As filed with the Securities and Exchange Commission on November 7, 2005
SEC Registration No. 333-123848
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Delaware NEOMEDIA TECHNOLOGIES, INC. 36-3680347
(State or other jurisdiction of (Name of issuer in its charter) (I.R.S. Employer
incorporation or organization) Identification No.)
2201 Second Street, Suite 600 7373 Charles T. Jensen
Fort Myers, Florida 33901 (Primary Standard Industrial 2201 Second Street, Suite 600
(239) 337-3434 Classification Code Number) Fort Myers, Florida 33901-3083
(Address and telephone number of (239) 337-3434
Registrant's principal executive offices) Telecopier No.: (239) 337-3668
(Name, address, and telephone
number of agent for service)
With copies to:
Clayton E. Parker, Esq. Christopher J. DeLise, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Blvd., Suite 2000 201 S. Biscayne Blvd., Suite 2000
Miami, FL 33131 Miami, FL 33131
Telephone No.: (305) 539-3305 Telephone No.: (305) 539-3319
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
Proposed Plus Maximum Proposed
Title of each class Maximum Estimated Aggregate Amount of
of Securities to Amount to be Offering Price Cash Offering Registration
be Registered Registered (1) Per Share (2) Consideration (2) Price (2) Fee(3)
------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per share 20,000,000 $0.227 $5.00 $4,530,005 $533.18
------------------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of NeoMedia shares issuable in the merger,
assuming no adjustment to the exchange ratio of 1.00 share of BSD common
stock exchanged for NeoMedia common stock equivalent to .07 divided by the
volume-weighted average price of NeoMedia stock for the five business days
preceding the effective date of the merger..
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1), based on 20,000,000 shares of NeoMedia common stock
being exchanged for 100% of BSD's common shares, using the average of the
closing bid and ask prices of NeoMedia's common stock of $0.227 per share
as reported in the Over-the-Counter Bulletin Board on April 1, 2005,. Cash
consideration is estimated at $0.05 per shareholder, times an estimated
100 shareholders.
(3) Registration fee was paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to Completion or Amendment.
Dated _________ __, 2005
20,000,000 Shares
NEOMEDIA TECHNOLOGIES, INC.
Exchange of Common Stock
--------------------------------------------------------------------------------
20,000,000 Shares of Common Stock of NeoMedia Technologies, Inc. Are Being
Exchanged For All of the Outstanding Common Stock of BSD Software, Inc.
--------------------------------------------------------------------------------
The common stock of NeoMedia Technologies, Inc. ("NeoMedia") is traded on the
Over-the-Counter Bulletin Board under the symbol "NEOM". The common stock of BSD
Software, Inc. ("BSD") is quoted on the Over-the-Counter Bulletin Board under
the symbol "BSDS". After consummation of the merger described in this
information statement/prospectus, shares of NeoMedia will continue to be traded
on the Over-the-Counter Bulletin Board; however, shares of BSD's common stock
will no longer be traded or listed on any exchange.
As of October 24, 2005, based on 32,560,897 shares of BSD common stock
outstanding, a volume-weighted 5-day average closing price of NeoMedia stock of
$0.357, and the share exchange rate outlined in the merger agreement, BSD
shareholders would receive 0.1962 shares of NeoMedia stock for each share of BSD
common stock that they currently hold. This calculation is given for reference
only. It is important to note that BSD shareholders will not know the actual
number of shares they will receive until the effective date of the merger. BSD
shareholders who wish to inquire about the number of shares they will receive in
the merger can call toll-free (877) 813-2419.
BSD shareholders wishing to exercise their dissenters' rights must deliver to
BSD within 20 days after receiving notice from BSD that such appraisal rights
are available, a written notice of intent to demand payment. A dissenting
shareholder then cannot vote in favor of the proposed action.
We currently have an additional offering outstanding in which we are registering
the shares underlying 54,000,000 warrants granted in connection with our $100
million Standby Equity Sistribution Agreement with Cornell Capital Partners. On
May 25, 2005, we filed a registration statement on Form S-3 (Registration No.
333-125239, as amended on July 18, 2005 and August 18, 2005) to register the
shares underlying such warrants.
Please pay careful attention to all of the information in this information
statement/prospectus. In particular, you should carefully consider the
discussion in the section entitled "Risk Factors" beginning on page 8 of this
information statement/prospectus.
--------------------------------------------------------------------------------
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE
DISTRIBUTED UNDER THIS INFORMATION STATEMENT /PROSPECTUS OR DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
This prospectus is dated ________, 2005, and is first being mailed to
stockholders of NeoMedia and BSD on or about _____, 2005.
The information in this information statement/prospectus is not complete and may
be changed. NeoMedia may not distribute these securities until the registration
statement filed with the United States Securities and Exchange Commission is
declared effective. The information statement/prospectus is not and shall not
constitute an offer to sell and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
This information statement/prospectus incorporates important business
information about NeoMedia and BSD that is not included in or delivered with the
information statement/prospectus. NeoMedia will provide you with copies of this
information statement/prospectus, as well as exhibits filed with the information
statement/prospectus, upon written or oral request to:
-----------------------------------------------------------------
If a NeoMedia Stockholder: If A BSD Shareholder:
-----------------------------------------------------------------
NeoMedia Technologies, Inc. BSD Software, Inc.
2201 Second Street, Suite 600 5824 Second Street SW, Suite 300
Ft. Myers, Florida 33901 Calgary, Alberta, Canada, T2H-0H2
(239) 337-3434 (403) 257-7090
-----------------------------------------------------------------
If you would like to request any documents from NeoMedia, please do so by
_______, 2005.
NeoMedia Technologies, Inc.
2201 Second Street, Suite 600
Fort Myers, Florida 33901
_____________, 2005
Dear BSD Shareholders:
As you may be aware, BSD Software, Inc. has entered into an agreement and plan
of merger with NeoMedia Technologies, Inc. which provides for NeoMedia to
acquire from you and the other BSD shareholders 100% of BSD's common stock. When
the merger is completed, BSD will become a wholly-owned subsidiary of NeoMedia.
Upon completion of the merger, BSD's shareholders will receive, for each share
of BSD stock owned, NeoMedia stock equivalent to .07 divided by the
volume-weighted average price of NeoMedia stock for the five days prior to the
effective time of the merger. NeoMedia common stock is publicly traded on the
Over-the-Counter Bulletin Board exchange under the symbol "NEOM". On October 24,
2005, the closing price of NeoMedia common stock was $0.359. In 2004, NeoMedia's
common stock traded between a low of $0.05 and a high of $0.299. Since April 5,
2005, the approximate date that NeoMedia filed its initial information
statement/prospectus relative to its acquisition of and merger with BSD,
NeoMedia's stock has been subject to dramatic price volatility. Between April 5,
2005 and October 24, 2005, NeoMedia's stock has traded as low as $0.21 per share
and as high as $0.72 per share. BSD shareholders who wish to inquire about the
number of shares they will receive in the merger can call toll-free (877)
813-2419.
Following the merger, based on 32,560,897 outstanding shares of BSD common stock
and 462,068,880 outstanding shares of NeoMedia common stock as of October 24,
2005, and assuming a NeoMedia stock price of $0.357 (the volume-weighted average
stock price for the five days preceding October 24, 2005), BSD shareholders
would hold approximately 1% of the outstanding shares of NeoMedia and existing
NeoMedia shareholders would hold the remaining 99% of NeoMedia's outstanding
shares. The actual exchange ratio will vary due to changes in NeoMedia's stock
price and any additional issuances of common stock by BSD prior to the effective
time of the merger, and will not be known until such effective time of the
merger.
Shareholders holding approximately 62.7% of the outstanding shares of BSD common
stock have each entered into an agreement with NeoMedia to vote to approve and
adopt the Merger Agreement and the merger. BSD's Board of Directors has also
approved the Merger Agreement.
On behalf of the BSD Board of Directors, I thank you for your support.
Sincerely,
/s/ Guy Fietz
President
BSD SOFTWARE, INC.
TABLE OF CONTENTS
SUMMARY OF INFORMATION STATEMENT/PROSPECTUS....................................2
The Companies...............................................................2
What You Will Receive In The Merger; Merger Consideration; Fractional
Shares......................................................................2
NeoMedia's Board of Directors after the Merger..............................2
BSD Approval Of The Merger..................................................2
BSD's Reasons for the Merger; Recommendation of BSD's Board of Directors....2
NeoMedia's Reasons for the Merger; Recommendation of NeoMedia's Board of
Directors...................................................................2
Conditions to the Merger....................................................2
Restrictions on Solicitation................................................2
Termination.................................................................2
Fees........................................................................2
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................2
Comparison of Rights of NeoMedia Shareholders and BSD Shareholders..........2
Comparative Market Price Information........................................2
Listing and Trading of NeoMedia Common Stock................................2
Interest of Directors and Officers of BSD in the Merger.....................2
Interest of Directors and Officers of NeoMedia in the Merger................2
Risks Related to the Merger.................................................2
Dissenters' Rights..........................................................2
RISK FACTORS...................................................................2
Risks Related to the Merger.................................................2
Risks Related to NeoMedia's Business........................................2
Risks Relating To NeoMedia's Industry.......................................2
Risks Specific To This Offering.............................................2
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.....................2
SELECTED HISTORICAL FINANCIAL DATA OF NEOMEDIA.................................2
SELECTED HISTORICAL FINANCIAL DATA OF BSD......................................2
COMPARATIVE PER SHARE DATA.....................................................2
COMPARATIVE STOCK PRICE DATA...................................................2
THE MERGER.....................................................................2
BSD's Reasons for the Merger................................................2
NeoMedia's Reasons for the Merger...........................................2
Interests of Certain Persons in the Merger; Conflicts of Interest...........2
Anticipated Accounting Treatment............................................2
Material Canadian Federal Income Tax Consequences of the Merger.............2
Dissenters' Rights..........................................................2
Federal or State Regulatory Requirements and Approvals......................2
Description of NeoMedia's and BSD's Securities..............................2
Material Differences Between Rights of Holders of NeoMedia Common Stock
Compared to BSD Common Stock................................................2
THE MERGER AGREEMENT...........................................................2
General; Structure of Transaction; Distribution of Common Stock.............2
Representations and Warranties..............................................2
Conduct of Business Prior to the Effective Time of the Merger...............2
No Solicitation.............................................................2
Additional Covenants........................................................2
Conditions to Completion of the Merger......................................2
Termination of the Merger Agreement.........................................2
Expenses and Termination Fees...............................................2
Amendment; Extension and Waiver of the Merger Agreement.....................2
COMPARATIVE RIGHTS OF NEOMEDIA AND BSD SHAREHOLDERS............................2
NEOMEDIA'S BUSINESS............................................................2
Company History.............................................................2
Recent Developments.........................................................2
Industry Overview...........................................................2
Strategy....................................................................2
i
Products/Services...........................................................2
Strategic Relationships.......................................................2
Sales and Marketing...........................................................2
Customers...................................................................2
Research and Development....................................................2
Intellectual Property Rights................................................2
Competition.................................................................2
Employees...................................................................2
Properties..................................................................2
Dividend Policy.............................................................2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.....................................................................2
Overview....................................................................2
Critical Accounting Policies................................................2
Results of Operations for the Year Ended December 31, 2004 as Compared
to the Year Ended December 31, 2003.........................................2
Liquidity and Capital Resources.............................................2
NEOMEDIA'S MANAGEMENT..........................................................2
Directors and Executive Officers............................................2
Election Of Directors And Officers..........................................2
Meetings Of The Board Of Directors..........................................2
Committees Of The Board Of Directors........................................2
Section 16(a) Beneficial Ownership Reporting Compliance.....................2
NeoMedia's Executive Compensation...........................................2
Employment Agreements.......................................................2
Incentive Plan for Management...............................................2
NeoMedia's Stock Option Plans...............................................2
NeoMedia's Stock Incentive Plan.............................................2
401(k) Plan.................................................................2
Options And Warrants Granted In NeoMedia's Last Fiscal Year.................2
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year-End
Values..................................................................2
Security Ownership of Certain Beneficial Owners and Management of
NeoMedia....................................................................2
Certain Relationships and Related Transactions of NeoMedia..................2
Section 16(a) Beneficial Ownership Reporting Compliance.....................2
Code of Ethics..............................................................2
Limitations on Director's Liability and Indemnification.....................2
DESCRIPTION OF NEOMEDIA'S CAPITAL STOCK........................................2
Common Stock................................................................2
Preferred Stock.............................................................2
Warrants And Options of NeoMedia............................................2
Registration Rights.........................................................2
Anti-Takeover Provisions Under bylaws and Laws..............................2
Transfer Agent..............................................................2
DESCRIPTION OF BSD'S BUSINESS..................................................2
Business Development........................................................2
BSD's/Triton's Business.....................................................2
Triton Recent Developments..................................................2
Triton's Products & Services................................................2
Triton's Strategic Technology Alliances.....................................2
Sales and Marketing Approach................................................2
Competitive Analysis........................................................2
Triton/BSD Legal Matters....................................................2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.....................................................................2
Overview....................................................................2
Background Of Triton........................................................2
Products and Services.......................................................2
Results of Operations For The Year Ended July 31, 2005, as Compared to
the Year Ended July 31, 2004................................................2
Critical Accounting Policies................................................2
ii
BSD's Liquidity and Capital Resources.......................................2
BSD'S MANAGEMENT...............................................................2
Directors and Executive Officers............................................2
Summary Compensation Table..................................................2
Employment Agreements.......................................................2
Stock Option Plan...........................................................2
Options And Warrants Granted In BSD's Last Fiscal Year......................2
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year end
Values......................................................................2
Security Ownership of Certain Beneficial Owners and Management of BSD.......2
Certain Relationships and Related Transactions..............................2
Section 16(a) Beneficial Ownership Reporting Compliance.....................2
Code of Ethics..............................................................2
Limitations on Director's Liability and Indemnification.....................2
DESCRIPTION OF BSD'S CAPITAL STOCK.............................................2
Common Stock................................................................2
Preferred Stock.............................................................2
Warrants And Options........................................................2
Registration Rights.........................................................2
Anti-Takeover Provisions Under bylaws and Laws..............................2
Transfer Agent..............................................................2
LEGAL MATTERS..................................................................2
EXPERTS........................................................................2
WHERE YOU CAN FIND MORE INFORMATION............................................2
INDEX TO FINANCIAL STATEMENTS................................................F-2
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS............................II-2
Item 20. Indemnification of Directors and Officers.......................II-2
Item 21. Exhibits and Financial Statement Schedules......................II-2
Item 22. Undertakings....................................................II-2
SIGNATURES..................................................................II-2
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following are some questions that you, as a stockholder of BSD or NeoMedia,
may have regarding the merger. BSD and NeoMedia urge you to read carefully the
remainder of this information statement/prospectus because the information in
this section does not provide all of the information that might be important to
you with respect to the merger. Additionally, important information is also
contained in the annexes to, and the documents incorporated by reference into,
this information statement/prospectus.
Q: What is the proposed transaction?
A: The Board of Directors of BSD, as well as a majority of BSD shareholders,
have voted to adopt an agreement and plan of merger among NeoMedia Technologies,
Inc., NeoMedia Telecom Services, Inc., and BSD Software, Inc., and the merger
contemplated thereby. In this information statement/prospectus, we refer to the
agreement and plan of merger as the "Merger Agreement." In the merger, BSD will
be merged into NeoMedia Telecom Services, Inc., a newly formed, wholly-owned
subsidiary of NeoMedia Technologies. After the merger, NeoMedia Telecom Services
will be the "Surviving Corporation" and will remain a wholly-owned subsidiary of
NeoMedia Technologies.
