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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
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.
(Exact Name of 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 402
Fort Myers, Florida 33901
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (Including Area Code) 239-337-3434
Securities Registered Under Section 12(b) of the Exchange Act:
Name of each exchange
Title of Each Class on which registered
---------------------------- -------------------------------
Common Stock, par value $.01 Over-the-Counter Bulletin Board
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 disclosure of delinquent filers in response to Item 405 of
Regulation S-X 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-K
or any amendment to this Form 10-K |_|
Issuer's consolidated revenue for its most recent fiscal year was
$2,400,000.
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 the
Over-the-Counter Bulleting Board on January 30, 2004 ($0.11) was $20,676,000.
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 February 27, 2004, there were outstanding 278,900,410 shares of
the issuer's Common Stock.
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements and information
relating to NeoMedia Technologies, Inc. ("NeoMedia" or "the Company"). NeoMedia
intends to identify forward-looking statements in this prospectus by using words
such as "believes," "intends," "expects," "may," "will," "should," "plan,"
"projected," "contemplates," "anticipates," "estimates," "predicts,"
"potential," "continue," or similar terminology. These statements are based on
the Company's beliefs as well as assumptions the Company made using information
currently available to us. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect the
Company's current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may differ
significantly from the results discussed in the forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
General
NeoMedia develops proprietary technologies that link physical information
and objects to the Internet marketed under the "PaperClickTM" brand name. The
primary focus of the Company is to develop and commercialize such technologies.
The Company has also developed an extensive patent portfolio covering
convergence of the physical world and the Internet.
The Company has adopted a code of ethics, as required by the rules of the
SEC. This code of ethics applies to all of the Company's directors, officers and
employees. The code of ethics, and any amendments to, or waivers from, the code
of ethics, is available in print, at no charge, to any stockholder who requests
such information.
Company Structure
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
- NeoMedia Internet Switching Software (NISS), and
- NeoMedia Consulting and Integration Services (NCIS)
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports the Company's physical world to
Internet core technology, including NeoMedia's linking "switch" and NeoMedia's
application platforms. NISS also manages the Company's intellectual property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.
NCIS (systems integration service offerings) is the original business line
upon which the Company was organized. This unit resells client-server equipment
and related software, and general and specialized consulting services. Systems
integration services also identifies prospects for custom applications based on
NeoMedia's products and services. These operations are based in Lisle, Illinois.
Company History
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., NeoMedia's
predecessor, which was organized in Illinois in December 1989. In March 1996,
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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.
NeoMedia also has the following wholly-owned subsidiaries: NeoMedia
Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A.,
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc., incorporated
in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH,
incorporated in Austria; NeoMedia Technologies Holding Company B.V.,
incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V.,
incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated
in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and
NeoMedia Technologies UK Limited, incorporated in the United Kingdom. In January
2004, the Company established NeoMedia Micro Paint Repair, Inc. in Nevada.
Recent Developments
AirClic, Inc.
On July 3, 2001, NeoMedia entered into a non-binding letter of intent with
AirClic, Inc., which contemplated an intellectual property cross-licensing
transaction between NeoMedia and AirClic. Under the terms of the letter of
intent, AirClic was to provide NeoMedia with bridge financing of $2,000,000,
which was to be paid to NeoMedia in installments. On July 11, 2001, AirClic
advanced $500,000 in bridge financing to NeoMedia in return for a promissory
note secured by all of NeoMedia's assets. During the negotiation of a definitive
set of agreements, the parties decided not to proceed with the cross-licensing
transaction. AirClic then initiated two lawsuits against NeoMedia, one of which
was dismissed, the other of which was settled (see "Legal Proceedings").
On October 3, 2003, the Company paid AirClic the principal plus interest in
the approximate amount of $610,000. On December 5, 2003, the Company paid an
additional $115,000 in legal fees and entered into a settlement agreement with
AirClic under which the suit was dismissed. The Company has no further
obligation relating to this matter.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Scanbuy, Inc., and LScan Technologies, Inc. The suit claims that each
of the parties has manufactured, or has manufactured for it, and has used, or
actively induced others to use, technology which allows customers to use a
built-in UPC bar code scanner to scan individual items and access information.
The Complaint states that AirClic, Scanbuy and LScan have had actual and
constructive notice of the existence of the patents-in-suite, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents in suit. NeoMedia's Complaint
seeks compensatory damages for infringement by AirClic, Scanbuy and LScan, with
those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin
AirClic, Scanbuy and LScan from their infringing activities
Brandkey Systems Corp. Patent License
During May 2002, NeoMedia granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey paid the Company a $50,000 licensing fee at signing, a
$25,000 minimum royalty in 2003, and is obligated to pay 2.5% of all
royalty-based revenues earned by Brandkey, with minimum royalties of $50,000 in
2004, and $75,000 in 2005 and after.
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Loch Energy, Inc.
On March 7, 2003, NeoMedia announced that it had reached an agreement in
principal to acquire and merge with Loch Energy, Inc., an oil and gas provider
based in Humble, Texas.
On October 1, 2003, NeoMedia discovered that the royalty interest from
future sales of oil owned by Loch were oversold, which would likely result in
materially lower projected available cashflow from Loch's operations. This
projected available cashflow was the basis for the acquisition. On October 3,
2003, NeoMedia cancelled the Memorandum of Terms signed on March 7, 2003, and
terminated the acquisition and merger proceedings.
PaperClick Business Partnerships
On September 8, 2003, NeoMedia announced its PaperClick for Camera
CellphonesTM, a mobile version of the Company's PaperClickTM software that links
physical objects to the Internet. On October 30, 2003, NeoMedia announced its
go-to-market strategy for PaperClick for Camera Cellphones, under which consumer
product manufacturers and retailers will register their product codes, such as
Universal Product Codes ("UPC") and European Article Numbering ("EAN") codes,
with a "click management services" provider, who will activate and route the
codes to the proper location on the Internet. Consumers with PaperClick for
Camera CellphonesTM and mobile web access can then take a picture of registered
barcodes and be immediately linked to an Internet location of the manufacturer's
or retailer's choice. To this end, NeoMedia signed an agreement with 12Snap UK
Ltd. in January 2004, under which 12Snap will market and promote the PaperClick
for Camera CellphonesTM technology in Europe. NeoMedia has also signed letters
of intent with Seven Worldwide to enter into contracts to provide click
management services in Europe, and with iCoupon and Digital Rum to provide
marketing and promotion services associated with PaperClick for Camera
CellphonesTM. NeoMedia has engaged Big Gig Strategies and SRP Consulting Group
LLC to act as agents to promote and sell the offering in Europe and the US,
respectively.
Secure Source Technologies, Inc.
On October 8, 2003, NeoMedia acquired Secure Source Technologies, a
provider of security solutions and covert security technology for the
manufacturing and financial services industries, in exchange for 3.5 million
shares of NeoMedia's common stock. With the purchase of SST, NeoMedia acquired
additional patents that complement its existing intellectual property portfolio,
as well as a security software platform, and computer equipment.
BSD Software/Triton Global Business Services
On December 9, 2003, NeoMedia signed a non-binding letter of intent to
acquire Triton Global Business Services Inc. and its parent company, BSD
Software Inc. (Pink Sheets: BSDS), both of Calgary, Alberta, Canada. Triton,
formed in 1998 and acquired by BSD in 2002, is an Internet Protocol-enabled
provider of live and automated operator calling services, e-business support,
billing and clearinghouse functions and information management services to
telecommunications, Internet and e-business service providers. The LOI outlined
terms, including an exchange of one share of NeoMedia common stock for each
share of BSD Software, not to exceed 40 million shares. The transaction is
contingent upon, among other things, satisfactory due diligence investigation by
both companies, approval by NeoMedia's Board of Directors, approval by BSD
Software's Board of Directors and shareholders, and any required regulatory
approvals.
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Virgin Entertainment Group
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore. The Complaint for Patent Infringement and Damages was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division. The Complaint claims that Virgin has infringed four of NeoMedia's
patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The
Complaint alleges that the Virgin Megaplay Stations located in Virgin's
Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to
allow customers to scan UPC codes from in-store CDs and DVDs to access
Internet-based product information, such as music and movie previews, and album
and video art. The Complaint also alleges that Virgin had notice of NeoMedia's
patents since the latter part of 2002 or before, yet it continued with its
infringing activities. NeoMedia's Complaint seeks compensatory damages for
Virgin's infringement, with those damages to be trebled due to the willful and
wanton nature of the infringement. NeoMedia also seeks to preliminarily and
permanently enjoin Virgin from its infringing activities
CSI International, Inc.
On February 6, 2004, NeoMedia acquired CSI International, Inc., of Calgary,
Alberta, Canada, a private technology products company in the micro paint repair
industry. NeoMedia paid 7,000,000 shares of its common stock, plus $2.5 million
cash in exchange for all outstanding shares of CSI. NeoMedia has centralized the
administrative functions in its Ft. Myers, Florida headquarters, and maintains
the sales and operations office in Calgary, Alberta, Canada.
Industry Overview
NeoMedia Internet Switching Software
The goal of NeoMedia's Internet Switching Software business segment is to
promote mass adoption of the Company's switch and background computer process to
link physical world objects to the Internet. The Company's switching platform is
a state-of-the-art open and extensible cross-media publishing tool that applies
to customers in a variety of industrial, commercial, and educational
applications. This business segment is also responsible for licensing NeoMedia's
intellectual property to others as a means of promoting this new market as well
as providing a revenue and cash resource. The Company has been developing its
physical world-to-Internet technology and offerings since 1996 and considers
itself an innovator and pioneer in this industry. In the past several years, the
Company has seen similar technologies and concepts emerge in the marketplace,
and sees these events as a positive validation of the physical world-to-internet
concept.
The Company believes the key to the adoption of physical world-to-Internet
technologies in the marketplace will be in the development of real world
applications that provide the end user a valuable experience. The Company
believes that camera-enabled cellular telephones are a key device in the
development of the market. The Company's product and service offerings differ
from those of its competitors in that, unlike their products and services,
NeoMedia's products do not require the use of a proprietary or specified device,
and NeoMedia offers its service on a private label basis. Management believes
that the Company is positioned to provide solutions that preserve a customer's
brand and also provide tailored solutions to fit the customer needs.
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NeoMedia Consulting and Integration Services
The Company believes that the technology and equipment resale business is
becoming a commodity industry for products undifferentiated by value added
proprietary elements and services. Resale operations are also being compressed
as equipment manufacturers consolidate their distribution channels.
Proprietary products, such as NeoMedia encoders, offer a competitive
value-add to the Company's NCIS business. The Company believes that it has
unique offerings, which, to the extent that they meet market needs, should offer
the potential for growth in this industry. In addition, the Company's recent
addition of Storage Area Network Solutions allows it to participate in the
higher-margin area of the open systems marketplace.
The NCIS division also sells migration products (tools designed to
"migrate" software code from one platform to another platform) primarily to
mid-sized to large corporations and government agencies. The products include
proprietary products and software tools to migrate Wang, HP3000, Data General,
DEC and IBM DOS/VSE platforms (legacy systems) to a Unix or NT open system
platform.
Strategy
NeoMedia has spent the past seven years developing and patenting the now
confirmed space of linking the physical and Internet environments, and
developing and implementing five generations of continuously refined switch
technology that bridge these environments. The Company recently announced its
PaperClick for Camera Cell PhonesTM product and go-to-market strategy. The
Company is strategically pursuing potential licensees of the PaperClickTM
switching platform, as well as intellectual property licensing opportunities
with organizations attempting to commercialize physical world-to-Internet
technology, such as Symbol Technologies, A.T. Cross Company and Brandkey Systems
Corporation.
Products/Services
NeoMedia Internet Switching Software
Resolution Server Software. The Resolution Server Software is NeoMedia's
server software suite used to map PaperClick Identifiers(TM), and UPC, EAN, ISBN
and SKU codes on physical objects (products) to URL addresses on the Internet or
to data on other computer networks.
Client Software. Client Software is installed on personal computers or
wireless communication devices (i.e. camera phones, PDA's, etc.) enabling them
to read and store identifiers and display the corresponding web content.
Identifiers currently recognized by NeoMedia's suite of Client Software include
PaperClick codes, UPC/EAN codes, and ISBN codes. NeoMedia anticipates adding
support for additional types of identifiers in the future. For organizations
wishing to create "closed systems", NeoMedia offers customized versions of the
Client Software with the licensee's brand identity, rather than the generic
PaperClick brand identity.
PaperClick Linking Services.
PaperClick Linking Services(TM) are simple and powerful. Simple - consumer
product companies doing advertising and promotions simply pay for "activation"
of UPC, EAN, ISBN and other bar codes on their products and printed materials.
When clicked with a PaperClick-enabled device, these identifiers provide
easy-to-use and accurate links between products and consumers. Powerful -
instead of sending out broad hit-or-miss TV or magazine campaigns to the masses,
consumer product companies may offer focused campaigns tailored to individuals
based on their demographics captured when they use the system. The Company
believes that the result is a seamless technique for brand managers, media
buyers, and major enterprises to roll out targeted messages directly from
packaged products, print ads, editorials, direct mail, or from a variety of
labels and printed materials, directly to customers worldwide.
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PaperClick Linking Services include Click Management Services(TM) - ongoing
management of the PaperClick Access Infrastructure(TM) through NeoMedia's United
States and European partners on behalf of clients. Specifically, NeoMedia's
partners will
o Handle the hosting, setup and ongoing management of the PaperClick
Resolution Server hardware, software, and database.
o Manage new releases of the software and access to NeoMedia's
internally controlled PaperClick Global Routing Server.
o Assist clients in establishing and maintaining the linkages between
codes and web sites.
o Consult with clients on the proper preparation of web-based material
for display on mobile and wireless devices.
With Click Management Services as the single source, from initial rollout
through full implementation, links can be dynamically changed, and integrity and
reliability of clicks ensured, all without requiring brand managers or other
organizations to make large investments in staff, training or infrastructure.
Seven Worldwide has signed a Letter of Intent to complete a contract with
NeoMedia to offer Click Management Services to consumer products companies.
Seven Worldwide is a $424 million company with 60 years of experience bringing
brands and associated graphics to markets for clients including several Fortune
500 companies. Upon completion of the contract, NeoMedia and Seven Worldwide
intend to manage authentication and authorization of "clicks" to Internet or
other network content and intend to offer separately demographic reporting
services and consulting for project implementation and management.
PaperClick Linking Services fall into two broad categories: Services for
existing industry codes, and services for created codes.
(A) Linking Services For Existing Industry Codes:
On a fee-per-link basis, consumer product companies may
activate or "PaperClick-enable" the existing industry codes on or
in all their existing products or other printed materials. These
codes may then be "clicked" or "read" by PaperClick-enabled devices
and immediately linked to specific promotions, additional
information, in-depth editorials, or even on-line purchase and
promotion fulfillment functions on the Internet or other networks.
Consumer product companies determine what information they want
linked.
At present, PaperClick supports the enabling of existing UPC,
EAN, and ISBN barcodes. NeoMedia plans to add support for
additional types of industry-standard identifiers in the future.
(B) Linking Services For Created Codes:
Created codes are appropriate for situations in which clients
wish to take advantage of the power of the PaperClick system, but
do not have existing codes, such as UPC, EAN or ISBN barcodes, on
the products, materials or items that they would like to
PaperClick-enable.
On a fee-per-link basis, consumer product companies can create
and activate PaperClick Codes on or in all their products or other
printed materials. These codes may then be "clicked" or "read" by a
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PaperClick-enabled device and immediately linked to specific
promotions, additional information, in-depth editorials, or even
on-line purchase and promotion fulfillment functions on the
Internet or other networks. Consumer product companies determine
what information they want linked.
The fee includes all benefits as offered through
PaperClick(TM) Linking Services for Existing Product Codes through
NeoMedia's US and European partners - Click Management Services. In
addition, Click Management Services will consult with clients on
how to best integrate created codes into their products and/or
materials, ensuring that they will be able to be properly read by
PaperClick-enabled devices.
Intellectual Property Licensing.
The Company currently holds six U.S. patents relating to the physical
world-to-Internet marketplace, and an additional six patents acquired with the
purchase of Secure Source Technologies related to document security. The
Company's core physical-world-to-Internet patent portfolio (Patent No.
5,933,829, No. 5,978,773, No. 6,108,656, No. 6,199,048, No. 6,434,561, and No.
6,542,933) is comprised of "system and method" patents that cover the use of
machine-readable data for information retrieval. Among the identifiers that
could be classified as machine-readable are PaperClick-enabled(TM) 2D barcodes,
1D barcodes, UPC/EAN barcodes, magnetic stripes, OCR/ICR, RFID, smartcards,
numbers, hot words, and voice. The Company intends to license this intellectual
property portfolio to companies endeavoring to tap the potential of this
emerging market. To date, the Company has entered into such agreements with
Digital:Convergence, A.T. Cross Company, Symbol Technologies, and Brandkey
Systems Corporation. During 2002, the Company entered into an agreement with
Baniak Pine and Gannon, a law firm specializing in patent licensing and
litigation, under which the firm will represent NeoMedia in seeking out
potential licensees of NeoMedia's patent portfolio.
NeoMedia Consulting and Integration Services
NCIS is a group of highly skilled application developers thoroughly
familiar with systems integration, storage networks, and other associated
technologies who contract to develop custom applications for clients.
System integration project management & consulting services are offered through
NeoMedia's NCIS business unit. These services fall into two broad categories:
A. For implementation of PaperClick(TM)Platform Software
B. For development and implementation of Customized Applications
(A) Services for implementation of PaperClick(TM) Platform Software
The NCIS business unit is comprised of the executive team,
technical team, and project managers to establish and deploy a
common set of processes and templates, presenting an organized,
unified implementation from each project manager. These reusable
project management components enable fast, efficient PaperClick
project deployment. Key functions of the NCIS business unit are
to:
o Create PaperClick Implementation Vision.
o Develop methodology including updating and deployment of
best practices.
o Facilitate team communication through common processes,
deliverables, and terminology.
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o Support a common repository so that prior project management
deliverables can be candidates for reuse by similar
projects.
o Provide clients (and internal management) continual training
to build core project management competencies, a common set
of experiences, and an understanding of PaperClick technical
development.
o Track status of PaperClick projects, and provide project
visibility to management in a common and consistent manner.
Services complementary to a PaperClick project
implementation are also provided. They may consist of consulting
or hardware services that are part of the project, such as
additional servers, network configurations etc., or totally
separate from the project due to a parallel need. Services may
also include continuation and maintenance of completed projects.
Post implementation change orders, training, and code alterations
are handled through this division of the System Integration
Business Unit.
(B) Services for development and implementation of Customized
Applications:
NeoMedia's NCIS business assists clients in developing and
implementing their own customized PaperClick applications.
Storage Area Networks (SAN). SAN is a Storage Management solutions and
consultancy consisting of tools and services that insure data integrity,
efficiency and accessibility, achieved through moving data backup, access and
archival functions off of traditional Local Area Networks (LANs) and Wide Area
Networks (WANs) that are added on to a highly reliable independent managed
network.
Product Sales and Equipment Re-sales. NCIS markets and sells proprietary
software products, including high-density symbology encoders (e.g. PDF417 and
UPS Maxicode) and resells client-server hardware and related systems such as Sun
Microsystems, IBM and others , as well as related applications software and
services.
Strategic Relationships
NeoMedia Internet Switching Software
In January 2001, the Company entered into a patent license with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products. A.T. Cross Company obtained the rights under the Company's
physical world-to-Internet patents for personal portable scanning devices used
to link bar codes on documents and other physical consumer goods to
corresponding Internet content. A.T. Cross Company will pay a royalty per device
to the Company for license rights granted under this agreement. To date, the
Company has not recognized any revenue relating to this contract.
In May 2001, the Company entered into an agreement with Symbol
Technologies, Inc., granting Symbol a worldwide, non-exclusive license of its
patents surrounding the sale and use of scanning devices used in physical
world-to-Internet technologies. Symbol will pay the Company a royalty per
qualified device shipped. To date, the Company has not recognized any revenue
relating to this contract.
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During January 2002, the Company engaged Baniak Pine and Gannon, a Chicago
law firm specializing in intellectual property licensing and litigation. The
firm will assist the Company in seeking out potential licensees of its
intellectual property portfolio, including any resulting litigation.
During May 2002, the Company granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey paid the Company a $50,000 upfront licensing fee in 2002,
a $25,000 royalty in 2003, and is obligated to pay 2.5% of all future
royalty-based revenues earned by Brandkey, with minimum royalties of $50,000 in
2004, and $75,000 in 2005 and after.
During September 2003, NeoMedia engaged Big Gig Strategies and SRP
Consulting Group LLC as agents to promote and sell the Company`s PaperClickTM
and PaperClick for Camera CellphonesTM technology, products and services in
Europe and the US, respectively.
During January 2004, the Company contracted with Seven Worldwide to provide
European click management services for its PaperClick for Camera CellphonesTM
technology, and also signed letters of intent with Seven Worldwide to enter into
contracts to provide click management services in Europe, and with iCoupon and
Digital Rum to provide marketing and promotion services associated with
PaperClick for Camera CellphonesTM.
NeoMedia Consulting and Integration Services
Through this segment, the Company provides services and products to a
spectrum of customers, ranging from closely held companies to Fortune 500
companies. For the year ended December 31, 2002, one customer, SBC/Ameritech
Services, Inc., accounted for 36% of the Company's revenue. During 2003,
SBC/Ameritech centralized its purchasing function, resulting in a material
decrease in sales to SBC/Ameritech. For the year ended December 31, 2003 sales
to SBC/Ameritech accounted for only 4% of the Company's revenue. The Company
expects sales to SBC/Ameritech as a percentage of total sales to decline, or
potentially stop altogether, in 2004. The Company does not have a written
agreement with Ameritech and, therefore, there are no contractual provisions to
prevent Ameritech from terminating its relationship with the Company at any
time. In addition, a single supplier supplies the equipment and software, which
is re-marketed to this customer. Accordingly, the loss of this customer or
supplier could materially adversely affect NeoMedia's business, prospects,
financial condition, and results of operations. For these reasons, NeoMedia is
seeking, and continue to seek, to diversify its sources of revenue and vendors
from whom it purchases.
Sales and Marketing
NeoMedia Internet Switching Software
PaperClickTM. During 2003, NeoMedia implemented an agent strategy to sell
and market its PaperClick suite of products. To this end, during 2003 NeoMedia
engaged Big Gig Strategies and SRP Consulting Group LLC as an agent to promote
and sell the Company's PaperClickTM and PaperClick for Camera CellphonesTM
technology, products and services in Europe and the US, respectively. Also
during 2003, the Company reached a partnering agreement with Tibbs Information
Systems, Inc., under which the two companies intend to team up to compete for
government and homeland security projects. NeoMedia will contribute its
Physical-world-to-Internet platform, intellectual property, and industry
know-how. No assurances can be given that any successful association will
result.
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NeoMedia Consulting and Integration Services
The Company, through its systems integration services segment, markets its
products and services, as well as those for which it acts as a re-marketer,
primarily through a direct sales force, which was composed of four individuals
as of December 31, 2003. In addition, this business unit also relies upon
strategic alliances to help market products and services, provide lead
referrals, and establish informal co-marketing arrangements. NeoMedia's
representatives attend seminars and trade shows, both as speakers and
participants, to help market products and services. In addition, this business
segment has three agents in the United States that sell NeoMedia's products and
services.
