2(c) as the Average Market Price of 200,000 Shares at $5.00 per share less the
applicable exercise price of one cent per share). To satisfy its obligations
under this Section 4.2, NeoMedia could, on that date, make a payment to Solar of
$864,500 (calculated under Section 4.2(a) as the difference between 1,862,500
minus 998,000, the Current Warrant Value. Alternatively, NeoMedia could satisfy
its obligations under this Section 4.2 by making a cash payment on a future date
that is no later than six (6) months after the Date of First Issuance. Suppose
that on any future date prior to the six-month deadline the price of NeoMedia
common stock has appreciated so that the Average Market Price is $6.00 per
share. At that price, the Current Warrant Value is 1,198,000 (calculated under
Section 4.2(c) as the Average Market Price of 200,000 Shares at $6.00 per share
less the applicable exercise price of one cent per share). Under Section 4.2(a),
NeoMedia could satisfy its obligations under this Section 4.2 on that future
date by making a cash payment to Solar in the amount of $664,500 (calculated
under Section 4.2(a) as the difference between 1,862,500 minus 1,198,000, the
Current Warrant Value. Alternatively, suppose that upon any date after issuance
of the Warrants but prior to expiration of the six-month period, the Average
Market Price of NeoMedia stock is $9.50 per share. At that price, the Current
Warrant Value is $1,898,000 (calculated under Section 4.2(c) as the Average
Market Price of 200,000 shares at $9.50 per share less the applicable exercise
price of one cent per share), which Current Market Value exceeds $1,862,500 and,
therefore, satisfied NeoMedia's obligations under this Section 4.2 without
further cash payments.
4.3 PREPAYMENT. At any time and at its sole discretion, NeoMedia may prepay, in
part or in its entirety, any consideration due under this Article IV, without
penalty; provided, however, that Solar shall have no obligation to refund
prepaid consideration.
4.4 TAXES. The party receiving consideration under this Agreement, whether in
the form of cash, Warrants or otherwise, shall be responsible for reporting and
paying all applicable sales, excise and income taxes relating to the payment and
receipt of such consideration.
ARTICLE V
DEFAULT AND REMEDIES
5.1 NOTICE OF DEFAULT. If either party materially breaches any of its
obligations under this Agreement the nonbreaching party may give notice to the
breaching party describing in reasonable detail the nature of the alleged breach
("NOTICE OF DEFAULT"). Upon its receipt of a Notice of Default, the alleged
breaching party shall have a thirty (30) day grace period ("GRACE PERIOD") to
cure the breach described in the Notice of Default. If the breach is not cured
within the Grace Period, then the breaching party shall be deemed to be in
Default as of the day after the last day of the Grace Period. Notwithstanding
the foregoing, the Grace Period for any breach by NeoMedia of its obligations
under Article III shall be twenty (20) days. No Default shall be declared or
occur unless notice and opportunity to cure has been provided, as set forth in
this Section 5.1. Either party's forbearance in giving Notice of Default shall
not be a waiver of its right to give such notice at a future date.
5.2 REMEDIES AVAILABLE TO NEOMEDIA. Except as otherwise provided in this Article
V, NeoMedia shall have all remedies available to it under this Agreement or at
law or in equity in the event of any Default, including:
(A) recovery of money damages, subject to the limitations
of Section 5.5;
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(B) equitable relief in accordance with Section 5.6; and
(C) recovery of its attorneys fees and other costs in
accordance with Section 5.7.
5.3 REMEDIES AVAILABLE TO SOLAR. Except as otherwise provided in this Article V,
Solar shall have all remedies available to it under this Agreement or at law or
in equity in the event of any Default, including:
(A) in the event of a Default by NeoMedia to pay amounts
owed by it to Solar under this Agreement, foreclosure
of Solar's security interest granted under Section
5.4 below;
(B) in the event of a Default by NeoMedia of its
obligations under Article III, assumption of
prosecution by Solar (as set forth in Section 3.3),
in which case Section 3.3 sets forth the sole and
exclusive remedy; except that Solar shall be entitled
to payment under Section 4.2 if a Patent is deemed
"issued" pursuant to 3.1(b).
(C) recovery of money damages subject to the limitations
of Section 5.5;
(D) equitable relief in accordance with Section 5.6;
(E) recovery of Solar's attorneys fees and other costs in
accordance with Section 5.7; and
(F) exercise of its rights and powers pursuant to the
Escrow Agreement (as defined in Section 5.8).
5.4 SECURITY INTEREST. To secure fulfillment by NeoMedia of its obligations to
pay the amounts owed (whether in cash or Warrants) under Article IV (the
"INDEBTEDNESS"), NeoMedia shall execute and deliver to Solar at the Closing the
form of security agreement (and accompanying financing statements) attached as
EXHIBIT F, granting to Solar a security interest in the Intellectual Property
(the "SECURITY INTEREST"). Solar's rights under the Security Agreement shall at
all times be subject to the conditions set forth in this Agreement and in this
Section 5.4 as follows:
(A) The Security Interest shall be automatically satisfied and
released when NeoMedia pays to Solar the Indebtedness in its entirety, upon
which event the Security Agreement shall automatically terminate. Solar shall
take any and all action necessary to release the security interest promptly upon
satisfaction thereof, but in no event later than ten (10) days after demand by
NeoMedia.