Q: Why are NeoMedia and BSD proposing to merge?
A: NeoMedia and BSD are merging because they believe the resulting combination
will create a stronger, more competitive company capable of achieving greater
financial strength, administrative efficiencies, growth potential, and
shareholder value than either company would have on its own.
Q: What will I receive in exchange for my BSD stock in the merger?
A: In the merger, each share of your BSD common stock will be exchanged for
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger. In
this prospectus, we refer to the ratio of NeoMedia common stock to be issued for
each share of BSD common stock as the "exchange ratio." The ratio of .07 divided
by the volume-weighted average price of NeoMedia stock for the five days prior
to the effective time of the merger that you will receive for each BSD share
will not change. However, the number of NeoMedia shares you will receive at
closing will change depending on NeoMedia's stock price at the time of closing.
NeoMedia's shares will be valued using a 5-day volume-weighted average closing
price for the five days prior to closing. You will not receive any fractional
shares of NeoMedia common stock. Instead of any fractional shares, you will be
paid cash for such fraction at a rate of $0.07 per share. The following table
illustrates how many shares of NeoMedia you would receive at different price
levels of NeoMedia stock at the time of closing:
--------------------------------------------------------------------------------
Shares of BSD owned 1,000 1,000 1,000 1,000
--------------------------------------------------------------------------------
NeoMedia volume-weighted average prices $0.07 $0.20 $0.30 $0.50
--------------------------------------------------------------------------------
NeoMedia shares issued in merger 1,000 350 233 140
--------------------------------------------------------------------------------
Additional cash consideration received in lieu
of receipt of fractional shares $0.00 $0.00 $0.02 $0.00
--------------------------------------------------------------------------------
It is important to note that BSD shareholders will not know the actual number of
shares they will receive until the effective date of the merger. BSD
shareholders who wish to inquire about the number of shares they will receive in
the merger can call toll-free (877) 813-2419.
Q: What will be the effect of the merger on the stockholders of NeoMedia and
BSD?
A: Based on the number of NeoMedia and BSD shares outstanding as of October 24,
2005, and the volume-weighted average closing stock price of NeoMedia stock of
$0.357 for the five days preceding October 24, 2005, upon completion of the
merger the current stockholders of NeoMedia would own approximately 99% of
NeoMedia and the former stockholders of BSD would own approximately 1% of
NeoMedia. Actual ownership percentages could change between the date of this
information statements/prospectus and closing due to any additional issuances of
shares by NeoMedia and/or BSD, or fluctuations in the price of NeoMedia stock.
NeoMedia and BSD currently estimate that they each will incur costs of
approximately $50,000 ($100,000 in total) related to the merger.
Q: What Are The Federal Income Tax Consequences Of The Merger To BSD
Shareholders?
A: Assuming that the merger is completed as currently contemplated, (i) you will
not recognize any gain or loss for United States federal income tax purposes
except to the extent you receive cash in exchange for your BSD common stock
(including any cash received in lieu of a fractional share of NeoMedia common
stock) and (ii) you will not recognize and gain or loss for Canadian federal
income tax purposes. You should consult your tax advisor for a full
understanding of the tax consequences of the merger to you.
Q: Am I entitled to dissenters' rights?
A: Under Florida law, holders of BSD common stock outstanding immediately prior
to the effective time of the merger who have not voted in favor of the merger
have the right to exercise their dissenters' rights and obtain payment in cash
for the fair value of their shares of common stock, rather than receive shares
of NeoMedia common stock as described in this information statement/prospectus
and the attached Merger Agreement. To exercise dissenters' rights, BSD
stockholders must strictly follow the procedures described under Section
607.1301 et seq. of the Florida Business Corporation Act. These procedures are
summarized under the section of this information statement/prospectus entitled
"The Merger-Dissenters' Rights" beginning on page 29. In addition, the text of
the applicable provisions of Florida Business Corporation Act, together with
BSD's initial notice to potential dissenters, and a Dissenters' Demand Notice
Form is attached as Annex A to this information statement/prospectus.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger promptly after we receive all necessary
regulatory approvals. We currently expect this to occur during the third quarter
of 2005. Satisfying some of the conditions to closing the merger, such as
receiving certain governmental clearances or approvals, is not entirely within
our control. If all the conditions to completion of the merger are not satisfied
during the first-half of 2005, we expect to complete the merger as soon as
practicable once the conditions are satisfied.
Q: Will I be able to sell the shares of NeoMedia common stock I receive in the
merger?
A: Yes. All of the shares of NeoMedia common stock received by BSD stockholders
in connection with the merger will be freely transferable unless the holder is
considered an affiliate of either BSD or NeoMedia under the Securities Act of
1933, as amended. Shares of NeoMedia acquired in the merger by BSD affiliates
may only be sold pursuant to a registration statement or an exemption from the
registration requirements of the Securities Act. The price at which the NeoMedia
common stock will trade after the merger is unknown.
Q: What do I need to do now?
A: After the merger is completed, you will receive written instructions for
exchanging your stock certificates.
Q: Will BSD continue as a public company?
A: No. If the merger occurs, BSD will no longer be publicly owned.
Q: Who can help answer my questions?
A: If you have any questions about the merger, or need additional copies of this
prospectus, you should contact BSD Software, Inc. at (403) 257-7090, if you are
a stockholder of BSD; or NeoMedia at (239) 337-3434 if you are stockholder of
NeoMedia. BSD shareholders who wish to inquire about the number of shares they
will receive in the merger can call toll-free (877) 813-2419.
2
SUMMARY OF INFORMATION STATEMENT/PROSPECTUS
The following is a summary that highlights certain information contained in this
information statement/prospectus. This summary may not contain all of the
information that may be important to you. For a more complete description of the
Merger Agreement and the merger contemplated by the Merger Agreement, we
encourage you to read carefully this entire information statement/prospectus,
including the attached exhibits and annexes hereto. In addition, we encourage
you to ready the information incorporated by reference into this information
statement/prospectus, which includes important business and financial
information about BSD and NeoMedia that has been filed with the United States
Securities and Exchange Commission. You may obtain the information incorporated
by reference into this information statement/prospectus by following the
instructions in the section of this information statement/prospectus entitled
"Additional Information Where You Can Find More Information" beginning on page
105.
--------------------------------------------------------------------------------
The Companies
NeoMedia Technologies, Inc.
2201 Second Street, Suite 600
Ft. Myers, FL 33901
(239) 337-3434
NeoMedia develops proprietary technologies that link physical information
and objects to the Internet marketed under its PaperClickTM brand name.
NeoMedia is structured as three business units: NeoMedia Internet Software
Service ("NISS"), NeoMedia Consulting and Integration Services ("NCIS"), and
NeoMedia Micro Paint Repair ("NMPR").
NISS is the core business and is based in the United States, with
development and operating facilities in Fort Myers, Florida. NISS develops and
supports our physical world to Internet core technology, including our linking
"switch" and NeoMedia's application platforms. NISS also manages our
intellectual property portfolio, including the identification and execution of
licensing opportunities surrounding the patents.
NCIS is the original business line upon which NeoMedia 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 our products and services. These
operations are based in Lisle, Illinois.
NMPR is the business unit encompassing the recently-acquired CSI
International chemical line. NMPR is attempting to commercialize its micro-paint
repair offerings and solutions.
--------------------------------------------------------------------------------
NeoMedia Telecom Services, Inc.
2201 Second Street, Suite 600
Ft. Myers, FL 33901
(239) 337-3434
NeoMedia Telecom Services, Inc. is a Nevada corporation and a wholly-owned
subsidiary of NeoMedia Technologies. NeoMedia Telecom Services was incorporated
during October 2004 solely for the purposes of effecting the merger with BSD. It
has not carried on any activities other than in connection with the Merger
Agreement. Following the merger, NeoMedia Telecom Services, Inc. will continue
the business of BSD.
--------------------------------------------------------------------------------
3
BSD Software, Inc.
5824 Second Street SW, Suite 300
Calgary, Alberta, Canada, T2H-0H2
(403) 257-7090
BSD was incorporated in Florida on February 7, 1989 under the name "Park
Avenue Marketing, Inc." On February 2, 1998, as a result of its acquisition of
100% of the common stock of two commonly controlled entities, Respiratory Care
Services, Inc. ("RCS") and RCS Subacute, Inc. ("RCSS"), that were engaged in the
healthcare industry, the name was changed from "Park Avenue Marketing, Inc." to
"BSD Healthcare Industries, Inc." Prior to these acquisitions, BSD did not
conduct any operations.
BSD acquired RCS and RCSS because BSD perceived increasing demand for
respiratory care services in long-term healthcare facilities. On July 1, 1999,
principally as a result of a change in Medicare reimbursement rates for
respiratory services, BSD sold RCS and RCSS. On December 17, 2001 BSD changed
its name to "BSD Software, Inc."
As a result of the sale of RCS and RCSS, BSD had no operations until its
acquisition of 90% of Triton Global Business Services Inc. ("TGBSI") on November
4, 2002. TGBSI is the 100% owner of Triton Global Communications Inc. ("Triton")
through which it conducts its business operations. The details of the
acquisition are contained in Note 4 to the attached Financial Statements.
Triton was incorporated in April 1998 as a next generation Internet
protocol ("IP") 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.
Triton focuses on helping its clients improve profitability by enabling
them to quickly deploy new services, streamline operations and make quicker,
more informed business decisions. Triton is a customer service oriented
organization providing service to direct customers and service providers, both
within North America and internationally.
Triton was the first fully implemented alternate billing agent within the
Local Exchange Carriers ("LECs") billing system in Canada. Triton's vision is to
continue expanding its live and automated operator service capability focusing
on making emerging web-based information and transaction services easier to
access and pay for.
BSD's management and staff are trained to assist and provide clients with
solutions for their business. Triton is currently operating with eight
employees.
The Merger
The Board of Directors of BSD, as well as a majority of BSD shareholders,
have voted to adopt an agreement and plan of merger among NeoMedia Technologies,
Inc., NeoMedia Telecom Services, Inc., and BSD Software, Inc., and the merger
contemplated thereby. In the merger, BSD will be merged into NeoMedia Telecom
Services, Inc., a newly formed, wholly-owned subsidiary of NeoMedia
Technologies. After the merger, NeoMedia Telecom Services will be the "Surviving
Corporation" and will remain a wholly-owned subsidiary of NeoMedia Technologies.
NeoMedia and BSD are merging because they believe the resulting
combination will create a stronger, more competitive company capable of
achieving greater financial strength, administrative efficiencies, growth
potential, and shareholder value than either company would have on its own.
What You Will Receive In The Merger; Merger Consideration; Fractional Shares
In the merger, each share of BSD common stock will be exchanged for
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger. You
will not receive any fractional shares of NeoMedia common stock. Instead of any
fractional shares, you will be paid cash for such fraction at a rate of $0.07
per share. It is important to note that BSD shareholders will not know the
actual number of shares they will receive until the effective date of the
merger. BSD shareholders who wish to inquire about the number of shares they
will receive in the merger can call toll-free (877) 813-2419.
4
NeoMedia's Board of Directors after the Merger
NeoMedia's Board of Directors will not change due to the acquisition of
BSD.
BSD Approval Of The Merger
BSD's Board of Directors approved the merger by written consent on
November 29, 2004. In addition, holders of 62.7% of BSD's outstanding shares
approved the merger by signing a Voting Rights Agreement on or before signing
the Merger Agreement.
BSD's Reasons for the Merger; Recommendation of BSD<129>fs Board of Directors
BSD's Board of Directors, as well as holders of 62.7% of BSD's outstanding
shares, has approved the Merger Agreement. BSD's board and the approving
majority shareholders believe that the Merger Agreement is advisable, fair to
and in the best interest of BSD and its shareholders. In reaching its decision,
the BSD board and majority shareholders considered a number of factors, which
are described in more detail in the section of this information/registration
statement entitled "BSD's Reasons for the Merger." The BSD Board of Directors
and majority shareholders did not assign relative weights to the factors
described in that section or the other factors considered by it. In addition,
the BSD board and majority shareholders did not reach any specific conclusion on
each factor considered, but conducted an overall analysis of these factors.
BSD's board and majority shareholders may have given different weight to
different factors.
NeoMedia's Reasons for the Merger; Recommendation of NeoMedia<129>fs Board of
Directors
The Board of Directors of NeoMedia approved the merger on August 18, 2004,
after NeoMedia's senior management discussed with them the business, assets,
liabilities, actual and projected results of operations and financial
performance of BSD, the complementary nature of certain of BSD's products and
capabilities and the products of NeoMedia, the expectation that BSD could be
readily integrated with NeoMedia, and the potential benefits that could be
realized as a result of such integration.
Conditions to the Merger
The obligations of NeoMedia and BSD to complete the merger are conditioned
upon the other party's representations and warranties being true and correct,
except as has not had or would not reasonably be expected to have a material
adverse effect, and the other party having complied in all material respects
with such party's covenants. In addition, NeoMedia's and BSD's obligations are
further conditioned on:
o the absence of any statute, rule, order, decree, regulation or injunction
of any United States or Canadian court, United States or Canadian
governmental authority or any governmental authority pursuant to foreign
antitrust laws that precludes, prohibits, restrains or enjoins the
consummation of the merger or makes the consummation of the merger
illegal;
o the termination or expiration of the waiting periods or receipt of
approvals pursuant to the Hart-Scott-Rodino Antitrust Improvements Act;
and
o the continuing effectiveness of the registration statement of which this
information statement/prospectus forms a part, and the material compliance
with all other applicable material state securities laws.
Restrictions on Solicitation
Subject to certain exceptions, the Merger Agreement precludes BSD, its
subsidiaries, officers, directors, employees, investment bankers, attorneys,
accountants and other representatives from directly or indirectly soliciting,
knowingly encouraging, participating in any discussions regarding, furnishing
any non-public information with respect to, or assisting or facilitating any
proposal for any third party to acquire more than 20% ownership of BSD, its
subsidiaries, or its assets.
5
Termination
The Merger Agreement may be terminated by the mutual consent of NeoMedia
and BSD. Additionally, either NeoMedia or BSD may terminate the Merger Agreement
if:
o both companies' boards of directors mutually agree to terminate;
o the party seeking termination is not in material breach of the
Merger Agreement and the other party has materially breached a
representation, warranty, covenant or agreement of that party
contained in the Merger Agreement and such breach is either not
capable of being cured or, with respect to a covenant or agreement
that is capable of being cured, has not been cured or satisfied
within 30 days of notice of the breach; and
o the merger has not closed by December 31, 2005, which date may be
extended by mutual consent of NeoMedia and BSD.
The Merger Agreement may be terminated by NeoMedia if, at the time of
closing, BSD has:
o less than $850,000 in assets;
o more than $5,000,000 in liabilities, or
o more than 35,000,000 shares of common stock outstanding (increased
to 38,000,000 on June 6, 2005).
The merger may be terminated by BSD if the holders of more than 5% of
BSD's outstanding shares dissent to the merger.
Fees
Each side will bear its own fees in connection with the proposed merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
IF THE MERGER IS COMPLETED AS CURRENTLY CONTEMPLATED, THEN, IN GENERAL, A
SHAREHOLDER WHO EXCHANGES SHARES OF BSD COMMON STOCK FOR SHARES OF NEOMEDIA
COMMON STOCK WILL NOT RECOGNIZE ANY GAIN OR LOSS EXCEPT TO THE EXTENT CASH IS
RECEIVED (INCLUDING ANY CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE OF NEOMEDIA
COMMON STOCK).