Customers
NeoMedia Internet Switching Software
PaperClickTM. NeoMedia's customers for its physical world-to-Internet
offerings have included Amway, Solar Communications, Inc., and NYCO Products
Company.
Intellectual Property Licensing. To date, the Company has entered into IP
licensing agreements with Digital:Convergence Corporation, A.T. Cross Company,
Symbol Technologies, and Brandkey Systems Corporation. The Company intends to
pursue additional license agreements in the future.
NeoMedia Consulting and Integration Services
The Company provides equipment and software reselling and integration and
automation consulting services to a variety of customers across a range of
industries, including telecommunications, insurance, financial services,
manufacturing, government entities, and more.
Research and Development
NeoMedia Internet Switching Software
NISS employed 2 persons in the area of product development as of December
31, 2003 and 2002. During the years ended December 31, 2003 and 2002, NISS
incurred total software development costs of $332,000 and $775,000,
respectively, none of which were capitalized as software development costs.
NeoMedia Consulting and Integration Services
Any future research or development of products relating to the NCIS
business unit will be performed by the application services division or outside
contractors.
Intellectual Property Rights
The Company's success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon its proprietary technology,
including patents, and other intellectual property, and on its ability to
protect its proprietary technology and other intellectual property rights. In
addition, the Company must conduct its operations without infringing on the
proprietary rights of third parties. The Company also intends to rely upon
unpatented trade secrets and the know-how and expertise of its employees. To
protect its proprietary technology and other intellectual property, the Company
relies primarily on a combination of the protections provided by applicable
patent, copyright, trademark, and trade secret laws, as well as on
confidentiality procedures and licensing arrangements. The Company has six
patents for its physical world-to-Internet technology, and an additional six
patents acquired with the purchase of Secure Source Technologies related to
document security. The Company also has several trademarks relating to its
proprietary software products.
10
Competition
NeoMedia Internet Switching Software
Although, the Company has been developing its physical
world-to-Internet technology and offerings since 1996, the physical
world-to-Internet market in which the Company competes is relatively new. In the
past year, new technologies and concepts have emerged in the physical
world-to-Internet space. The Company views the increased development of other
products in this space as a validation of the physical world-to-Internet concept
and believes that the increased promotion of these products and services by the
Company and other companies in this space, including AirClic, Inc., will raise
consumer awareness of this technology, resulting in a larger market. The Company
believes that the significant portfolio of physical world-to-Internet
technologies that it has developed over the last five years will provide a
barrier to entry for most potential competitors.
NeoMedia Consulting and Integration Services.
The largest competition, in terms of number of competitors, is for
customers desiring systems integration, including the re-marketing of another
party's products, and document solutions. These competitors range from local,
small privately held companies to large national and international
organizations, including large consulting firms. A large number of companies act
as re-marketers of another party's products, and therefore, the competition in
this area is intense. In some instances, the Company, in acting as a
re-marketer, may compete with the original manufacturer.
Product Liability
The Company has never had any product liability claim asserted against
it. Currently the Company does not maintain insurance against such claims, which
could result in material adverse effects in the event of a successful claim.
Government Regulation
Existing or future legislation could limit the growth of use of the
Internet, which would curtail the Company's revenue growth. Statutes and
regulations directly applicable to Internet communications, commerce and
advertising are becoming more prevalent. Congress recently passed laws regarding
children's online privacy, copyrights and taxation. The law remains largely
unsettled, even in areas where there has been legislative action. It may take
years to determine whether and how existing laws governing intellectual
property, privacy, libel and taxation apply to the Internet, e-commerce and
online advertising. In addition, the growth and development of e-commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad.
11
Certain of the Company's proprietary technology allows for the storage of
demographic data from NeoMedia's users. In 2000, the European Union adopted a
directive addressing data privacy that may limit the collection and use of
certain information regarding Internet users. This directive may limit the
Company's ability to collect and use information collected by the Company's
technology in certain European countries. In addition, the Federal Trade
Commission and several state governments have investigated the use by certain
Internet companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if the Company's privacy practices are investigated.
Environmental Protection Compliance
The Company has no knowledge of any federal, state or local
environmental compliance regulations which affect its business activities. The
Company has not expended any capital to comply with any environmental protection
statutes and does not anticipate that such expenditures will be necessary in the
future.
Employees
As of December 31, 2003, the Company employed 14 persons. Of the 14
employees, 7 are located at the Company's headquarters in Fort Myers, Florida,
and 7 at other domestic locations. Of the 14 employees, 3 are dedicated to the
Application Services business unit, 7 are dedicated to the Systems Integration
Services business unit, and 4 provide shared services used by both business
units. None of the Company's employees are represented by a labor union or bound
by a collective bargaining agreement. The Company believes that its employee
relations are good.
The Company'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. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could materially
adversely affect the Company's business.
Safe Harbor Provision of the Private Securities Litigation Act of 1995
The Company 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 this document
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 the Company's filings with the Securities and Exchange Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the Company's management. Accordingly, these statements are subject to
significant risks, uncertainties and contingencies which could cause the
Company's actual growth, results, performance and business prospects and
opportunities in 2004 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, the Company's
limited operating history on which expectations regarding its future performance
can be based, competition from, among others, high technology companies that
have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
effectiveness of the Company's efforts to control operating expenses and general
economic and business conditions affecting the Company and its customers in the
United States and other countries in which the Company sells and anticipates to
sell its products and services.
12
RISK FACTORS
Risks Specific To NeoMedia
The Company Has Historically Lost Money and Losses May Continue
The Company has incurred substantial losses since its inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
The Company incurred a loss of $5,382,000 in the year ended December 31, 2003
and $7,421,000 in the year ended December 31, 2002. The Company's accumulated
losses were approximately $76,147,000 as of December 31, 2003. As of December
31, 2003 and 2002, the Company had a working capital (deficit) of approximately
$(6,526,000) and $(8,985,000), respectively. The Company had stockholders'
deficit of $(3,203,000) and $(6,026,000) at December 31, 2003 and 2002,
respectively. The Company generated revenues of $2,400,000 and $9,399,000 for
the years ended December 31, 2003 and 2002, respectively. In addition, during
the years ended December 31, 2003 and 2002, the Company recorded negative cash
flows from operations of $3,191,000 and $535,000, respectively. To succeed, the
Company must develop new client and customer relationships and substantially
increase its revenue derived from improved products and additional value-added
services. The Company has expended and to the extent it has available financing,
the Company intends to continue to expend substantial resources to develop and
improve its products, increase its value-added services and to market its
products and services. These development and marketing expenses must be incurred
well in advance of the recognition of revenue. As a result, the Company may not
be able to achieve or sustain profitability.
The Company's Independent Accountants Have Added Going Concern Language To Their
Report On The Company's Financial Statements, Which Means That The Company May
Not Be Able To Continue Operations
The report of Stonefield Josephson, Inc., the Company's independent
auditors, with respect to the Company's financial statements and the related
notes for the years ended December 31, 2003 and 2002, indicates that, at the
date of their report, the Company had suffered recurring losses from operations
and that the Company's current cash position raises substantial doubt about its
ability to continue as a going concern. The Company's financial statements do
not include any adjustments that might result from this uncertainty.
There is Limited Information Upon Which Investors Can Evaluate The Company's
Business Because The Physical World - to - Internet Market Has Existed For A
Short Period Of Time
The physical world-to-Internet market in which the Company operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company has a relatively limited
operating history upon which an investor may base an evaluation of the Company's
primary business and determine the Company's prospects for achieving its
intended business objectives. To date, the Company has sold its physical
world-to-Internet products to only 12 companies. Further, Digital:Convergence,
the Company's primary customer for its physical world-to-Internet products in
2000, has filed Chapter 7 of the United States Bankruptcy Code and is presently
being sued by the Company for default on a promissory note issued to the Company
in lieu of payment. The Company is prone to all of the risks inherent to the
establishment of any new business venture, including unforeseen changes in its
business plan. An investor should consider the likelihood of the Company's
future success to be highly speculative in light of the Company's limited
operating history in its primary market, as well as the limited resources,
problems, expenses, risks, and complications frequently encountered by similarly
situated companies in the early stages of development, particularly companies in
new and rapidly evolving markets, such as the physical world-to-Internet space.
To address these risks, the Company must, among other things:
13
o maintain and increase its client base;
o implement and successfully execute its business and marketing
strategy;
o continue to develop and upgrade its products;
o continually update and improve its service offerings and features;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
The Company may not be successful in addressing these risks. If the Company
is unable to do so, its business, prospects, financial condition, and results of
operations would be materially and adversely affected.
The Company's Common Stock Is Subject to Price Volatility
As a result of the emerging and evolving nature of the markets in which the
Company competes, as well as the current nature of the public markets and the
Company's current financial condition, the Company believes that its operating
results may fluctuate materially, as a result of which quarter-to-quarter
comparisons of its results of operations may not be meaningful. If in some
future quarter, whether as a result of such a fluctuation or otherwise, the
Company's results of operations fall below the expectations of securities
analysts and investors, the trading price of the Company's common stock would
likely be materially and adversely affected. An investor should not rely on the
Company's results of any interim period as an indication of its future
performance. Additionally, the Company's quarterly results of operations may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may cause the Company's
quarterly results to fluctuate include, among others:
o the Company's ability to retain existing clients and customers;
o the Company's ability to attract new clients and customers at a steady
rate;
o the Company's ability to maintain client satisfaction;
o the Company's ability to motivate potential clients and customers to
acquire and implement new technologies;
o the extent to which the Company's products gain market acceptance;
o the timing and size of client and customer purchases;
o introductions of products and services by competitors;
o price competition in the markets in which the Company competes;
o the pricing of hardware and software that the Company resells or
integrates into its products;
o the level of use of the Internet and online services, as well as the
rate of market acceptance of physical world-to-Internet marketing;
o the Company's ability to upgrade and develop its systems and
infrastructure in a timely and effective manner;
14
o the Company's ability to attract, train, and retain skilled
management, strategic, technical, and creative professionals;
o the amount and timing of operating costs and capital expenditures
relating to the expansion of the Company's business, operations, and
infrastructure;
o unanticipated technical, legal, and regulatory difficulties with
respect to use of the Internet; and
o general economic conditions and economic conditions specific to
Internet technology usage and electronic commerce.
The Company's Common Stock Is Deemed To Be "Penny Stock," Which May Make It More
Difficult For Investors To Sell Their Shares Due To Suitability Requirements
The Company's common stock is deemed to be "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934.
These requirements may reduce the potential market for the Company's common
stock by reducing the number of potential investors. This may make it more
difficult for investors in the Company's common stock to sell shares to third
parties or to otherwise dispose of them. This could cause the Company's stock
price to decline. Penny stocks are stock:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o in issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$10.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last three
years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
The Company Is Uncertain Of The Success Of Its Internet Switching Software
Business Unit And The Failure Of This Unit Would Negatively Affect The Price Of
The Company's Stock
The Company provides products and services that provide a link from
physical objects, including printed material, to the Internet. The Company can
provide no assurance that:
o this Internet Switching Software business unit will ever achieve
profitability;
o the Company's current product offerings will not be adversely affected
by the focusing of its resources on the physical world-to-Internet
space; or
o the products the Company develops will obtain market acceptance.
In the event that the Internet Switching Software business unit should
never achieve profitability, that the Company's current product offerings should
15
so suffer, or that the Company's products fail to obtain market acceptance, the
Company's business, prospects, financial condition, and results of operations
would be materially adversely affected.
The Company's Success is Dependent Upon The Resale Of Software And Equipment For
Revenue; A Reduction In These Sales Would Materially Adversely Affect The
Company's Operations And The Price Of Its Stock
During the years ended December 31, 2003 and 2002, the Company derived 83%
and 95%, respectively, of its revenues from the resale of computer software and
technology equipment. A loss or a reduction of this revenue would have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations, as well as its stock price. The Company
can provide no assurance that:
o the market for its products and services will continue;
o the Company will be successful in marketing these products due to
competition and other factors;
o the Company will continue to be able to obtain short-term financing
for the purchase of the products that it resells; or
o the Company's relationship with companies whose products and services
the Company sells will continue, including its relationship with Sun
Microsystems Computer Company.
Further, the Company believes that the technology and equipment resale
business is becoming a commodity industry for products undifferentiated by
value-added proprietary elements and services. A large number of companies act
as re-marketers of another party's products, and therefore, the competition in
this area is intense. Resale operations are also being compressed as equipment
manufacturers consolidate their distribution channels. In some instances, the
Company, in acting as a re-marketer, may compete with the original manufacturer.
An inability to effectively compete and generate revenues in this industry would
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
A Large Percentage Of The Company's Assets Are Intangible Assets, Which Will
Have Little Or No Value If Its Operations Are Unsuccessful
At December 31, 2003, approximately 65% of the Company's total assets were
intangible assets, consisting primarily of rights related to its patents and
other intellectual property. If the Company's operations are unsuccessful, these
assets will have little or no value, which will materially adversely affect the
value of the Company's stock and the ability of its stockholders to recoup their
investments in the Company's capital stock.
The Company's ISS Business Unit Marketing Strategy Has Not Been Tested And May
Not Result In Success
To date, the Company has conducted limited marketing efforts directly
relating to its ISS business unit. All of the Company's marketing efforts have
been largely untested in the marketplace, and may not result in sales of its
products and services. To penetrate the markets in which the Company competes,
the Company will have to exert significant efforts to create awareness of, and
demand for, its products and services. With respect to the Company's marketing
efforts conducted directly, the Company intends to expand its sales staff upon
the receipt of sufficient operating capital. The Company's failure to further
develop its marketing capabilities and successfully market its products and
services would have a material adverse effect on its business, prospects,
financial condition, and results of operations.
The Company's Internally Developed Systems Are Inefficient And May Put The
Company At A Competitive Disadvantage
The Company uses internally developed technologies for a portion of its
systems integration services, as well as the technologies required to
interconnect its clients' and customers' physical world-to-Internet systems and
hardware with its own. As the Company developed these systems in order to
integrate disparate systems and hardware on a case-by-case basis, these systems
are inefficient and require a significant amount of customization. Such client
and customer specific customization is time-consuming and costly and may place
the Company at a competitive disadvantage when compared to competitors with more
efficient systems.
16
The Company Could Fail to Attract Or Retain Key Personnel
The Company's future success will depend in large part on its ability to
attract, train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other technology companies and more established organizations,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than the Company has. The Company may not
be successful in attracting and retaining qualified personnel on a timely basis,
on competitive terms, or at all. The Company's failure to attract and retain
qualified personnel would have a material adverse effect on its business,
prospects, financial condition, and results of operations will be materially
adversely affected.
The Company Depends Upon Its Senior Management And Their Loss Or Unavailability
Could Put The Company At A Competitive Disadvantage
The Company's success depends largely on the skills of certain key
management and technical personnel, including Charles T. Jensen, its President,
Chief Executive Officer and Chief Operating Officer, and Charles W. Fritz, the
Company's founder and Chairman of the Board of Directors. The loss of the
services of Mr. Jensen or Mr. Fritz could materially harm the Company's business
because of the cost and time necessary to replace and train a replacement. Such
a loss would also divert management attention away from operational issues. The
Company does not presently maintain a key-man life insurance policy on Mr.
Jensen or Mr. Fritz.
The Company May Be Unable To Protect Its Intellectual Property Rights And May Be
Liable For Infringing The Intellectual Property Rights Of Others
The Company's success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon its proprietary technology,
including its patents and other intellectual property, and on the Company's
ability to protect its proprietary technology and other intellectual property
rights. In addition, the Company must conduct its operations without infringing
on the proprietary rights of third parties. The Company also intends to rely
upon unpatented trade secrets and the know-how and expertise of its employees,
as well as its patents. To protect its proprietary technology and other
intellectual property, the Company relies primarily on a combination of the
protections provided by applicable patent, copyright, trademark, and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has six patents for its physical world-to-Internet technology, and
an additional six patents acquired with the purchase of Secure Source
Technologies related to document security. The Company also has several
trademarks relating to its proprietary products. Although the Company believes
that it has taken appropriate steps to protect its unpatented proprietary
rights, including requiring that its employees and third parties who are granted
17
access to its proprietary technology enter into confidentiality agreements with
the Company, the Company can provide no assurance that these measures will be
sufficient to protect its rights against third parties. Others may independently
develop or otherwise acquire patented or unpatented technologies or products
similar or superior to those of the Company.
The Company licenses from third parties certain software tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek licenses for similar software from other
third parties or develop these tools internally. The Company may not be able to
obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. The Company may in the future be required to defend its
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from, or pay royalties to, third parties, or
require the Company to develop appropriate alternative technology. Some or all
of these licenses may not be available to the Company on acceptable terms or at
all, and the Company may be unable to develop alternate technology at an
acceptable price or at all. Any of these events could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations.
The Company Is Exposed To Product Liability Claims And An Uninsured Claim Could
Have A Material Adverse Effect On The Company's Business, Prospects, Financial
Condition, And Results Of Operations, As Well As The Value Of Its Stock
Many of the Company's projects are critical to the operations of its
clients' businesses. Any failure in a client's information system could result
in a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. The Company could, therefore, be
subject to claims in connection with the products and services that the Company
sells. The Company does not currently maintain product liability insurance.
There can be no assurance that:
o the Company has contractually limited its liability for such claims
adequately or at all;
o the Company would have sufficient resources to satisfy any liability
resulting from any such claim;
The successful assertion of one or more large claims against the Company
could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations.
The Company Will Not Pay Cash Dividends and Investors May Have To Sell Their
Shares In Order To Realize Their Investment
The Company has not paid any cash dividends on its common stock and does
not intend to pay cash dividends in the foreseeable future. The Company intends
to retain future earnings, if any, for reinvestment in the development and
marketing of its products and services. As a result, investors may have to sell
their shares of common stock to realize their investment.
18
Some Provisions Of The Company's Certificate of Incorporation And By-Laws May
Deter Takeover Attempts, Which May Limit The Opportunity Of The Company's
Stockholders To Sell Their Shares At A Premium To The Then Market Price
Some of the provisions of the Company's certificate of incorporation and
by-laws could make it more difficult for a third party to acquire the Company,
even if doing so might be beneficial to the Company's stockholders by providing
them with the opportunity to sell their shares at a premium to the then market
price. On December 10, 1999, the Company's Board of Directors adopted a
stockholders rights plan and declared a non-taxable dividend of one right to
acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each
outstanding share of the Company's common stock to stockholders of record on
December 10, 1999 and each share of common stock issued thereafter until a
pre-defined hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure, commonly referred to as a "poison pill." The stockholder
rights plan was designed to enable all stockholders not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
NeoMedia and to guard against partial or two-tiered tender offers, open market
accumulations and other hostile tactics to gain control of NeoMedia. The
stockholders rights plan was not adopted in response to any effort to acquire
control of NeoMedia at the time of adoption. This stockholders rights plan may
have the effect of rendering more difficult, delaying, discouraging, preventing,
or rendering more costly an acquisition of NeoMedia or a change in control of
NeoMedia. Certain of the Company's directors, officers and principal
stockholders, Charles W. Fritz, William E. Fritz and The Fritz Family Limited
Partnership and their holdings were exempted from the triggering provisions of
the Company's "poison pill" plan, as a result of the fact that, as of the plan's
adoption, their holdings might have otherwise triggered the "poison pill".
In addition, the Company's certificate of incorporation authorizes the
Board of Directors to designate and issue preferred stock, in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights, including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion, and redemption rights,
and sinking fund provisions.
The Company is authorized to issue a total of 25,000,000 shares of
Preferred Stock, par value $0.01 per share. The Company has no present plans for
the issuance of any preferred stock. However, the issuance of any preferred
stock could have a material adverse effect on the rights of holders of the
Company's common stock, and, therefore, could reduce the value of shares of the
Company's common stock. In addition, specific rights granted to future holders
of preferred stock could be used to restrict NeoMedia's ability to merge with,
or sell its assets to, a third party. The ability of the Board of Directors to
issue preferred stock could have the effect of rendering more difficult,
delaying, discouraging, preventing, or rendering more costly an acquisition of
the Company or a change in the Company's control thereby preserving NeoMedia's
control by the current stockholders.
19
Risks Relating To The Company's Industry
The Security of the Internet Poses Risks To The Success Of The Company's Entire
Business
Concerns over the security of the Internet and other electronic
transactions and the privacy of consumers and merchants may inhibit the growth
of the Internet and other online services generally, especially as a means of
conducting commercial transactions, which may have a material adverse effect on
the Company's physical world-to-Internet business.
The Company Will Only Be Able To Execute Its Physical World-To-Internet Business
Plan If Internet Usage and Electronic Commerce Continue To Grow
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of information and commerce. If use of
the Internet and other online services does not continue to grow or grows more
slowly than the Company expects, if the infrastructure for the Internet and
other online services does not effectively support the growth that may occur, or
if the Internet and other online services do not become a viable commercial
marketplace, the Company's physical world-to-Internet business, and therefore
its business, prospects, financial condition, and results of operations, could
be materially adversely affected. Rapid growth in the use of, and interest in,
the Internet, the Web, and online services is a recent phenomenon, and may not
continue on a lasting basis. In addition, customers may not adopt, and continue
to use, the Internet and other online services as a medium of information
retrieval or commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and few services and products have generated profits. For the
Company to be successful, consumers and businesses must be willing to accept and
use novel and cost efficient ways of conducting business and exchanging
information.
In addition, the public in general may not accept the Internet and other
online services as a viable commercial or information marketplace for a number
of reasons, including potentially inadequate development of the necessary
network infrastructure or delayed development of enabling technologies and
performance improvements. To the extent that the Internet and other online
networks continue to experience significant growth in the number of users, their
frequency of use, or in their bandwidth requirements, the infrastructure for the
Internet and online networks may be unable to support the demands placed upon
them. In addition, the Internet or other online networks could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Significant issues concerning the commercial
and informational use of the Internet and online networks technologies,
including security, reliability, cost, ease of use, and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies. Changes in, or insufficient availability of,
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online networks generally and the Company's physical
world-to-Internet product and networks in particular.
20
The Company May Not Be Able To Adapt As The Internet, Physical
World-to-Internet, Equipment Resales And Systems Integrations Markets, And
Customer Demands Continue To Evolve
The Company may not be able to adapt as the Internet, physical
world-to-Internet, equipment resales and systems integration markets, and
consumer demands continue to evolve. The Company's failure to respond in a
timely manner to changing market conditions or client requirements would have a
material adverse effect on its business, prospects, financial condition, and
results of operations. The Internet, physical world-to-Internet, equipment
resales, and systems integration markets are characterized by:
o rapid technological change;
o changes in user and customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices that could
render proprietary technology and hardware and software infrastructure
obsolete.
The Company's success will depend, in part, on its ability to:
o enhance and improve the responsiveness and functionality of the
Company's products and services;
o license or develop technologies useful in the Company's business on a
timely basis;
o enhance the Company's existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of its prospective or current customers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The Company May Not Be Able To Compete Effectively In Markets Where Its
Competitors Have More Resources
While the market for physical world-to-Internet technology is relatively
new, it is already highly competitive and characterized by an increasing number
of entrants that have introduced or developed products and services similar to
those offered by the Company. The Company believes that competition will
intensify and increase in the future. The Company's target market is rapidly
evolving and is subject to continuous technological change. As a result, the
Company's competitors may be better positioned to address these developments or
may react more favorably to these changes, which could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. The Company competes in these industries on the basis
of a number of factors, including the attractiveness of the services offered,
the breadth and quality of these services, creative design and systems
engineering expertise, pricing, technological innovation, and understanding
clients' needs. A number of these factors are beyond the Company's control.