(B) In accordance with Section 9-504 of the Uniform
Commercial Code, if any foreclosure by Solar of its Security Interest results in
a surplus, then Solar shall account for same to NeoMedia.
(C) Concurrently with the execution of the Security
Agreement, NeoMedia shall execute as licensor and deliver to Solar as licensee a
contingent license in the form of EXHIBIT G, which license shall be contingent
upon NeoMedia's Default on its obligation to pay the second installment of
consideration under Section 4.2.
5.5 MONEY DAMAGES. Neither party shall be liable to the other for special,
incidental or consequential damages (including lost profits or sales) as a
result of any breach under this Agreement. In the case of claims against
NeoMedia, Solar's damages shall not exceed $2,500,000. In the case of claims
against Solar, NeoMedia's damages shall not exceed $2,500,000. The limitations
of this Section 5.5 shall not apply to claims for breach of intellectual
property rights, attorney fees under Section 5.7, unauthorized disclosures of
Confidential Information under Section 6.1, fraud, or obligations to defend
under Article VIII.
5.6 EQUITABLE RELIEF. Except as otherwise provided herein, each party agrees
that in the event of its Default
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or its violation of any of the terms or conditions of this Agreement, the
non-Defaulting party shall be entitled, without posting of bond or showing of
irreparable harm, to emergency, preliminary and permanent injunctive relief in
regard to remedies related to such Default or from further violation of any of
the provisions hereof. Application of such injunction will be without prejudice
to any other right or action that may accrue to the non-Defaulting party by
reason of breach of this Agreement, including the right to recover damages
flowing from such breach. To prevent the abandonment or forfeiture of Patent
Applications, Solar shall also be entitled to emergency equitable relief in
accordance with Section 3.3(c) above.
5.7 ATTORNEY FEES. In the event of litigation, arbitration or another proceeding
to enforce or construe this Agreement, the prevailing party shall be entitled to
an award of its cost of litigation including reasonable attorney fees upon a
showing that the other party has acted in bad faith.
5.8 ESCROW. The parties shall enter into the form of escrow agreement attached
hereto as EXHIBIT H ("ESCROW AGREEMENT"), pursuant to which: (a) NeoMedia shall
execute and deposit with the escrow agent named therein ("ESCROW AGENT") the
following: (i) powers to inspect in the form attached hereto as EXHIBIT C; and
(ii) powers of attorney in the form attached as EXHIBIT D (collectively, the
"ESCROWED DOCUMENTS"). In accordance with the terms and conditions contained in
the Escrow Agreement, an aggrieved party hereunder may present a demand to the
Escrow Agent for release of one or more of the Escrowed Documents subject to and
in accordance with the terms of the Escrow Agreement in the event that the other
party is in Default under this Agreement or when the party making such demand is
otherwise entitled to obtain an Escrowed Document under this Agreement.
5.9 INSOLVENCY. In the event an insolvency proceeding is voluntarily or
involuntarily commenced by or against either party or its successors (the
"INSOLVENT PARTY"), then the Insolvent Party, on behalf of itself and its
successors and trustees, hereby waives the protection of Section 362 of the
Bankruptcy Code (11 U.S.C. 362) and consents to the remedies available to the
other party under this Article V.
ARTICLE VI
OTHER COVENANTS
6.1 CONFIDENTIALITY
(A) CONFIDENTIAL INFORMATION. In the course of negotiating and
performing its duties and obligations under this Agreement, including without
limitation the due diligence investigations made by the party, a party hereunder
("RECEIVING PARTY") may receive and otherwise have access to the other party's
("DISCLOSING PARTY") confidential information ("CONFIDENTIAL INFORMATION").
Confidential Information that is disclosed visually or orally shall be treated
as Confidential Information.
(B) EXCLUSIONS. Notwithstanding the foregoing Confidential Information
will not include, and no obligation of confidentiality hereunder will attach to,
information that: (a) was in the Receiving Party's possession, free of any
obligation of confidence, before receipt from the Disclosing Party; provided,
however, that it shall be the Receiving Party's burden to prove that such
information was in its possession; (b) is already available by publication at
the time the Disclosing Party communicates such information to the Receiving
Party, or same becomes available to the public through no breach of this
Agreement by the Receiving Party; (c) is received independently by the Receiving
Party from a third party not under an obligation to the Disclosing Party or
others to keep such information confidential; or (d) is independently developed
by the Receiving Party's personnel without the benefit of access, directly or
indirectly, to Confidential Information of the Disclosing Party; provided,
however, that the Receiving Party shall bear the burden of proving that such
personnel did not benefit from access to the Confidential Information.
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(C) NONDISCLOSURE OBLIGATIONS. The Receiving Party shall: (a) not use
for any purpose, reproduce in any manner or disclose to any third party
Confidential Information of the Disclosing Party except as authorized in this
Agreement; and (b) treat such Confidential Information with the same degree of
care to avoid disclosure to any third party as is used by the Receiving Party
with respect to the Receiving Party's own information of like importance, or, at
a minimum, with a reasonable degree of care to avoid any such disclosure.