Certain exceptions and/or other considerations may apply to the foregoing
statement. See the section of this information statement/prospectus entitled
"The Merger--Material Federal Income Tax Consequences."
Comparison of Rights of NeoMedia Shareholders and BSD Shareholders
After the merger, BSD shareholders who receive NeoMedia common stock in
the merger will become NeoMedia shareholders and their rights as shareholders
will be governed by the Certificate of Incorporation and bylaws of NeoMedia and
Delaware General Corporation Law ("DGCL"). There are a number of differences
between the Certificate of Incorporation and bylaws of NeoMedia and the DGCL,
and the Articles of Incorporation and bylaws of BSD and the Florida Business
Corporations Act (the "FBCA") by which BSD is governed. These differences are
summarized under the section of this information statement/prospectus entitled
"Comparative Rights of NeoMedia and BSD Shareholders."
6
Comparative Market Price Information
Shares of NeoMedia common stock are listed under the Symbol "NEOM" on the
Over-the-Counter Bulletin Board, and shares of BSD common stock are listed under
the trading symbol "BSDS" on the Over-the-Counter Bulletin Board. On December
20, 2004, the last full trading day prior to the public announcement of the
Merger Agreement, the last sales price of BSD common stock was $0.15 per share
and the last sales price of NeoMedia common stock was $0.18 per share. On
October 24, 2005, the most recent practicable date prior to the printing of this
information statement/prospectus, the last sales price of BSD common stock was
$0.05 per share and the last sales price of NeoMedia common stock was $0.359 per
share. Since April 5, 2005, the approximate date that NeoMedia filed its initial
information statement/prospectus relative to its acquisition of and merger with
BSD, NeoMedia's stock has been subject to dramatic price volatility. Between
April 5, 2005 and October 24, 2005, NeoMedia's stock has traded as low as $0.21
per share and as high as $0.72 per share. You are urged to obtain current market
quotations.
Listing and Trading of NeoMedia Common Stock
Shares of NeoMedia common stock received by BSD shareholders in the merger
will be listed on the Over-the-Counter Bulletin Board. After completion of the
merger, shares of NeoMedia common stock will continue to be traded on the
Over-the-Counter Bulletin Board, but shares of BSD common stock will no longer
be listed or traded.
Interest of Directors and Officers of BSD in the Merger
As of October 24, 2005, the directors and officers of BSD, in the
aggregate, owned approximately 27.3% of the outstanding common stock of BSD.
Interest of Directors and Officers of NeoMedia in the Merger
As of October 24, 2005, the directors and officers of NeoMedia, in the
aggregate, owned approximately 21.1% of the outstanding common stock of
NeoMedia.
Risks Related to the Merger
You should refer to the section of this information statement/prospectus
entitled "Risk Factors" beginning on page 8 for a detailed discussions of the
risks associated with the merger, the offering described hereunder, and the
businesses of NeoMedia and BSD.
7
Dissenters' Rights
In order to exercise appraisal rights, dissenting shareholders must
strictly comply with the statutory procedures of the Florida Business
Corporation Act (the "FBCA"). If a proposed corporation action requiring
appraisal rights under the FCBA is submitted to a vote at a shareholders'
meeting, or is submitted to a shareholder pursuant to a consent to vote, a
dissenting shareholder who wishes to exercise appraisal rights, must deliver to
the corporation before the vote is taken, or within 20 days after receiving
notice from the corporation that such appraisal rights are available, a written
notice of intent to demand payment. A dissenting shareholder then cannot vote in
favor of the proposed action. If the proposed action becomes effective, the
corporation must deliver a written appraisal notice and form to all dissenting
shareholders who provided a notice of intent to demand payment within the
statutorily prescribed time limits. The corporation must send the appraisal
notice and form within 10 days after the corporate action became effective. The
corporation may offer to a dissenting shareholder a payment based on the
corporation's estimate of the fair value of the shareholder's shares. The fair
value of the shares is determined immediately before the effectuation of the
corporate action to which the shareholder objects and using customary and
current valuation concepts and techniques generally employed for similar
business in the context of the transaction requiring appraisal, excluding any
appreciation or depreciation in anticipation of the corporate action, unless
such exclusion would be inequitable. A dissenting shareholder who is
dissatisfied with the corporation's offer, must notify the corporation on the
form provided to the dissenting shareholder by the corporation of that
dissenting shareholder's estimate of the fair value of the shares and demand
payment of that estimate plus interest. If a dissenting shareholder fails to
notify the corporation in writing of the demand to be paid the shareholder's
stated estimate of the fair value plus interest within the timeframe requested
be the corporation, which shall be no less than 40 or more than 60 days after
the appraisal notice and form are sent, the shareholder is entitled only to the
payment offered by the corporation.. Due to the fact that the actual exchange
rate of BSD shares for NeoMedia shares will not be known until the effective
time of the merger, a dissenting shareholder may not know the actual exchange
rate at the time the notice of dissent is submitted.
8
RISK FACTORS
In addition to the other information included in this information
statement/prospectus, including the matters addressed in "Cautionary Statement
Concerning Forward-Looking Statements," you should carefully consider the
following risks before deciding whether to assert your right to dissent to the
proposed merger. In the case of BSD stockholders, if you do not exercise your
dissenters' rights as discussed on page 29, you will become a stockholder of
NeoMedia. In addition, you should read and consider the risks associated with
the business of NeoMedia because these will affect the combined entity.
Risks Related to the Merger
The value of shares of NeoMedia common stock to be received by BSD stockholders
in the merger is fixed and will not be adjusted for changes in the price of BSD
or NeoMedia common stock.
BSD's shareholders will receive, for each share of BSD stock owned,
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger. The
number of shares each BSD shareholder will receive will change based on the
number of shares of both BSD and NeoMedia common shares outstanding and the
price of NeoMedia common stock at the effective time of the merger. It is
important to note that BSD shareholders will not know the actual number of
shares they will receive until the effective date of the merger. The ratio of
.07 to the price of NeoMedia common stock will not be adjusted for changes in
the market price of BSD or NeoMedia common stock, meaning an increase in
NeoMedia's stock price prior to the effective time of the merger would result in
fewer shares of NeoMedia stock being exchanged for each share of BSD stock. The
price at which the NeoMedia common stock will trade after the merger is unknown.
The market price of NeoMedia common stock at the effective time of the
merger will likely be different from the current market price of NeoMedia common
stock for a variety of reasons, including market reactions to the merger. For
example, between January 1, 2004 and December 31, 2004, the market price of the
NeoMedia common stock ranged from a low of $0.05 per share to a high of $0.299
per share. Additionally, since April 5, 2005, the approximate date that NeoMedia
filed its initial information statement/prospectus relative to its acquisition
of and merger with BSD, NeoMedia's stock has been subject to dramatic price
volatility. Between April 5, 2005 and October 24, 2005, NeoMedia's stock has
traded as low as $0.21 per share and as high as $0.72 per share. Stockholders of
NeoMedia and BSD are urged to obtain current market quotations for the NeoMedia
common stock.
The market price and trading volume of the NeoMedia common stock may be volatile
and the holders of BSD common stock may not be able to sell their shares at or
above the initial market price of the NeoMedia common stock following the
merger.
The market price of the NeoMedia common stock could fluctuate
significantly for many reasons, including in response to the risk factors listed
in this prospectus or for reasons unrelated to NeoMedia's performance, such as
reports by industry analysts, investor perceptions, or announcements by
NeoMedia's customers, competitors or suppliers regarding their own performance,
as well as general economic and industry conditions. For example, to the extent
that other companies within NeoMedia's industry experience declines in their
stock price, NeoMedia's stock price may decline as well.
NeoMedia common stock has been subject to dramatic price volatility since the
filing of the information statement/prospectus relating to the merger with BSD
Since April 5, 2005, the approximate date that NeoMedia filed its initial
information statement/prospectus relative to its acquisition of and merger with
BSD, NeoMedia's stock has been subject to dramatic price volatility. Between
April 5, 2005 and October 24, 2005, NeoMedia's stock has traded as low as $0.21
per share and as high as $0.72 per share.
NeoMedia may face significant challenges in integrating NeoMedia and BSD and, as
a result, may not realize the expected benefits of the merger.
The merger involves the integration of two companies that have previously
operated independently. Combining the operations of NeoMedia and BSD will be a
complex process that will require, among other things, integration of various
functional areas, such as finance, human resources and sales and marketing
groups, and coordination of development efforts. NeoMedia cannot be certain that
the integration will be completed in a timely manner, if at all, or that it will
be able to achieve the anticipated benefits of the merger. For example, the
companies may experience difficulties in harmonizing employee benefit policies,
the relocation of certain job functions may result in the loss of personnel with
critical corporate knowledge and upgrading financial reporting systems to
operate as a single system may lead to interruptions in tracking financial or
sales information. Failure to adequately manage the integration process and to
coordinate the joint efforts of the two companies may have a material adverse
effect on the business of the combined company. There can be no assurance that
the employees of BSD will be willing to continue their employment with NeoMedia
after the merger. There is no assurance that after the merger NeoMedia will be
able to maintain all of the existing commercial relationships of BSD or
NeoMedia.
9
NeoMedia and BSD may suffer negative consequences if the merger is not
completed.
If the merger is not completed for any reason, NeoMedia and BSD will be
subject to a number of material risks, including:
o the market price of NeoMedia and BSD common stock may decline to the
extent that the current market price of such shares reflects a
market assumption that the merger will be completed;
o costs related to the merger, such as legal and accounting fees, must
be paid even if the merger is not completed;
o the diversion of management attention from the day-to-day business
of the companies and the unavoidable disruption to their employees
during the period before the completion of the merger may make it
difficult for NeoMedia and BSD to regain their financial position if
the merger does not occur; and
o if the merger is terminated and BSD's Board of Directors seeks
another merger or business combination, BSD's stockholders cannot be
certain that BSD will be able to find a partner willing to pay an
equivalent or more attractive price than the price to be paid by
NeoMedia in the merger
10
Risks Related to NeoMedia's Business
NeoMedia has Historically Lost Money and Losses May Continue
NeoMedia has incurred substantial losses since our inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
NeoMedia incurred a loss of $3,519,000 and $4,053,000 in the six-month periods
ended June 30, 2005 and 2004, respectively, and a loss of $7,230,000 in the year
ended December 31, 2004 and $5,382,000 in the year ended December 31, 2003.
NeoMedia's accumulated losses were approximately $86,896,000 and $83,377,000 as
of June 30, 2005 and December 31, 2004, respectively. As of June 30, 2005 and
December 31, 2004 and 2003, NeoMedia had a working capital (deficit) of
approximately ($3,418,000), ($2,597,000) and ($6,526,000), respectively.
NeoMedia had stockholders' equity (deficit) of $5,169,000, $4,392,000 and
($3,203,000) at June 30, 2005, and December 31, 2004 and 2003, respectively.
NeoMedia generated revenues of $1,285,000, $798,000, $1,700,000 and $2,400,000
for the six-month periods ended June 30, 2005 and 2004, and the years ended
December 31, 2004 and 2003, respectively. In addition, during the six-month
periods ended June 30, 2005 and 2004, and the years ended December 31, 2004 and
2003, NeoMedia recorded negative cash flows from operations of $3,455,000,
$2,261,000, $4,650,000 and $2,979,000, respectively. To succeed, NeoMedia must
develop new client and customer relationships and substantially increase its
revenue derived from improved products and additional value-added services.
NeoMedia has expended, and to the extent it has available financing, NeoMedia
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, NeoMedia may not be able to
achieve or sustain profitability.
NeoMedia's Independent Registered Public Accounting Firm Have Added Going
Concern Language To Their Report On NeoMedia's Consolidated Financial
Statements, Which Means That NeoMedia May Not Be Able To Continue Operations
The report of Stonefield Josephson, Inc., NeoMedia's independent
registered public accounting firm, with respect to NeoMedia's consolidated
financial statements and the related notes for the years ended December 31, 2004
and 2003, indicates that, at the date of their report, NeoMedia had suffered
significant recurring losses from operations and its working capital deficit
raised substantial doubt about its ability to continue as a going concern.
NeoMedia's consolidated financial statements do not include any adjustments that
might result from this uncertainty.
There is Limited Information Upon Which Investors Can Evaluate NeoMedia's
Business Because The Physical-World-to-Internet Market Has Existed For Only A
Short Period Of Time
The physical-world-to-Internet market in which NeoMedia operates is a
recently developed market. Further, NeoMedia has conducted operations in this
market only since March 1996. Consequently, NeoMedia has a relatively limited
operating history upon which an investor may base an evaluation of NeoMedia's
primary business and determine NeoMedia's prospects for achieving its intended
business objectives. To date, NeoMedia has sold its physical-world-to-Internet
products to only 12 companies. NeoMedia 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 NeoMedia's
future success to be highly speculative in light of its 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 new and rapidly evolving markets, such as the
physical-world-to-Internet space. To address these risks, NeoMedia must, among
other things:
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 service offerings and features;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
11
NeoMedia may not be successful in addressing these risks. If NeoMedia is
unable to do so, its business, prospects, financial condition, and results of
operations would be materially and adversely affected.
NeoMedia's future success depends on the timely introduction of new products and
the acceptance of these new products in the marketplace.
Rapid technological change and frequent new product introductions are
typical for the markets NeoMedia serves. NeoMedia's future success will depend
in large part on continuous, timely development and introduction of new products
that address evolving market requirements. To the extent that NeoMedia fails to
introduce new and innovative products, it may lose market share to its
competitors, which may be difficult to regain. Any inability, for technological
or other reasons, to successfully develop and introduce new products could
materially and adversely affect NeoMedia's business.
NeoMedia'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
NeoMedia'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, as
amended. These requirements may reduce the potential market for NeoMedia's
common stock by reducing the number of potential investors. This may make it
more difficult for investors in NeoMedia's common stock to sell shares to third
parties or to otherwise dispose of them. This could cause NeoMedia'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 million (if the
issuer has been in continuous operation for at least three years) or
$10 million (if in continuous operation for less than three years),
or with average revenues of less than $6 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.
NeoMedia is Uncertain Of The Success Of Its Internet Switching Software Business
Unit And The Failure Of This Unit Would Negatively Affect The Price Of
NeoMedia's Stock
NeoMedia provides products and services that provide a link from physical
objects, including printed material, to the Internet. NeoMedia can provide no
assurance that:
o this Internet Switching Software business unit will ever achieve
profitability;
o its 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 NeoMedia develops will obtain market acceptance.
In the event that the Internet Switching Software business unit should
never achieve profitability, that NeoMedia's current product offerings should so
suffer, or that NeoMedia's products fail to obtain market acceptance, NeoMedia's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
12
A Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have
Little Or No Value If NeoMedia's Operations Are Unsuccessful
At June 30, 2005, and December 31, 2004 and 2003, approximately 37%, 49%
and 65%, respectively, of NeoMedia's total assets were intangible assets,
consisting primarily of rights related to NeoMedia's patents, other intellectual
property, and excess of purchase price over fair market value paid for CSI
International, Inc. (now NeoMedia Micro Paint Repair). If NeoMedia's operations
are unsuccessful, these assets will have little or no value, which would
materially adversely affect the value of NeoMedia's stock and the ability of
NeoMedia's stockholders to recoup their investments in NeoMedia's capital stock.