Existing or future competitors may develop or offer products or services that
provide significant technological, creative, performance, price, or other
advantages over the products and services offered by the Company.
21
Many of the Company's competitors have longer operating histories, larger
customer bases, longer relationships with clients, and significantly greater
financial, technical, marketing, and public relations resources than NeoMedia.
Based on total assets and annual revenues, the Company is significantly smaller
than its two largest competitors in the physical world-to-Internet industry, the
primary focus of its business. Similarly, the Company competes against
significantly larger and better-financed companies in its systems integration
and resales businesses, including the manufacturers of the equipment and
technologies that the Company integrates and resells. If the Company competes
with its primary competitors for the same geographical or institutional markets,
their financial strength could prevent the Company from capturing those markets.
The Company may not successfully compete in any market in which the Company
conducts or may conduct operations. In addition, based on the increasing
consolidation, price competition and participation of equipment manufacturers in
the systems integration and equipment resales markets, the Company believes that
it will no longer be able to compete effectively in these markets in the future.
It is for this reason, that the Company has increasingly focused its business
plan on competing in the emerging market for physical world-to-Internet
products.
In The Future There Could Be Government Regulations And Legal Uncertainties
Which Could Harm The Company's Business
The Company is not currently subject to direct regulation by any government
agency other than laws or regulations applicable generally to electronic
commerce. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services, could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
Due to the increasing popularity and use of the Internet and other online
services, federal, state, and local governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the Internet or other
online services covering issues such as taxation, user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. The growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
services and increase its cost of doing business, or otherwise have a material
adverse effect on the Company's business, prospects, financial condition, and
results of operations. Moreover, the relevant governmental authorities have not
resolved the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership and
personal privacy and it may take time to resolve these issues definitively.
Certain of the Company's proprietary technology allows for the storage
of demographic data from the Company's users. In 2000, the European Union
adopted a directive addressing data privacy that may limit the collection and
use of certain information regarding Internet users. This directive may limit
the Company's ability to collect and use information collected by its technology
in certain European countries. In addition, the Federal Trade Commission and
several state governments have investigated the use by certain Internet
companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if the Company's privacy practices are investigated.
22
ITEM 2. Description of Properties
The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. The Company
occupies approximately 5,000 square feet under terms of a written lease from an
unaffiliated party which expires on July 31, 2005, with monthly rent totaling
approximately $7,000.
The Company maintains a sales facility at 2150 Western Court, Suite 230,
Lisle, Illinois 60532, occupying approximately 6,000 square feet under the terms
of a written lease from an unaffiliated party expiring on October 31, 2004, with
monthly rent totaling approximately $3,000. The Company also prepaid
approximately $63,000 of rent under the current lease through the issuance of
common stock during 2003. The Company recognizes approximately $5,000 per month
in additional rent expense relating to the stock issuance.
The Company believes that existing office space is adequate to meet current
and short-term requirements.
ITEM 3. Legal Proceedings
The Company is involved in the following legal actions arising in the
normal course of business, both as claimant and defendant.
Virgin Entertainment Group
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The Complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
Eastern Division, by Baniak Pine & Gannon, the Company's intellectual property
law firm. The Complaint claims that Virgin has infringed four of NeoMedia's
patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The
Complaint alleges that the Virgin Megaplay Stations located in Virgin's
Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to
allow customers to scan UPC codes from in-store CDs and DVDs to access
Internet-based product information, such as music and movie previews, and album
and video art. The Complaint also alleges that Virgin had notice of NeoMedia's
patents since the latter part of 2002 or before, yet it continued with its
infringing activities. NeoMedia's Complaint seeks compensatory damages for
Virgin's infringement, with those damages to be trebled due to the willful and
wanton nature of the infringement. NeoMedia also seeks to preliminarily and
permanently enjoin Virgin from its infringing activities.
AirClic, Inc. Litigation
On September 6, 2001, AirClic, Inc. filed suit against the Company in the
Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among other
things, the accelerated repayment of a $500,000 loan it advanced to the Company
pursuant to the terms of a Secured Promissory Note made on July 11, 2003 and a
non-binding Letter of Intent dated July 3, 2001 between AirClic and the Company.
The note was secured by substantially all of the Company's intellectual
property, including the core physical world-to-Internet technologies. In the
suit, the Company acknowledged its obligations under the note but filed a
counterclaim against AirClic seeking damages for fraud, negligent
misrepresentation and promissory estoppel.
On October 3, 2003, the Company paid AirClic the principal plus interest in
the approximate amount of $610,000. On December 5, 2003, the Company paid an
additional $115,000 in legal fees and entered into a settlement agreement with
AirClic under which the suit was dismissed. The Company has no further
obligation relating to this matter.
23
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Scanbuy, Inc., and LScan Technologies, Inc. The suit claims that each
of the parties has manufactured, or has manufactured for it, and has used, or
actively induced others to use, technology which allows customers to use a
built-in UPC bar code scanner to scan individual items and access information.
The Complaint states that AirClic, Scanbuy and LScan have had actual and
constructive notice of the existence of the patents-in-suite, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents in suit. NeoMedia's Complaint
seeks compensatory damages for infringement by AirClic, Scanbuy and LScan, with
those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin
AirClic, Scanbuy and LScan from their infringing activities.
Other Litigation
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of NeoMedia common stock, to
be valued at the time of registration of the shares. The Company's stock was
trading at approximately $0.05 at that time. The Company included for
registration 2.7 million shares in the name of Ripfire in its Form S-1 that was
declared effective by the SEC on February 14, 2003. The Company's stock was
trading at approximately $0.02 on February 14, 2003. The actual number of shares
to be issued to Ripfire per the pricing outlined in the agreement was
approximately 9.8 million. On March 31, 2003, the Company issued the 2.7 million
shares of common stock that had been registered in the S-1 to Ripfire. The
Company is attempting to negotiate settlement of the remaining balance. The
Company had a remaining accrued liability of $106,000 relating to this matter as
of December 31, 2003.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
In October 2003, the Company settled this matter for $10,000 cash payments over
time, plus 3,000,000 shares of common stock. The Company had accrued a liability
of $7,000 as of December 31, 2003.
On July 27, 2002, the Company's former General Counsel filed suit in U.S.
District Court, Ft. Myers division, seeking payment of the 2000 executive
incentive, severance and unpaid vacation days in the amount of approximately
$154,000. In June 2001, the Company's compensation committee approved an
adjustment to the 2000 executive incentive plan that reduced the executive
incentive payout as a result of the write-off of the Digital:Convergence
intellectual property license contract in the second quarter of 2001. As a
result, the Company reduced the accrual for such payout by an aggregate of
approximately $1.1 million in the second quarter of 2002. The plaintiff was
seeking payment of the entire original incentive payout. On November 12, 2002,
NeoMedia settled the lawsuit. The settlement calls for cash payments totaling
approximately $90,000 over a period of ten months, plus 250,000 vested options
to purchase shares of NeoMedia common stock at an exercise price of $0.01 with a
term of five years. The Company had a liability of approximately $3,000 relating
to this matter as of December 31, 2003.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, the Company
settled the suit for cash payments over a period of approximately one year. The
Company had an accrued liability of approximately $82,000 relating to this
matter as of December 31, 2003.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
24
unpaid on February 28, 2002. On May 1, 2003, the Company settled the suit for
cash payments totaling approximately $196,000, to be paid at a rate of $30,000
per quarter until the balance is satisfied. If the balance is paid within one
year of the settlement, the Company will not pay interest charges. The Company
had a remaining liability of approximately $116,000 relating to this matter as
of December 31, 2003, which was included in notes payable.
On November 11, 2002, Avnet/Hallmark Computer Marketing Group filed a
complaint against the Company seeking payment of approximately $66,000 in past
due amounts relating to hardware and software re-sold by the Company. During
December 2002, the Company made payment of approximately $30,000 to
Avnet/Hallmark, reducing the balance owed to approximately $37,000. On April 1,
2003, the plaintiff received a judgment from the circuit court for the remaining
balance. The Company has agreed to a payment plan for the balance over a period
of approximately nine months. The Company had a liability of approximately
$17,000 relating to this matter as of December 31, 2003.
On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company has agreed to a payment plan relating to this matter under which the
balance will be paid over approximately 12 months. The Company had a liability
of approximately $13,000 relating to this matter as of December 31, 2003.
On April 18, 2003, a former participant in the Company's 2001 self-insured
health plan sued the Company to recover approximately $46,000 in unpaid health
claims from 2001. On December 1, 2003, the Company settled this suit for cash
payments over a period of approximately one year. The Company had accrued
approximately $36,000 as of December 31, 2003.
On January 26, 2004, Day West & Associates, Inc., filed a complaint
against the Company seeking payment of approximately $6,000 in past due legal
services. The Company is attempting to negotiate settlement of the suit. The
Company had not accrued any liability relating to his matter as of December 31,
2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's shares trade on the OTC Bulletin
Board under the symbol "NEOM." As of December 31, 2003, the Company had
243,991,257 common shares outstanding.
The following table summarizes the high and low closing sales prices per
share of the common stock for the periods indicated as reported on The OTC
Bulletin Board and Nasdaq SmallCap Market, as applicable:
(U.S. $)
------------------------------------ ----------------------------------------------------------
2001 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $6.00 $2.50
Second Quarter 4.50 1.76
Third Quarter 1.85 0.16
Fourth Quarter 0.24 0.11
------------------------------------ ------------------------------ ---------------------------
2002 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $0.41 $0.14
Second Quarter 0.17 0.05
Third Quarter 0.10 0.02
Fourth Quarter 0.05 0.01
------------------------------------ ------------------------------ ---------------------------
2003 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $0.06 $0.01
Second Quarter 0.04 0.01
Third Quarter 0.29 0.01
Fourth Quarter 0.23 0.10
(b) Holders. As of December12, 2003, NeoMedia had approximately 3,500
recordholders of common stock.
(c) Dividends. The Company has not declared or paid any dividends on
its common stock during the years ended December 31, 2003 or 2002. The Company
will base any issuance of dividends upon its earnings, financial condition,
capital requirements and other factors considered important by its board of
directors. Delaware law and the Company's certificate of incorporation do not
require the board of directors to declare dividends on the Company's common
stock. The Company expects to retain all earnings, if any, generated by its
operations for the development and growth of its business and does not
anticipate paying any dividends to its stockholders for the foreseeable future.
(d) Recent Issuances of Unregistered Securities.
On February 6, 2004, the Company issued 7,000,000 shares of common stock to
CSI International, Inc. shareholders in connection with NeoMedia's purchase of
CSI. The closing market price on the date of issuance was $0.10.
On October 31, 2003, the Company entered into an agreement to issue
8,000,000 shares of stock to International Digital Scientific, Inc., as payment
of all past and future amounts owed under a note payable from 1994. The shares
were valued at $0.113. The market price at the time of the agreement was $0.113.
26
On October 23, 2003, the Company entered into an agreement to issue
3,000,000 shares of stock to Orsus Solutions, USA, Inc., an unrelated vendor, as
payment of past due liabilities of $331,000. The shares were valued at $0.107.
The market price at the time of the agreement was $0.107.
On October 28, 2003, the Company issued 95,238 shares of stock to Newbridge
Securities Corporation, an unrelated advisor, for services relating to the
Standby Equity Distribution Agreement. The shares were valued at $0.105, the
market price on the date of issuance.
On October 27, 2003, the Company issued 7,279 shares of stock to one
unrelated vendor as payment of past due liabilities of $1,000. The shares were
valued at $0.105, the market price on the date of issuance.
On October 27, 2003, the Company issued to Cornell Capital Partners, LP,
10,000,000 warrants to purchase shares of its common stock at an exercise price
of $0.05 per share. The warrants were issued as a one-time commitment fee
relating to the Standby Equity Distribution Agreement between Cornell and
NeoMedia.
On October 3, 2003, the Company finalized its purchase of Secure Source
Technologies, Inc. for 3,500,000 shares of stock. The shares were valued at
$0.14, the market price on the date of closing.
On October 20, 2003, the Company issued 66,841 shares of stock to one
unrelated vendor as payment of past due liabilities of $10,000. The shares were
valued at $0.10. The market price on the date of the agreement was $0.10.
On October 7, 2003, the Company issued 103,907 shares of stock to one
unrelated vendor as payment of past due liabilities of $16,000. The shares were
valued at $0.13. The market price on the date of the agreement was $0.13.
On October 6, 2003, the Company issued 37,743 shares of stock to one
unrelated vendor as payment of past due liabilities of $5,000. The shares were
valued at $0.14. The market price on the date of issuance was $0.16.
On September 25, 2003, the Company issued 875,855 shares of stock to an
unrelated vendor as payment of past due liabilities totaling $34,000. The shares
were valued at $0.23 based on the market price on the grant date. The market
price on the date of issuance was $0.20.
On August 26, 2003, the Company issued 1,600,000 shares of stock to a
former employee as payment of past due incentive compensation in the amount of
$29,000. The shares were valued at $0.02. The market price on the date of
issuance was $0.02.
On August 26, 2003, the Company entered into an agreement to issue 450,000
shares of stock an unrelated vendor as payment of past due liabilities totaling
$9,000. The shares were valued at $0.02. The market price on the date of the
agreement was $0.02.
On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of
its outside directors. This amount was added to the principal of a $10,000 note
payable to Mr. Fritz that matures in April 2004, with all other terms of the
note remaining the same. As consideration for the loan, the Company granted Mr.
Fritz 2,500,000 warrants to purchase shares of the Company's common stock at an
exercise price of $0.01 per share.
On April 21, 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. In
connection with the sale, the Company also granted the purchaser 25,000,000
27
warrants to purchase shares of its common stock at an exercise price of $0.01
per share. The warrants had a fair value of $298,000 and have been recorded as a
cost of issuance. The purchaser was William E. Fritz, a member of the Company's
Board of Directors. Proceeds to us from sale of the shares were $250,000. The
Company recognized a discount expense in general and administrative expenses of
approximately $50,000 relating to this transaction with Mr. Fritz. On August 6,
2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional
shares of common stock at a price of $0.01 per share.
On April 17, 2003, the Company's Board of Directors approved the
payment in full of approximately $154,000 of liabilities owed by us to Charles
W. Fritz, its Founder and Chairman of the Board of Directors, through the
issuance of 15,445,967 shares of common stock. The shares were valued at $0.01.
The market price on the date of issuance was $0.011. The Company recognized an
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.
During November 2002, the Company issued Convertible Secured Promissory
Notes with an aggregate face value of $60,000 to 3 separate parties, including
Charles W. Fritz, Chairman of the Board of Directors of NeoMedia; William E.
Fritz, an outside director; and James J. Keil, an outside director. In
connection with the notes, the Company granted to the holders an additional
1,355,670 shares of its common stock and 60,000 warrants to purchase shares of
its common stock at $0.03 per share, with a term of three years. The warrants
and shares were issued in January 2003.
In August 2002, the Company issued 900,000 shares of common stock to 2150
Western Court L.L.C, the landlord of its Lisle, Illinois sales office, as
settlement of a lawsuit relating to past-due and future building rents. The
shares were valued at $0.03 per share, the market price at the date of issuance.
In June 2002, the Company issued 10,000 shares of common stock to an
unrelated vendor as an interest payment on past-due accounts payable. The shares
were valued at $0.09. The market price on the date of issuance was $0.09.
In February 2002, the Company issued 19,000,000 shares of its common stock
at a price of $0.17 per share to five individuals and two institutional
unrelated parties. The shares were issued in exchange for limited recourse
promissory notes maturing at the earlier of i.) 90 days from the date of
issuance, or ii.) 30 days from the date of registration of the shares. The gross
proceeds of such transaction will be approximately $3,040,000 upon maturity of
the notes, as a purchase price of $0.01 per share, or $190,000 in aggregate, was
paid in cash. During August 2002, the notes matured without payment, and the
Company subsequently cancelled the 19 million shares issued in connection with
such notes. The Company accrued a liability in the third quarter of 2001 of
$190,000 relating to the par value paid in connection with the issuance of the
shares, and such amount remained unpaid as of December 31, 2003.
In February 2002, the Company issued 500,000 warrants to a provider of
commercial financing services, in exchange for interest due to the provider on
past due amounts under a credit agreement.
In January 2002, the Company issued 452,489 shares of common stock to
About.com, Inc. The shares were issued upon conversion of 452,489 shares of
Series A Convertible Preferred Stock issued to About.com, Inc. as payment for
advertising expenses incurred during 2001. The market price on the date of
issuance was $0.15. This issuance was made pursuant to Section 3(a)(9) of the
Act.
In January 2002, the Company issued 55,000 shares of common stock at a
price of $0.13 per share to an individual unrelated party. The market price on
the date of issuance was $0.14. Cash proceeds to NeoMedia were $7,150.
28
In January 2002, the Company issued 1,614,501 shares of common stock to an
unrelated vendor as settlement of past-due accounts payable and future payments
under equipment lease agreements. The shares were valued at $0.17. The market
price on the date of issuance was $0.17.
In January 2002, the Company issued 32,486 shares of common stock to an
unrelated vendor as settlement of past-due accounts payable in the amount of
$5,000. The shares were valued at $0.15. The market price on the date of
issuance was $0.17.
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act and/or Rule 506, which cover "transactions by an issuer not
involving any public offering," to issue securities discussed above without
registration under the Securities Act of 1933. The certificates representing the
securities issued displayed a restrictive legend to prevent transfer except in
compliance with applicable laws, and the Company's transfer agent was instructed
not to permit transfers unless directed to do so by us, after approval by the
Company's legal counsel. The Company believes that the investors to whom
securities were issued had such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
prospective investment. The Company also believes that the investors had access
to the same type of information as would be contained in a registration
statement.
29
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Over the past several years, NeoMedia's focus has been aimed toward the
intellectual property commercialization unit of its Internet Switching Systems
(NISS, formerly NAS) business. NISS consists of the patented PaperClickTM
technology that enables users to link directly from the physical to the digital
world, as well as the patents surrounding certain physical-world-to-web linking
processes. NeoMedia's mission is to invent, develop, and commercialize
technologies and products that effectively leverage the integration of the
physical and electronic to provide clear functional value for NeoMedia's
end-users, competitive advantage for their business partners and
return-on-investment for their investors. To this end, NeoMedia has signed four
intellectual property licenses since its inception, and also recently acquired
additional patents as part of NeoMedia's acquisition of Secure Source
Technologies, Inc. On September 8, 2003, NeoMedia announced its PaperClick for
Camera Cell PhonesTM product, which reads and decodes UPC/EAN or other bar codes
to link users to the Internet, providing information and enabling e-commerce on
a compatible camera cell phone, such as the Nokia 3650 model. On October 30,
2003, NeoMedia unveiled its go-to-market strategy for the product. During 2003,
NeoMedia signed contracts with several key partners outlined in the strategy,
including agents Big Gig Strategies and SRP Consulting, and European advertising
agency 12Snap. The Company has also entered into letters of intent with global
brand communication company Seven Worldwide, and markting organizations iCoupon
and Digital Rum.
Loch Energy, Inc.
During the first quarter of 2003, NeoMedia announced that it had reached an
agreement in principle to acquire and merge with Loch Energy, Inc., an oil and
gas provider based in Humble, Texas. On October 1, 2003, NeoMedia discovered
that the royalty interest from future sales of oil owned by Loch were oversold,
which would likely result in materially lower projected available cashflow from
Loch's operations. This projected available cashflow was the basis for the
acquisition. On October 2, 2003, NeoMedia's Board of Directors voted to
terminate the acquisition and merger proceedings.
SEC Inquiry
NeoMedia recently received requests from the SEC's Southeast Regional
Office for certain documents including those concerning negotiations and
arrangements with certain strategic partners and consultants, patents, recent
issuances of securities, investor relations, and the stock ownership by
NeoMedia's officers and directors. NeoMedia responded promptly and fully and
will cooperate with any further requests. The SEC's letter states that the
staff's inquiry is informal and should not be construed as an indication of any
violation of law or as a reflection on any person, entity, or security.
Acquisitions
CSI International, Inc. On February 6, 2004, NeoMedia acquired CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia paid 7,000,000 shares of
its common stock, plus $2.5 million cash in exchange for all outstanding shares
of CSI. NeoMedia has centralized the administrative functions in its Ft. Myers,
Florida headquarters, and maintains the sales and operations office in Calgary,
Alberta, Canada.
BSD Software, Inc. On December 9, 2003, NeoMedia signed a non-binding
letter of intent to acquire Triton Global Business Services Inc. and its parent
company, BSD Software Inc. (Pink Sheets: BSDS), both of Calgary, Alberta,
Canada. The LOI outlined terms, including an exchange of one share of NeoMedia
common stock for each share of BSD Software, not to exceed 40 million shares.
The transaction is dependent on due diligence by both companies, approval by
NeoMedia's Board of Directors, BSD Software's Board of Directors, shareholders,
required regulatory approvals, and other conditions. Triton, formed in 1998 and
acquired by BSD in 2002, is an Internet Protocol-enabled provider of live and
automated operator calling services, e-business support, billing and
clearinghouse functions and information management services to
telecommunications, Internet and e-business service providers.
30
NeoMedia's 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 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, 2003 as Compared to the
Year Ended December 31, 2002
Net sales. Total net sales for the year ended December 31, 2003 were
$2,400,000, which represented a $6,999,000, or 74%, decrease from $9,399,000 for
the year ended December 31, 2002. This decrease primarily resulted from reduced
resales of Sun Microsystems equipment due to increased competition and general
economic conditions. NeoMedia intends to continue to pursue additional resales
of equipment, software and services. NeoMedia expects resales to more closely
resemble the results for the year ended December 31, 2003, rather than the year
ended December 31, 2002. With the acquisition of CSI, the Company expects sales
in 2004 from this new segment of business to be substantially higher than in
2003.
License fees. License fees were $414,000 for the year ended December 31,
2003, compared with $446,000 for the year ended December 31, 2002, a decrease of
$32,000, or 7%. The decrease was due to slightly lower sales of internally
developed software licenses in 2003. NeoMedia will continue to attempt to
increase sales of these high-margin products, and expects license fees to remain
materially constant over the next 12 months.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $6,967,000, or
78%, to $1,986,000 for the year ended December 31, 2003, as compared to
$8,953,000 for the year ended December 31, 2002. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the year ended December 31,
2003, rather than the year ended December 31, 2002.
Cost of Sales. Cost of license fees was $300,000 for the year ended
December 31, 2003, a decrease of $541,000, or 64%, compared with $841,000 for
the year ended December 31, 2002. The decrease resulted from reduced
amortization expense in 2003 of capitalized development costs relating to the
PaperClick, MLM/Affinity, and Qode products that were written off during 2002.
Cost of resales was $1,829,000 for the year ended December 31, 2003, a decrease
of $5,594,000, or 75%, compared with $7,423,000 for the year ended December 31,
2002. The decrease resulted from decreased resales in 2003 compared with 2002.
Cost of resales as a percentage of related resales was 92% in 2003, compared to
83% in 2002. This increase is due to an increased sales mix of lower-margin
equipment products sold in 2003 compared to 2002, combined with the general
erosion of margins in the resale sector. NeoMedia expects costs of resales to
fluctuate with the sales of its equipment, software, and services over the next
12 months. With the acquisition of CSI, the Company expects cost of sales in
2004 from this new segment of business to be substantially higher than in 2003.