(D) COMPULSORY DISCLOSURES. The restrictions of this Section 6.1 shall
not operate to prevent disclosures that are required by any law or regulation,
court order or other governmental decree or authority; provided, however, that
the Receiving Party, if required by governmental authority to reveal
Confidential Information of the other party, will, if allowed by law, notify the
Disclosing Party promptly following learning of the government requirement and
before making such disclosure, and will provide the Disclosing Party with an
opportunity (at Disclosing Party's own expense) to resist such disclosure and/or
to seek a protective order or other appropriate procedure so that the
disclosure, if required, can be made in a manner that preserves the
confidentiality of the Confidential Information.
(E) RETURN OF DOCUMENTS. Upon termination of this Agreement for any
reason, the Receiving Party shall promptly tender to the Disclosing Party all
documents however made that embody, reflect or otherwise disclose Confidential
Information of the Disclosing Party; provided, however, that the Receiving
Party's legal counsel may keep one (1) file copy of the Disclosing Party's
Confidential Information.
6.2 RESTRICTIVE COVENANT.
6.2.1 The parties acknowledge that:
(a) The parties are entering into an agreement and
arrangement under which they shall have a continuing
commercial relationship relating to the development,
production, marketing and sale of a variety of
services and products;
(b) NeoMedia has invested and will invest substantial
sums in the development of the rights and interests
provided for herein and in the commercial
relationship among the parties;
(c) The parties have, and contemplate that they will,
exchange and provide substantial Confidential
Information each to the other in connection with this
Agreement, the related agreements and the commercial
relationship among them;
(d) For Solar to utilize the Confidential Information or
engage in competition with NeoMedia, with respect to
the matters specified herein would result in the loss
or substantial diminution in value of the
Confidential Information, other rights and commercial
relationships provided for herein; and
(e) The restrictions provided for in this paragraph are
reasonable in scope and necessary to protect the
interests of NeoMedia in Confidential Information and
other rights provided for herein and in the
commercial relationships provided for herein.
6.2.2 Solar covenants and agrees that, it shall not, without the
written consent of NeoMedia or as specifically provided and
authorized herein or pursuant to a separate license or
distribution agreement with NeoMedia:
(a) Develop, manufacture, produce, have manufactured or
produced, market or sell any service or product which
utilizes or incorporates any Confidential
Information;
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(b) Develop, manufacture, produce, have manufactured or
produced, market or sell any service or product which
would infringe any Patent issued hereunder or which
is similar in functionality of the technology claimed
in any Patent; except that the restriction in this
paragraph 6.2.2(b) shall not apply once and if the
contingent patent license granted under Section 5.4
becomes effective as a result of NeoMedia's Default.
(c) Develop, manufacture, produce, have manufactured or
produced, market or sell any Competing Product.
6.3 PRESS RELEASES. NeoMedia shall use its best efforts to mention Solar in
NeoMedia press releases that publicize acquisition of the Patent Applications or
grant of the Patents, but NeoMedia shall not be so obligated regarding releases
that publicize products that use the technology represented in the Patent
Applications. Notwithstanding the foregoing, however, unless otherwise agreed by
both parties in a duly executed writing, the terms of this Agreement and this
transaction shall be kept confidential by the parties and their respective
attorneys, accountants and bankers.
6.4 PRINTING SERVICES. NeoMedia shall use reasonable efforts to include Solar in
its bid process for services to print, package and/or mail print media
materials, including direct mail, periodical inserts and diskette giveaways.
6.5 DELIVERY OF STOCKHOLDER MATERIALS. Until the Warrants have been exercised or
expire, NeoMedia will provide Solar with copies of all materials it distributes
to its stockholders.
6.6 TRADEMARK LICENSE. Solar shall execute as licensor and deliver to NeoMedia
at closing as licensee the form of trademark license attached hereto as EXHIBIT
I.
6.7 SOFTWARE LICENSE AGREEMENT. NeoMedia shall execute and deliver to Solar at
closing the form of option agreement attached hereto as EXHIBIT J, pursuant to
which Solar shall have the option to enter into certain software license
agreements with NeoMedia.
6.8 VALUE-ADDED RESELLER AGREEMENT. NeoMedia shall execute and deliver to Solar
at closing the form of option agreement attached hereto as EXHIBIT K, pursuant
to which Solar shall have the option to enter into certain value added reseller
and distribution agreements with NeoMedia.