NeoMedia's Physical-World-To-Internet Marketing Strategy Has Not Been Tested And
May Not Result In Success
To date, NeoMedia has conducted limited marketing efforts directly
relating to NeoMedia's NISS business unit. All of NeoMedia's marketing efforts
have been largely untested in the marketplace, and may not result in sales of
NeoMedia's products and services. To penetrate the markets in which it competes,
NeoMedia will have to exert significant efforts to create awareness of, and
demand for, its products and services. With respect to NeoMedia's marketing
efforts conducted directly, NeoMedia intends to expand its sales staff upon the
receipt of sufficient operating capital. NeoMedia's failure to further develop
NeoMedia's marketing capabilities and successfully market NeoMedia's products
and services would have a material adverse effect on NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia's Internally Developed Systems Are Inefficient And May Put NeoMedia At
A Competitive Disadvantage
NeoMedia 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 NeoMedia develops 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
NeoMedia at a competitive disadvantage when compared to competitors with more
efficient systems.
NeoMedia Could Fail to Attract Or Retain Key Personnel
NeoMedia'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 NeoMedia has. NeoMedia may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. NeoMedia's failure to attract and retain qualified
personnel could have a material adverse effect on its business, prospects,
financial condition, and results of operations.
NeoMedia Depends Upon Its Senior Management And Their Loss Or Unavailability
Could Put NeoMedia At A Competitive Disadvantage
NeoMedia's success depends largely on the skills of certain key management
and technical personnel, including Charles T. Jensen, NeoMedia's President,
Chief Executive Officer and Chief Operating Officer, and Charles W. Fritz,
NeoMedia's founder and Chairman of the Board of Directors. The loss of the
services of Messrs. Jensen or Fritz could materially harm NeoMedia'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.
NeoMedia does not presently maintain a key-man life insurance policy on Messrs.
Jensen or Mr. Fritz.
NeoMedia May Be Unsuccessful In Integrating Its Micro Paint Repair Business With
Its Current Business
The success of NeoMedia's Micro Paint Repair business unit could depend on
the ability of NeoMedia's executive management to integrate the business plan
with the business plan of NeoMedia's NCSI and NISS business units. The NMPR
business unit operates in a separate industry from NeoMedia's other two business
units.
13
NeoMedia May Be Unable To Protect Its Intellectual Property Rights And May Be
Liable For Infringing The Intellectual Property Rights Of Others
NeoMedia'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 the ability to protect
proprietary technology and other intellectual property rights. In addition,
NeoMedia must conduct its operations without infringing on the proprietary
rights of third parties. NeoMedia 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, NeoMedia
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. NeoMedia 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. NeoMedia also has several trademarks relating to its proprietary
products. Although NeoMedia believes that it has taken appropriate steps to
protect its unpatented proprietary rights, including requiring that its
employees and third parties who are granted access to NeoMedia's proprietary
technology enter into confidentiality agreements, NeoMedia 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 NeoMedia's.
NeoMedia licenses from third parties certain software tools that are
included in NeoMedia's services and products. If any of these licenses were
terminated, NeoMedia could be required to seek licenses for similar software
from other third parties or develop these tools internally. NeoMedia 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. NeoMedia 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, NeoMedia. An adverse determination could
subject NeoMedia to significant liabilities to third parties, require NeoMedia
to seek licenses from, or pay royalties to, third parties, or require NeoMedia
to develop appropriate alternative technology. Some or all of these licenses may
not be available to NeoMedia on acceptable terms or at all, and NeoMedia 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 NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia Is Exposed To Product Liability Claims And An Uninsured Claim Could
Have A Material Adverse Effect On NeoMedia's Business, Prospects, Financial
Condition, And Results Of Operations, As Well As The Value Of NeoMedia's Stock
Many of NeoMedia'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 NeoMedia, regardless of NeoMedia's
responsibility for such failure. NeoMedia could, therefore, be subject to claims
in connection with the products and services that it sells. NeoMedia currently
maintains product liability insurance. There can be no assurance that:
o NeoMedia has contractually limited its liability for such claims
adequately or at all; or
o NeoMedia would have sufficient resources to satisfy any liability
resulting from any such claim.
The successful assertion of one or more large claims against NeoMedia
could have a material adverse effect on its business, prospects, financial
condition, and results of operations.
NeoMedia Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares
In Order To Realize Their Investment
NeoMedia has not paid any cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. NeoMedia intends to
retain future earnings, if any, for reinvestment in the development and
marketing of NeoMedia's products and services. As a result, investors may have
to sell their shares of common stock to realize their investment.
14
Some Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter
Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders To
Sell Their Shares At A Premium To The Then-Current Market Price
Some of the provisions of NeoMedia's Certificate of Incorporation and
bylaws could make it more difficult for a third party to acquire NeoMedia, even
if doing so might be beneficial to NeoMedia's stockholders by providing them
with the opportunity to sell their shares at a premium to the then-current
market price. On December 10, 1999, NeoMedia'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 NeoMedia'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 NeoMedia'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 NeoMedia'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, NeoMedia'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, redemption rights, and
sinking fund provisions.
NeoMedia is authorized to issue a total of 25,000,000 shares of Preferred
Stock, par value $0.01 per share. NeoMedia 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 NeoMedia's common stock,
and, therefore, could reduce the value of shares of NeoMedia'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 NeoMedia's 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 NeoMedia or a change in
NeoMedia's control thereby preserving control by the current stockholders.
15
Risks Relating To NeoMedia's Industry
The Security of the Internet Poses Risks To The Success Of NeoMedia'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
NeoMedia's physical-world-to-Internet business.
NeoMedia Will Only Be Able To Execute Its Physical-World-To-Internet Business
Plan If Internet Usage and Electronic Commerce Continue To Grow
NeoMedia's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet, cellular
telephones, 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 expected, or 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, NeoMedia's physical-world-to-Internet business, and
therefore NeoMedia's 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 World Wide Web (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, the Web
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 NeoMedia 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, the Web
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, the Web 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, the Web, and online networks may be unable to
support the demands placed upon them. In addition, the Internet, the Web 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, the Web, 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, the Web or other online services also could
result in slower response times and adversely affect usage of the Internet, the
Web and other online networks generally and NeoMedia's
physical-world-to-Internet product and networks in particular.
NeoMedia 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
NeoMedia 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. NeoMedia'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.
16
NeoMedia's success will depend, in part, on its ability to:
o enhance and improve the responsiveness and functionality of its
products and services;
o license or develop technologies useful in its business on a timely
basis;
o enhance its existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of NeoMedia's prospective or current customers; and
o respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
NeoMedia's Competitors In The Micro Paint Repair Industry Could Duplicate
NeoMedia's Proprietary Processes
NeoMedia's success in the micro paint repair industry depends upon
proprietary chemical products and processes. There is no guarantee that
NeoMedia's competitors will not duplicate NeoMedia's proprietary processes.
NeoMedia 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 NeoMedia. NeoMedia believes that competition will intensify and
increase in the future. NeoMedia's target market is rapidly evolving and is
subject to continuous technological change. As a result, NeoMedia'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
NeoMedia's business, prospects, financial condition, and results of operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. NeoMedia 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 NeoMedia'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 NeoMedia.
Many of NeoMedia'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, NeoMedia is significantly smaller
than its two largest competitors in the physical-world-to-Internet industry, the
primary focus of NeoMedia's business. Similarly, NeoMedia competes against
significantly larger and better-financed companies in the systems integration
and equipment resale businesses, including the manufacturers of the equipment
and technologies that NeoMedia integrates and resells. If NeoMedia competes with
its primary competitors for the same geographical or institutional markets,
their financial strength could prevent NeoMedia from capturing those markets.
NeoMedia may not successfully compete in any market in which it 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, NeoMedia believes that it may no
longer be able to compete effectively in these markets in the future. It is for
this reason, that NeoMedia has increasingly focused its business plan on
competing in the emerging market for physical-world-to-Internet products.
Many of NeoMedia's competitors in the Micro Paint Repair business have
access to more financial resources as well. NeoMedia may not be able to
penetrate markets or market its products as effectively as NeoMedia's
better-funded competitors.
17
In The Future There Could Be Government Regulations And Legal Uncertainties
Which Could Harm NeoMedia's Business
NeoMedia 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 NeoMedia's
business, or the application of existing laws and regulations to the Internet
and other online services, could have a material adverse effect on NeoMedia's
business, prospects, financial condition, and results of operations. Due to the
increasing popularity and use of the Internet, the Web 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, the Web
or other online services, which could, in turn, decrease the demand for
NeoMedia's services and increase NeoMedia's cost of doing business, or otherwise
have a material adverse effect on NeoMedia's business, prospects, financial
condition, and results of operations. Moreover, the relevant governmental
authorities have not resolved the applicability to the Internet, the Web 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 NeoMedia'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
NeoMedia's ability to collect and use information collected by NeoMedia'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. NeoMedia could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if NeoMedia's privacy practices are investigated.
Certain of NeoMedia's micro paint solutions could be subject to
environmental regulations.
18
Risks Specific To This Offering
As of October 24, 2005, NeoMedia had 462,068,880 shares of common stock
outstanding, and options and warrants to purchase up to an aggregate 150,876,721
shares of common stock. NeoMedia will also issue additional shares of common
stock in connection with the acquisition of BSD described herein, and up to an
additional 75,445,552 previously registered shares of common stock may be issued
under NeoMedia's Standby Equity Distribution Agreement with Cornell Capital
Partners, LP. On March 30, 2005, NeoMedia and Cornell entered into a new Standby
Equity Distribution Agreement under which Cornell agreed to purchase up to $100
million of NeoMedia's common stock over a two-year period, with the timing and
amount of the purchase at NeoMedia's discretion. Also on March 30, 2005,
NeoMedia borrowed from Cornell the principal amount of $10,000,000 (less $68,000
of discounts and fees paid to Cornell) in the form of a secured promissory note.
Current BSD Stockholders May Sell Their Shares Of NeoMedia Common Stock To Be
Received In the Merger In The Public Market, Which Sales May Cause NeoMedia's
Stock Price To Decline
BSD's shareholders will receive, for each share of BSD stock owned,
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger. Such
holders may sell the shares of common stock being registered in this offering in
the public market, which may cause NeoMedia's stock price to decline.
The Market Price Of NeoMedia's Securities May Be Volatile
As a result of the emerging and evolving nature of the markets in which
NeoMedia competes, as well as the current nature of the public markets and
NeoMedia's current financial condition, NeoMedia's operating results may
fluctuate materially, as a result of which quarter-to-quarter comparisons of
NeoMedia's results of operations may not be meaningful. If in some future
quarter, whether as a result of such a fluctuation or otherwise, NeoMedia's
results of operations fall below the expectations of securities analysts and
investors, the trading price of NeoMedia's common stock would likely be
materially and adversely affected. An investor should not rely on NeoMedia's
results of any interim period as an indication of NeoMedia's future performance.
Additionally, NeoMedia's quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside NeoMedia's control. Factors that may cause NeoMedia's quarterly
results to fluctuate include, among others:
o the ability to retain existing clients and customers;
o the ability to attract new clients and customers at a steady rate;
o the ability to maintain client satisfaction;
o the ability to motivate potential clients and customers to acquire
and implement new technologies;
o the extent to which NeoMedia'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 NeoMedia competes;
o the pricing of hardware and software that we resell or integrate
into NeoMedia's 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 ability to upgrade and develop NeoMedia's systems and
infrastructure in a timely and effective manner;
19
o the 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 NeoMedia'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.
NeoMedia's common stock traded as low as $0.01 and as high as $0.299
between January 1, 2003 and December 31, 2004. Since April 5, 2005, the
approximate date that NeoMedia filed its initial information
statement/prospectus relative to its acquisition of and merger with BSD,
NeoMedia's stock has been subject to dramatic price volatility. Between April 5,
2005 and October 24, 2005, NeoMedia's stock has traded as low as $0.21 per share
and as high as $0.72 per share. From time to time after this offering, the
market price of NeoMedia's common stock may experience significant volatility.
NeoMedia's quarterly results, failure to meet analysts' expectations,
announcements by us or NeoMedia's competitors regarding acquisitions or
dispositions, loss of existing clients, new procedures or technology, changes in
general conditions in the economy, and general market conditions could cause the
market price of the common stock to fluctuate substantially. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many technology
companies. These price and volume fluctuations often have been unrelated to the
operating performance of the affected companies.
You May Suffer Significant Additional Dilution If Outstanding Options And
Warrants Are Exercised
As of October 24, 2005, NeoMedia had outstanding stock options and
warrants to purchase 149,904,221 shares of common stock, some of which have
exercise prices at or below the price of NeoMedia's common shares on the public
market. To the extent such options or warrants are exercised, there will be
further dilution. In addition, in the event that any future financing should be
in the form of, be convertible into, or exchangeable for, equity securities, and
upon the exercise of options and warrants, investors may experience additional
dilution.
You May Suffer Significant Dilution As A Result Of NeoMedia's Standby Equity
Distribution Agreement With Cornell Capital Partner, LP
During the years ended December 31, 2004 and 2003, NeoMedia sold
112,743,417 and 98,933,244 shares, respectively, under its Standby Equity
Distribution Agreement (and the predecessor of the Standby Equity Distribution
Agreement called an Equity Line of Credit) with Cornell Capital Partners, LP. To
the extent that cash generated from operations does not meet NeoMedia's cash
needs, NeoMedia could continue to sell additional shares under the Standby
Equity Distribution Agreement.
On March 30, 2005, NeoMedia and Cornell entered into a new Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. Also on March 30, 2005, NeoMedia borrowed
from Cornell the principal amount of $10,000,000 (less discounts and fees of
$68,000 paid to Cornell) in the form of a secured promissory note.
Future Sales Of Common Stock By NeoMedia's Stockholders Could Adversely Affect
NeoMedia's Stock Price And NeoMedia's Ability To Raise Funds In New Stock
Offerings
The market price of NeoMedia's common stock could decline as a result of
sales of a large number of shares of NeoMedia's common stock in the market as a
result of this offering, or the perception that these sales could occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. Following the
acquisition of BSD (assuming a NeoMedia stock price at the effective time of the
merger of $0.357, which was the volume-weighted average price of NeoMedia's
stock for the five days preceding October 24, 2005), if NeoMedia sold to Cornell
Capital Partners, LP the remainder of the 200,000,000 shares previously
registered under its Standby Equity Distribution Agreement, and if all options
and warrants were exercised, NeoMedia would have up to 689,838,179 shares
outstanding.
20
Sales of NeoMedia's common stock in the public market following this
offering could lower the market price of NeoMedia's common stock. Sales may also
make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that NeoMedia's management deems
acceptable or at all. All 462,068,880 shares of common stock outstanding as of
October 24, 2005, are, or upon effectiveness of this registration statement will
be, freely tradable without restriction, unless held by NeoMedia's "affiliates."
21
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information statement/prospectus contains or incorporates by
reference certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements are subject to risks and uncertainties, including
those described under the section of this information statement/prospectus
entitled "Risk Factors," many of which are beyond NeoMedia's control.
Accordingly, actual results may differ materially from those expressed or
implied in any such forward-looking statements. Words such as "estimate,"
"project," "plan," "believe," "expect," "anticipate," "intend" and similar
expressions may identify forward-looking statements.