31
Gross Profit. Gross profit was $271,000 for the year ended December 31,
2003, a decrease of $864,000, or 76%, compared with gross profit of $1,135,000
for the year ended December 31, 2002. This decrease was primarily the result of
lower resales of, and lower margin on, computer equipment, software, and
services in 2003 relative to 2002.
Sales and marketing. Sales and marketing expenses were $523,000 for the
year ended December 31, 2003, compared to $1,009,000 for the year ended December
31, 2002, a decrease of $486,000 or 48%. This decrease resulted primarily from
reduced sales commissions earned on lower sales in 2003 as compared with 2002,
as well as a smaller sales force during 2003. NeoMedia expects sales and
marketing expense to increase over the next 12 months with the acquisition of
CSI International and the potential acquisition of BSD Software, as well as with
the continued development and potential rollout of the Company's PaperClick
product suite.
General and administrative. General and administrative expenses increased
by $202,000, or 5%, to $4,270,000 for the year ended December 31, 2003, compared
to $4,068,000 for the year ended December 31, 2002. The increase resulted
primarily from non-cash expenses relating to NeoMedia's option repricing
program, expense for stock options issued with exercise prices below market
price, and stock-based professional service expense. NeoMedia expects general
and administrative expense to increase over the next 12 months with the
acquisition of CSI International and the potential acquisition of BSD Software.
Research and development. During the year ended December 31, 2003, NeoMedia
charged to expense $332,000 of research and development costs, a decrease of
$443,000 or 57% compared to $775,000 charged to expense for the year ended
December 31, 2002. The decrease is primarily due to a continued reduction in
research and development overhead since first quarter 2002. NeoMedia expects
research and development costs to increase slightly over the next 12 months with
the continued development and potential rollout of the Company's PaperClick
product suite.
Loss on Impairment of Assets. During the year ended December 31, 2002,
NeoMedia recognized a loss on impairment of assets of $1,003,000 for the
write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. NeoMedia did not take an impairment charge
during the year ended December 31, 2003.
Loss on extinguishment of debt. During the year ended December 31, 2003,
NeoMedia recognized a loss on extinguishment of debt of $152,000, resulting
primarily from the payment of debt through the issuance of shares of common
stock.
Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense increased
by $198,000, or 111%, to $376,000 for the year ended December 31, 2003 from
$178,000 for the year ended December 31, 2002, due to interest expense incurred
during 2003 associated with notes payable, lawsuits, and past due trade accounts
payable.
Loss on disposal of discontinued operations. During the year ended December
31, 2002, NeoMedia recognized a loss on disposal of discontinued business unit
of $1,523,000 to write off the remaining Qode-related assets. No disposal loss
was recognized during the year ended December 31, 2003.
Net Loss. The net loss for the year ended December 31, 2003 was $5,382,000,
which represented a $2,039,000, or 27% decrease from a $7,421,000 loss for the
year ended December 31, 2002. The decrease resulted primarily from an impairment
charge of $1,003,000 relating to NeoMedia's PaperClick assets and a loss on
disposal of NeoMedia's Qode business unit of $1,523,000 in 2002. The decrease
was offset by higher non-cash expenses in 2003 relating to NeoMedia's option
repricing program, expense for stock options issued with exercise prices below
market price, and stock-based professional service expense, as well as lower
sales and gross profit in 2003 compared to 2002.
32
Liquidity and Capital Resources
As of December 31, 2003, NeoMedia's cash balance was $61,000, compared to
$70,000 at December 31, 2002.
Net cash used in operating activities was approximately $3,191,000 for the
year ended December 31, 2003, compared with $535,000 for the year ended December
31, 2002. NeoMedia's net cash flow used in investing activities for the years
ended December 31, 2003 and 2002, was $69,000 and $21,000, respectively. Net
cash provided by financing activities for the years ended December 31, 2003 and
2002 was $3,251,000 and $492,000, respectively.
During the years ended December 31, 2003 and 2002, NeoMedia's net loss
totaled $5,382,000 and $7,421,000, respectively. As of December 31, 2003,
NeoMedia had accumulated losses from operations of $76,147,000, had a working
capital deficit of $6,526,000, and $61,000 in cash balances.
The accompanying consolidated financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from NeoMedia's inability to continue as a going concern. NeoMedia may
obtain up to $20 million over the next two years through its Standby Equity
Distribution Agreement with Cornell Capital Partners LP. As of January 30, 2004,
NeoMedia had obtained approximately $3.6 million under its previous $10 million
Equity Line of Credit Agreement with Cornell, and an additional $4.0 million
promissory note, which is scheduled to be repaid from the proceeds of sale of
common stock under the current $20 million Standby Equity Distribution Agreement
with Cornell. NeoMedia also issued 40 million warrants with an exercise price of
$0.05 per share to Cornell in connection with this financing. NeoMedia is also
entitled to receive an additional $1.0 million from Cornell in the form of a
promissory note within 15 days of filing a registration statement to register
the warrants. Once the warrants are registered, and if the average closing bid
price of NeoMedia's common stock for any five day period exceeds $0.10, NeoMedia
can force Cornell to exercise the warrants, resulting in an additional $2.0
million cash to NeoMedia. Management believes that it has sufficient funding to
sustain operations through December 31, 2004, however, there can be no
assurances that the market for NeoMedia's stock will support the sale of
sufficient shares of NeoMedia's common stock to raise sufficient capital to
sustain operations for such a period, or that actual revenue will meet
management's expectations. If necessary funds are not available, NeoMedia's
business and operations would be materially adversely affected and in such
event, NeoMedia would attempt to reduce costs and adjust its business plan.
33
Contractual Obligations
The following table presents the Company's contractual obligations as of
December 31, 2003 over the next five years and thereafter:
Payments by Period
(in thousands)
--------------------------------------------------------------------------------------------------------
Less
Than 1-3 4-5 After 5
Amount 1 Year Years Years Years
---------- --------- ---------- ----------- -----------
Legal Settlements $249 $249 $--- $--- $---
Vendor Settlements & Agreements 841 760 81 --- ---
Operating Leases 30 30 --- --- ---
Short Term Debt 732 732 --- --- ---
---------- --------- ---------- ----------- -----------
Total Contractual Cash Obligations $1,852 $1,771 $81 $--- $---
========== ========= ========== =========== ===========
Intangible Assets
At the end of each quarter, or upon occurrence of material events
relating to a specific intangible item, NeoMedia performs impairment tests on
each of its intangible assets, which include goodwill, capitalized patent costs,
and capitalized and purchased software costs. In doing so, NeoMedia evaluates
the carrying value of each intangible asset with respect to several factors,
including historical revenue generated from each intangible asset, application
of the assets in NeoMedia's current business plan, and projected discounted cash
flow to be derived from the asset. Intangible asset balances are then adjusted
to their current net realizable value based on these criteria if impaired. The
Company received an independent valuation of its patent portfolio as of December
31, 2003. The independent valuation concluded that no impairment was necessary
as of December 31, 2003. No impairment charges were taken during the year ended
December 31, 2003. During the year ended December 31, 2002, NeoMedia recognized
an impairment charge of $1.0 million relating to its PaperClick software
product.
Financing Agreements
As of December 31, 2003 and 2002, NeoMedia was party to a commercial
financing agreement with GE Access that provides short-term financing for
certain computer hardware and software purchases. This arrangement allows
NeoMedia to re-sell high-dollar technology equipment and software without
committing cash resources to financing the purchase. NeoMedia and GE Access are
currently operating under an additional arrangement under which GE Access
retains 50% of NeoMedia's proceeds from sales financed by GE Access, and applies
the portion of proceeds toward past due balances. This arrangement reduces by
half NeoMedia's cash flow from resales of equipment and software financed by GE
Access, until the balance owed to GE Access is paid in full. During October
2003, NeoMedia and GE entered into an additional agreement under which NeoMedia
also makes regular payment against its past due balances. Termination of this
financing relationship with GE Access could materially adversely affect
NeoMedia's financial condition. Management expects the agreement to remain in
place in the near future. As of December 31, 2003, the amount payable under this
financing arrangement was approximately $196,000.
Note Payable to Cornell Capital Partners
On September 11, 2003, the Company received funding in the form of a
promissory note from Cornell Capital Partners in the gross amount of $500,000
before Cornell discounts and fees. As of December 31, 2003, the Company had not
made any payment against the principal of this note. Accordingly, the company
has recorded the advance balance of $500,000 in "Notes Payable" on its
consolidated balance sheet as of December 31, 2003. The original maturity date
of this note is October 26, 2003. During January 2004, the Company reduced the
balance to approximately $337,000.
34
Going Concern
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Through December
31, 2003, NeoMedia has not been able to generate sufficient revenues from its
operations to cover its costs and operating expenses. Although NeoMedia has been
able to issue its common stock or other financing for a significant portion of
its expenses, it is not known whether NeoMedia will be able to continue this
practice, or if revenue will increase significantly to be able to meet cash
operating expenses. This, in turn, raises substantial doubt about NeoMedia's
ability to continue as a going concern. Management believes that NeoMedia will
be able to raise additional funds through its $20 million Standby Equity
Distribution Agreement with Cornell. However, there can be no assurances that
the market for NeoMedia's stock will support the sale of sufficient shares of
stock to raise enough capital to sustain operations. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Based on current cash balances and operating budgets, NeoMedia believes it
only has sufficient financing to last until December 31, 2004. If NeoMedia's
financial resources are insufficient, it may be forced to seek protection from
its creditors under the United States Bankruptcy Code or analogous state
statutes unless it is able to engage in a merger or other corporate finance
transaction with a better capitalized entity. NeoMedia cannot predict whether
additional financing will be available, its form, whether equity or debt, or be
in another form, or if it will be successful in identifying entities with which
it may consummate a merger or other corporate finance transactions.
Critical Accounting Policies
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, NeoMedia's most
critical accounting policies include: inventory valuation, which affects cost of
sales and gross margin; and the valuation of intangibles, which affects
amortization and write-offs of goodwill and other intangibles. NeoMedia also has
other key accounting policies, such as policies for revenue recognition,
including the deferral of a portion of revenues on sales to distributors, and
allowance for bad debt. The methods, estimates and judgments NeoMedia uses in
applying these most critical accounting policies have a significant impact on
the results NeoMedia reports in its consolidated financial statements.
Intangible Asset Valuation. The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets especially requires the exercise of judgment.
While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, NeoMedia primarily uses the
weighted-average probability method outlined in SFAS 144. This method requires
significant management judgment to forecast the future operating results used in
the analysis. In addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect NeoMedia's net operating
results.
35
Allowance for Bad Debt. NeoMedia maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of NeoMedia's
customers to make required payments. NeoMedia's allowance for doubtful accounts
is based on NeoMedia's assessment of the collectibility of specific customer
accounts, the aging of accounts receivable, NeoMedia's history of bad debts, and
the general condition of the industry. If a major customer's credit worthiness
deteriorates, or NeoMedia's customers' actual defaults exceed NeoMedia's
historical experience, NeoMedia's estimates could change and impact NeoMedia's
reported results.
Stock-based Compensation. NeoMedia records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
NeoMedia does not record expense relating to stock options granted to employees
with an exercise price greater than or equal to market price at the time of
grant. NeoMedia reports pro-forma net loss and loss per share in accordance with
the requirements of SFAS 123 and 148. This disclosure shows net loss and loss
per share as if NeoMedia had accounted for its employee stock options under the
fair value method of those statements. Pro-forma information is calculated using
the Black-Scholes pricing method at the date of grant. This option valuation
model requires input of highly subjective assumptions. Because NeoMedia's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of fair value of
its employee stock options.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see "Legal Proceedings").
NeoMedia accrues liabilities relating to these lawsuits on a case-by-case basis.
NeoMedia generally accrues attorney fees and interest in addition to the
liability being sought. Liabilities are adjusted on a regular basis as new
information becomes available. NeoMedia consults with its attorneys to determine
the viability of an expected outcome. The actual amount paid to settle a case
could differ materially from the amount accrued.
Revenue Recognition. The Company derives revenues from two primary
sources: (1) license revenues and (2) resale of software and technology
equipment and service fee revenues.
License fees, including Intellectual Property license, represent
revenue from the licensing of NeoMedia's proprietary software tools and
applications products. NeoMedia licenses its development tools and application
products pursuant to non-exclusive and non-transferable license agreements.
Resales of software and technology equipment represent revenue from the resale
of purchased third party hardware and software products and from consulting,
education, maintenance and post contract customer support services.
The basis for license fee revenue recognition is substantially governed
by American Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended. License
revenue is recognized if persuasive evidence of an agreement exists, delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.
Revenue for resale of software and technology equipment and service fee
is recognized based on guidance provided in Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," as amended (SAB 101). Software and technology equipment resale
revenue is recognized when all of the components necessary to run software or
hardware have been shipped. Service revenues include maintenance fees for
providing system updates for software products, user documentation and technical
support and are recognized over the life of the contract. Software license
revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed. The Company uses stand-alone pricing to determine an
element's vendor specific objective evidence (VSOE) in order to allocate an
arrangement fee amongst various pieces of a multi-element contract. NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer basis
as appropriate.
36
Disposal of Qode Business Unit
On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its Ft. Lauderdale-based Qode business unit,
which it acquired in March 2001, to The Finx Group, Inc., a holding company
based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode payables
and $800,000 in long-term leases in exchange for 500,000 shares of the Finx
Group, right to use and sell Qode services, and up to $5 million in affiliate
revenues over the next five years. During the third and fourth quarters of 2001
and the first quarter of 2002, NeoMedia recorded a $2.6 million expense from the
write-down of the Qode assets/liabilities to net realizable value.
The loss for discontinued operations during the phase-out period from
August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No
further loss is anticipated.
During June 2002, the Finx Group notified NeoMedia that it did not intend
to carry out the letter of intent due to capital constraints. As a result,
during the year ended December 31, 2002, the Company recorded an additional
expense of $1.5 million for the write-off of remaining Qode assets. As of
December 31, 2003, NeoMedia had approximately $657,000 of liabilities relating
to the Qode system on its books.
Impairment of PaperClick Asset
During the year ended December 31, 2002, NeoMedia recognized an impairment
charge of approximately $1.0 million relating to its PaperClick
physical-world-to-internet software solution.
Effect Of Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria was based on control through voting interest. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
During October 2003, the FASB issued Staff Position No. FIN 46, deferring
the effective date for applying the provisions of FIN 46 until the end of the
first interim or annual period ending after December 31, 2003 if the variable
interest was created prior to February 1, 2003 and the public entity has not
issued financial statements reporting that variable interest entity in
accordance with FIN 46.
37
On December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised
December 2003), "Consolidation of Variable Interest Entities," (FIN-46R)
primarily to clarify the required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46 that was issued in January 2003. FIN-46R
exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. While FIN-46R modifies or clarifies various provisions of FIN-46, it
also incorporates many FASB Staff Positions previously issued by the FASB. The
Company has deferred the adoption of FIN 46 with respect to VIEs created prior
to February 1, 2003. Management is currently assessing the impact, if any, FIN
46 may have on the Company; however, management does not believe there will be
any material impact to the Company's financial position, results of operations
or liquidity resulting from the adoption of this interpretation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting of derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, except for certain
hedging relationships designated after June 30, 2003. The adoption of this
Statement is not expected to have a material impact on the Company's financial
position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that issuers classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). With certain exceptions,
this Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this Statement is
not expected to have a material impact on the Company's financial position,
results of operations, or cash flows.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 132 (Revised 2003) "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This standard replaces FAS-132 of the same
title which was previously issued in February 1998. The revised FAS-132 was
issued in response to concerns expressed by financial statement users about
their need for more transparency of pension information. The revised standard
increases the existing GAAP disclosures for defined benefit pension plans and
other defined benefit postretirement plans. However, it does not change the
measurement or recognition of those plans as required under: FAS-87, "Employers'
Accounting for Pensions"; FAS-88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"; and
FAS-106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Specifically, the revised standard requires companies to provide
additional disclosures about pension plan assets, benefit obligations, cash
flows, and benefit costs of defined benefit pension plans and other defined
benefit postretirement plans. Also, for the first time, companies are required
to provide a breakdown of plan assets by category, such as debt, equity and real
estate, and to provide certain expected rates of return and target allocation
percentages for these asset categories. The revised FAS-132 is effective for
financial statements with fiscal years ending after December 15, 2003 and for
interim periods beginning after December 15, 2003. The adoption of this
Statement is not expected to have a material impact on the Company's financial
position, results of operations, or cash flows.
38
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
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. NeoMedia's chief executive
officer and chief financial officer, after evaluating the effectiveness of
NeoMedia's "disclosure controls and procedures" (as defined in Sections
13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period
reported in this annual report (the "Evaluation Date"), concluded that
NeoMedia's disclosure controls and procedures were effective and designed to
ensure that material information relating to NeoMedia and its consolidated
subsidiaries is accumulated and would be made known to them by others within
those entities as appropriate to allow timely decisions regarding required
disclosures.
Changes in Internal Controls. NeoMedia does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in NeoMedia's
internal controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date, NeoMedia's senior management, in
conjunction with its Board of Directors, continuously reviews overall company
policies and improves documentation of important financial reporting and
internal control matters. NeoMedia is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
Limitations on the Effectiveness of Controls. NeoMedia's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that
its disclosure or internal controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Neomedia Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Neomedia
Technolgies, Inc. (a Delaware Corporation) and subsidiaries as of December 31,
2003, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Neomedia
Technologies, Inc. as of December 31, 2003, and the results of its operations
and its cash flows for the years ended December 31, 2003 and 2002 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's significant operating
losses, working capital deficit, and current cash flow position raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters also are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
February 27, 2004
40
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
2003
--------
ASSETS
Current assets:
Cash and cash equivalents $ 61
Trade accounts receivable, net of allowance for doubtful accounts
of $49 133
Inventories, net of allowance for obsolete & slow-moving
inventory of $143 3
Prepaid expenses and other current assets 356
--------
Total current assets 553
Property and equipment, net 61
Capitalized patents, net 2,415
Capitalized and purchased software costs, net 118
Other long-term assets 729
--------
Total assets $ 3,876
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,327
Amounts due under financing agreements 196
Amounts payable under settlement agreements 772
Liabilities of discontinued business unit 657
Sales taxes payable 137
Accrued expenses 1,743
Deferred revenues and other 515
Notes payable 732
--------
Total current liabilities 7,079
Commitments and contingencies --
Shareholders' deficit:
Preferred stock, $0.01 par value, 25,000,000 shares authorized,
none issued and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares authorized,
247,041,675 shares issued and 243,991,257 outstanding 2,440
Additional paid-in capital 71,565
Deferred stock-based compensation (282)
Accumulated deficit (76,147)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' deficit (3,203)
--------
Total liabilities and shareholders' deficit $ 3,876
========
The accompanying notes form an integral part of these consolidated
financial statements.
F-2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
------------------------------
2003 2002
------------- -------------
NET SALES:
License fees $ 414 $ 446
Resale of software and technology equipment and service fees 1,986 8,953
------------- -------------
Total net sales 2,400 9,399
------------- -------------
COST OF SALES:
License fees 300 841
Resale of software and technology equipment and service fees 1,829 7,423
------------- -------------
Total cost of sales 2,129 8,264
------------- -------------
GROSS PROFIT 271 1,135
Sales and marketing expenses 523 1,009
General and administrative expenses 4,270 4,068
Research and development costs 332 775
Loss on impairment of assets -- 1,003
------------- -------------
Loss from operations (4,854) (5,720)
Loss on extinguishment of debt, net (152) --
Interest expense, net (376) (178)
------------- -------------
Loss from continuing operations (5,382) (5,898)
Loss on disposal of discontinued business unit (Note 12) -- (1,523)
------------- -------------
NET LOSS $ (5,382) $ (7,421)
============= =============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS--BASIC AND DILUTED $ (0.04) $ (0.26)
============= =============
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS--BASIC AND DILUTED $ -- $ (0.07)
============= =============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.04) $ (0.33)
============= =============
Weighted average number of common shares--basic and diluted 125,029,723 22,330,485
============= =============
The accompanying notes form an integral part of these consolidated
financial statements.
F-3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($5,382) ($7,421)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 470 1,061
Inventory reserve 13 130
Provision for doubtful accounts and notes receivable 191 --
Loss on disposal of discontinued business unit -- 1,523
Loss on impairment of assets -- 1,003
Expense associated with option and warrant repricing 773 195
Fair value of expense portion of stock-based
compensation granted for professional services 1,000 685
Interest expense allocated to debt 56 23
Discount related to common stock issuance 50 --
(Gain) loss on payment of accounts payable in stock 152 --
(Increase)/decrease in value of life insurance policies (35) 63
Changes in operating assets and liabilities
Trade accounts receivable, net 212 2,299
Inventory (3) --
Other current assets 273 346
Accounts payable, amounts due under financing agreements, amounts due
under Settlement agreements, liabilities in excess of assets of
discontinued business unit, accrued expenses and stock liability (383) (584)
Deferred revenue other current liabilities (366) 142
------- -------
Net cash used in operating activities (2,979) (535)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Amounts issued under notes receivable (209) --
Capitalization of software development and purchased intangible assets (28) (21)
Acquisition of property and equipment (44) --
------- -------
Net cash used in investing activities (281) (21)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $226 250 8
Net proceeds from exercise of stock warrants 250 45
Net proceeds from exercise of stock options 156 274
Borrowings under notes payable and long-term debt 3,350 165
Repayments on notes payable and long-term debt (755) --
------- -------
Net cash provided by financing activities 3,251 492
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS (9) (64)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 70 134
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 61 $ 70
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year $ 6 $ 15
Income taxes paid -- --
Non-cash investing and financing activities:
Value of stock granted to acquire Secure Source Technologies, Inc. 500 --
Fair value of warrants issued as a direct incremental cost of financing 93 --
Reduction in accounts payable and accruals for debt paid in stock 1,509 --
Reduction of long-term debt paid and accrued interest with stock 904 --
Fair value of stock compensation deferred to future periods 282 --
Discount recognized on the issuance of stock with notes payable 56 --
Cancellation of common stock issued in 2001 to offset stock
subscription receivable -- (240)
Shares issued in accordance with Equity Line of Credit to repay Notes
Payable, net of issuance costs of $6,772 2,793 --
Net effect of issuance and subsequent
cancellation of common stock underlying notes receivable -- (190)
The accompanying notes form an integral part of these consolidated
financial statements.