6.9 SOLAR'S COVENANT NOT TO CONTEST VALIDITY. Solar covenants that it shall not,
in any litigation in which it is a party that is brought by or on behalf of
NeoMedia to enforce any of the Intellectual Property, challenge, attack or
otherwise contest the validity of any of the Intellectual Property, and it shall
not allege as a defense in such litigation the invalidity of any of the
Intellectual Property.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
7.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each party represents and warrants to
the other that as of the Closing:
(A) POWER AND AUTHORITY. It has full power and authority to execute
this Agreement and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by it of this Agreement,
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and the consummation by it of the transactions contemplated hereby and thereby,
have been duly authorized by all necessary corporate action. It has duly
executed and delivered this Agreement and, assuming due execution and delivery
by it, this Agreement constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or from time to time
affecting the enforcement of creditors' rights generally and except that the
enforceability of its obligations is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(B) NO CONFLICT. The execution, delivery and performance of this
Agreement by it does not and will not violate, conflict with or result in a
breach of any term, condition or provision of, or require the consent of any
other Person under: (i) any law, ordinance, rule or regulation to which it or
its assets are subject; (ii) any judgment, order, writ, injunction, decree or
award of any federal, state, local or foreign court, arbitrator or governmental
or regulatory official, department, agency, commission or other authority
("GOVERNMENTAL AUTHORITY") that applies to it or its assets; (iii) the charter,
by-laws or other governing documents of it; or (iv) any license, contract,
agreement, commitment or other instrument or document to which it is a party or
by which it or its assets are otherwise bound. No authorization, approval or
consent of, and no registration or filing with, any Governmental Authority is
required in connection with the execution, delivery or performance of this
Agreement by it.
(C) ORGANIZATION. It is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has full corporate power and authority necessary to enable it to own, lease or
otherwise hold its properties and assets and conduct its business. It has the
corporate power and authority to execute, deliver and perform this Agreement.
7.2 REPRESENTATIONS AND WARRANTIES OF SOLAR. Solar represents and warrants to
NeoMedia that, as of the Closing:
(A) TITLE. Solar exclusively owns and controls the Patent Applications
totally free, clear and unencumbered by claims, liens, licenses, option rights
or other interests of other parties.
(B) AUTHORITY. Solar has full right, power and authority to enter into
this Agreement and assign the Intellectual Property.
(C) ADVERSE CLAIMS. To the best of Solar's knowledge, there is no
claim, fact, circumstance, or prior art that would adversely affect the
patentability of inventions claimed in the Patent Applications other than those
claims, facts, circumstances and prior art identified in the prosecution
histories of the Patent Applications. NeoMedia acknowledges that it has been
given complete access to the records of the Patent and Trademark Office with
respect to the Patent Applications and has had full opportunity to review those
records and to make its own assessment as to the patentability of the inventions
claimed in the Patent Applications, including the pending final rejection. Solar
makes no warranty or representation that any Patent will be issued on the Patent
Applications.
(D) INFRINGEMENT. No party has ever asserted or threatened to assert a
claim of patent infringement against Solar based on or relating to the invention
described in the Patent Application and to the best of Solar's knowledge, there
is no specific patent or prior claim of patent rights that would be infringed by
the practice of the invention described in the Patent Applications, other than
any patent cited in the Patent Applications. However, Solar is aware, through
publicly available information such as news reports, that patents purporting to
cover the use of bar-codes and bar-code symbologies exist, and that it is
possible that use of bar-codes, either in accordance with the Patent
Applications or otherwise, may infringe such patents. Such general knowledge by
Solar shall not constitute Solar's "knowledge" of a specific patent that would
be infringed for purposes of determining whether Solar has breached its
representations and warranties under this Section 7.2(d).
(E) LITIGATION. No litigation, action, proceedings (legal, equitable or
administrative), arbitration or
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otherwise (including but not limited to claims for infringement by Solar and/or
against Solar) are pending or threatened that might materially affect Solar's
business or Solar's fulfillment of its obligations under this Agreement, except
for WHEELS MOTOR SPORTS V. SOLAR.
(F) BANKRUPTCY. No bankruptcy, receivership or other such proceedings
are threatened or pending against Solar.
7.3 REPRESENTATIONS AND WARRANTIES OF NEOMEDIA. NeoMedia represents and warrants
to Solar that, as of the Closing:
(A) FINANCIAL RECORDS. To the best of NeoMedia's knowledge, the
financial records for NeoMedia disclosed to Solar contain a full and complete
record and account of the operations of the business and truthfully set forth
the results of the operation for the years represented thereby and, furthermore,
that there have been no material changes in the financial condition of the
business before the time set for the Closing as described herein except for
transactions normal to said business operations and in the ordinary course
thereof.
(B) LITIGATION. No litigation, action, proceedings (legal, equitable or
administrative), arbitration or otherwise (including but not limited to claims
for infringement by NeoMedia and/or against NeoMedia) are pending or threatened
that might materially affect NeoMedia's business or NeoMedia's fulfillment of
its obligations under this Agreement.
(C) BANKRUPTCY. No bankruptcy, receivership or other such proceedings
are threatened or pending against NeoMedia.