All forward-looking statements are qualified by the risks described under
the section of this information statement/prospectus entitled "Risk Factors"
which, if they develop into actual events, could have a material adverse effect
on the merger or on NeoMedia's and/or BSD's business, financial condition or
results of operations. In addition, investors should consider the other
information contained in or incorporated by reference into this information
statement/ prospectus.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties. Factors that may cause actual results to differ from
those contemplated by the forward-looking statements include, among others, the
following possibilities:
o inability to protect intellectual property or license third party
patents;
o a significant increase in competitive pressures in the industries in
which NeoMedia and BSD compete;
o less favorable than expected general economic or business
conditions, both domestic and foreign, resulting in, among other
things, lower than expected revenues;
o greater than expected costs or difficulties related to the
integration of the businesses of NeoMedia and BSD;
o the impact of competitive products and pricing;
o the success of operating initiatives;
o availability of qualified personnel;
o changes in, or the failure to comply with, government regulations;
and
o adverse changes in the securities markets.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by forward-looking
statements. Stockholders are cautioned not to place undue reliance on these
statements, which speak only as of the date of this information statement/
prospectus or, in the case of documents incorporated by reference, the date of
such documents.
NeoMedia and BSD undertake no obligation and do not intend to make
publicly available any update or other revisions to any of the forward-looking
statements contained in this information statement/prospectus to reflect
circumstances existing after the date of this information statement/prospectus
or to reflect the occurrence of future events even if experience or future
events make it clear that any expected results expressed or implied by those
forward-looking statements will not be realized, except as may be required by
securities law.
22
SELECTED HISTORICAL FINANCIAL DATA OF NEOMEDIA
The following selected financial data the three and six month periods
ended June 30, 2005 and 2004 have been derived from NeoMedia's unaudited
consolidated financial statements which include, in management's opinion, all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results of operations and financial position of NeoMedia for the
periods and dates presented. The following selected financial data for each of
the five years in the period ended December 31, 2004 have been derived from
NeoMedia's audited consolidated financial statements which include, in
management's opinion, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the results of operations and financial
position of NeoMedia for the periods and dates presented. This data should be
read in conjunction with the respective audited consolidated financial
statements of NeoMedia, including the notes thereto, incorporated herein by
reference and with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of NeoMedia contained in, or incorporated
in, the Annual Reports and other information that NeoMedia has filed with the
United States Securities and Exchange Commission. See the section of this
information statement/prospectus entitled "Where You Can Find More Information."
Six Months
Ended June 30, Years Ended December 31,
-------------------- --------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
Total net sales $1,285 $798 $1,700 $2,400 $9,399 $8,142 $27,565
Net loss ($3,519) ($4,053) ($7,230) ($5,382) ($7,421) ($25,469) ($5,409)
Net loss per share ($0.01) ($0.01) ($0.02) ($0.04) ($0.26) ($1.55) ($0.39)
Weighted average shares outstanding
during the period (thousands) 443,301 287,733 329,362 125,030 22,330 16,410 13,931
Total assets $16,993 $7,340 $10,406 $3,876 $4,323 $9,039 $40,594
Long-term debt -- $24 -- -- $226 $390 $539
23
SELECTED HISTORICAL FINANCIAL DATA OF BSD
The following selected financial data for each of the five years in the
period ended July 31, 2005 have been derived from BSD's audited consolidated
financial statements, and include, in management's opinion, all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
results of operations and financial position of BSD for the periods and dates
presented. This data should be read in conjunction with the respective audited
and unaudited consolidated financial statements of BSD, including the notes
thereto, incorporated herein by reference and with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of BSD contained
in, or incorporated in, the Annual Reports and other information that NeoMedia
has filed with the United States Securities and Exchange Commission. See the
section of this information statement/prospectus entitled "Where You Can Find
More Information."
Year Ended July 31,
-----------------------------------------------------------------------
2005 2004(A) 2003(A) 2002(B) 2001(B) 2000(B)
------- ------- -------- ------- ------- -------
(in thousands, except for per share data)
-----------------------------------------------------------------------
Total net sales $7,350 $6,091 $2,911 $5,382 $705 $210
Net income (loss) $271 $45 ($4,860) $193 $29 $51
Net income (loss) per share $0.01 $0.00 ($0.19) $193.00(C) $29.00(C) $51.00(C)
Weighted average shares outstanding
during the period (thousands) 32,781 31,494 25,494 1(C) 1(C) 1(C)
Total assets $1,706 $1,158 $886 $1,269 $260 $108
------------
(A) On November 2, 2002, BSD changed its fiscal year end from December 31 to
July 31. BSD was not required to file a transition report because it
adopted the fiscal year end of Triton Global Business Services, Inc., the
company it acquired on or about that date. Accordingly, financial
statements were not audited for the fiscal year ended July 31, 2002.
(B) BSD acquired Triton Global Business Services and Triton Global
Communications during November 2002. These business units represent 100%
of BSD's revenue since that date. Prior to the acquisition, BSD was an
inactive publicly traded "shell" corporation with little or no revenue. As
a result, the financial information shown above for the years ended July
31, 2002, 2001, and 2000, is the financial information of Triton Global
Communications, which is considered the acquirer of BSD for accounting
purposes.
(C) Prior to the business combination with BSD and Triton Global Business
Services, Triton Global Communications was a privately held company with
one share outstanding.
24
COMPARATIVE PER SHARE DATA
The following tables present historical per share data of BSD and NeoMedia
as of and for the 12 months ended July 31, 2005 and December 31, 2004,
respectively. The data presented below should be read in conjunction with the
historical financial statements of NeoMedia and BSD incorporated by reference in
this information statement/prospectus. Because the number of shares of NeoMedia
common stock to be issued in the merger will not be known until the completion
of the merger, pro forma per share data is presented below using the closing
sale price of a share of NeoMedia common stock on December 31, 2004 which was
$0.265.
Year Ended Year Ended
July 31, December 31,
2005 2004
---------- ------------
BSD Historical
Earnings per share $0.01 --
Book value per share (as of end of period)(1) ($0.10) --
NeoMedia Historical
Loss per share -- ($0.02)
Book value per share (as of end of period)(1) -- $0.01
Pro Forma Combined
Loss per combined company share(2) -- ($0.02)
Book value per combined company share (as of end of period)(3) -- $0.02
------------
(1) The historical net book value per share of NeoMedia and BSD common
stock is computed by dividing common stockholders' equity at
period end by the number of shares of common stock outstanding at
the period end.
(2) The pro forma combined net loss per share of the combined
company's common stock is computed by dividing the pro forma
combined net loss by the pro forma weighted number of shares of
common stock outstanding at the period end, assuming the merger
had been completed on January 1, 2004.
(3) The pro forma combined net book value per share of the combined
company's common stock is computed by dividing the pro forma
common stockholders' equity (deficit) by the pro forma number of
shares of common stock outstanding at the period end, assuming the
merger had been completed on January 1, 2004.
25
COMPARATIVE STOCK PRICE DATA
NeoMedia common stock is listed and traded on the Over-the-Counter
Bulletin Board under the symbol "NEOM". BSD common stock and is listed and
traded on the Over-the-Counter Bulletin Board under the symbol "BSDS". The
following table sets forth, for the periods indicated, the high and low sales
prices per share of NeoMedia common stock and BSD common stock as reported on
the respective markets in which they are traded. Neither NeoMedia nor BSD has
paid dividends with respect to its common stock.
NeoMedia BSD
Common Stock Common Stock
------------- ---------------
High Low High Low
----- ----- ------ ------
2001
January 1 - March 31 $6.00 $5.69 $0.25 $0.25
April 1 - June 30 $4.50 $5.00 $0.25 $0.001
July 1 - September 30 $1.85 $4.12 $0.001 $0.001
October 1 - December 31 $0.24 $1.94 $7.25 $1.10
2002
January 1 - March 31 $0.41 $0.14 $7.05 $5.25
April 1 - June 30 $0.17 $0.05 $8.52 $6.00
July 1 - September 30 $0.10 $0.02 $8.52 $1.25
October 1 - December 31 $0.05 $0.01 $4.75 $0.33
2003
January 1 - March 31 $0.06 $0.01 $1.85 $0.64
April 1 - June 30 $0.04 $0.01 $1.28 $0.30
July 1 - September 30 $0.29 $0.01 $0.51 $0.22
October 1 - December 31 $0.23 $0.10 $0.44 $0.16
2004
January 1 - March 31 $0.16 $0.14 $0.25 $0.09
April 1 - June 30 $0.11 $0.05 $0.51 $0.09
July 1 - September 30 $0.12 $0.06 $0.85 $0.22
October 1 - December 31 $0.30 $0.06 $0.34 $0.12
2005
January 1 - March 31 $0.29 $0.22 $0.24 $0.07
April 1 - June 30 $0.72 $0.19 $0.17 $0.06
July 1 - September 30 $0.51 $0.32 $0.10 $0.05
October 1 - October 24 $0.45 $0.32 $0.06 $0.04
On December 20, 2004, the last trading day prior to the public
announcement of the execution of the Merger Agreement, the closing price of BSD
common stock was $0.15 per share and the closing price of NeoMedia common stock
was $0.18 per share. On October 24, 2005, the most recent practicable trading
day prior to the printing of this information statement/prospectus, the closing
price of BSD common stock was $0.055 per share and the closing price of NeoMedia
common stock was $0.359 per share. The market prices of shares of BSD common
stock and NeoMedia common stock are subject to fluctuation. As a result, BSD
shareholders are urged to obtain current market quotations. Since April 5, 2005,
the approximate date that NeoMedia filed its initial information
statement/prospectus relative to its acquisition of and merger with BSD,
NeoMedia's stock has been subject to dramatic price volatility. Between April 5,
2005 and October 24, 2005, NeoMedia's stock has traded as low as $0.21 per share
and as high as $0.72 per share. On October 24, 2005, there were 32,560,897
shares of BSD common stock outstanding and 462,068,880 shares of NeoMedia common
stock outstanding.
26
THE MERGER
On December 21, 2004, NeoMedia and BSD signed a definitive Merger
Agreement, the form of which is attached hereto as Exhibit 10.55.
BSD's Reasons for the Merger
On November 29, 2004, BSD's Board of Directors approved the Merger
Agreement, which provides for the acquisition by NeoMedia of BSD through a
merger of BSD with and into NeoMedia Telecom Services, a newly formed and
wholly-owned subsidiary of NeoMedia. In addition, holders of 63% of BSD's
outstanding shares approved the merger by signing a Voting Rights Agreement.
In reaching their decision to approve the merger and the other
transactions contemplated by the Merger Agreement, the BSD Board of Directors
and majority shareholders consulted with BSD's management and its legal and
financial advisors. BSD's board and majority shareholders considered a number of
factors and potential benefits of the merger including, without limitation, the
following:
o the enhanced potential for earnings and revenue growth that could be
attained through a combination of NeoMedia's PaperClickTM technology
with BSD's technology and telecommunications industry expertise (in
addition, both companies expect cost savings may be attained by
eliminating overlap of expenses);
o the significantly larger public float and trading volume of NeoMedia
common shares compared to the public float and trading volume of
shares of BSD common stock, which should provide BSD shareholders
who receive NeoMedia shares in the merger the opportunity to gain
greater liquidity in their investment;
o the results of the business and accounting due diligence review
conducted by BSD's management and directors;
o the potential benefits to BSD employees from a combination with
NeoMedia;
o BSD's business, current financial condition and results of operation
and future prospects and the belief of the board and majority
shareholders, based on its familiarity with these matters, that the
consideration to be received by BSD's shareholders in the
transaction fairly reflects BSD's intrinsic value, including its
prospects for future growth in line with historical growth rates;
o the recent evaluation by BSD's management of BSD's strategic plan
and projections and the risks related to achieving those projections
and the goals of that plan, compared to the risks and benefits of
the merger; and
o THE ABILITY OF BSD'S SHAREHOLDERS TO RECEIVE THE MERGER
CONSIDERATION ON A TAX-ADVANTAGED BASIS.
The BSD Board of Directors and majority shareholders also considered and
balanced against the potential benefits of the merger a number of potentially
adverse factors concerning the merger including, without limitation, the
following:
o the fact that the final number of NeoMedia shares to be issued in
exchange for each share of BSD is dependent upon the trading price
of NeoMedia's common stock at the time of closing, and that an
increase in NeoMedia's share price between the date of this
prospectus and closing will result in BSD shareholders receiving
fewer shares of NeoMedia common stock in the merger;
o the opportunities for growth and the potential for increased
shareholder value if BSD were to stay independent and realize its
strategic plan, financial projections and expected technological
advances over the next five years;
o the risk that the merger might not be completed in a timely manner
or at all;
27
o the risk of diverting management focus and resources from other
strategic opportunities and from operational matters while working
to implement the merger; and
o the possibility of management and employee disruption associated
with the merger.
After taking into account all of the factors set forth above, as well as
others, the BSD Board of Directors and majority shareholders agreed that the
benefits of the merger outweigh the risks and that the Merger Agreement and the
merger are advisable and fair and in the best interests of BSD and its
shareholders.
The BSD Board of Directors and majority shareholders did not assign
relative weights to the above factors or the other factors considered by it. In
addition, the BSD board and majority shareholders did not reach any specific
conclusion on each factor considered, but conducted an overall analysis of these
factors. Individual members of the BSD board may have given different weight to
different factors.
NeoMedia's Reasons for the Merger
The Board of Directors of NeoMedia approved the Merger Agreement on August
18, 2004 after NeoMedia's senior management discussed with the Board of
Directors the business, assets, liabilities, results of operations and financial
performance of BSD, the complementary nature of certain of BSD's products and
capabilities and the products of NeoMedia, the expectation that BSD could be
integrated with NeoMedia, and the potential benefits that could be realized as a
result of such integration.
Interests of Certain Persons in the Merger; Conflicts of Interest
BSD shareholders should be aware that some of BSD's directors and
executive officers have interests in the merger that are different from, or in
addition to, the interests of BSD shareholders generally. The Board of Directors
of BSD was aware of these interests and considered them in approving the merger
and the Merger Agreement.
Equity Plans. Upon the completion of the merger, BSD employees, including
senior management, will be eligible to participate in NeoMedia's stock option
plans and stock incentive plans. Any issuances of stock or stock options under
NeoMedia's various plans must be approved by either the Stock Option Committee
of NeoMedia's board, or the Board of Directors as a whole.
Insiders Who Are Debtholders of BSD. Two of BSD's majority shareholders
who approved the merger are also debtholders of BSD. The debt owed to these
individuals will become debt of NeoMedia Telecom Services upon completion of the
merger.
Anticipated Accounting Treatment
The total merger consideration paid by NeoMedia, together with the direct
costs of the merger, will be allocated to BSD's tangible and intangible assets
and liabilities based on their fair market values. The assets, liabilities and
results of operations of BSD will be consolidated into the assets, liabilities
and results of operations of NeoMedia after the merger.
Material United States Federal Income Tax Consequences of the Merger
The following discussion sets forth the material United States federal
income tax consequences of the merger to BSD Stockholders (as defined below).
This discussion does not address any tax consequences arising under the laws of
any state, local or foreign jurisdiction. This discussion is based upon the
Internal Revenue Code of 1986, as amended, (the "Code"), the regulations of the
U.S. Treasury Department and court and administrative rulings and decisions in
effect on the date of this registration statement. These laws may change,
possibly retroactively, and any change could affect the continuing validity of
this discussion.