F-4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Common Stock
-----------------------------------------------
Additional Stock Deferred
Paid-in Subscription Stock
Shares Amount Capital Receivable Compensation
-------------- -------------- --------------- --------------- ----------------------
BALANCE, DECEMBER 31, 2001 18,804,917 $188 $63,029 (240) 0
Exercise of employee options 5,252,455 52 222 - -
Issuance of Common Stock through private
Placement, Net of $0 of issuance costs (2,945,000) (29) (203) - -
Expense associated with warrant repricing - - 195 - -
Fair value stock issued for professional
services rendered 4,900,000 49 915 - -
Exercise of Warrants 369,450 4 41 - -
Stock issued to pay liabilities 2,556,987 24 319 - -
Conversion of preferred stock to common
stock 452,489 5 878 - -
Issuance of warrants and stock with
convertible debt 1,355,670 14 46 - -
Stock Subscription Receivable - - - 240 -
Change in Deferred Stock Compensation - - - - (231)
Net Loss - - - - -
-------------- -------------- --------------- --------------- ----------------------
BALANCE, DECEMBER 31, 2002 30,746,968 $307 $65,442 0 (231)
Shares issued to Cornell Capital Partners 98,933,244 $990 $8,575
under Equity Line of Credit (Gross) - -
Fees & discounts associated with Shares
issued to Cornell Capital Partners under
Equity Line of Credit - (6,772) - -
Issuance of Common Stock through private
Placement, 25,000,000 250 50 - -
Exercise of employee options 15,599,175 156 - - -
Exercise of Warrants 28,904,900 289 (39) - -
Expense associated with option & warrant
repricing - - 773 - -
Fair value of stock, options, & warrants
issued for professional services rendered 4,030,424 40 385 - -
Stock issued to pay past due liabilities 37,276,546 373 2,040 - -
Issuance of shares to purchase Secure
Source Technologies, Inc. 3,500,000 35 465 - -
Issuance of warrants and stock with debt - - 19 - -
Expense recognized for options issued
with exercise price below market price - - 627 -
Change in Deferred Stock Compensation - - - - (51)
Net Loss - - - - -
-------------- -------------- --------------- --------------- ----------------------
BALANCE, DECEMBER 31, 2003 243,991,257 $2,440 $71,565 - (282)
-------------- -------------- --------------- --------------- ----------------------
Preferred Stock Treasury Stock
------------------------------------------------- -----------------------
Additional Total
Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------------ -------- --------- -------------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2001 452,489 $5 $878 ($63,344) 201,230 ($779) ($263)
Exercise of employee options - - - - - - 274
Issuance of Common Stock through private
Placement, Net of $0 of issuance costs - - - - - - (232)
Expense associated with warrant repricing - - - - - - 195
Fair value stock issued for professional
services rendered - - - - - - 964
Exercise of Warrants - - - - - - 45
Stock issued to pay liabilities - - - - - - 343
Conversion of preferred stock to common
stock (452,489) (5) (878) - - - -
Issuance of warrants and stock with
convertible debt - - - - - - 60
Stock Subscription Receivable - - - - - - 240
Change in Deferred Stock Compensation - - - - - - (231)
Net Loss - - - (7,421) - - (7,421)
------------ -------- --------- -------------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2002 0 $0 $0 ($70,765) 201,230 ($779) ($6,026)
Shares issued to Cornell Capital Partners 9,565
under Equity Line of Credit (Gross) - - - - - -
Fees & discounts associated with Shares
issued to Cornell Capital Partners under
Equity Line of Credit - - - - - - (6,772)
Issuance of Common Stock through private
Placement, - - - - - - 300
Exercise of employee options - - - - - - 156
Exercise of Warrants - - - - - - 250
Expense associated with option & warrant
repricing - - - - - - 773
Fair value of stock, options, & warrants
issued for professional services rendered - - - - - - 425
Stock issued to pay past due liabilities - - - - - - 2,413
Issuance of shares to purchase Secure
Source Technologies, Inc. - - - - - - 500
Issuance of warrants and stock with debt - - - - - - 19
Expense recognized for options issued
with exercise price below market price - - - - - 627
Change in Deferred Stock Compensation - - - - - - (51)
Net Loss - - - (5,382) - - (5,382)
------------ -------- --------- -------------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2003 - $- $- ($76,147) 201,230 ($779) ($3,203)
------------ -------- --------- -------------- ----------- ---------- ------------
The accompanying notes form an integral part of these consolidated
financial statements.
F-5
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; NeoMedia Technologies of Canada, Inc. incorporated in
Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH
incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated
in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in
Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico;
NeoMedia Technologies do Brasil Ltd. incorporated in Brazil and NeoMedia
Technologies UK Limited incorporated in the United Kingdom, and are collectively
referred to as "NeoMedia" or the "Company". The consolidated financial
statements of NeoMedia are presented on a consolidated basis for all periods
presented. All significant intercompany accounts and transactions have been
eliminated in preparation of the consolidated financial statements.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has reported net losses of $5,382,000 and $7421,000 for the
years ended December 31, 2003 and 2002, respectively, and has an accumulated
deficit of $76,147,000 as of December 31, 2003. In addition, the Company has
cash balance of $61,000 and working capital deficit of $6,526,000 as of December
31, 2003.
The Company cannot be certain that anticipated revenues from operations
will be sufficient to satisfy its ongoing capital requirements. Management's
belief is based on the Company's operating plan, which in turn is based on
assumptions that may prove to be incorrect. If the Company's financial resources
are insufficient the Company may require additional financing in order to
execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity, debt,
or another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge to revenue generation
from the Company's valuable intellectual property portfolio and PaperClickTM
internet "switching" software. On February 6, 2004, NeoMedia acquired CSI
International, Inc., ("CSI") of Calgary, Alberta, Canada, a private technology
products company in the micro paint repair industry. NeoMedia paid 7,000,000
shares of its common stock, plus $2.5 million cash in exchange for all
outstanding shares of CSI. NeoMedia has centralized the administrative functions
in its Ft. Myers, Florida headquarters, and maintains the sales and operations
office in Calgary, Alberta, Canada. Through the acquisition of CSI, the Company
expects the revenue for 2004 to be substantially higher than that for 2003 and
expects this division will generate positive cash in 2004.
F-6
Nature of Business Operations
During the yearss ended December 31, 2003 and 2002, the Company was
structured and evaluated by its Board of Directors and Management as two
distinct business units:
NeoMedia Internet Switching Software (NISS), and
NeoMedia Consulting and Integration Services (NCIS)
On February 6, 2004, the Company acquired CSI International, Inc. ("CSI"),
of Calgary, Alberta, Canada, a private technology products company in the micro
paint repair industry. NeoMedia has centralized the administrative functions in
its Ft. Myers, Florida headquarters, and maintains the sales and operations
office in Calgary, Alberta, Canada. CSI-related operations will be evaluated as
a separate business unit during the year ended December 31, 2004.
NeoMedia Internet Switching Software (NISS). NISS (physical
world-to-Internet offerings) is the core business and is based in the United
States, with development and operating facilities in Fort Myers, Florida. NISS
develops and supports the Company's physical world to Internet core technology,
including NeoMedia's linking "switch" and application platforms. NISS also
manages the Company's intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NeoMedia Consulting and Integration Services (NCIS). NCIS (systems
integration service offerings) is the original business line upon which the
Company was organized. This unit resells client-server equipment and related
software, and general and specialized consulting services. Systems integration
services also identifies prospects for custom applications based on NeoMedia's
products and services. The operations are based in Lisle, Illinois.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For 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.
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, accounts payable and accrued
expenses, accrued salaries and benefits, and payable to merchants approximates
their estimated fair values due to the short-term maturities of those financial
instruments. Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
F-7
Accounts Receivable
The Company reports accounts receivable at net realizable value. The
Company's terms of sale provide the basis for when accounts become delinquent or
past due. The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on historical
collection experience and a review of the current status of accounts receivable.
Receivables are generally charged off and sent to a collections agency after
ninety days past due. It is at least reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change in the near-term. At
December 31, 2003, the allowance for doubtful accounts was $49,000.
Inventories
Inventories are stated at the lower of cost or market, and at December 31,
2003 was comprised of purchased computer technology resale products. Cost is
determined using the first-in, first-out method. At December 31, 2003, the
reserve for obsolescence was $143,000.
Property and Equipment
Property and equipment are carried at cost less allowance for accumulated
depreciation. Repairs and maintenance are charged to expense as incurred.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the related assets. Upon retirement or sale, cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the consolidated statements of operations. The cost of normal
maintenance and repairs is charged to operations as incurred. Material
expenditures, which increase the life of an asset, are capitalized and
depreciated over the estimated remaining life of the asset.
The estimated service lives of property and equipment are as follows:
Furniture and fixtures 7 years
Computer equipment 3 to 5 years
Capitalized Patents
Patents (including patents pending and intellectual property) are stated
at cost, less accumulated amortization. Patents are generally amortized over
periods ranging from five to seventeen years.
Capitalized and Purchased Software Costs
Intangible assets consist of capitalized software development costs and
patents.
Software development costs are accounted for in accordance with Statement
of Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Costs associated with the
planning and designing phase of software development, including coding and
testing activities necessary to establish technological feasibility, are
classified as research and development and expensed as incurred. Once
technological feasibility has been determined, additional costs incurred in
development, including coding, testing, quality assurance and documentation are
capitalized. Once a product is made available for sale, capitalization is
stopped unless the related costs are associated with a technologically feasible
enhancement to the product. Amortization of purchased and developed software is
provided on a product-by-product basis over the estimated economic life of the
software, generally three years, using the straight-line method.
F-8
In accordance with SFAS No. 86, at the end of each quarterly reporting
period, the Company evaluates each of its software products for impairment by
adjusting the unamortized capitalized costs of each computer software product to
its net realizable value. Net realizable value is equal to the estimated future
gross revenues from each product reduced by the estimated future costs of
completing and disposing of that product, including the costs of performing
maintenance and customer support required to satisfy the Company's
responsibility set forth at the time of sale. It is reasonably possible that the
estimates underlying the impairment analysis could change in the near term, and
the effect of the change could be material to the consolidated financial
statements.
Evaluation of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." Although retaining many of the fundamental
recognition and measurement provisions of SFAS 121, the new rules significantly
change the criteria that would have to be met to classify an asset as
held-for-sale. The statement also supersedes certain provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," and will require expected
future operating losses from discontinued operations to be displayed in
discontinued operations in the period or periods in which the losses are
incurred rather than as of the measurement date, as presently required. NeoMedia
adopted this new statement on January 1, 2002, and concluded that the effect of
adopting this statement had no material impact on NeoMedia's financial position,
results of operations, or cash flows.
Amounts Due Under Settlement Agreements
NeoMedia is party to various settlement agreements with certain of its
vendors relating to past due accounts payable. The settlement agreements
generally call for monthly payment installments against such past due amounts.
Revenue Recognition
NeoMedia derives revenues from two primary sources: (1) license revenues
and (2) resale of software and technology equipment and service fee revenues.
License fees, including Intellectual Property license, represent revenue
from the licensing of NeoMedia's proprietary software tools and applications
products. NeoMedia licenses its development tools and application products
pursuant to non-exclusive and non-transferable license agreements. Resales of
software and technology equipment represent revenue from the resale of purchased
third party hardware and software products and from consulting, education,
maintenance and post contract customer support services.
The basis for license fee revenue recognition is substantially governed by
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended. License
revenue is recognized if persuasive evidence of an agreement exists, delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.
Revenue for resale of software and technology equipment and service fee is
recognized based on guidance provided in Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," as amended (SAB 101). Software and technology equipment resale
revenue is recognized when all of the components necessary to run software or
hardware have been shipped. Service revenues include maintenance fees for
F-9
providing system updates for software products, user documentation and technical
support and are recognized over the life of the contract. Software license
revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed. The Company uses stand-alone pricing to determine an
element's vendor specific objective evidence (VSOE) in order to allocate an
arrangement fee amongst various pieces of a multi-element contract. NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer basis
as appropriate.
Shipping and Handling Costs
Shipping and handling costs are passed through to the Company's
customers, and are netted in cost of goods sold.
Research and Development
Costs associated with the planning and designing phase of software
development, including coding and testing activities, and related overhead,
necessary to establish technological feasibility of the Company's
internally-developed software products, are classified as research and
development and expensed as incurred.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123.
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized over the vesting period based on the excess, if any, on the date
of grant of the fair value of the Company's shares over the employee's exercise
price. When the exercise price of the option is less than the fair value price
of the underlying shares on the grant date, deferred stock compensation is
recognized and amortized to expense in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 44 over the vesting period of the
individual options. Accordingly, if the exercise price of the Company's employee
options equals or exceeds the market price of the underlying shares on the date
of grant no compensation expense is recognized. Options or shares awards issued
to non-employees and directors are valued using the Black-Scholes pricing model
and expensed over the period services are provided.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends, SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 expands the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition provisions of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The transition provisions do not currently
have an impact on the Company's consolidated financial position and results of
operations as the Company has not elected to adopt the fair value-based method
of accounting for stock-based employee compensation under SFAS NO. 123. The
disclosure provisions of SFAS No. 148 are effective for financial statements for
interim periods beginning after December 15, 2002. The Company adopted the
disclosure requirements in the first quarter of 2003.
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net loss and
loss per share if the company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
F-10
Years Ended
December 31,
---------------------
2003 2002
------- -------
Net Loss, as reported ($5,382) ($7,421)
Compensation recognized under APB 25 623 --
Compensation recognized under SFAS 123 (962) (1,277)
------- -------
Pro-forma net loss ($5,721) ($8,698)
======= =======
Net Loss per share:
Basic and diluted - as reported ($ 0.04) ($ 0.33)
======= =======
Basic and diluted - pro-forma ($ 0.05) ($ 0.39)
======= =======
For grants in 2003 and 2002, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5%; (iii) expected
volatility ranging from 253% to 457% for 2003 and 135% to 211% for 2002, and
(iv) an expected life of the shorter of 3 years or the stated life of the option
for options granted in 2003, and 5 years or the stated life of the option for
options granted in 2002. The fair-value was determined using the Black-Scholes
option-pricing model.
The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements. These options vest in the same manner as the employee options
granted under each of the option plans as described above.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", income
taxes are accounted for using the assets and liabilities approach. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be recognized. The
Company has recorded a 100% valuation allowance as of December 31, 2003.
Computation of Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all outstanding stock options and warrants from the
calculation of diluted net loss per share because these securities are
anti-dilutive for all years presented. The shares excluded from the calculation
of diluted net loss per share are detailed in the table below:
December 31, 2003 December 31, 2002
----------------- -----------------
Outstanding Stock Options 33,512,507 10,801,219
Outstanding Warrants 26,195,000 7,433,758
F-11
Comprehensive Income
For the years ended December 31, 2003 and 2002, the Company did not have
other comprehensive income and therefore has not included the statement of
comprehensive income in the accompanying consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2002 consolidated
financial statements to conform to the 2003 presentation.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
During October 2003, the FASB issued Staff Position No. FIN 46, deferring
the effective date for applying the provisions of FIN 46 until the end of the
first interim or annual period ending after December 31, 2003 if the variable
interest was created prior to February 1, 2003 and the public entity has not
issued financial statements reporting that variable interest entity in
accordance with FIN 46.
On December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised
December 2003), "Consolidation of Variable Interest Entities," (FIN-46R)
primarily to clarify the required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46 that was issued in January 2003. FIN-46R
exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. While FIN-46R modifies or clarifies various provisions of FIN-46, it
also incorporates many FASB Staff Positions previously issued by the FASB. The
Company has deferred the adoption of FIN 46 with respect to VIEs created prior
to February 1, 2003. Management is currently assessing the impact, if any, FIN
46 may have on the Company; however, management does not believe there will be
any material impact to the Company's financial position, results of operations
or liquidity resulting from the adoption of this interpretation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting of derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, except for certain
hedging relationships designated after June 30, 2003. The adoption of this
Statement is not expected to have a material impact on the Company's financial
position, results of operations, or cash flows.
F-12
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that issuers classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). With certain exceptions,
this Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this Statement is
not expected to have a material impact on the Company's financial position,
results of operations, or cash flows.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 132 (Revised 2003) "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This standard replaces FAS-132 of the same
title which was previously issued in February 1998. The revised FAS-132 was
issued in response to concerns expressed by financial statement users about
their need for more transparency of pension information. The revised standard
increases the existing GAAP disclosures for defined benefit pension plans and
other defined benefit postretirement plans. However, it does not change the
measurement or recognition of those plans as required under: FAS-87, "Employers'
Accounting for Pensions"; FAS-88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"; and
FAS-106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Specifically, the revised standard requires companies to provide
additional disclosures about pension plan assets, benefit obligations, cash
flows, and benefit costs of defined benefit pension plans and other defined
benefit postretirement plans. Also, for the first time, companies are required
to provide a breakdown of plan assets by category, such as debt, equity and real
estate, and to provide certain expected rates of return and target allocation
percentages for these asset categories. The revised FAS-132 is effective for
financial statements with fiscal years ending after December 15, 2003 and for
interim periods beginning after December 15, 2003. The adoption of this
Statement is not expected to have a material impact on the Company's financial
position, results of operations, or cash flows.
3. EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS ("CORNELL")
On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase
was $150,000 with a minimum of seven days between purchases. The shares were
valued at 98% of the lowest closing bid price during the five-day period
following the delivery of a notice of purchase by NeoMedia. The Company paid 5%
of the gross proceeds of each purchase to Cornell
During the year ended December 31, 2003, the Company sold 98,933,244 shares
of its common stock to Cornell under the Equity Line of Credit. The following
table summarizes funding received from Cornell during the year ended December
31, 2003:
Year
Ended
First Second Third Fourth December 31,
Quarter Quarter Quarter Quarter 2003
------------ ------------ ------------ ------------ ------------
Number of shares sold to Cornell 3,990,342 27,873,902 56,069,000 11,000,000 98,933,244
Gross Proceeds from sale of shares to Cornell $ 84,000 $ 633,000 $ 7,088,000 $ 1,760,000 $ 9,565,000
Less: discounts and fees* (29,000) (189,000) (5,429,000) (1,125,000) ($6,772,000)
------------ ------------ ------------ ------------ ------------
Net Proceeds from sale of shares to Cornell $ 55,000 $ 444,000 $ 1,659,000 $ 635,000 $ 2,793,000
------------ ------------ ------------ ------------ ------------
F-13
* - Per Equity line of Credit Agreement, stock is valued at 98% of the lowest
closing bid price during the week it is sold
As of December 31, 2003, the Company had a promissory note payable to
Cornell in the amount of $500,000
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement. The terms of the agreement are identical
to the terms of the previous Equity Line of Credit, except that the maximum
"draw" under the new agreement is $280,000 per week, not to exceed $840,000 in
any 30-day period, and Cornell will purchase up to $20 million of the Company's
common stock over a two-year period. As a consideration fee for Cornell to enter
into the agreement, the Company issued 10 million warrants to Cornell with an
exercise price of $0.05 per share, and a term of five years. Cornell exercised
the warrants in January 2004, resulting in $500,000 cash receipts to the
Company. In November 2003, the Company filed a Form SB-2 to register 200 million
shares under this $20 million Standby Equity Distribution Agreement. In January
2004, the Form SB-2 was declared effective by the Securities and Exchange
Commission.
4. PROPERTY AND EQUIPMENT
As of December 31, 2003, property and equipment consisted of the
following:
(dollars
in
thousands)
-------------
2003
Furniture and fixtures $266
Equipment 41
-------------
Total 307
Less: accumulated depreciation
Furniture and fixtures (237)
Equipment (9)
-------------
Total property and equipment, net $61
=============
Depreciation expense was $83,000 and $108,000 for the years ended December
31, 2003 and 2002, respectively.
F-14
5. INTANGIBLE ASSETS
As of December 31, 2003, intangible assets consisted of the following:
(dollars
in
thousands)
------------
2003
-----------
Capitalized and purchased software costs $575
Patents and related costs 3,566
------------
Total 4,141
Less: accumulated amortization
Capitalized and purchased software costs (456)
Patents and related costs (1,152)
------------
Intangible assets, net $2,533
============
Capitalized patent activity for the year ended December 31, 2003 was as
follows:
(dollars in
thousands)
------------
2003
------------
Beginning balance $2,244
Additions 22
Acquisition of Secure Source Technologies, Inc. Patents 422
Amortization (273)
------------
Ending balance $2,415
============
Amortization expense of capitalized patents was $273,000 and $276,000 for
the years ended December 31, 2003 and 2002, respectively. The weighted-average
amortization period of capitalized patents as of December 31, 2003 was 15.8
years.
Capitalized and purchased software activity for the year ended December
31, 2003 was as follows:
(dollars in
thousands)
------------
2003
------------
Beginning balance $149
Additions 6
Acquisition of Secure Source Technologies, Inc. software 77
Amortization (114)
------------
Ending balance $118
============
Amortization expense of capitalized and purchased software costs was
$114,000 and $677,000 for the years ended December 31, 2003 and 2002,
respectively. The weighted-average amortization period of capitalized and
purchased software costs as of December 31, 2003 was 6.1 years.
During the year ended December 31, 2002, the Company recognized an
impairment charge of $1.0 million relating to its PaperClick
F-15
physical-world-to-internet software solution in its NISS business unit. The
impairment charge was the result of a funding shortage during 2002 that forced
the Company to terminate the majority of its workforce, including the selling,
marketing, and development functions supporting PaperClick. During 2003, the
Company reinstituted its PaperClick selling, marketing and development efforts.
As of December 31, 2003, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:
(In Thousands)
--------------
2004 $353
2005 275
2006 228
2007 211
2008 187
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE
Allowance for doubtful accounts activity for the year ended December 31,
2003 was as follows:
(dollars
in thousands)
-------------------
2003
-------------------
Beginning balance $55
Bad debt expense -
Write-off of uncollectible accounts -
Collection of accounts previously written off (18)
Adjustment to general allowance 12
-------------------
Ending balance $49
===================
Inventory reserve activity for the year ended December 31, 2003 was as
follows:
(dollars
in thousands)
-------------------
2003
-------------------
Beginning balance $130
Allowance for slow-moving parts inventory 13
-------------------
Ending balance $143
===================
7. FINANCING AGREEMENTS
Resale Financing Arrangement
As of December 31, 2003, the Company was party to a commercial
financing agreement with GE Access that provides short-term financing for
certain computer hardware and software purchases. This arrangement allows the
Company to re-sell high-dollar technology equipment and software without
committing cash resources to financing the purchase. The Company and GE Access
are currently operating under an additional arrangement under which GE Access
retains 50% of the Company's proceeds from sales financed by GE Access, and
applies the portion of proceeds toward past due balances. This arrangement
reduces by half the Company's cash flow from resales of equipment and software
financed by GE Access, until the balance owed to GE Access is paid in full.
During October 2003, the Company and GE entered into an additional agreement
under which the Company also makes regular payment against its past due
balances. Termination of the Company's financing relationship with GE Access
could have a material adverse effect the Company's financial condition.
Management expects the agreement to remain in place in the near future. As of
December 31, 2003 and 2002, the amount payable under this financing arrangement
was approximately $196,000 and $430,000, respectively.
F-16
8. NOTES PAYABLE
On February 26, 2002, the Company borrowed $10,000 from William E. Fritz
under a note payable bearing interest at 8% per annum. The note was repaid in
April 2003.
During March 2002, the Company borrowed $190,000 from William E. Fritz
under a note payable bearing interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.
On April 5, 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum. The note was repaid in April
2003.
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an
outside director; and James J. Keil, an outside director. The notes bear
interest at a rate of 15% per annum, and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were convertible, at the option of the
holder, into either cash or shares of NeoMedia common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia also granted to the holders an additional 1,355,670 shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share, with a term of three years. The warrants and shares were issued in
January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, was recognizable as debt discount, and
amortized over the life of the notes payable. During March 2003, two of the
affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the
maturity date due to the Company's capital constraints. The Company repaid
Charles Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003. The Company paid $30,000 of the principal on William
Fritz's note during April 2003, and entered into a new note with Mr. Fritz for
the remaining $10,000. The new note bears interest at a rate of 10% per annum
and matures in April 2004. The new note also includes a provision under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.
On December 2, 2002, the Company issued to Michael Kesselbrenner, a private
investor, a Promissory Note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. The investor
only funded to the Company $84,000 of the principal amount of the note. The
Company repaid this note during March 2003, and the shares which had been held
in escrow as collateral for the loan were returned. The Company has not incurred
further obligation under this note agreement.