(D) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC Reports filed
prior to the date hereof, since December 31, 1997 NeoMedia and its subsidiaries
have conducted their respective businesses only in, and have not engaged in any
material transaction other than according to, the ordinary and usual course of
such businesses and there has not been (i) any change in the financial
condition, properties, business or results of operations of NeoMedia and its
subsidiaries or any development or combination of developments affecting
NeoMedia of which management of NeoMedia has knowledge, except those changes,
developments or combinations of developments that, individually or in the
aggregate, are not reasonably likely to result in a material adverse effect on
NeoMedia's business, operations, properties or financial condition; (ii) any
material damage, destruction or other casualty loss with respect to any material
asset or property owned, leased or otherwise used by NeoMedia or any of its
subsidiaries, whether or not covered by insurance; (iii) any material change by
NeoMedia in accounting principles, practices or methods; or (iv) any
declaration, setting aside or payment of any dividend or other distribution in
respect of the capital stock of NeoMedia, except for dividends or other
distributions on its capital stock publicly announced prior to the date of the
closing.
(E) NO OTHER LIENS. Except for that certain security interest granted by
NeoMedia to IBM Credit Corporation, NeoMedia has not filed or permitted to be
filed any financing statement or similar instrument (other than any which have
been filed on behalf of Solar) and no Person has any lien, encumbrance or other
right that will attach to the Intellectual Property upon acquisition by NeoMedia
pursuant to this Purchase Agreement.
ARTICLE VIII
INDEMNITY AND LIABILITY
8.1 SOLAR'S INDEMNIFICATION OBLIGATIONS. Contingent upon NeoMedia's compliance
with the procedures set forth in Section 8.3, Solar agrees, at its expense, to
defend and settle any claims by any third party against
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NeoMedia or any of its Affiliates, or any of the directors, officers, employees
or agents of any of them, arising out of a breach by Solar of its
representations and warranties under Article VII. Notwithstanding the foregoing,
Solar shall not have any obligation to defend NeoMedia from any suit by
shareholders, any suit based on copyright or trademark infringement, or any suit
based on patent infringement if the infringing acts are based on NeoMedia's
particular implementation of the inventions set forth in the Patent Application.
8.2 NEOMEDIA'S INDEMNIFICATION OBLIGATIONS. Contingent upon Solar's compliance
with the procedures set forth in Section 8.3, NeoMedia agrees, at its expense,
to defend and settle any claims by any third party against Solar or any of its
Affiliates, or any of the directors, officers, employees or agents of any of
them, arising out of a breach by NeoMedia of its representations and warranties
under Article VII.
8.3 PROCEDURES FOR INDEMNIFICATION. If any claim that is subject to a defense
obligation is asserted by a third party, the party entitled to defense shall
promptly notify (no later than two weeks after written notice of such claim) the
party obligated to provide such defense of the claim and any matters that may be
subject to the defense and of which the notifying party has knowledge. The
defending party shall promptly assume the defense of such matters, and if the
defending party fails to do so, the party entitled to defense may assume the
defense at the defending party's expense. The defending party shall have sole
control over the defense; provided, however, that the defending party shall not
enter into any settlement without the consent of the party entitled to a
defense, which consent shall not be unreasonably withheld. Except as set forth
in the proceeding sentence, the defending party shall pay all costs and
expenses, including without limitation reasonable attorneys' fees and expenses,
arising out of the defense of any claim that is the subject of a defense
obligation under this Article, judgments and any settlements entered into with
the defending party's consent. The parties obligations under this Article VIII
shall only survive for a period of ten (10) years after the termination of this
Agreement if no Patent is issued or, if a Patent is issued then shall survive
for the life of the last-to-expire of the Patents.
ARTICLE IX
CLOSING
9.1 TIME AND PLACE. The Closing shall take place on December 31, 1998, at the
offices of McBride Baker & Coles, 500 West Madison Street, 40th Floor, Chicago,
Illinois. Closing may be rescheduled at the reasonable request of either party.
9.2 CONDITIONS TO THE CLOSING TO BE MET BY SOLAR. NeoMedia's obligation to close
is subject to the fulfillment to the reasonable satisfaction of NeoMedia, at or
before the Closing, of each of the following conditions:
(A) at the Closing, Solar shall have successfully made
the deliveries enumerated in Section 9.4;
(B) the Parties shall have entered into the form of
trademark license agreement attached as EXHIBIT I,
and the form of option agreements attached as EXHIBIT
J and EXHIBIT K; and
(C) All of Solar's warranties and representations made in
Section 7.2(a), 7.2(c) and 7.2(d) are true.
9.3 CONDITIONS TO THE CLOSING TO BE MET BY NEOMEDIA. Solar's obligation to close
is subject to the fulfillment to the reasonable satisfaction of Solar, at or
before the Closing, of each of the following conditions:
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(A) at the Closing, NeoMedia shall have successfully made
the deliveries enumerated in Section 9.5;
(B) NeoMedia shall have deposited into escrow the
documents that it is required to deposit under
Section 5.8;
(C) the common stock of NeoMedia shall be listed for
trading on the NASDAQ Stock Exchange;
(D) IBM Credit Corporation and NeoMedia shall have
executed and delivered to Solar a subordination
agreement substantially in the form of EXHIBIT L; and
(E) all of NeoMedia's representations and warranties made
in Section 7.3(e) are true.