For purposes of this discussion, the term "BSD Stockholder" refers to a
holder of BSD common stock that is:
o A citizen or resident of the United States;
28
o a corporation, or other entity taxable as a corporation for U.S.
federal income tax purposes, created or organized under the laws of
the United States or any of its political subdivisions;
o a trust if it (i) is subject to the primary supervision of a court
within the United States and one or more United States persons have
the authority to control all substantial decisions of the trust or
(ii) has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person; or
o an estate that is subject to U.S. federal income tax on its income
regardless of its source.
If a partnership (including any entity treated as a partnership for U.S.
federal income tax purposes) holds BSD common stock, the tax treatment of a
partner will generally depend on the status of the partners and the activities
of the partnership. A partner of a partnership holding BSD common stock should
consult his own tax advisor.
This discussion assumes that BSD common stock is held as a capital asset
within the meaning of Section 1221 of the Code. Further, this discussion does
not address all aspects of U.S. federal income taxation that may be relevant to
BSD Stockholder under the stockholder's particular circumstances or that may be
applicable to a BSD Stockholder if the stockholder is subject to special
treatment under the U.S. federal income tax laws, including if a BSD Stockholder
is:
o a financial institution;
o a tax-exempt organization;
o an S corporation or other pass-through entity;
o an insurance company;
o a mutual fund;
o a dealer in securities or foreign currencies;
o a trader in securities who elects the mark-to-market method of
accounting for the securities;
o subject to the alternative minimum tax provisions of the Code;
o a BSD Stockholder who received BSD common stock through the exercise
of employee stock options or through a tax-qualified retirement
plan;
o a person that has a functional currency other than the U.S. dollar;
o a holder of options granted under any BSD benefit plan;
o a BSD Stockholder who holds BSD common stock as part of a hedge,
straddle or a constructive sale or conversion transaction; or
o certain United States expatriates.
The Merger. NeoMedia and BSD have structured the merger to qualify as a
reorganization within the meaning of Section 368(a) of the Code. NeoMedia will
receive a legal opinion that the merger so qualifies. In addition, based on
representations and covenants contained in a tax opinion certificate provided by
NeoMedia and NeoMedia Telecom Services, Inc. and on customary factual
assumptions, all of which must continue to be true and accurate in all material
respects as of the effective time of the merger, and subject to the
qualifications and limitations set forth in the opinion, it is the opinion of
Kirkpatrick & Lockhart Nicholson Graham LLP, counsel to NeoMedia, that the
merger will qualify as a reorganization within the meaning of Section 368(a) of
the Code. Accordingly, the material U.S. federal income tax consequences of the
merger are as follows:
29
o BSD Stockholders will not recognize gain or loss upon the exchange
of BSD common stock for NeoMedia common stock except to the extent
of any cash received instead of a fractional share of NeoMedia
common stock. This gain or loss will be capital gain or loss equal
to the difference between the amount of cash received and the tax
basis allocated to such fractional share. The capital gain or loss
recognized will constitute long-term capital gain or loss if the BSD
Stockholder's holding period in BSD common stock surrendered in the
merger is greater than one year as of the date of the merger.
o the aggregate tax basis in the NeoMedia common stock that a BSD
Stockholder receives in the merger (including any fractional share
interest deemed to be received and exchanged for cash) will equal
the BSD Stockholder's aggregate tax basis in the BSD common stock
that the stockholder surrenders less the amount of cash, if any, the
BSD Stockholder receives, plus the amount of any gain the BSD
Stockholder recognizes as a result of receiving the cash, if any;
and
o the holding period for the NeoMedia common stock that a BSD
Stockholder receives in the merger (including any fractional share
interest deemed to be received and exchanged for cash) will include
the BSD Stockholder's holding period for the shares of BSD common
stock that the stockholder surrenders in the exchange.
If a BSD Stockholder acquired different blocks of BSD common stock at
different times and at different prices, the stockholder's tax basis and holding
period in his NeoMedia common stock may be determined with reference to each
block of BSD common stock.
Backup Withholding. A non-corporate BSD Stockholder may be subject to
information reporting and backup withholding on any cash received instead of a
fractional share interest in NeoMedia common stock. A BSD Stockholder will not
be subject to backup withholding, however, if the stockholder:
o furnishes a correct taxpayer identification number and certifies
that the BSD Stockholder is not subject to backup withholding on the
Form W-9 or successor form; or
o is otherwise exempt from backup withholding.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or credit against your U.S. federal income tax liability, provided you
furnish the required information to the Internal Revenue Service.
Reporting Requirements. A BSD Stockholder that receives NeoMedia common
stock as a result of the merger will be required to retain records pertaining to
the merger and will be required to file with the stockholder's United States
federal income tax return for the year in which the merger takes place a
statement setting forth facts relating to the merger.
This discussion does not address tax consequences that may vary with, or
are contingent on, individual circumstances. Moreover, it does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
Tax matters are very complicated, and the tax consequences of the merger to an
individual BSD Stockholder will depend upon the facts of the stockholder's
particular situation. Accordingly, BSD Stockholders are strongly encouraged to
consult with a tax advisor to determine the particular federal, state, local or
foreign income or other tax consequences to them of the merger.
Material Canadian Federal Income Tax Consequences of the Merger
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to BSD Stockholders who are resident in
Canada. This summary, which does not constitute a legal opinion, is restricted
in its scope to BSD Stockholders who are individuals (that is, taxpayers who are
persons and not corporations, trusts or other entities) resident in Canada for
the purposes of the Income Tax Act Canada (the "Tax Act") and who hold their
shares as capital property. This commentary assumes that the BSD Stockholder and
any person deemed to deal with him not at arm's-length for the purposes of the
Tax Act, will not after the exchange hold or have rights to acquire more than
one-half of the shares entitled to vote to elect directors in NeoMedia nor have
shares with a fair market value of more than 50% of all issued shares in
NeoMedia.
This summary is based upon NeoMedia's understanding of the Tax Act, the
regulations to it (the "Regulations") and the current administrative practices
of the Canada Revenue Agency ("CRA"). This summary also takes into account
proposals for specific amendments to the Tax Act publicly announced in writing
by the Minister of Finance of Canada as of the date of this information
statement/prospectus (the "Proposed Amendments"). There is no assurance that the
Proposed Amendments will be enacted into law in the manner proposed, or at all.
This summary does not take into account or anticipate any possible changes in
the law, whether by legislative, governmental or judicial action.
30
No advance income tax ruling has been applied for from CRA in connection
with the transactions contemplated by filing nor will one be sought.
This summary is not exhaustive of all possible federal income tax
considerations and does not deal with provincial or foreign income tax
considerations. This summary does not constitute, and should not be construed to
constitute, legal or tax advice to any particular person. BSD STOCKHOLDERS
RESIDENT IN CANADA ARE THEREFORE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
A BSD Stockholder who exchanges his/her or her shares for NeoMedia stock
will have a disposition of those shares for the purposes of the Tax Act. That
BSD Stockholder will be deemed to have disposed of BSD shares for an amount
equal to their cost base immediately prior to the exchange (thus realizing no
gain or loss) and will be deemed to have acquired the NeoMedia shares for that
same amount.
However, a Canadian resident BSD Stockholder can elect in his/her return
of income of the taxation year in which the exchange occurs to treat the
disposition not as a "rollover" or non-recognition transaction but as one which
may generate a capital gain (or loss). In that case, proceeds of disposition of
shares by the BSD Stockholder equal to the fair market value of the NeoMedia
shares received on the exchange will be deemed to have realized. To the extent
that the proceeds of disposition received or deemed to have been received in
respect of the BSD shares exceed the aggregate of the BSD Stockholder's adjusted
cost base and costs of disposition, the BSD Stockholder will realize a capital
gain for income tax purposes. A capital loss will generally be realized to the
extent that proceeds of disposition are exceeded by the BSD Stockholder's
adjusted cost base of the BSD shares and costs of disposition.
A Canadian resident must include one-half of the amount of any capital
gain realized into income which would then be taxed at ordinary marginal rates.
One-half of a capital loss, referred to in the Tax Act as an allowable capital
loss, may be utilized to offset taxable capital gains realized by the individual
in the current year. To the extent that allowable capital losses realized in the
year are not utilized to offset taxable capital gains for that year, such
allowable capital losses can be used to offset net taxable capital gains in
future years or in the three preceding years.
The cost base of the NeoMedia shares to that Canadian resident BSD
Stockholder will be their fair market value on the date of the transaction if
that BSD Stockholder elects out of the "rollover" treatment.
Dissenters' Rights
Under Florida law, holders of BSD common stock outstanding immediately
prior to the effective date of the merger who have not voted in favor of the
merger have the right to exercise their dissenters' rights and obtain payment in
cash for the fair value of their shares of common stock, rather than receive
shares of NeoMedia common stock as described in this information
statement/prospectus and the attached Merger Agreement. To exercise dissenters'
rights, BSD stockholders must strictly follow the procedures described under
Section 607.1301 et seq. of the Florida Business Corporation Act (the "FBCA").
The text of the applicable provisions of Florida Business Corporation Act,
together with BSD's initial notice to dissenters as required under the FBCA and
a Dissenter's Demand Notice Form, is attached as Annex A to this information
statement/prospectus. Instruction as to how to exercise dissenters' rights in
connection with the merger are included in Annex A. A BSD shareholder desiring
to exercise his/her dissenters' rights under the FBCA must execute and return to
BSD the Dissenter's Demand Notice Letter in Annex A.
31
In order to exercise appraisal rights, dissenting shareholders must
strictly comply with the statutory procedures of the FBCA. If a proposed
corporation action requiring appraisal rights under the FCBA is submitted to a
vote at a shareholders' meeting, or is submitted to a shareholder pursuant to a
consent to vote, a dissenting shareholder who wishes to exercise appraisal
rights, must deliver to the corporation before the vote is taken, or within 20
days after receiving notice from the corporation that such appraisal rights are
available, a written notice of intent to demand payment. A dissenting
shareholder then cannot vote in favor of the proposed action. If the proposed
action becomes effective, the corporation must deliver a written appraisal
notice and form to all dissenting shareholders who provided a notice of intent
to demand payment within the statutorily prescribed time limits. The corporation
must send the appraisal notice and form within 10 days after the corporate
action became effective. The corporation may offer to a dissenting shareholder a
payment based on the corporation's estimate of the fair value of the
shareholder's shares. The fair value of the shares is determined immediately
before the effectuation of the corporate action to which the shareholder objects
and using customary and current valuation concepts and techniques generally
employed for similar business in the context of the transaction requiring
appraisal, excluding any appreciation or depreciation in anticipation of the
corporate action, unless such exclusion would be inequitable. A dissenting
shareholder who is dissatisfied with the corporation's offer, must notify the
corporation on the form provided to the dissenting shareholder by the
corporation of that dissenting shareholder's estimate of the fair value of the
shares and demand payment of that estimate plus interest. If a dissenting
shareholder fails to notify the corporation in writing of the demand to be paid
the shareholder's stated estimate of the fair value plus interest within the
timeframe requested be the corporation, which shall be no less than 40 or more
than 60 days after the appraisal notice and form are sent, the shareholder is
entitled only to the payment offered by the corporation. Due to the fact that
the actual exchange rate of BSD shares for NeoMedia shares will not be known
until the effective time of the merger, a dissenting shareholder may not know
the actual exchange rate at the time the notice of dissent is submitted.
Section 607.1302 of the FBCA provides in pertinent part that a shareholder
is entitled to appraisal (i.e., dissenters') rights, and to obtain payment of
the fair value of that shareholder's shares in the event of, among other things,
consummation of a merger to which the corporation is a party if shareholder
approval is required for the merger under Section 607.1103 of the FBCA, and the
shareholder is entitled to vote on the merger or exchange of shares in such
merger; provided that the shareholder has not voted in favor of the merger or
share exchange.
A shareholder may assert his/her/her dissenters' rights to all or fewer
than all shares he/she/she held as of the record date.
Under Section 607.1320, the corporation is required to provide the
stockholder with an initial notice of the corporate action giving rise to
dissenters' rights (e.g., a merger or share exchange) at the same time the
corporation provides notice of the meeting on which the proposed merger will be
put to a vote, or if no such meeting is to occur, on the date on which the
corporation first solicits consents for the proposed merger or share exchange
from any stockholder (the "Initial Notice"). The Initial Notice must also inform
the stockholder that the corporation has concluded that a stockholder may be,
is, or is not entitled to assert their dissenters' rights under the FBCA.
Within 20 days of receipt of the Initial Notice (or before a vote is taken
on the proposed merger), a stockholder who has not voted to approve the merger
and who wished to exercise his/her dissenters' rights, must so notify the
corporation in writing.
If the proposed merger is approved by the stockholders, then the
corporation must, within 10 days of the date on which the merger became
effective, send a second notice to the stockholders who previously provided
notice to the corporation of their intention to assert their dissenters' rights
informing such persons that the merger was approved and soliciting from them
certain information to be supplied on an enclosed form and returned to the
corporation, such as name, number of shares held, affirmative representation
that they did not vote for the merger, the corporation's estimate of the fair
value of the shares held by such person, a copy of the corporation's current
financial statements, and a copy of Sections 607.1301 through 607.1333 of the
FBCA (the "Second Notice"). "Fair value" is defined under the FBCA as the value
of the corporation's shares immediately prior to the proposed merger using
customary and current valuation concepts and techniques generally employed for
similar businesses in the context of the transaction requiring appraisals.
A stockholder wishing to exercise his/her dissenters' rights must then
execute the form enclosed in the Second Notice and return it to the corporation
within 20 days, and, if his shares are represented by certificates, deposit such
certificates in accordance with the terms contained in the Second Notice. Once
the shareholder has done the foregoing, he/she loses all rights as a shareholder
unless he/she withdraws his/her election to exercise his/her dissenters' rights.
If the shareholder states on such form that he/she accepts the corporation's
offer, then the corporation must tender payment to shareholder within 90 days.
However, if the shareholder indicates on such form that he/she does not accept
the corporation's offer, then he/she must provide his/her determination of the
fair value and note same on the form before returning it to the corporation.
32
The corporation then has 60 days in which to (a) accept the shareholders'
counter-offer/determination of fair value and thereafter pay such amount within
said 60-day period, or (b) negotiate with the shareholder toward a compromise
value and thereafter pay such amount within said 60-day period, or (c) reject
the shareholder's counter-offer/determination of fair value and thereafter
within said 60-day period commence a proceeding in the appropriate court in the
county in which the corporation's principal office is located for a judicial
determination of fair value. The corporation must tender payment of the fair
value determined by the court within 10 days of a final determination.
Under the FBCA, court costs, including costs of any third party appraisals
ordered by the court, are paid by the corporation. Additionally, if the court
finds that the corporation did not substantially comply with the FBCA with
regard to dissenters' rights, it can assess fees for the shareholder's counsel
against the corporation as well. However, if the court finds that the
shareholder acted arbitrarily or vexatiously, it can assess the corporation's
legal fees against the shareholder.
Federal or State Regulatory Requirements and Approvals
NeoMedia has consulted with its legal counsel and believes that it is not
required to obtain the consent of, or furnish prior notice to, any federal or
state governmental authority in connection with the consummation of the merger,
including any notice required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, 15 United States, Section 18a (Section 7A of the Clayton Act).
Description of NeoMedia's and BSD's Securities
A description of NeoMedia's and BSD's securities is provided on page 77
and page 102 of this information statement/prospectus, respectively.
Material Differences Between Rights of Holders of NeoMedia Common Stock Compared
to BSD Common Stock
A description of the material differences between rights of holders of
NeoMedia common stock compared to BSD common stock is provided on page 40 of
this information statement/prospectus.