On March 13, 2003, the Company borrowed from Cornell the gross amount of
$262,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 18,535,039 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
F-17
On May 27, 2003, the Company borrowed from Cornell the gross amount of
$245,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 8,922,467 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
On June 24, 2003, the Company borrowed from Cornell the gross amount of
$400,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 18,426,808 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of
its outside directors. This amount was added to the principal of the $10,000
note payable to Mr. Fritz entered into during April 2003, with all other terms
of the note remaining the same. As consideration for the loan, the Company
granted Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common
stock at an exercise price of $0.01 per share. The warrants had a fair value of
approximately $74,000. In accordance with EITF 00-27, the Company recorded the
relative fair value of the warrants as a discount against the note, and is
amortizing the discount over the life of the note. The note matures in April
2004.
On July 21, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 10,806,998 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
On August 1, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 5,915,410 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
On August 29, 2003, the Company borrowed $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.
On September 2, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold 5,919,784 shares to Cornell under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.
On September 11, 2003, the Company received funding in the form of a
promissory note from Cornell in the gross amount of $500,000 before Cornell
discounts and fees. As of December 31, 2003, the Company had not made any
payment against the principal of this note. Accordingly, the company has
recorded the advance balance of $500,000 in "Notes Payable" on its condensed
consolidated balance sheet as of December 31, 2003. During January 2004, the
Company sold 1,408,992 shares to Cornell, reducing the balance to approximately
$337,000. The Company has the option to repay any remaining principal in cash.
On September 29, 2003, the Company borrowed from Cornell the gross amount
of $1,500,000 before Cornell discounts and fees. As of December 31, 2003, the
Company had sold 26,000,000 shares to Cornell under the Equity Line of Credit
and the proceeds were used to repay this obligation in full.
9. LONG-TERM DEBT
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 the seller with an
uncollateralized note payable, without interest, in an amount equal to the
greater of: (i) 5% of the collected gross revenues of NeoMedia Migration for the
preceding month; or (ii) the minimum installment payment as defined, until paid
in full. The minimum installment payment is the amount necessary to provide an
average monthly payment for the most recent twelve month period of $16,000 per
month. The present value of $2,000,000 discounted at 9% (the Company's then
incremental borrowing rate) for 125 months was approximately $1,295,000, the
capitalized cost of the assets acquired. The discount was accreted to interest
expense over the term of the note. The software acquired was amortized over its
estimated useful life of three years.
F-18
On October 21, 2002, IDSI filed a demand for arbitration relating to past
due payments on the note payable. On October 31, 2003, the Company paid off all
past due and future obligations under the note to IDSI through the issuance of
8,000,000 shares of NeoMedia common stock. The Company has no future obligation
under the note. The Company incurred a loss of $187,000 which is included in the
Loss on Extinguishment of Debt.
10. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $49,000 in its December
31, 2003 consolidated balance sheet. In addition, a single company supplies the
majority of the Company's resold equipment and software, which is re-marketed to
this customer. Accordingly, the loss of this customer or supplier would
materially adversely affect the Company's operations. During 2004, the Company
will attempt to diversify its customer base to offset the decrease in sales to
SBC/Ameritech. 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 83% and 87% of NeoMedia's
revenue for the years ended December 31, 2003 and 2002, respectively.
11. ACQUISITIONS
Secure Source Technologies, Inc. ("SST")
On October 8, 2003, the Company acquired 100% ownership of SST, a provider
of security solutions and covert security technology for the manufacturing and
financial services industries, in exchange for 3.5 million shares of the
Company's common stock. With the purchase of SST, the Company acquired
additional patents that compliment its existing intellectual property portfolio,
as well as a security software platform, and computer equipment. Prior to the
acquisition, SST was inactive and had minimal operating activities. The
acquisition was accounted for under the purchase method. The actual purchase
price was based on the fair value of the Company's stock on the dates of the
grant. The purchase price was allocated as follows:
(Dollars in
Thousands)
---------------
Value of 3.5 Million Shares Issued (Purchase Price) $500
Assets Purchased:
Computer Equipment 1
Software Platform 77
Patents 422
---------------
Total Purchase Price Allocation $500
---------------
The allocation of the purchase price is preliminary and is subject to
revision, which is not expected to be material, based on the final valuation of
the net assets acquired. Merger related cost was expensed as incurred.
F-19
The proforma financial information is not presented as this acquisition
was not considered significant or material to the combined financial statements
on the date of the acquisition.
The values assigned to intangible assets are subject to amortization. The
acquired software platform has no residual value and a weighted-average
amortization period of 3 years. The acquired patents have no residual value and
a weighted-average amortization period of 11.1 years. The results of SST are
included in the consolidated financial statements for the period October 8, 2003
through December 31, 2003.
Loch Energy, Inc.
On March 7, 2003, NeoMedia announced that that it had reached an
agreement in principle to acquire and merge with Loch, an oil and gas provider
based in Humble, Texas. On October 1, 2003, NeoMedia discovered that the royalty
interest from future sales of oil owned by Loch were oversold, which would
likely result in materially lower projected available cashflow from Loch's
operations. This projected available cashflow was the basis for the proposed
acquisition by NeoMedia. On October 2, 2003, NeoMedia's Board of Directors voted
to cancel the Memorandum of Terms signed on March 13, 2003, and terminate the
acquisition and merger.
12. DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its former Ft. Lauderdale-based Qode business
unit, which it acquired in March 2001, to The Finx Group, Inc., a holding
company based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode
payables and $800,000 in long-term leases in exchange for the issuance of
500,000 shares of the Finx Group, right to use and sell Qode services, and up to
$5 million in affiliate revenues over the next five years. During the third and
fourth quarters of 2001 and the first quarter of 2002, the company recorded a
$2.6 million expense from the write-down of the Qode assets/liabilities to net
realizable value.
During June 2002, the Finx Group notified the Company that it did not
intend to carry out the letter of intent due to capital constraints. As a
result, during the year ended December 31, 2002, the Company recorded an
additional expense of $1.5 million for the write-off of remaining Qode assets.
As of December 31, 2003, the Company had approximately $769,000 of liabilities
relating to the Qode system remaining on its books.
13. 2000 EXECUTIVE INCENTIVE
During the year ended December 31, 2003, the Company satisfied a
portion of its 2000 accrued executive incentive obligation through the issuance
of common stock to current and former employees who had participated in the
plan. The Company relieved approximately $592,000 of the liability through the
issuance of approximately 5.4 million shares during the year ended December 31,
2003. The excess of the fair value of the common stock issued over the
outstanding accrued bonuses was included in the loss on extinguishment of debt.
F-20
14. INCOME TAXES
For the years ended December 31, 2003 and 2002, the components of income
tax expense were as follows:
2003 2002
------ ------
(In thousands)
Current $ -- $ --
Deferred -- --
------ ------
Income tax expense/(benefit) $ -- $ --
====== ======
As of December 31, 2003, 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:
2003 2002
-------- --------
Accrued employee benefits $ 8 $ 26
Provisions for doubtful accounts 20 22
Capitalized software development costs and fixed assets 740 821
Net operating loss carryforwards (NOL) 27,014 25,134
Accruals 578 468
Write-off of long-lived assets 2,070 2,070
State taxes 107 95
Alternative minimum tax credit carryforward 45 45
-------- --------
Total deferred tax assets 30,582 28,681
Valuation Allowance (30,582) (28,681)
-------- --------
Net deferred income tax asset $ -- $ --
======== ========
Because it is more likely than not that NeoMedia will not realize the
benefit of its deferred tax assets, a valuation reserve has been established
against them.
For the years ended December 31, 2003 and 2002, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:
2003 2002
------- -------
Benefit at federal statutory rate $(1,830) $(2,523)
State income taxes, net of federal (213) (294)
Permanent and other, net 142 (609)
Change in valuation allowance 1,901 3,426
------- -------
Income tax expense/(benefit) $ -- $ --
======= =======
As of December 31, 2003, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $68 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities, NeoMedia anticipates that the
annual usage of its pre-1998 net operating loss carryforwards should be further
restricted pursuant to the provisions of Section 382 of the Internal Revenue
Code.
F-21
15. TRANSACTIONS WITH RELATED PARTIES
During August 2003, the Company borrowed $50,000 from William E. Fritz, one
of its outside directors, under an unsecured note payable with a term of 30
days. The note was repaid in full during September 2003.
During July 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside directors. This amount was added to the principal of a $10,000
note payable to Mr. Fritz that matures in April 2004, with all other terms of
the note remaining the same. As consideration for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of its common stock at an
exercise price of $0.01 per share.
During April 2003, the Company entered into a consulting agreement with
William Fritz, an outside director, for consulting and advisement services
relating to the merger with Loch Energy, Inc., and to the subsequent
implementation of various management programs surrounding the business. The
agreement called for total payments of $250,000 over a period of one year.
During August 2003, the Company paid the consulting contract in full. During
September 2003, the consulting contract was rescinded and the full $250,000 was
returned to us.
During April 2003, the Company's Board of Directors approved the payment
in full of approximately $154,000 of liabilities owed by NeoMedia to Charles W.
Fritz, the Company's Founder and Chairman of the Board of Directors, through the
issuance of 15,445,967 shares of common stock. The Company recognized a discount
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.
During April 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share to William
Fritz. In connection with the sale, the Company also granted 25,000,000 warrants
to purchase shares of NeoMedia common stock at an exercise price of $0.01 per
share. The warrants had a fair value of $298,000 and have been recorded as a
cost of issuance. The Company recognized a discount expense in general and
administrative expenses of approximately $50,000 relating to this transaction
with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and
purchased 25,000,000 additional shares of common stock at a price of $0.01 per
share.
During November 2002, the Company issued Convertible Secured Promissory
Notes with an aggregate face value of $60,000 to 3 separate parties, including
Charles W. Fritz, Chairman of the Board of Directors of NeoMedia; William E.
Fritz, an outside director; and James J. Keil, an outside director. The notes
had an interest rate of 15% per annum, and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were convertible, at the option of the
holder, into either cash or shares of the Company's common stock at a 30%
discount to either market price upon closing, or upon conversion, whichever is
lower. The Company also granted to the holders an additional 1,355,670 shares of
its common stock and 60,000 warrants to purchase shares of its common stock at
$0.03 per share, with a term of three years. The warrants and shares were issued
in January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, was recognizable as debt discount, and
amortized over the life of the notes payable. During March 2003, two of the
affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the
maturity date due to NeoMedia's capital constraints. The Company repaid Charles
Fritz's note in full during March 2003, and repaid James J. Keil's note in full
during April 2003. The Company paid $30,000 of the principal on William Fritz's
note during April 2003, and entered into a new note with Mr. Fritz for the
remaining $10,000. The new note bears interest at a rate of 10% per annum and
matures in April 2004. The new note also includes a provision under which, as
consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.
F-22
During April 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum with a term of 60 days. The note
was repaid in April 2003.
During March 2002, the Company borrowed $190,000 from William E. Fritz
under a note payable bearing interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.
During February 2002, the Company borrowed $10,000 from William E. Fritz
under a note payable bearing interest at 8% per annum with a term of 30 days.
The note was repaid in April 2003.
During October 2001, the Company borrowed $4,000 from Charles W. Fritz,
NeoMedia's Chairman, its former Chief Executive Officer and a director, under a
note payable bearing interest at 10% per annum with a term of six months. The
note was repaid in April 2003.
The Company believes that all of the above transactions were conducted at
"arm's length", representing what NeoMedia believes to be fair market value for
those services.
16. 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, 2003 and 2002, NeoMedia's rent expense was $265,000 and
$853,000, respectively.
NeoMedia is party to various payment arrangements with its vendors that
call for fixed payments on past due liabilities. NeoMedia is also party to
various consulting agreements that carry payment obligations into future years.
The following is a schedule of the future minimum payments under
non-cancelable operating leases in effect as of December 31, 2003:
Payments
(In Thousands)
2004 $ 30
Thereafter --
----------
Total $ 30
==========
As of December 31, 2003, none of the Company's employees were under
contract. Additionally, as of December 31, 2003, the Company was not a party to
any long-term consulting agreements that are to be paid in cash.
Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of business, both as claimant and defendant. While it is not possible to
determine with certainty the outcome of these matters, it is the opinion of
management that the eventual resolution of the following legal actions could
have a material adverse effect on the Company's financial position or operating
results.
F-23
AirClic, Inc. Litigation
On September 6, 2001, AirClic, Inc. filed suit against the Company in the
Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among other
things, the accelerated repayment of a $500,000 loan it advanced to the Company
pursuant to the terms of a Secured Promissory Note made on July 11, 2003 and a
non-binding Letter of Intent dated July 3, 2001 between AirClic and the Company.
The note was secured by substantially all of the Company's intellectual
property, including the core physical world-to-Internet technologies. In the
suit, the Company acknowledged its obligations under the note but filed a
counterclaim against AirClic seeking damages for fraud, negligent
misrepresentation and promissory estoppel.
On October 3, 2003, the Company paid AirClic the principal plus interest in
the approximate amount of $610,000. On December 5, 2003, the Company paid an
additional $115,000 in legal fees and entered into a settlement agreement with
AirClic under which the suit was dismissed. The Company has no further
obligation relating to this matter.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Scanbuy, Inc., and LScan Technologies, Inc. The suit claims that each
of the parties has manufactured, or has manufactured for it, and has used, or
actively induced others to use, technology which allows customers to use a
built-in UPC bar code scanner to scan individual items and access information.
The Complaint states that AirClic, Scanbuy and LScan have had actual and
constructive notice of the existence of the patents-in-suite, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents in suit. NeoMedia's Complaint
seeks compensatory damages for infringement by AirClic, Scanbuy and LScan, with
those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin
AirClic, Scanbuy and LScan from their infringing activities.
Other Litigation
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of NeoMedia common stock, to
be valued at the time of registration of the shares. The Company's stock was
trading at approximately $0.05 at that time. The Company included for
registration 2.7 million shares in the name of Ripfire in its form S-1 that was
declared effective by the SEC on February 14, 2003. The Company's stock was
trading at approximately $0.02 on February 14, 2003. The actual number of shares
to be issued to Ripfire per the pricing outlined in the agreement was
approximately 9.8 million. On March 31, 2003, the Company issued the 2.7 million
shares of common stock that had been registered in the S-1 to Ripfire. The
Company is attempting to negotiate settlement of the remaining balance. The
Company had a remaining accrued liability of $106,000 relating to this matter as
of December 31, 2003.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
In October 2003, the Company settled this matter for $10,000 cash payments over
time, plus 3,000,000 shares of common stock. The Company had accrued a liability
of $7,000 as of December 31, 2003.
F-24
On July 27, 2002, the Company's former General Counsel filed suit in U.S.
District Court, Ft. Myers division, seeking payment of the 2000 executive
incentive, severance and unpaid vacation days in the amount of approximately
$154,000. In June 2001, the Company's compensation committee approved an
adjustment to the 2000 executive incentive plan that reduced the executive
incentive payout as a result of the write-off of the Digital:Convergence
intellectual property license contract in the second quarter of 2001. As a
result, the Company reduced the accrual for such payout by an aggregate of
approximately $1.1 million in the second quarter of 2002. The plaintiff was
seeking payment of the entire original incentive payout. On November 12, 2002,
NeoMedia settled the lawsuit. The settlement calls for cash payments totaling
approximately $90,000 over a period of ten months, plus 250,000 vested options
to purchase shares of NeoMedia common stock at an exercise price of $0.01 with a
term of five years. The Company had a liability of approximately $3,000 relating
to this matter as of December 31, 2003.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, the Company
settled the suit for cash payments over a period of approximately one year. The
Company had an accrued liability of approximately $82,000 relating to this
matter as of December 31, 2003.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, the Company settled the suit for
cash payments totaling approximately $196,000, to be paid at a rate of $30,000
per quarter until the balance is satisfied. If the balance is paid within one
year of the settlement, the Company will not pay interest charges. The Company
had a remaining liability of approximately $116,000 relating to this matter as
of December 31, 2003.
On November 11, 2002, Avnet/Hallmark Computer Marketing Group filed a
complaint against the Company seeking payment of approximately $66,000 in past
due amounts relating to hardware and software re-sold by the Company. During
December 2002, the Company made payment of approximately $30,000 to
Avnet/Hallmark, reducing the balance owed to approximately $37,000. On April 1,
2003, the plaintiff received a judgment from the circuit court for the remaining
balance. The Company has agreed to a payment plan for the balance over a period
of approximately nine months. The Company had a liability of approximately
$17,000 relating to this matter as of December 31, 2003.
On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company has agreed to a payment plan relating to this matter under which the
balance will be paid over approximately 12 months. The Company had a liability
of approximately $13,000 relating to this matter as of December 31, 2003.
On April 18, 2003, a former participant in the Company's 2001 self-insured
health plan sued the Company to recover approximately $46,000 in unpaid health
claims from 2001. On December 1, 2003, the Company settled this suit for cash
payments over a period of approximately one year. The Company had accrued
approximately $36,000 as of December 31, 2003.
On January 26, 2004, Day West & Associates, Inc., filed a complaint
against the Company seeking payment of approximately $6,000 in past due legal
services. The Company is attempting to negotiate settlement of the suit. The
Company had not accrued any liability relating to his matter as of December 31,
2003.
F-25
17. DEFINED CONTRIBUTION SAVINGS PLAN
NeoMedia maintains a defined contribution 401(k) savings plan.
Participants may make elective contributions up to established limits. All
amounts contributed by participants and earnings on these contributions are
fully vested at all times. The plan provides for matching and discretionary
contributions by NeoMedia, although no such contributions to the plan have been
made to date.
18. STOCK OPTIONS AND WARRANTS
Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
1,500,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price shall be equal to or in excess of the fair market value per share
of NeoMedia's common stock on the date of grant. These options granted expired
ten years from the date of grant. These options vest 100% one year from the date
of grant.
Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
8,000,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price may be less than the fair market value per share of NeoMedia's
common stock on the date of grant. Options generally vest 20% upon grant and 20%
per year thereafter. The options expire ten years from the date of grant.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan provides for authority for the stock option committee of
the board of directors to grant non-qualified stock options with respect to a
maximum of 10,000,000 shares of common stock. The option exercise price may be
less than the fair market value per share of NeoMedia's common stock on the date
of grant, and may be granted with any vesting schedule as approved by the stock
option committee.
Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan.
The 2003 Stock Option Plan provides for authority for the Board of Directors to
the grant non-qualified stock options with respect to a maximum of 150,000,000
shares of common stock. On October 17, 2003, NeoMedia filed a Form S-8 to
register all 150,000,000 shares underlying the options in the 2003 Stock Option
Plan.
The following table summarizes the status of NeoMedia's 2003, 2002, 1998
and 1996 stock option plans as of and for the years ended December 31, 2003 and
2002:
2003 2002
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------ ------------------------
(In (In
thousands) thousands)
Outstanding at beginning of year 10,801 $1.11 4,214 $2.96
Granted 39,018 $0.01 12,306 $0.06
Exercised (15,605) $0.01 (5,252) $0.07
Forfeited (702) $1.26 (467) $2.75
------------------------ ------------------------
Outstanding at end of year 33,512 $0.23* 10,801 $1.11
======================== ========================
Options exercisable at year-end 33,512 10,272
Weighted-average fair value of options
granted during the year $0.10 $0.10
Available for grant at the end
of the year 114,025 2,319
* - Includes 3,644,382 options that have a restated exercise price of
$0.01 under option repricing program that extends through June 30,
2004. For purposes of this table,options subject to repricing are show
at their original exercise price.
The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Number Contractual Number
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
(In thousands) (In thousands)
$-- to $0.10 31,068 9.7 years $0.01 31,068 $0.01
0.11 to 0.84 742 6.2 years $0.24 742 $0.24
0.85 to 3.63 955 5.6 years $2.99 955 $2.99
3.64 to 5.13 437 6.1 years $4.83 437 $4.83
5.14 to 7.31 310 4.3 years $7.29 310 $7.29
------------------------------------------------------------------------ ----------------------------
$ -- to $7.31 33,512 9.4 years $0.23 33,512 $0.23
======================================================================== ============================
In March 2002, the Company issued 2,946,310 options to buy shares of its
common stock to two outside consultants at a price of $0.17 per share for
consulting services rendered over a six-month period, and recognized
approximately $407,000 in expense in the 2002 consolidated financial statements.
The options vested 100% upon grant. The options were all exercised during 2002
and 2003.
F-26
In June 2002, the Company issued 3,000,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting services rendered over a one-year period, and recognized
approximately $125,000 in general and administrative expense in the 2002
consolidated financial statements. The options vested 100% upon grant. All
3,000,000 options were exercised during 2002, resulting in proceeds to the
Company of $30,000.
In December 2002, the Company issued 2,000,000 options to buy shares of
the Company's common stock to two outside consultant at a price of $0.01 per
share for consulting services rendered over a twelve-month period. The Company
recognized approximately $57,000 and $5,000 in general and administrative
expense in the accompanying consolidated financial statements for the years
ended December 31, 2003 and 2002, respectively. The options vested 100% upon
grant. All 2,000,000 options were exercised during 2003.
In June 2003, the Company issued 375,000 options to buy shares of the
Company's common stock to two outside consultants at a price of $0.01 per share
for consulting services rendered. The Company recognized approximately $13,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In October 2003, the Company issued 125,000 options to buy shares of the
Company's common stock to two outside consultants at a price of $0.01 per share
for consulting services rendered. The Company recognized approximately $13,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In October 2003, the Company issued 1,000,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting to be provided over a period of one year. The options were valued
at approximately $102,000, of which the Company recognized approximately $20,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In October 2003, the Company issued 500,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting to be provided over a period of one year. The options were valued
at approximately $51,000, of which the Company recognized approximately $10,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In November 2003, the Company issued 50,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.06 per share
for consulting services rendered. The Company recognized approximately $7,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In November 2003, the Company issued 150,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.16 per share
for consulting services rendered. The Company recognized approximately $3,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In December 2003, the Company issued 50,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.052 per share
for consulting services rendered. The Company recognized approximately $7,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
In December 2003, the Company issued 43,125 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting services rendered. The Company recognized approximately $6,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
F-27
Warrants
Warrant activity as of December 31, 2003 and 2002 was as follows:
Warrants Outstanding as of December 31, 2001
Warrants Outstanding as of December 31, 2001 3,239,897
Warrants issued 5,000,000
Warrants exercised (369,450)
Warrants expired (436,689)
-----------
Warrants Outstanding as of December 31, 2002 7,433,758
Warrants issued 48,060,000
Warrants exercised (28,904,900)
Warrants expired (393,858)
-----------
Warrants Outstanding as of December 31, 2003 26,195,000
===========
The following table summarizes information about warrants outstanding at
December 31, 2003, all of which are exercisable:
Weighted- Weighted-
Average Average
Remaining Exercise
Range of Warrants Contractual
Exercise Prices Outstanding Life Price
------------------ -------------- ------------------ -------------
(In thousands)
$--- to $0.05 24,560 4.6 years $0.03
0.06 to 3.56 225 4.6 years $3.47
3.57 to 6.54 1,410 1.8 years $6.00
------------------ -------------- ------------------ -------------
$--- to $6.54 26,195 4.5 years $0.38
================== ============== ================== =============
In June 2002, the Company issued 2,000,000 warrants to an outside
consultant at an exercise price of $0.00. During 2002, the Company recognized an
expense of approximately $100,000 related to this transaction, which is included
in general and administrative expense in the accompanying consolidated
statements of operations. The Company used the Black-Scholes option-pricing
model to value the shares, with the following assumptions: (i) no expected
dividends (ii) a risk-free interest rate of 4.5% (iii) expected volatility of
135% and (iv) an expected life of 1 year. All 2,000,000 warrants were exercised
during the year ended December 31, 2003.