9.4 DELIVERIES BY SOLAR AT THE CLOSING. At the Closing, Solar shall deliver or
cause to be delivered to NeoMedia:
(A) the Assignment as specified in Section 2.1;
(B) a good standing certificate for Solar issued by the
Secretary of State of Illinois not more than thirty
(30) days before the date of the Closing;
(C) a certificate of the Secretary of Solar attesting to
the incumbency of the officers executing this
Agreement and the other certificates and agreements;
(D) certified copies of the resolutions of the board of
directors of Solar approving this Agreement and the
transactions contemplated hereby; including the
Assignment; and
(E) certified copies of Solar's articles of incorporation
and by-laws in effect as of the date of the Closing.
9.5 DELIVERIES BY NEOMEDIA. At the Closing, NeoMedia shall deliver or cause to
be delivered to Solar:
(A) the cash and Warrants as specified in Section 4.1;
(B) a duly executed security agreement in the form of
EXHIBIT F;
(C) a duly executed power to inspect in the form attached
as EXHIBIT C;
(D) a duly executed option to enter into certain software
license agreements in the form attached as EXHIBIT J;
(E) a duly executed option to enter into certain value
added reseller and distribution agreements in the
form attached as EXHIBIT K;
(F) a good standing certificate for NeoMedia issued by
the Secretary of State of Delaware not more than
thirty (30) days before the date of the Closing;
(G) a certificate of the Secretary of NeoMedia attesting
to the incumbency of the officers executing this
Agreement and the other certificates and agreements
delivered by NeoMedia at the Closing;
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(H) certified copies of the resolutions of the board of
directors of NeoMedia approving this Agreement and
the transactions contemplated hereby, including the
issuance of Warrants;
(I) certified copies of NeoMedia's articles of
incorporation and by-laws in effect as of the date of
the Closing; and
(J) a subordination agreement substantially in the form
of EXHIBIT L executed by NeoMedia and IBM Credit
Corporation.
9.6 FURTHER ASSURANCES. Either party, from time to time after the Closing, at
the other party's request, shall execute, acknowledge and deliver to the
requesting party such other instruments of conveyance and transfer and will take
such other actions and execute and deliver (or cause the execution and delivery
by third parties of) such other documents, certifications, consents and further
assurances as the requesting party may reasonably request in order to vest more
effectively in the requesting party, or to put the requesting party more fully
in possession of, any of the pertinent rights, or to better enable the
requesting party to complete, perform or discharge any of the assumed
obligations hereunder. Each party shall cooperate with the other and execute and
deliver to the other such other instruments and documents and take such other
actions as may be reasonably requested from time to time by such other party as
necessary to carry out, evidence and confirm the intended purposes of this
Agreement.
ARTICLE X
TERM AND TERMINATION
10.1 TERM. The term of this Agreement shall commence as of the Effective Date
and, unless earlier terminated in accordance with Sections 10.2 or 10.3 below,
shall expire upon payment by NeoMedia of all consideration to Solar under
Sections 4.1 and 4.2.
10.2 TERMINATION BEFORE THE CLOSING. Prior to the Closing, this Agreement may
be terminated by both parties by mutual written agreement.
10.3 TERMINATION AFTER THE CLOSING. After the Closing, this Agreement may be
terminated by: (a) both parties by mutual written agreement; or (b) by either
party upon written notice to the other if all of the following conditions are
met: (i) there are no issued Patents in the United States, (ii) there are no
pending Patent Applications in the United States or abandoned Patent
Applications in the United States for which a petition or other procedure is
available for revival; and (iii) the absence of any pending Patent Applications
in the United States is not due to NeoMedia's failure to comply with its
obligations under Article III.
10.4 EFFECT OF TERMINATION.
(A) CONFIDENTIAL INFORMATION. Unless otherwise explicitly
provided elsewhere in this Agreement, upon termination or expiration of this
Agreement each party shall promptly return to the other any documents containing
Confidential Information belonging to the other party.
(B) SURVIVAL. Sections 2.3, 4.4 and 10.4 and all of Articles
V, VI, VII, VIII and XI shall survive termination or expiration of this
Agreement.
(C) OTHER AGREEMENTS. The termination or expiration of this
Agreement shall terminate the security agreement and license agreement entered
into pursuant to Section 5.4 and the escrow agreement entered into pursuant to
Section 5.8. However, termination or expiration of this Agreement shall not
effect other agreements entered into pursuant to this Agreement including the
agreements entered into pursuant to
14
<PAGE>
Sections 6.6, 6.7 and 6.8.
ARTICLE XI
MISCELLANEOUS
11.1 NOTICES. All notices and other communications hereunder shall be
in writing and: (a) delivered personally, (b) mailed first class mail (postage
pre-paid), certified, return receipt requested, or (c) sent by documented
overnight delivery service, in each case, to the receiving party at the
appropriate address or number, as applicable, set forth below. Notices shall be
deemed to have been given hereunder when delivered personally, three (3) days
after deposit with the U.S. Postal Service as certified or registered mail,
postage prepaid, return receipt requested, and one (1) day after deposit with a
reputable overnight courier service. Otherwise, notice shall be deemed to have
been given hereunder when actually received.