33
THE MERGER AGREEMENT
This section of the information statement/ prospectus describes the Merger
Agreement. While NeoMedia and BSD believe that the description covers the
material terms of the Merger Agreement, this summary may not contain all of the
information that is important to you. The Merger Agreement is attached to this
prospectus as Exhibit 10.55. This document is incorporated herein by reference,
and NeoMedia and BSD urge you to read it carefully.
General; Structure of Transaction; Distribution of Common Stock
Following satisfaction or waiver of all of the conditions to the merger,
BSD will merge into NeoMedia Telecom Services, a wholly-owned subsidiary of
NeoMedia which is sometimes referred to as the "merger subsidiary." NeoMedia
Telecom Services will survive the merger as a wholly-owned subsidiary of
NeoMedia. If all conditions to the merger are satisfied or waived, the merger
will become effective at the time of the filing by the surviving corporation of
a duly executed certificate of merger with the Nevada Secretary of State.
The Exchange Ratio and Treatment of BSD Common Stock. BSD's shareholders
will receive, for each share of BSD stock owned, NeoMedia stock equivalent to
.07 divided by the volume-weighted average price of NeoMedia stock for the five
days prior to the effective time of the merger. The number of NeoMedia shares
each BSD shareholder will receive at closing will change depending on NeoMedia's
stock price at the time of closing. NeoMedia stock to be issued in the exchange
will be valued using a 5-day volume-weighted average closing price for the five
days prior to closing. No fractional shares will be issued. BSD common
stockholders that otherwise would receive fractional shares will instead receive
the nearest whole number of shares rounded down and an amount of cash (without
interest) equal to the product of such fraction multiplied by the
volume-weighted average closing price for the five days prior to closing of one
share of NeoMedia common stock as reported on the Over-the-Counter Bulletin
Board. It is important to note that BSD shareholders will not know the actual
number of shares they will receive until the effective date of the merger. BSD
shareholders who wish to inquire about the number of shares they will receive in
the merger can call toll-free (877) 813-2419.
Treatment of BSD Stock Options and Warrants. NeoMedia will not assume any
outstanding stock options or warrants issued by BSD. All options and warrants to
purchase BSD stock will be converted or cancelled prior to the effective date.
Exchange of Certificates. After the effective date of the merger, BSD's
transfer agent, Florida Atlantic Stock Transfer, will mail to each record holder
of BSD common stock a letter of transmittal and instructions for surrendering
their certificates. Only those holders who properly surrender their certificates
in accordance with the instructions will receive a certificate or certificates
representing that number of whole shares of NeoMedia common stock, cash in lieu
of any fractional shares of NeoMedia common stock and any dividends or
distributions to which they are entitled. The surrendered certificates
representing shares of BSD common stock will be cancelled. After the effective
time of the merger, each certificate representing shares of BSD common stock
that has not been surrendered will only represent the right to receive common
stock of NeoMedia, cash in lieu of any fractional shares of NeoMedia common
stock and any dividends or distributions to which they are entitled. Following
the effective date of the merger, BSD will not register any transfers of BSD
common stock on its stock transfer books.
No dividends or other distributions declared or made with respect to
NeoMedia common stock with a record date after the closing date of the merger
will be paid to the holder of any unsurrendered BSD certificate until the holder
surrenders its BSD certificate in accordance with the letter of transmittal.
Upon surrender, the transfer agent will deliver to the record holder of the
certificate, without interest, any dividends or distributions with respect to
the NeoMedia common stock to which the holder is entitled which have a record
date after the closing date of the merger.
If any BSD common stock certificate is lost, stolen or destroyed, a BSD
stockholder must provide an appropriate affidavit of that fact. NeoMedia may
require a BSD stockholder to deliver a bond or indemnity agreement as security
against any claim that may be made against NeoMedia, the surviving corporation
or the transfer agent with respect to any lost, stolen or destroyed certificate.
34
Representations and Warranties
NeoMedia and BSD each made a number of representations and warranties in
the Merger Agreement regarding aspects of their respective businesses, financial
condition, structure and other facts pertinent to the merger.
BSD's representations and warranties include representations as to:
o Organization of BSD;
o Capitalization of BSD;
o Stockholders' Agreements, etc;
o Authorization;
o Officers and Directors;
o Bank Accounts;
o Subsidiaries;
o Real Property;
o Personal Property;
o Environmental Matters;
o Contracts;
o No Conflict or Violation;
o Consents;
o Permits;
o SEC Reports;
o Financial Statements;
o Books and Records;
o Absence of Certain Changes or Events;
o Liabilities;
o Litigation;
o Labor Matters;
o Employee Benefit Plans;
o Transactions with Related Parties;
o Compliance with Law;
o Intellectual Property;
o Tax Matters;
o Insurance;
o Brokers;
o Transaction Costs;
o No Other Agreements to Sell NeoMedia or its Assets;
o Accounts Receivable;
o Inventory;
o Product Warranty;
o Board Recommendation; and
o Material Misstatements or Omissions.
NeoMedia's representations and warranties include representations as to:
o Organization;
o Capitalization of NeoMedia and Merger Subsidiary;
o Authorization;
o SEC Reports;
o Financial Statements;
o Books and Records;
o No Conflicts;
o Approvals;
o Merger Consideration;
o Brokers' and Finders' Fees;
o Board Approval; and
o No Stockholder Approval Required.
35
The representations and warranties in the Merger Agreement are complicated
and not easily summarized. You are urged to carefully read the portions of the
Merger Agreement entitled "Representations and Warranties of NeoMedia and major
stockholders" relating to BSD and "Representations and Warranties of Buyer and
Merger Sub" relating to NeoMedia and the Merger Subsidiary.
Conduct of Business Prior to the Effective Time of the Merger
BSD and NeoMedia have agreed that, until the earlier of the completion of
the merger or termination of the Merger Agreement, except as contemplated by the
Merger Agreement or agreed to in writing, they will, and will cause their
respective subsidiaries to, operate their respective businesses solely in the
ordinary course of business and in accordance with past practice.
BSD and NeoMedia have also agreed that until the earlier of the completion
of the merger or termination of the Merger Agreement, BSD will not, and will not
permit any of its respective subsidiaries to, do any of the following without
NeoMedia's prior written consent, unless expressly contemplated by the Merger
Agreement and subject to certain exceptions:
o incur any indebtedness for borrowed money, or assume, guarantee,
endorse, or otherwise become responsible for obligations of any
other person;
o issue or commit to issue any shares of its capital stock or any
other securities or any securities convertible into shares of its
capital stock or any other securities;
o declare, pay or incur any obligation to pay any dividend or
distribution on its capital stock or declare, make or incur any
obligation to make any distribution or redemption with respect to
capital stock;
o make any changes to its Articles of Incorporation or bylaws or other
charter documents;
o mortgage, pledge or otherwise encumber any assets or sell, transfer,
license or otherwise dispose of any assets except for the sale or
disposition of inventory to customers in the ordinary course of
business and consistent with past practice;
o cancel, release or assign any indebtedness owed to it or any claims
or rights held by it;
o make any investment or commitment of a capital nature either by
purchase of stock or securities, contributions to capital, property
transfer or otherwise, or by the purchase of any property or assets
of any other person;
o terminate any contracts or make any change in any contract;
o enter into or modify any employment contract;
o pay any compensation to or for any employee, officer or director
other than in the ordinary course of business and pursuant to
employment arrangements existing as of the date of the Merger
Agreement;
o pay or agree to pay any bonus, incentive compensation, service
award, severance, "stay bonus" or other like benefit;
o enter into or modify any other material employee plan;
o enter into or modify any contract or other arrangement with a
related party;
o make any change in any method of accounting or accounting practice;
o fail to comply with all material laws applicable to the assets of
BSD or BSD's subsidiaries and business consistent with past
practices;
36
o fail to use its commercially reasonable efforts to (i) maintain its
business, (ii) maintain existing relationships with material
suppliers and customers of BSD and others having business dealings
with BSD, and (iii) otherwise preserve the goodwill of its business
so that such relationships and goodwill will be preserved on and
after the closing date;
o make or change any election in respect of taxes, adopt or change any
material accounting method in respect of taxes, enter into any tax
allocation agreement, tax sharing agreement, tax indemnity agreement
or closing agreement, settle or compromise any claim, notice, audit
report or assessment in respect of taxes, or consent to any
extension or waiver of the limitation period applicable to any claim
or assessment in respect of taxes; or
o commence any legal action or proceeding.
The agreements related to the conduct of business in the Merger Agreement
are complicated and not easily summarized. You are urged to carefully read the
section of the Merger Agreement entitled "Conduct Prior to the Effective Time."
No Solicitation
Until the merger is completed or the Merger Agreement is terminated, BSD
has agreed not to, and agreed to direct their respective officers, directors,
employees, representatives and other agents not to:
o take any action to solicit, initiate or encourage the making of, any
acquisition proposal, or
o subject to the discussion below, engage in any negotiations with, or
provide any nonpublic information or data to, or afford any access
to its properties, books or records any person relating to any
acquisition proposal.
BSD may, without breaching the Merger Agreement, respond to an unsolicited
acquisition proposal by discussing the proposal with, and furnishing information
to the party making the proposal, if the board determines in good faith with
advice from its financial advisor that the potential acquirer submitting such
acquisition proposal is reasonably capable of consummating the acquisition, and
the board determines in good faith after receiving advice from its financial
advisor, that such acquisition proposal is reasonably likely to lead to a
superior proposal.
BSD has agreed to promptly notify NeoMedia of any acquisition proposal, or
any request for information or access to properties, books or records by any
person who has advised that it may be considering making, or that has made, an
acquisition proposal.
Additional Covenants
BSD has also agreed to the following covenants:
o The major stockholders shall have entered into voting agreements
with NeoMedia with respect to the voting of their BSD common stock
and which voting agreements prohibit the major stockholders from
selling or transferring their BSD common stock prior to the
effective time of the merger;
o BSD will give NeoMedia and its officers, employees, accountants,
counsel, financing sources and other agents and representatives
reasonable access to all buildings, offices, and other facilities
and to all books and records of BSD and all BSD subsidiaries,
whether located on the premises of BSD or at another location;
o BSD will permit NeoMedia to make such inspections as it may
reasonably require;
o BSD will cause its officers to furnish NeoMedia such financial,
operating, technical and product data and other information with
respect to the business and assets of BSD as NeoMedia from time to
time may request, including without limitation, financial statements
and schedules;
37
o BSD will allow NeoMedia the opportunity to interview such employees
and other personnel and affiliates of BSD as NeoMedia may reasonably
request;
o BSD will assist and cooperate with NeoMedia in the development of
integration plans for implementation by NeoMedia and the Surviving
Corporation following the effective date of the merger;
o BSD will exercise any rights that mature between the date hereof and
the effective date of the merger to repurchase any outstanding
shares of BSD common stock at the price at which such shares were
issued;
o BSD will make reasonable efforts to maintain its proprietary rights;
and
o BSD will deliver to NeoMedia all SEC filings it makes prior to the
closing date.
BSD and NeoMedia have mutually agreed to the following covenants:
o BSD and NeoMedia will keep the information or knowledge obtained
pursuant to the negotiation and execution of the Merger Agreement or
the effectuation of the merger transaction confidential;
o Both sides will bear their own expenses relating to the merger;
o Except as required by law (including federal and state securities
laws), or as may be reasonably necessary to complete the merger,
neither BSD nor NeoMedia will disclose the existence of, or any
subject matter of, or the terms and conditions of, the Merger
Agreement to any third party without the prior written consent of
the other;
o BSD and NeoMedia will use commercially reasonable efforts to take,
or cause to be taken, all actions under the Merger Agreement;
o BSD and NeoMedia will notify one another of (a) the occurrence of
any event, the occurrence of which is likely to cause any
representation or warranty of BSD or NeoMedia to be untrue or
inaccurate at or prior to the closing date, and (b) any failure of
the BSD or NeoMedia to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under
the Merger Agreement;
o BSD will be responsible for all tax returns and related liabilities
until the closing date, and NeoMedia will be responsible for all tax
returns and related liabilities after the closing date;
o BSD and NeoMedia agree that in connection with any third party or
derivative litigation which may be brought against BSD relating to
the merger, BSD will keep NeoMedia informed of the course of such
litigation, and BSD agrees that it will consult with NeoMedia prior
to entering into settlement or compromise of any such litigation;
and
o The Certificate of Incorporation and bylaws of the Surviving
Corporation shall contain the provisions with respect to
indemnification set forth in the Certificate of Incorporation and
bylaws of BSD as of the date of the Merger Agreement.
Conditions to Completion of the Merger
The obligations of NeoMedia and BSD to complete the merger and the other
transactions contemplated by the Merger Agreement are subject to the
satisfaction or waiver, to the extent legally permissible, of each of the
following conditions before completion of the merger:
o the registration statement on Form S-4 of which this information
statement/prospectus is a part shall have been declared effective by
the United States Securities and Exchange Commission (the "SEC") and
shall not be the subject of any stop order or proceeding by the SEC
seeking a stop order, and no similar proceeding shall have been
initiated in respect of the information statement/prospectus;
o no temporary restraining order or injunction, law, regulation, order
or proceeding by a governmental entity, that could prevent the
merger or make the merger illegal, has been entered or begun; and
o each of BSD, NeoMedia and the Surviving Corporation shall have
timely obtained from each governmental entity all necessary
approvals, waivers or consents.
38
BSD's obligations to complete the merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
in writing of each of the following additional conditions before completion of
the merger:
o The representations and warranties of NeoMedia contained in the
Merger Agreement shall have been accurate in all respects as of the
date of the Merger Agreement and shall be accurate in all respects
as of the closing date as if made on and as of the closing date;
o NeoMedia shall have performed and complied with in all material
respects of each agreement, covenant and obligation required by the
Merger Agreement to be so performed or complied with by NeoMedia at
or before the closing date; and
o NeoMedia shall have delivered to BSD a buyer certificate, dated the
closing date and executed by an authorized officer of NeoMedia.