In June 2002, the Company issued 1,500,000 warrants to buy shares of the
Company's common stock at a price of $0.05 per share to Charles W. Fritz, the
Company's Chairman of the Board and former CEO, as replacement for warrants
exercised in the Company's warrant repricing program for which Mr. Fritz
received no profit. The Company recognized approximately $66,000 in expense in
the 2002 consolidated financial statements relating to the warrant issuance. All
1,500,000 warrants were outstanding as of December 31, 2003.
F-28
In June 2002, the Company issued 1,500,000 warrants to buy shares of the
Company's common stock at a price of $0.05 per share to an outside consultant,
as replacement for warrants exercised in the Company's warrant repricing program
for which the outside consultant received no profit. The Company recognized
approximately $66,000 in expense in the 2002 consolidated financial statements
relating to the warrant issuance. All 1,500,000 warrants were outstanding as of
December 31, 2003.
During January 2003, the Company granted 40,000, 10,000, and 10,000
warrants with an exercise price of $0.03 per share to William E Fritz, Charles
W. Fritz, and James J. Keil, respectively, in connection with funding provided
to the Company by these individuals during November 2002.
During February 2003, the Company granted 500,000 warrants to GE Access,
its primary equipment supplier, as payment of interest relating to a commercial
credit agreement between GE Access and NeoMedia. The Company recognized
approximately $7,000 in interest expense in the 2003 consolidated financial
statements relating to the warrant issuance. The warrants were not exercised as
of December 31, 2003.
During April 2003, the Company granted 25,000,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.01 per share to
William E. Fritz, an outside director, in connection with financing provided to
the Company by Mr. Fritz. The warrants were not exercised as of December 31,
2003.
During July 2003, the Company granted 2,500,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.01 per share to
William E. Fritz, an outside director, in connection with financing provided to
the Company by Mr. Fritz. The warrants were not exercised as of December 31,
2003.
During September 2003, the Company granted 10,000,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.01 per share to an
outside consultant for consulting, advisory, and financing services performed
during the third and fourth quarters of 2003. The Company recognized
approximately $93,000 in expense in the 2003 consolidated financial statements
relating to the warrant issuance. The warrants were not exercised as of December
31, 2003.
During October 2003, the Company granted to Cornell 10,000,000 warrants to
purchase shares of the Company's common stock at an exercise price of $0.05 per
share, in connection with the $20 million Standby Equity Distribution Agreement
entered into between the Company and Cornell. The warrants were not exercised as
of December 31, 2003. Cornell exercised the warrants during January 2004.
Option and Warrant Repricing Programs
In June 2002, the Company repriced 3 million of its common stock warrants
from $0.12 to $0.05 per share. All of the warrants were exercised immediately.
The Company recognized an expense of $132,000 related to this repricing during
the year ended December 31, 2002.
In April 2002, in order to encourage the exercise of options, NeoMedia's
Board of Directors adopted an option repricing program. Under the program, those
persons holding options granted under the 1996, 1998 and 2002 Stock Option
Plans, to the extent their options were exercisable during the period ending
October 9, 2002, were allowed to exercise the option at a price which is the
greater of $0.12 per share or 50% of the last sale price of a share of NeoMedia
common stock on the OTC Bulletin Board on the trading date immediately preceding
the date of exercise. No options were exercised under the program and no expense
was recognized relating to the program.
During March 2002, the Company repriced approximately1.2 million of its
common stock warrants for a period of six months. During the term of the warrant
repricing program, participating holders were entitled to exercise qualified
warrants at an exercise price per share equal to the greater of (1) $0.12 or (2)
50% of the last sale price of shares of Common Stock on the OTCBB, on the
trading date immediately preceding the date of exercise. Approximately 370,000
warrants were exercised in connection with the program, and NeoMedia recognized
approximately $63,000 in expense relating to the repricing during the year ended
December 31, 2002.
F-29
During April 2003, the Company repriced approximately 1.9 million warrants
held by Thornhill Capital LLC, an outside consultant to the Company. Of the 1.9
million warrants, 1.5 million had an exercise price of $0.05 per share, and
approximately 0.4 million had an exercise price of $2.09 per share. All 1.9
million warrants were repriced to $0.00 per share. The Company recognized an
expense of approximately $27,000 related to this transaction during the second
quarter of 2003. These warrants were exercised immediately after the repricing.
During May 2003, the Company re-priced approximately 8.0 million stock
options under a 6-month repricing program. Under the terms of the program, the
exercise price for outstanding options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months. In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions, the award has been accounted for as variable from
May 19, 2003 through the period ended December 31, 2003. Accordingly, the
Company recognized approximately $746,000 as compensation in general and
administrative expense during the year ended December 31, 2003. Approximately
4.4 million options were exercised under the repricing program during the year
ended December 31, 2003. During December 2003, the deadline for the option
repricing was extended to June 30, 2004 by the Stock Option Committee of
NeoMedia's Board of Directors.
19. SEGMENT INFORMATION
Beginning with the year ended December 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company is organized into two business segments: (a) NeoMedia ISS, and
(b) NeoMedia CIS. Performance is evaluated and resources allocated based on
specific segment requirements and measurable factors. Management uses the
Company's internal income statements to evaluate each business unit's
performance. Assets of the business units are not available for management of
the business segments or for disclosure.
F-30
Operational results for the two segments for the years ended December 31,
2003 and 2002 are presented below (in thousands):
(in thousands)
--------------------------
Years Ended
December 31,
--------------------------
2003 2002
------------- ------------
Net Sales:
NeoMedia Consulting & Integration Services $2,354 $9,370
NeoMedia Internet Switching Service 46 29
------------- ------------
$2,400 $9,399
------------- ------------
Net Loss:
NeoMedia Consulting & Integration Services ($4,331) ($1,275)
NeoMedia Internet Switching Service (1,051) (6,146)
------------- ------------
($5,382) ($7,421)
------------- ------------
Identifiable Assets
NeoMedia Consulting & Integration Services $426
NeoMedia Internet Switching Service 2,537
Corporate 913
-------------
$3,876
-------------
20. COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of NeoMedia's outstanding shares of common stock, subject to the
rights of the holders of preferred stock, can elect all of NeoMedia's directors,
if they choose to do so. In this event, the holders of the remaining shares of
common stock would not be able to elect any directors. Subject to the prior
rights of any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available for that purpose and, upon NeoMedia's liquidation,
dissolution, or winding up, are entitled to share ratably in all assets
remaining after payment of liabilities and payment of accrued dividends and
liquidation preferences on the preferred stock, if any. Holders of common stock
have no preemptive rights and have no rights to convert their common stock into
any other securities. The outstanding common stock is duly authorized and
validly issued, fully-paid, and nonassessable.
On June 6, 2002, the Company's shareholders voted to increase the number
of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 50,000,000 to 200,000,000 and the number of share of
preferred stock, par value $0.01 per share, that the Company is authorized to
issue from 10,000,000 to 25,000,000.
On September 24, 2003, the Company's shareholders voted to (i) increase the
number of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 200,000,000 to 1,000,000,000; and (ii) implement the
2003 Stock Option Plan, under which NeoMedia is authorized to grant to
employeees, directors, and consultants up to 150,000,000 options to purchase
shares of its common stock. On October, 30, 2003, the Company's Board of
Directors approved the 2003 Stock Incentive Plan, under which the Company can
issue up to 30 million shares of stock to employees, non-employee directors,
consultants for incentive purposes.
F-31
On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase
was $150,000 with a minimum of seven days between purchases. The shares were
valued at 98% of the lowest closing bid price during the five-day period
following the delivery of a notice of purchase by NeoMedia. The Company paid 5%
of the gross proceeds of each purchase to Cornell
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement. The terms of the agreement are identical
to the terms of the previous Equity Line of Credit, except that the maximum
"draw" under the new agreement is $280,000 per week, not to exceed $840,000 in
any 30-day period, and Cornell will purchase up to $20 million of the Company's
common stock over a two-year period. As a consideration fee for Cornell to enter
into the agreement, the Company issued 10 million warrants to Cornell with an
exercise price of $0.05 per share, and a term of five years. Cornell exercised
the warrants in January 2004, resulting in $500,000 cash receipts to the
Company.
21. PREFERRED STOCK
The Company's Preferred Stock is currently comprised of 25,000,000
shares, par value $0.01 per share, of which 200,000 shares are designated as
Series A Preferred Stock, none of which are issued or outstanding, and,
following the conversion into common stock of 452,489 shares of Series A
Convertible Preferred Stock issued to About.com, 47,511 shares are designated as
Series A Convertible Preferred Stock, none of which are issued and outstanding,
and 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock, none
of which are issued and outstanding. The Company has no present agreements
relating to or requiring the designation or issuance of additional shares of
preferred stock.
22. SUBSEQUENT EVENTS
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The Complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
Eastern Division, by Baniak Pine & Gannon, the Company's intellectual property
law firm. The Complaint claims that Virgin has infringed four of NeoMedia's
patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The
Complaint alleges that the Virgin Megaplay Stations located in Virgin's
Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to
allow customers to scan UPC codes from in-store CDs and DVDs to access
Internet-based product information, such as music and movie previews, and album
and video art. The Complaint also alleges that Virgin had notice of NeoMedia's
patents since the latter part of 2002 or before, yet it continued with its
infringing activities. NeoMedia's Complaint seeks compensatory damages for
Virgin's infringement, with those damages to be trebled due to the willful and
wanton nature of the infringement. NeoMedia also seeks to preliminarily and
permanently enjoin Virgin from its infringing activities.
On January 20, 2004, the Company borrowed from Cornell the gross amount of
$4,000,000 before Cornell discounts and fees. Cornell has also committed to fund
an additional $1,000,000 in the form of a promissory note. As consideration for
the advance, the Company granted to Cornell 40,000,000 warrants to purchase
shares of NeoMedia stock with an exercise price of $0.05 per share. The
additional $1,000,000 promissory note will be funded within 15 days of the
filing of a registration statement by the Company to register the warrants. Upon
registration of the warrants, if the average closing bid price of NeoMedia's
common stock for any five day period exceeds $0.10, the Company has the option
to force Cornell to exercise the warrants, resulting in additional funds to the
Company of $2,000,000. Of the $4,000,000 funding, $2,500,000 was used to fund
the acquisition of CSI International, Inc. during February 2004. As of February
2, 2004, the Company had sold to Cornell 2,868,313 shares under the Standby
Equity Distribution Agreement, reducing the balance payable to $3,680,000. All
assets of the Company are pledged as collateral for the note, which matures on
June 18, 2004. The note has a 60-day cure period after maturity during which the
Company can cure any defaults without penalty. The note accrues interest at a
rate of 24% upon default only. The Company has the option to repay any remaining
principal in cash.
F-32
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Scanbuy, Inc., and LScan Technologies, Inc. The suit claims that each
of the parties has manufactured, or has manufactured for it, and has used, or
actively induced others to use, technology which allows customers to use a
built-in UPC bar code scanner to scan individual items and access information.
The Complaint states that AirClic, Scanbuy and LScan have had actual and
constructive notice of the existence of the patents-in-suite, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents in suit. NeoMedia's Complaint
seeks compensatory damages for infringement by AirClic, Scanbuy and LScan, with
those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin
AirClic, Scanbuy and LScan from their infringing activities.
On February 6, 2004, NeoMedia acquired CSI International, Inc., of Calgary,
Alberta, Canada, a private technology products company in the micro paint repair
industry. NeoMedia paid 7,000,000 shares of its common stock, plus $2.5 million
cash in exchange for all outstanding shares of CSI. NeoMedia has centralized the
administrative functions in its Ft. Myers, Florida headquarters, and maintains
the sales and operations office in Calgary, Alberta, Canada.
On December 9, 2003, NeoMedia signed a non-binding letter of intent to
acquire Triton Global Business Services Inc. and its parent company, BSD
Software Inc. (Pink Sheets: BSDS), both of Calgary, Alberta, Canada. Triton,
formed in 1998 and acquired by BSD in 2002, is an Internet Protocol-enabled
provider of live and automated operator calling services, e-business support,
billing and clearinghouse functions and information management services to
telecommunications, Internet and e-business service providers. The LOI outlined
terms, including an exchange of one share of NeoMedia common stock for each
share of BSD Software, not to exceed 40 million shares. The transaction is
contingent upon, among other things, satisfactory due diligence investigation by
both companies, approval by NeoMedia's Board of Directors, approval by BSD
Software's Board of Directors and shareholders, and any required regulatory
approvals. As of February 27, 2004, the Company has not yet entered into any
definitive purchase agreement with BSD.
F-33
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 January 30, 2004, NeoMedia's directors and executive officers
were:
Name Age Position
---- --- --------
Charles W. Fritz 47 Chairman of the Board of Directors
President, Chief Operating Officer, Acting Chief
Charles T. Jensen 60 Executive Officer and Director
David A. Dodge 28 Vice-President, Chief Financial Officer and Controller
William E. Fritz 73 Secretary and Director
James J. Keil 76 Director
A. Hayes Barclay 73 Director
The following is certain summary information with respect to the directors
and executive officers of NeoMedia:
Charles W. Fritz is a founder of NeoMedia and has served as an officer and
as a Director of NeoMedia since NeoMedia's inception. On August 6, 1996, Mr.
Fritz was appointed Chief Executive Officer and Chairman of the Board of
Directors. On April 2, 2001, Mr. Fritz was appointed as President where he
served until June 2002. Mr. Fritz is currently a member of the Compensation
Committee. Prior to founding NeoMedia, Mr. Fritz was an account executive with
IBM Corporation from January 1986 to January 1988, and Director of Marketing and
Strategic Alliances for the information consulting group from February 1988 to
January 1989. Mr. Fritz holds an M.B.A. from Rollins College and a B.A. in
finance from the University of Florida. Mr. Fritz is the son of William E.
Fritz, a Director of NeoMedia.
Charles T. Jensen was Chief Financial Officer, Treasurer and Vice-President
of NeoMedia since May 1, 1996. Mr. Jensen has been a Director since August 6,
1996, and currently is a member of the Compensation Committee. During June 2002,
Mr. Jensen was promoted to President, Chief Operating Officer, and Acting Chief
Executive Officer. Prior to joining NeoMedia in November 1995, Mr. Jensen was
Chief Financial Officer of Jack M. Berry, Inc., a Florida corporation which
grows and processes citrus products, from December 1994 to October 1995, and at
Viking Range Corporation, a Mississippi corporation which manufactures gas
ranges, from November 1993 to December 1994. From December 1992 to February
1994, Mr. Jensen was Treasurer of Lin Jensen, Inc., a Virginia corporation
specializing in ladies clothing and accessories. Prior to that, from January
1982 to March 1993, Mr. Jensen was Controller and Vice-President of Finance of
The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a B.B.A. in
accounting from Western Michigan University and is a Certified Public
Accountant.
III-1
David A. Dodge joined NeoMedia in 1999 as the Financial Reporting
Manager. Since then, Mr. Dodge has acted as NeoMedia's Director of Financial
Planning and Controller, and currently holds the title of Vice President, Chief
Financial Officer and Controller. Prior to joining NeoMedia in 1999, Mr. Dodge
was an auditor with Ernst & Young LLP for 2 years. Mr. Dodge holds a B.A. in
economics from Yale University and an M.S. in accounting from the University of
Hartford, and is also a Certified Public Accountant.
William E. Fritz is a founder of NeoMedia and has served as Secretary and
Director of NeoMedia since NeoMedia's inception. Mr. Fritz also served as
Treasurer of NeoMedia from its inception until May 1, 1996. Since February 1981,
Mr. Fritz has been an officer and either the sole stockholder or a majority
stockholder of G.T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc.
(formerly Dev-Mark, Inc.) and EDSCO, three railroad freight car equipment
manufacturing companies. Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval
Science degree from the University of Wisconsin. Mr. Fritz is the father of
Charles W. Fritz, NeoMedia's former Chief Executive Officer and Chairman of the
Board of Directors.
James J. Keil has been a Director of NeoMedia since August 6, 1996. Mr.
Keil currently is a member of the Compensation Committee, the Stock Option
Committee and the Audit Committee. He is founder and President of Keil & Keil
Associates, a business and marketing consulting firm located in Washington,
D.C., specializing in marketing, sales, document application strategies,
recruiting and electronic commerce projects. Prior to forming Keil & Keil
Associates in 1990, Mr. Keil worked for approximately 38 years at IBM
Corporation and Xerox Corporation in various marketing, sales and senior
executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of
Elixir Technologies Corporation (a non-public corporation), and from 1990-1992
was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on
the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S.
degree from the University of Dayton and did Masters level studies at the
Harvard Business School and the University of Chicago in 1961/62.
A. Hayes Barclay has been a Director of NeoMedia since August 6, 1996,
and currently is a member of the Stock Option Committee and the Audit Committee.
Mr. Barclay has practiced law for approximately 37 years and, since 1967, has
been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd.
and its predecessor, with offices in Chicago, Wheaton and Arlington Heights,
Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the
University of Illinois and a J.D. from the Illinois Institute of Technology -
Chicago Kent College of Law.
Election Of Directors And Officers
Directors are elected at each annual meeting of stockholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. NeoMedia's By-Laws permit the Board of Directors to fill any vacancy
and such director may serve until the next annual meeting of shareholders and
the due election and qualification of his successor.
Meetings Of The Board Of Directors
During the fiscal year ended December 31, 2003, the Company's Board of
Directors held 5 meetings. All members of the Board of Directors attended at
least 75% of such meetings.
III-2
Committees Of The Board Of Directors
NeoMedia's Board of Directors has an Audit Committee, Compensation
Committee and a Stock Option Committee. The Board of Directors does not have a
standing Nominating Committee.
Audit Committee. The Audit Committee is responsible for nominating
NeoMedia's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with NeoMedia's independent
accountants, and reviewing the consolidated financial statements, audit
practices and internal controls of NeoMedia. During 2003, members of the Audit
Committee were non-employee directors James J. Keil and A. Hayes Barclay. During
2003, the Audit Committee held 2 meetings. Due to financial constraints, the
Company does not have an audit committee financial expert serving on its audit
committee.
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, and James J. Keil were members
of NeoMedia's Compensation Committee during 2003. This Committee held one
meeting throughout 2003.
Stock Option Committee. The Stock Option Committee, which is comprised of
non-employee directors, is responsible for administering NeoMedia's Stock Option
Plans. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's
Stock Option Committee. During 2003, this Committee held one meeting.
Director Compensation
During October 2003, each outside director was granted 1,000,000 options at
an exercise price of $0.01 per share from the 2003 Stock Option Plan. The last
grant to outside directors was at NeoMedia's previous annual meeting held on
June 6, 2002, at which each outside director received 100,000 options with an
exercise price of $0.05 per share. NeoMedia does not have a written compensation
policy for its outside directors at this time.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
NeoMedia's officers and directors, and persons who own more than ten percent of
a registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulation to furnish NeoMedia with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to
NeoMedia, NeoMedia believes that during 2003 all Section 16(a) filing
requirements applicable to NeoMedia's officers, directors and ten percent
beneficial owners were complied with.
III-3
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 other executive officers who received aggregate cash compensation in
excess of $100,000 for services rendered to NeoMedia (collectively, "the Named
Executive Officers") during the years ended December 31, 2003, 2002 and 2001:
Summary Compensation Table
Annual Compensation Long-term Compensation
-------------------------------------------------- -------------------------------------------------
Other Securities
Annual Restricted Underlying
Compens- Stock Options/ LTIP All other
Name and Salary Bonus ation Award(s) SARs(1) Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------
Charles W. Fritz 2003 $145,255 $110,322(2) $60,568 (3) - 10,000,000 - --
Chairman of the Board 2002 144,583 - 4,470 (4) - 1,800,000 -
2001 221,758 - 21,532 (4) - 400,000 - --
Charles T. Jensen 2003 162,318 91,618(2) 1,072 (4) - 10,000,000 -
Chief Operating Officer, 2002 163,542 - 5,079 (4) - 800,000 -
President, Acting Chief 2001 144,239 - 17,794 (4) - 240,000 - --
Executive Officer
---------------
(1) Represents options granted under NeoMedia's 2003, 2002 and 1998 Stock
Option Plans and warrants granted at the discretion of the Stock Option
Committee of NeoMedia's Board of Directors.
(2) During 2003, the Company paid past due Year 2000 Executive Incentive
liability through the issuance of shares of its common stock. The amounts
reported in this table represent the market value of the shares on the
date of issuance.
(3) During 2003, the Company paid Charles W. Fritz unpaid salary from 2002
through the issuance of shares of its common stock. The amounts reported
in this table represent the market value of the shares on the date of
issuance.
(4) Includes automobile expenses attributable to personal use and the
corresponding income tax effects, and life insurance premiums where
policy benefits are payable to beneficiary of the Named Executive
Officer.
Employment Agreements
On June 26, 2002, Charles T. Jensen was elected president and Chief
Operating Officer, and also named acting CEO. The Company also promoted David
Dodge, its Controller, to Vice President and Chief Financial Officer. No
employment agreements are currently in place for any employees of the Company.
III-4
Incentive Plan for Management
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive
Plan for Management ("Incentive Plan"), which provides for annual bonuses to
eligible employees based upon the attainment of certain corporate and/or
individual performance goals during the year. The Incentive Plan is designed to
provide additional incentive to NeoMedia's management to achieve these growth
and profitability goals. Participation in the Incentive Plan is limited to those
employees holding positions assigned to incentive eligible salary grades and
whose participation is authorized by NeoMedia's Compensation Committee which
administers the Incentive Plan, including determination of employees eligible
for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.
To be eligible for consideration for inclusion in the Incentive Plan,
an employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and/or the
employee's performance during the year, and if performance goals are attained,
eligible employees are entitled to an award based upon a specified percentage of
their base salary.
The Company did not have an incentive plan for management in place for
the year ended December 31, 2003.
During 2003, the Company settled approximately $300,000 in past due
incentive awards relating to its executive incentive plan for fiscal 2000,
through the issuance of common stock. The Company has a remaining liability of
approximately $80,000 as of December 31, 2003 relating to this executive
incentive. During January 2004, the Company paid an additional $74,000 toward
the balance through the issuance of common stock.
Stock Option Plans
Effective 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. All 1,500,000 options were granted under NeoMedia's 1996 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. All 8,000,000 options were granted under
NeoMedia's 1998 Stock Option Plan.
III-5
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan provides for authority for the Board of Directors to the
grant non-qualified stock options with respect to a maximum of 10,000,000 shares
of common stock. All 10,000,000 options were granted under NeoMedia's 2002 Stock
Option Plan
Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option
Plan. The 2003 Stock Option Plan provides for authority for the Board of
Directors to the grant non-qualified stock options with respect to a maximum of
150,000,000 shares of common stock. On October 17, 2003, NeoMedia filed a Form
S-8 to register all 150,000,000 shares underlying the options in the 2003 Stock
Option Plan.
Stock Incentive Plan
Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive
Plan. Under the terms of the Plan, NeoMedia has set aside up to 30,000,000
shares of common stock to be issued to pay compensation and other expenses
related to employees, former employees, consultants, and non-employee directors.