Notices to Solar shall be addressed to:
Solar Communications, Inc.
1120 Frontenac Road
Naperville, Illinois 60563-1799
Attention: Frank Hudetz, Chief Executive Officer
Facsimile: (630) 983-5773
with a copy to: McBride Baker & Coles
500 West Madison Street
40th Floor
Chicago, Illinois 60661
Attention: David Ackerman
Facsimile: (312) 993-9350
or to such other address or to the attention of such other person as Solar may
designate by written notice to NeoMedia.
Notices to NeoMedia shall be addressed to:
NeoMedia Technologies, Inc.
2201 Second St., Suite 600
Ft. Myers, FL 33901
Attention: Charles W. Fritz, President and CEO
Facsimile: (941) 337-3361
with a copy to:
NeoMedia Technologies, Inc.
2201 Second St., Suite 600
Ft. Myers, FL 33901
Attention: Marianne LePera, General Counsel
Facsimile: (941) 337-3361
or to such other address and/or to the attention of such other person as
NeoMedia may designate by written notice to Solar.
15
<PAGE>
11.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois without reference to the
choice of law principles thereof.
11.3 JURISDICTION AND VENUE. Any legal action, suit or proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby shall be instituted exclusively in the courts of the State of Illinois,
located in the City of Chicago or, provided subject matter jurisdiction exists,
in the United States federal court for the Northern District of Illinois,
located in Chicago, Illinois, and each party hereto agrees not to assert as a
defense in any such action, suit or proceeding any claim that such party is not
subject personally to the jurisdiction of such courts, that its property is
exempt or immune from attachment or execution, that the action, suit or
proceeding is brought in an inconvenient forum, that the venue of the action,
suit or proceeding is improper, or that this Agreement or the subject matter
hereof may not be enforced in or by such court. Each party further irrevocably
submits to the exclusive jurisdiction of such courts in any such action, suit or
proceeding.
11.4 WAIVER OF JURY TRIAL. Each of the parties does hereby waive any
rights it might otherwise have to a jury trial of any claim or cause of action
based upon or arising out of this Agreement and does also waive any bond or
surety or security upon such bond that might, but for this waiver, be required
of any party. This waiver is irrevocable, meaning that it may not be modified,
either orally or in writing, and the waiver shall apply to any subsequent
amendments, renewals, supplements or modifications to this Agreement. In the
event of litigation, this Agreement may be filed with the court as written
consent by both parties to a bench trial.
11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that no party hereto will assign its rights under
this Agreement without the express written consent of the other parties hereto,
except that either party may, without the consent of the other party, upon
notice to the other party, assign its rights under this Agreement to an
Affiliate or to third party assignee with or to whom the assigning party is
merging, consolidating or selling substantially all of its assets in the
business which relates to the Intellectual Property; provided, however, in
either case, the Affiliate or other assignee must assume the obligations of the
assigning party hereunder. No assignment of this Agreement that is effected
under this Section 11.5 without the requisite consent of the non-assigning party
shall relieve the assigning party of its obligations to the other under this
Agreement.
11.6 INTERPRETATION; RECITALS, EXHIBITS, SCHEDULES. The headings
contained in this Agreement, in any Exhibit or Schedule hereto, and in the Table
of Contents to this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. All Exhibits
annexed hereto or referred to herein, are hereby incorporated in and made a part
of this Agreement as if set forth in full herein. All capitalized terms defined
herein apply equally to both the singular and plural forms of such terms. When a
reference is made in this Agreement to a Section, Article or Exhibit such
reference shall be to a Section or Article of, or an Exhibit to, this Agreement
unless otherwise indicated. All monetary amounts refer to U.S.
dollars unless otherwise indicated.
11.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
(or such party's duly authorized agent) against whom enforcement of any such
modification or amendment is sought. Either party may, only by an instrument in
writing, waive compliance by the other party regarding any term or provision of
this Agreement. The waiver by a party of a breach of any term or provision of
this Agreement shall not be construed as a waiver of any subsequent breach.
Notwithstanding the consummation of the transactions contemplated hereby: (a)
neither party shall be deemed to have waived any breach of the provisions hereof
occurring before the Closing, and (b) each party shall be deemed to have
preserved all rights with respect to any such breach, in each case, unless it
shall have executed a written waiver with respect thereto.
11.8 SEVERABILITY. If at any time any provision of this Agreement is or
becomes illegal, invalid or unenforceable in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the
16
<PAGE>
remaining provisions hereof nor the legality, validity, or enforceability of
such provision under the law of any other jurisdiction shall in any way be
affected or impaired thereby, and the remainder of the provisions of this
Agreement shall remain in full force and effect. The parties shall endeavor in
good faith negotiations to replace any illegal, invalid or unenforceable
provision with a valid, legal and enforceable provision, the economic effect of
which comes as close as possible to the illegal, invalid or unenforceable
provision.
11.9 NO ELECTION OF REMEDIES. The remedies accorded to each party in
this Agreement are, unless otherwise specified herein, cumulative and in
addition to those provided by law, and can be exercised separately, concurrently
or successively.