On November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
underlying the options in the 2003 Stock Incentive Plan. As of December 31,
2003, the Company had issued approximately 5.8 million shares under the 2003
Stock Incentive Plan.
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 $12,000 for 2003) to the 401(k) Plan, although the
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The 401(k)
Plan also provides for matching and discretionary contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.
Options Granted in the Last Fiscal Year
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 2003:
Percent of
Number of Total Potential Realizable Value
Securites Options/ at Assumed Annual Rates
Underlying SARs of Stock Price Appreciation
Options Granted to Exercise or for option Term
Granted Employees in Base Price Expiration -------------------------------
Name (#) Fiscal Year ($/share) Date 5%($) 10%($)
------------------- -------------- -------------- --------------- ------------------ -------------------------------
Charles W. Fritz 10,000,000 16.6% $0.01 October 20, 2013 $641,473 $1,625,617
Charles T. Jensen 10,000,000 16.6% $0.01 October 20, 2013 641,473 1,625,617
III-6
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Options/SAR Values
The following table sets forth options exercised by NeoMedia Named
Executive Officers during the year ended December 31, 2003, and the number and
value of all unexercised options at fiscal year end.
Number of Unexercised
Shares Securities Underlying Value of Unexercised In-
Acquired Value Options/SARs at the-Money Options/SARs at
on Exercise Realized December 31, 2003 December 31, 2003 (1)
------------------------------- --------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------ -------------- ----------- ------------------------------- --------------------------------
Charles W. Fritz -- $ - 13,059,000 - $1,658,493 -
Charles T. Jensen -- $ - 11,505,386 - $1,461,184 -
(1) Based on the closing price of $0.137 of NeoMedia's common stock as quoted
on OTC Bulletin Board on December 31, 2003 and the exercise price of the
option/SAR. During May 2003, the Option Committee of the Company's Board of
Directors repriced all outstanding stock options to an exercise price of
$0.01 per share for a period of six months. The Option Committee
subsequently extended the option repricing through June 30, 2004. As a
result, as of December 31, 2003, Mr. Fritz and Mr. Jensen held 3,059,000
and 1,527,386, respectively, with restated exercises prices, for which the
exercise prices will revert to the original amounts if not exercised by
June 30, 2004. All of the restated options were out-of-the-money at their
original exercise prices.
III-7
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 January 30, 2004, (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 and nominees,
(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.
Amount and Nature of Percent of
Beneficial Ownership (1) Class (1)
------------------------------ -------------
Charles W. Fritz (2)(3) 30,316,467 11.1%
William Fritz(2)(4) 56,674,776 21.5%
Charles T. Jensen(2)(5) 11,506,886 4.2%
David A. Dodge(2)(6) 2,300,000 *
A. Hayes Barclay(2)(7) 1,139,000 *
James J. Keil(2)(8) 1,412,000 *
---------------------------- -------------
Officers and Directors as a Group (6 Persons)(9) 103,349,129 35.5%
---------------------------- -------------
________
* - denotes ownership of less than one percent of issued and outstanding shares
of NeoMedia's common stock.
(1) Applicable percentage of ownership is based on 259,477,268 shares of
common stock outstanding as of January 30, 2004, together with
securities exercisable or convertible into shares of common stock
within 60 days of January 30, 2004, for each stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that
are currently exercisable or exercisable within 60 days of January 30,
2004, are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The common
stock is the only outstanding class of equity securities of NeoMedia.
(2) Address of the referenced individual is c/o NeoMedia Technologies,
Inc., 2201 Second Street, Suite 402, Fort Myers, FL, 33901.
(3) Charles W. Fritz is the Company's founder and the Chairman of the
Board of Directors. Shares beneficially owned include 100 shares owned
by each of Mr. Fritz's four minor children for an aggregate of 400
shares, 11,549,000 shares of common stock issuable upon exercise of
options granted under the Company's 2003, 2002 and 1998 stock option
plans, 1,510,000 shares issuable upon exercise of stock warrants,
15,714,098 shares of common stock owned by Mr. Charles W. Fritz
directly, and 1,542,969 shares of common stock held by the CW/LA II
Family Limited Partnership, a family limited partnership for the
benefit of Mr. Fritz's family.
(4) William E. Fritz, the Company's corporate secretary and a director,
and his wife, Edna Fritz, are the general partners of the Fritz Family
Limited Partnership and therefore each are deemed to be the beneficial
owners 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 165,467 shares of NeoMedia
held in these trusts. Additionally, Mr. Fritz is deemed to own:
51,172,567 shares held directly by Mr. Fritz or his spouse, 2,540,000
shares to be issued upon the exercise of warrants held by Mr. Fritz or
his spouse, and 1,285,000 shares to be issued upon the exercise of
options held by Mr. Fritz or his spouse. Mr. William E. Fritz may be
deemed to be a parent and promoter of NeoMedia, as those terms are
defined in the Securities Act.
(5) Charles T. Jensen is President, Chief Operating Officer, Acting Chief
Executive Officer, and a member of the Board of Directors. Beneficial
ownership includes 11,505,386 shares of common stock issuable upon
exercise of options granted under NeoMedia's stock option plans, and
1,500 shares owned by Mr. Jensen's sons.
(6) David A. Dodge is Vice President, Chief Financial Officer, and
Controller. Beneficial ownership includes 2,300,000 shares of common
stock issuable upon exercise of options granted under NeoMedia's stock
option plans.
(7) A. Hayes Barclay is a member of the Board of Directors. Ownership
includes 1,134,000 shares of common stock issuable upon exercise of
options granted under NeoMedia's stock option plans, and 5,000 shares
owned by Mr. Barclay directly.
(8) James J. Keil is a member of the Board of Directors. Shares
benficially owned includes 10,000 shares issuable upon exercise of
warrants, and 1,402,000 shares owned by Mr. Keil directly.
III-8
(9) Includes an aggregate of 27,773,386 currently exercisable options to
purchase shares of common stock granted under NeoMedia's stock option
plans, 4,060,000 currently exercisable warrants to purchase shares of
common stock, and 71,515,743 shares owned directly by NeoMedia's
officers and directors.
III-9
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During February 2002, the Company borrowed $10,000 from William E. Fritz
under a note payable bearing interest at 8% per annum with a term of 30 days.
The note was repaid during April 2003.
During March 2002, the Company borrowed $190,000 from William E. Fritz
under a note payable bearing interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.
During April 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum with a term of 60 days. The note
was repaid during April 2003..
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an
outside director; and James J. Keil, an outside director. The notes bear
interest at a rate of 15% per annum, and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were convertible, at the option of the
holder, into either cash or shares of NeoMedia common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia also granted to the holders an additional 1,355,670 shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share, with a term of three years. The warrants and shares were issued in
January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, was recognizable as debt discount, and
amortized over the life of the notes payable. During March 2003, two of the
affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the
maturity date due to the Company's capital constraints. The Company repaid
Charles Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003. The Company paid $30,000 of the principal on William
Fritz's note during April 2003, and entered into a new note with Mr. Fritz for
the remaining $10,000. The new note bears interest at a rate of 10% per annum
and matures in April 2004. The new note also includes a provision under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.
During April 2003, the Board of Directors of the Company approved the
payment in full of approximately $154,000 of liabilities owed by the Company to
Charles W. Fritz, the Company's Founder and Chairman of the Board of Directors,
through the issuance of 15,445,967 shares of common stock. The Company
recognized a discount expense in general and administrative expenses of
approximately $15,000 relating to this transaction with Mr. Fritz.
During April 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. In
connection with the sale, the Company also granted the purchaser 25,000,000
warrants to purchase shares of the Company's common stock at an exercise price
of $0.01 per share. The warrants had a fair value of $298,000 and have been
recorded as a cost of issuance. The purchaser was William E. Fritz, a member of
the Company's Board of Directors. Proceeds to the Company from sale of the
shares were $250,000. The Company recognized a discount expense in general and
administrative expenses of approximately $50,000 relating to this transaction
with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and
purchased 25,000,000 additional shares of common stock at a price of $0.01 per
share.
III-10
During April 2003, the Company entered into a consulting agreement with
William Fritz, an outside director, for consulting and advisement services
relating to the merger with Loch Energy, Inc., and to the subsequent
implementation of various management programs surrounding the business. The
agreement called for total payments of $250,000 over a period of one year.
During August 2003, the Company paid the consulting contract in full. During
September 2003, the consulting contract was rescinded and the full $250,000 was
returned to NeoMedia.
During July 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside directors. This amount was added to the principal of a $10,000
note payable to Mr. Fritz that matures in April 2004, with all other terms of
the note remaining the same. As consideration for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at
an exercise price of $0.01 per share. The warrants had a fair value of
approximately $74,000. In accordance with EITF 00-27, the Company recorded the
relative fair value of the warrants as a discount against the note, and
amortized the discount over the life of the note.
On August 29, 2003, the Company borrowed $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.
III-11
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:
Exhibit No. Description Location
----------- ----------- --------
3.1 Articles of Incorporation of Dev-Tech Associates, Incorporated by reference to Exhibit 3.1
Inc. and amendment thereto to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.2 Bylaws of DevSys, Inc. Incorporated by reference to Exhibit 3.2
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.3 Restated Certificate of Incorporation of DevSys, Incorporated by reference to Exhibit 3.3
Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.4 By-laws of DevSys, Inc. Incorporated by reference to Exhibit 3.4
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.5 Articles of Merger and Agreement and Plan of Incorporated by reference to Exhibit 3.5
Merger of DevSys, Inc and Dev-Tech Associates, Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.6 Certificate of Merger of Dev-Tech Associates, Inc. Incorporated by reference to Exhibit 3.6
into DevSys, Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.7 Articles of Incorporation of Dev-Tech Migration, Incorporated by reference to Exhibit 3.7
Inc. and amendment thereto to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.8 By-laws of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit 3.8
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
III-12
Exhibit No. Description Location
----------- ----------- --------
3.9 Restated Certificate of Incorporation of DevSys Incorporated by reference to Exhibit 3.9
Migration, Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.10 Form of By-laws of DevSys Migration, Inc. Incorporated by reference to Exhibit 3.10
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.11 Form of Agreement and Plan of Merger of Incorporated by reference to Exhibit 3.11
Dev-Tech Migration, Inc. into DevSys Migration, to Registrant's Registration Statement
Inc. No. 333-5534 as filed with the SEC on
November 25, 1996
3.12 Form of Certificate of Merger of Dev-Tech Incorporated by reference to Exhibit 3.12
Migration, Inc. into DevSys Migration, Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.13 Certificate of Amendment to Certificate of Incorporated by reference to Exhibit 3.13
Incorporation of DevSys, Inc. changing its name to Registrant's Registration Statement
to NeoMedia Technologies, Inc. No. 333-5534 as filed with the SEC on
November 25, 1996
3.14 Form of Certificate of Amendment to Certificate Incorporated by reference to Exhibit 3.14
of Incorporation of NeoMedia Technologies, Inc. to Registrant's Registration Statement
authorizing a reverse stock split No. 333-5534 as filed with the SEC on
November 25, 1996
3.15 Form of Certificate of Amendment to Restated Incorporated by reference to Exhibit 3.5
Certificate of Incorporation of NeoMedia to Registrant's Annual Report as filed
Technologies, Inc. increasing authorized with the SEC on November 2, 2001
capital and creating preferred stock
10.1 Dev-Tech Associates, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit
10.44 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.2 First Amendment and Restatement of Dev-Tech Incorporated by reference to Exhibit
Associates, Inc. 1996 Stock Option Plan 10.45 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.3 Form of Stock Option Agreement - Dev-Tech Incorporated by reference to Exhibit
Associates, Inc. 10.46 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
III-12
Exhibit
No. Description Location
------ ----------- --------
10.4 Dev-Tech Migration, Inc. 1996 Stock Option Incorporated by reference to Exhibit 10.47 to
Plan the Registrant's Registration Statement No. 333-
5534 as filed with the SEC on November 25, 1996
10.5 First Amendment and Restatement of Dev-Tech Incorporated by reference to Exhibit 10.48 to
Migration, Inc. the Registrant's Registration Statement No. 333-
5534 as filed with the SEC on November 25, 1996
10.6 Form of Stock Option Agreement - Dev-Tech Incorporated by reference to Exhibit 10.49 to
Migration, Inc. the Registrant's Registration Statement No. 333-
5534 as filed with the SEC on November 25, 1996
10.7 Dev-Tech Associates, Inc. 401(k) Plan and Incorporated by reference to Exhibit 10.50 to
amendments the Registrant's Registration Statement No. 333-
5534 as filed with the SEC on November 25, 1996
10.8 First Amendment and Restatement of NeoMedia Incorporated by reference to Exhibit 10.60 to
Technologies, Inc. 1996 Stock Option Plan the Registrant's Registration Statement No. 333-
5534 as filed with the SEC on November 25, 1996
10.9 NeoMedia Technologies, Inc. 1998 Stock Provided Herewith
Option Plan
10.10 Amendment to NeoMedia Technologies 1998 Incorporated by reference to Form 14A as filed
Stock Option Plan with the SEC on July 2, 1999
10.11 Sale and Purchase Agreement between Incorporated by reference to Exhibit 10.48 to
Qode.com, Inc. and NeoMedia Technologies, the Registrant's Current Report on Form 8-K as
Inc. filed with the SEC on March 15, 2001
10.12 Warrant repricing letter dated March 19, 2002 Incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K as
filed with the SEC on April 2, 2002
10.13 Option repricing letter dated April 3, 2002 Incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K as
filed with the SEC on April 15, 2002
10.14 Intellectual Property licensing agreement Incorporated by reference to Exhibit 10.18 to
between NeoMedia and A.T. Cross Company the Registrant's Form S-1/A as filed with the
SEC on April 24, 2002
III-14
Exhibit
No. Description Location
-------- ----------- --------
10.15 Intellectual Property licensing agreement Registrant's Form S-1/A as filed with the SEC on April
between NeoMedia and Symbol 24, 2002
Technologies, Inc.
10.16 Sponsorship and Advertising Agreement Incorporated by reference to Exhibit 10.20 to the
between NeoMedia and About.com, Inc. Registrant's Form S-1/A as filed with the SEC on April
24, 2002
10.17 Letter of Intent regarding proposed strategic Incorporated by reference to Exhibit 10.21 to the
transaction between NeoMedia and AirClic, Registrant's Form S-1/A as filed with the SEC on April
Inc. 24, 2002
10.18 Form of Promissory Note issued to AirClic, Incorporated by reference to Exhibit 10.22 to the
Inc. Registrant's Form S-1/A as filed with the SEC on April
24, 2002
10.19 Form of Limited Recourse Promissory Note Incorporated by reference to Exhibit 10.23 to the
issued in exchange for 19 Million Shares of Registrant's Form S-1/A as filed with the SEC on April
Common Stock 24, 2002
10.20 Nasdaq Staff Determination Letter with Incorporated by reference to Exhibit 10.24 to the
respect to de-listing of NeoMedia securities Registrant's Form S-1/A as filed with the SEC on April
from the Nasdaq SmallCap market 24, 2002
10.21 Revised warrant repricing letter dated April Incorporated by reference to Exhibit 10.25 to the
3, 2002 Registrant's Form S-1/A as filed with the SEC on April
24, 2002
10.22 Equity Line of Credit Agreement, dated May Incorporated by reference to Exhibit 10.17 to the
6, 2002, between NeoMedia Technologies Registrant's Quarterly Report on Form 10-Q as filed
and Cornell Capital Partners, LP with the SEC on August 14, 2002
10.23 Nasdaq Staff delisting notification letter Incorporated by reference to Exhibit 10.18 to the
dated May 16, 2002 Registrant's Quarterly Report on Form 10-Q as filed
with the SEC on August 14, 2002
10.24 Settlement Agreement relating to wrongful Incorporated by reference to Exhibit 10.19 to the
termination lawsuit brought by former Registrant's Form 10-Q as filed with the SEC on
president and Chief Operating Officer August 14, 2002
10.25 Mutual settlement agreement by and Incorporated by reference to Exhibit 10.20 to the
between NeoMedia Technologies and 2150 Registrants Form 10-Q as filed on November 14, 2002
Western Court Company, LLC
III-15
Exhibit
No. Description Location
-------- ----------- --------
10.26 Mutual settlement agreement by and between Incorporated by reference to Exhibit 10.21 to
NeoMedia Technologies and Ripfire, Inc. the Registrants Form 10-Q as filed on
November 14, 2002
10.27 Mutual settlement agreement by and between Incorporated by reference to Exhibit 10.22 to
NeoMedia Technologies and Wachovia Bank, the Registrants Form 10-Q as filed on
N.A. November 14, 2002
10.28 Mutual settlement agreement by and between Incorporated by reference to Exhibit 10.23 to
NeoMedia Technologies and Marianne LePera, the Registrants Form 10-Q as filed on
NeoMedia Technologies' former General November 14, 2002
Counsel
10.29 Equity Line of Credit Agreement, dated Incorporated by reference to Exhibit 10.80 to
February 11, 2003, between NeoMedia the Registrants Form S-1/A as filed on
Technologies and Cornell Capital Partners February 14, 2003
10.30 Sponsorship and Advertising Agreement, dated Incorporated by reference to Exhibit 23.7 to
May 23, 2001, between About.com and the Registrants Form S-1/A as filed on
NeoMedia November 16, 2001
10.31 Promissory Note dated December 2, 2002 Incorporated by reference to Exhibit 99.1 of
between Michael Kesselbrenner and NeoMedia the Registrant's Form 8-K as filed with the
SEC on December 12, 2002.
10.32 Pledge Agreement dated December 2, 2002, Incorporated by reference to Exhibit 99.2 of
between Michael Kesselbrenner and NeoMedia the Registrant's Form 8-K as filed with the
SEC on December 12, 2002.
10.33 Form of Placement Agent Agreement, dated Incorporated by reference to Exhibit 10.84 to
November 2002, between NeoMedia the Registrant's Form S-1 as filed on
Technologies and Westrock Advisors, Inc. February 12, 2003
10.34 Form of Escrow Agreement, dated November Incorporated by reference to Exhibit 10.85 to
2002, between NeoMedia Technologies and the Registrant's Form S-1 as filed on
Cornell Capital Partners February 12, 2003
10.35 Form of Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.86 to
November 2002, between NeoMedia the Registrant's Form S-1 as filed on
Technologies and Cornell Capital Partners February 12, 2003
10.36 Promissory Note, dated February 23, 2001, Incorporated by reference to Exhibit 10.87 to
between Digital Convergence Corporation and the Registrant's Form S-1 as filed on
NeoMedia February 12, 2003
10.37 Termination Agreement, dated August 21, 2001, Incorporated by reference to Exhibit 10.88 to
between About.com and NeoMedia the Registrant's Form S-1 as filed on
February 12, 2003
III-16
Exhibit
No. Description Location
-------- ----------- --------
10.38 Memorandum of Terms to merge, dated March 7, Incorporated by reference to Exhibit 3.1 to the
2003, between NeoMedia and Loch Energy, Inc. Registrant's Form 8-K as filed on March 19, 2003
10.39 Binding Letter of Intent to merge, dated July 25, Incorporated by reference to Exhibit 99.5 to
2003, between NeoMedia and Secure Source the Registrant's Form 10-QSB as filed on
Technologies, Inc. August 14, 2003
10.4 Definitive Merger Agreement, dated October 3, 2003, Incorporated by reference to Exhibit 99.1 to
between NeoMedia and Secure Source Technologies, the Registrant's Form 8-K as filed on
Inc October 8, 2003
10.41 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit 10.91 to
October 27, 2003, between NeoMedia and Cornell the Registrant's Form SB-2/A as filed on
Capital Partners December 19, 2003
10.42 Form of Placement Agent Agreement, dated October Incorporated by reference to Exhibit 10.92 to
27, 2003, between NeoMedia and Newbridge the Registrant's Form SB-2/A as filed on
Securities Corporation December 19, 2003
10.43 Form of Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.93 to
October 27, 2003, between NeoMedia and Cornell the Registrant's Form SB-2/A as filed on
Capital Partners December 19, 2003
10.44 Form of Escrow Agreement, dated October 27, 2003, Incorporated by reference to Exhibit 10.94 to
between NeoMedia and Cornell Capital Partners the Registrant's Form SB-2/A as filed on
December 19, 2003
10.45 2003 Stock Compensation Plan Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 as filed on October 31, 2003
10.46 Letter of Intent to acquire CSI International, Incorporated by reference to Exhibit 3.1 to
Inc., dated November 8, 2003 the Registrant's Form 8-K as filed on November 13, 2003
10.47 Letter of Intent to acquire BSD Software, Inc., Incorporated by reference to Exhibit 3.1 to
dated December 9, 2003 the Registrant's Form 8-K as filed on December 11, 2003
10.48 Definitive Merger Agreement, dated February 6, Incorporated by reference to Exhibit 3.1 to the
2004, between NeoMedia and CSI International, Inc. Registrant's Form 8-K as filed on February 10, 2004
$4 million Promissory note payable to Cornell
10.49 Capital Partners, dated January 15, 2004 Provided Herewith
23.1 Consent of Stonefield Josephson, Inc. Provided Herewith
III-17
(b) Reports on Form 8-K
NeoMedia filed a report on Form 8-K on October 3, 2003, reporting that it
had terminated its letter of intent to merge with Loch Energy, Inc.
NeoMedia filed a report on Form 8-K on October 9, 2003, reporting that it
had completed its pending merger with Secure Source Technologies, Inc.
NeoMedia filed a report on Form 8-K on November 13, 2003, reporting that
it had signed a letter of intent to acquire CSI International, Inc.
NeoMedia filed a report on Form 8-K on December 11, 2003, reporting that
it had signed a letter of intent to acquire BSD Software, Inc.
NeoMedia filed a report on Form 8-K on February 10, 2004, reporting that
it had completed its pending merger with CSI International, Inc.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for the audit of NeoMedia's annual consolidated financial
statements and reviews of quarterly financial statements for the years ended
December 31, 2003 and 2002 were $119,000 and $145,000, respectively.
Audit-related Fees
The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for assurance and related services for the years ended
December 31, 2003 and 2002 were $0 and $0, respectively.
Tax Fees
The aggregate fees billed by Wiltshire, Whitley, Richardson & English,
NeoMedia's principal accountants for tax compliance, advice, and planning, for
the years ended December 31, 2003 and 2002 were $9,000 and $9,000, respectively.
All Other Fees
The aggregate fees billed by Stonefield Josephson, Inc., for other products
and services during the years ended December 31, 2003 and 2002 were $0 and $0,
respectively.
Audit Committee Pre-approval
The audit committee of NeoMedia's board of directors approves all non-audit
services provided by NeoMedia's primary accountants.
III-19
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 27th day of February, 2004.
NEOMEDIA TECHNOLOGIES, INC.
Registrant
By: /s/ Charles T. Jensen, President, Chief Operating
Officer, Acting Chief Executive Officer, and Director
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 February 27, 2004.
Signatures Title Date
---------- ----- ----
---------------------------- President, Acting Chief Executive Officer,
/s/ Charles T. Jensen Chief Operating Officer and Director February 27, 2004
---------------------------- Director and Secretary February 27, 2004
/s/ William E. Fritz
---------------------------- Chairman of the Board
/s/ Charles W. Fritz February 27, 2004
---------------------------- Vice-President, Chief Financial
/s/ David A. Dodge Officer and Controller February 27, 2004
---------------------------- Director February 27, 2004
/s/ Hayes Barclay
---------------------------- Director February 27, 2004
/s/ James J. Keil