11.10 RELATIONSHIP OF PARTIES. The parties are independent contractors.
Nothing stated in this Agreement shall be deemed to create the relationship of
partners, joint venturers, employee-employer or franchiser-franchisee between
the parties hereto.
11.11 COUNTERPARTS. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each party and
delivered to the other party.
11.12 ENTIRE AGREEMENT. This Agreement, and the Exhibits thereto,
contains the entire agreement between the parties with respect to the subject
matter hereof, and there are no agreements or understandings between the parties
other than those set forth or referred to herein or therein.
IN WITNESS WHEREOF, the parties have each duly executed and delivered
this Agreement as of the Effective Date.
NEOMEDIA TECHNOLOGIES, INC., SOLAR COMMUNICATIONS, INC.
a Delaware corporation an Illinois corporation
By: __________________________________ By: _____________________-
Charles W. Fritz Peter R. Hudetz
Its: Chief Executive Officer Its: President
17
<PAGE>
AMENDMENT AND CLARIFICATION
THIS AMENDMENT AND CLARIFICATION ("AMENDMENT") is entered into as of
February 15, 1999 ("AMENDMENT EFFECTIVE DATE") by and between Solar
Communications, Inc., an Illinois corporation ("SOLAR"), and NeoMedia
Technologies, Inc., a Delaware corporation ("NEOMEDIA").
WHEREAS, Solar and NeoMedia have entered into a certain Purchase
Agreement, including exhibits thereto, dated as of December 31, 1998 (the
"PURCHASE AGREEMENT") whereby Solar sold, and NeoMedia purchased, certain patent
applications owned by Solar relating to encoding of network address information
in a bar-code or other machine readable format;
WHEREAS, pursuant to the Purchase Agreement, Solar and NeoMedia have
entered into a Patent License Agreement dated as of December 31, 1998 ("PATENT
LICENSE"), an Option Agreement -- Software License dated as of December 31, 1998
("SOFTWARE AGREEMENT"); and an Option Agreement -- VAR Distribution dated as of
December 31, 1998 ("DISTRIBUTION AGREEMENT") (collectively, the "AGREEMENTs");
WHEREAS, the parties desire to clarify certain terms in the Agreements
and to make certain amendments to the Software Agreement and Distribution
Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and promises herein contained and other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties have agreed as follows:
1. PATENT LICENSE. For purposes of Section 2.3 of the Patent License,
the term "license rights granted by Licensor prior to the Effective Date" shall
be deemed to include rights granted by NeoMedia to third parties to distribute
software and other products.
2. SOFTWARE AGREEMENT. For purposes of Section 2 of the Software
Agreement, the term "product application" shall be defined to include the
bundling of non-tethered writing instruments or styli. In accordance with
Section 2 of the Software Agreement, Solar's rights under the Software Agreement
shall be subject to exclusive rights granted by NeoMedia with respect to such
product applications, provided that Solar shall not be excluded from using the
Licensed Product to enable printed products and printing services, as those
terms are used in the Software Agreement, with the capabilities of the Licensed
Product. The Software Agreement is amended by deleting the term "LICENSED
SOFTWARE" as it appears in Section 2 and Section 6 of the Software Agreement and
inserting in its place "Licensed Product."
3. DISTRIBUTION AGREEMENT. For purposes of Section 2 of the
Distribution Agreement, the term "product application" shall be defined to
include the bundling of non-tethered writing instruments or styli. In accordance
with Section 2 of the Distribution Agreement, Solar's rights under the
Distribution Agreement shall be subject to exclusive rights granted by NeoMedia
with respect to such product applications, provided that Solar shall not be not
excluded from reselling NeoMedia Products with printed products and printing
services, as those terms are used in the Distribution Agreement. The
Distribution Agreement is hereby amended by deleting the term "LICENSED
SOFTWARE" where it appears in Section 2 and inserting in its place the term
"NeoMedia Products".
IN WITNESS WHEREOF, the parties have each duly executed and delivered
this Amendment as of the Amendment Effective Date.
NEOMEDIA TECHNOLOGIES, INC., a SOLAR COMMUNICATIONS, INC., an
Delaware corporation Illinois corporation
By:___________________________ By:_______________________________
Its:__________________________ Its: _____________________________
18
NeoMedia Technologies, Inc.
Exhibit 23.2
Independent Auditors' Consent
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NeoMedia Technologies, Inc:
We consent to incorporation by reference in the registration statement (No.
333-42477) on Form S-8 of NeoMedia Technologies, Inc. of our report dated March
12, 1999, relating to the consolidated balance sheets of NeoMedia Technologies,
Inc. and subsidiaries (collectively referred to as the "Company") as of December
31, 1998 and 1997, and the related consolidated statements of operations, cash
flows and stockholders' equity for the years then ended, which report appears in
the December 31, 1998 annual report on Form 10-KSB of NeoMedia Technologies,
Inc.
Our report dated March 12, 1999 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, has a
significant accumulated deficit, and working capital deficiency which raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
/s/ KPMG LLP
- ---------------
KPMG LLP
Miami, Florida
April 15, 1999
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