BSD's representations and warranties must be true and correct as of the
date the merger is to be completed as if made at and as of such time except:
o The representations and warranties of BSD contained in the Merger
Agreement shall have been accurate in all respects as of the date of
the Merger Agreement and shall be accurate in all respects as of the
closing date as if made on and as of the closing date;
o BSD shall have performed and complied with in all material respects
each agreement, covenant and obligation required by the Merger
Agreement to be so performed or complied with by BSD on or before
the closing date;
o BSD shall have delivered to NeoMedia a seller certificate, dated the
closing date and executed by the President and Chief Executive
Officer of BSD;
o The adoption of the Merger Agreement by the requisite holders of the
outstanding shares of BSD common stock shall have been obtained by
BSD at a special meeting or by written consent as permitted by law;
o BSD shall not have liabilities in an amount greater than $5 million
as of July 31, 2005, and as of the closing date;
o BSD shall have assets in an amount equal to or greater than $850,000
as of July 31, 2005, and as of the closing date;
o BSD shall not have in excess of 35 million shares of common stock
issued and outstanding as of the closing date (increased to 38
million on June 6, 2005);
o BSD shall have terminated prior to the closing date any and all
employment agreements, severance agreements, "golden parachute"
provisions of any agreements, and/or any other agreements that would
entitle any person compensation or payment pursuant to the
termination of such person's employment or a change of control in
BSD;
o All required consents, approvals, notifications, disclosures,
filings and registrations shall have been obtained or made;
o No action shall be pending or threatened relating in any way to the
Merger Agreement or the transactions contemplated in the Merger
Agreement;
39
o The holders of not more than 5% of the issued and outstanding shares
of BSD common stock shall have dissented to the merger;
o Each of the key employees defined in the Merger Agreement shall
remain continuously employed by BSD on substantially the same terms
and with substantially the same responsibilities as on the date of
the Merger Agreement and BSD shall have no knowledge that any of the
key employees has any intention to terminate their employment with
the Surviving Corporation;
o Each required employee shall have executed and delivered to NeoMedia
an employment agreement;
o All BSD stock option and warrant agreements shall be converted or
cancelled prior to the effective time of the merger;
o BSD, BSD Stockholders and any person who is a "disqualified
individual" (as defined in Section 280G(c) of the United States
Internal Revenue Code, as amended (the "Code") and the proposed
Treasury Regulations promulgated thereunder) with respect to BSD
shall have taken any and all actions necessary to provide that no
payment or acceleration of any right to benefits or payment pursuant
to the Merger Agreement, any employee plan, contract or any other
plan or arrangement shall constitute an "excess parachute payment"
within the meaning of Code Section 280G(b)(1) (NeoMedia and BSD each
acknowledge and agree that such actions may include, but are not
necessarily limited to, the approval by BSD stockholders of the
right to receive or retain such payments or benefits, which approval
satisfies the requirements of Code Section 280G(b)(5)(B) of and the
proposed Treasury Regulations promulgated thereunder); and
o NeoMedia shall have no actual knowledge and shall not have received
a notice pursuant to Treasury Regulations Section 1.445-4 that the
statement delivered by BSD pursuant to Code Section 6.11(g) is
false.
Termination of the Merger Agreement
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by either NeoMedia or BSD, if:
o the merger shall not have been consummated on or before December 31,
2005, which date may be extended by mutual consent of NeoMedia and
BSD (such date was extended from October 31, 2005 to December 31,
2005 on October 28, 2005);
o any law shall have been enacted, entered or promulgated prohibiting
the consummation of the Merger substantially on the terms
contemplated in the Merger Agreement; or
o a court of competent jurisdiction or other government entity shall
have issued an order, decree, ruling or injunction, or taken any
other action, having the effect of permanently restraining,
enjoining or otherwise prohibiting the merger substantially on the
terms contemplated hereby, and such order, decree, ruling,
injunction or other action shall have become final.
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by NeoMedia, if:
o BSD shall have failed to comply in any material respect with any of
the covenants or agreements contained in the Merger Agreement;
o there exists a breach or breaches of any representation or warranty
of BSD contained in the Merger Agreement; or
o (i) the Board of Directors of BSD fails to adopt the Merger
Agreement, or withdraws, amends or modifies in a manner adverse to
NeoMedia its adoption of the Merger Agreement, (ii) a tender offer
(to which Rule 14e-2(a) under the Securities Exchange Act of 1934,
as amended (the "1934 Act") applies) for any of the outstanding
shares of capital stock of BSD is commenced prior to BSD the closing
date, and within the time required by Rule 14e-2(a) under the
Exchange Act the Board of Directors of BSD fails to recommend
against acceptance of such tender offer, or takes no position with
respect to such tender offer, or states its inability to take a
position with respect to such tender offer, (iii) BSD or its Board
of Directors takes any position (including making no recommendation
or stating an inability to make a recommendation) with respect to
any acquisition proposal other than a recommendation to reject such
acquisition proposal, (iv) the Board of Directors of BSD resolves to
accept, accepts or recommends to the stockholders of BSD a superior
proposal, or (v) the Board of Directors of BSD resolves to take any
of the foregoing actions.
40
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by BSD, if:
o NeoMedia or the Surviving Corporation shall have failed to comply in
any material respect with any of the covenants or agreements
contained in any section of the merger;
o there exists a breach or breaches of any representation or warranty
of NeoMedia or the Surviving Corporation contained in the Merger
Agreement; or
o the Board of Directors of BSD accepts or recommends to the
stockholders of BSD a superior proposal or resolves to do so,
provided that BSD has given written notice of such superior proposal
and NeoMedia has not made a proposal which is reasonably equivalent
from the perspective of the stockholders of BSD within 72 hours of
such written notice.
Expenses and Termination Fees
Each side shall pay their own expenses relating to the merger. Neither
party is subject to a termination fee in the event the merger is not completed.
Amendment; Extension and Waiver of the Merger Agreement
Amendment. The Merger Agreement may be amended by the mutual written
agreement of NeoMedia and BSD at any time prior to the closing of the merger.
Extension and Waiver. At any time prior to the effective time of the
merger any party may, to the extent legally allowed:
o extend the time for the performance of any of the obligations or
other acts of the other parties under the Merger Agreement;
o waive any inaccuracies in the representations and warranties made to
such party contained in the Merger Agreement or in any document
delivered pursuant to the Merger Agreement; or
o waive compliance with any of the agreements or conditions for the
benefit of such party contained in the Merger Agreement.
41
COMPARATIVE RIGHTS OF NEOMEDIA AND BSD SHAREHOLDERS
NeoMedia is incorporated under the laws of the State of Delaware, whereas
BSD is incorporated under the laws of the State of Florida. BSD shareholders'
rights are currently governed by the Florida Business Corporation Act ("FBCA"),
the Articles of Incorporation of BSD and the bylaws of BSD; however, if the
merger is completed, BSD shareholders who receive shares of NeoMedia common
stock in the merger will become shareholders of NeoMedia, and their rights as
such will be governed by the Delaware General Corporation Law ("DGCL"),
NeoMedia's Certificate of Incorporation and bylaws. The material differences
between the rights of holders of BSD common stock and the rights of holders of
NeoMedia common stock, resulting from the differences in their governing
documents, are summarized below.
The following summary does not purport to be a complete statement of the
rights of holders of NeoMedia common stock or the rights of the holders of BSD
common stock. This summary contains a list of the material differences but is
not meant to be relied upon as an exhaustive list or a detailed description of
the provisions discussed and is qualified in its entirety by reference to the
DGCL, the FBCA, and the governing corporate documents of NeoMedia and BSD, to
which the holders of BSD common stock are referred. Copies of such governing
corporate documents of NeoMedia and BSD are available, without charge, to any
person, including any beneficial owner to whom this information
statement/prospectus is delivered, by following the instructions listed under
"Where You Can Find More Information."
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BSD Software, Inc. NeoMedia
-----------------------------------------------------------------------------------------------------
Authorized capital BSD's authorized capital stock NeoMedia's authorized capital
stock consists of 5,000,000 shares of stock consists of 25,000,000
preferred stock, $0.001 par value shares of preferred stock, par
per share, and 50,000,000 shares of value $0.01 per share; and
common stock, $0.001 par value per 1,000,000,000 shares of common
share. stock, par value $0.01 per share.
-----------------------------------------------------------------------------------------------------
Payment of dividends The Board of Directors of BSD may, Under the DGCL, NeoMedia may
from time to time, declare and the declare and pay cash dividends out
corporation may pay dividends on of its surplus or, if it has no
its shares in cash, property or its surplus, out of any net profits
own shares, except when the for the current or preceding
corporation is insolvent or when fiscal year, provided that the
the payment thereof would render payment will not reduce the
the corporation insolvent subject capital of the corporation below
to the provisions of the Florida the aggregate liquidation
Statutes. BSD has never paid a preference of the corporation's
dividend. stock having a preference upon the
distribution of assets. NeoMedia
has never paid a cash dividend.
-----------------------------------------------------------------------------------------------------
Election and size Elected annually with a minimum of The number of directors which
of Board of one and no more than seven. BSD shall constitute the whole board
Directors currently has one director. shall be not less than one nor
more than nine. NeoMedia
currently has five board members
who are elected annually.
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42
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BSD Software, Inc. NeoMedia
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Removal of directors A director may resign at any time A director may resign at any time
or may be removed at a meeting of upon written notice to the Board
shareholders called expressly for of Directors. A director may be
that purpose. Any director or the removed with or without cause, by
entire Board of Directors may be a majority of stockholders if the
removed, with or without cause, by notice of the meeting names the
a vote of the holders of a majority director or directors to be
of the shares then entitled to vote removed at said meeting.
at an election of directors.
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Vacancies on the Any vacancy occurring in the Board Any vacancy on the Board of
board of Directors, including any vacancy Directors may be filled by
created by reason of an increase in election at the next annual or
the number of directors, may be special meeting of stockholders.
filled by the affirmative vote of a A majority of the Board of
majority of the remaining directors Directors may fill any vacancy
though less than a quorum of the prior to such annual or special
Board of Directors. A director meeting of stockholders.
elected to fill a vacancy shall
hold office only until the next
election of directors by the
shareholders.
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Vote on Shareholders: Special meetings of Stockholders: Special meetings of
extraordinary the shareholders shall be held when the stockholders may be called
corporate directed by the president or the either by the chairman, president
transactions Board of Directors, or when or secretary at the request, in
requested in writing by the holders writing of a majority of the Board
of no less than 10% of all the of Directors or at the request in
shares entitled to vote at the writing of stockholders owning
meeting. A meeting requested by shares of capital stock equal to
shareholders shall be called for a 50% of the entire capital stock of
date not less than 3 nor more than the corporation issued and
30 days after the request is made, outstanding and entitled to vote.
unless the shareholders requesting
the meeting designate a later date. Directors: The authority of the
The call for the meeting shall be Board of Directors may be
issued by the secretary, unless the exercised without a meeting if a
president, the Board of Directors, consent in writing, setting for
or the shareholders requesting the the action taken, is signed by all
meeting shall designate another of the directors entitled to vote.
person to do so.
Directors: Written notice of the
time and place of special meetings
of the Board of Directors shall be
given to each director by either
personal delivery, telegram, or
cablegram at least three days
before the meeting or by notice
mailed to the director at least 3
days before the meeting. Members of
the Board of Directors may
participate in a meeting of such
board by means of a conference
telephone or similar communications
equipment by means of which all
persons participating in the
meeting can hear each other at the
same time. Participation by such
means shall constitute presence in
person at the meeting.
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43
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BSD Software, Inc. NeoMedia
-----------------------------------------------------------------------------------------------------
Amendment of May be amended by the affirmative NeoMedia reserves the right to
certificate or vote of a majority of the Board of amend, alter, change or repeal any
Articles of Directors and by the affirmative provision contained in the
Incorporation vote of the holders of not less Certificate of Incorporation, in
than two-thirds of the then the manner now or hereafter
outstanding stock of the prescribed by statute, and all
corporation. rights conferred upon the
stockholders herein are granted
subject to this right.
-----------------------------------------------------------------------------------------------------
Amendment of bylaws bylaws may be altered, amended, or In furtherance and not in
repealed, and new bylaws may be limitation of the powers conferred
adopted by the majority vote of by statute, the Board of Directors
directors of the corporation. is expressly authorized to make,
alter or repeal the bylaws of
NeoMedia.
-----------------------------------------------------------------------------------------------------
Indemnification The corporation may indemnify the NeoMedia's Certificate of
officers and directors against any Incorporation and bylaws limit or
contingency or peril and in eliminate the liability of
conjunction therewith to procure, directors to the fullest extent
at the corporation's expense, permitted by Delaware law and
policies of insurance. require indemnification to the
maximum extent permitted by
Delaware law.
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Appraisal rights Under Florida law, a shareholder is Under Delaware law, no appraisal
entitled to appraisal (i.e. rights are available for the
dissenters') rights, and to obtain stockholders of the surviving
payment of the fair value of that corporation if no vote of the
shareholder's shares in the event surviving corporation is required
of, among other things, to approve the merger
consummation of a merger to which
the corporation is a party if
shareholder approval is required
for the merger, and the shareholder
is entitled to vote on the merger
or the exchange of shares in such
merger, provided that the
shareholder has not voted in favor
of the merger or share exchange. A
shareholder may assert his/her
dissenters' rights to all or fewer
than all shares he/she held as of
the record date. For a more
detailed description of the timing
and procedures to be associated
with a BSD's shareholder's exercise
of his/her dissenter's rights,
please refer to page 29 of this
Statement entitled "Dissenters'
Rights."
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44
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BSD Software, Inc. NeoMedia
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Preemptive rights Under Florida law, the shareholders Under Delaware law, absent express
of a corporation do not have a provision in a corporation's
preemptive right to acquire the Certificate of Incorporation, a
corporation's unissued shares or stockholder does not, by operation
the corporation's treasury shares, of law, possess preemptive rights
except in each case to the extent to subscribe to additional
that the corporation's Articles of issuances of the corporation's
Incorporation so provide. BSD's stock. NeoMedia's Certificate of
Articles of Incorporation do not Incorporation does not provide for
provide for its shareholders to its stockholders to have any
have any preemptive rights with preemptive rights with respect to
respect to any shares of its any shares of its capital stock.
capital stock.
-----------------------------------------------------------------------------------------------------
Meetings of An annual meeting of the An annual meeting of the
shareholders shareholders at such time and place stockholders shall be held at such
as designated by the Board of time as the Board of Directors may
Directors. Business transacted at designate for the purpose of
the annual meeting shall include electing directors and for the
the election of directors of the transaction of such other business
corporation. as may properly come before the
meeting.
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45
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BSD Software, Inc. NeoMedia
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Consent of Any action required to be taken at Any action required to be
shareholders in an annual or special meeting of taken at a meeting of the
lieu of meeting shareholders, may be taken without stockholders, or any other
a meeting, without prior notice and action which may be taken at a
without a vote, if a consent in meeting of the stockholders,
writing, setting forth the action may be taken without a meeting
so taken, shall be signed by the and without a vote, if a
holders of outstanding stock having consent in writing, setting
not less than the minimum number of forth the action so taken
votes that would be necessary to shall be signed (a) if five
authorize such action at a meeting days prior notice of the
at which all shares entitled to proposed action is given in
vote thereon were present and writing to all of the
voted. A majority of the shares stockholders entitled to vote
entitled to vote, represented in with respect to the subject
person or by proxy, shall matter, hereof, by the holders
constitute a quorum at a meeting of of outstanding shares having
shareholders. If a quorum is not less than the minimum
present, the affirmative vote of a number of votes that would be
majority of the shares represented necessary to authorize or take
at the meeting and entitled to vote such action at a meeting at
on the subject matter shall be the which all shares entitled to
act of the shareholders unless vote thereon were present and
otherwise provided by law. voting; or (b) by all of the
stockholders entitled to vote
with respect to the subject
matter thereof. Prompt notice
of the taking of the corporate
action without a meeting by
less than unanimous written
consent shall be given in
writing to those stockholders
who have not consented in
writing. In the event that the
action which is consented to
is such as would have required
the filing of a certificate
under any section of the DGCL
if such action had been voted
on by the stockholders at a
meeting thereof, the
certificate filed under such
section shall state, in lieu
of any statement required by
such section concerning any
vote of stockholders, that
written consent has been given
in accordance with the DGCL
and that written notice has
been given as provided in the
DGCL.
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46
NEOMEDIA'S BUSINESS
Company History
NeoMedia Technology, Inc. ("NeoMedia") was incorporated under the laws of
the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech
Associates, Inc., NeoMedia's predecessor, which was organized in Illinois in
December 1989. In March 1996, Dev-Tech's common stock was split, with an
aggregate of 2,551,120 shares of common stock being issued in exchange for the
164 then-issued and outstanding shares of common stock. On August 5, 1996,
NeoMedia acquired all of the shares of Dev-Tech in exchange for the issuance of
shares of NeoMedia's common stock to Dev-Tech's stockholders.
NeoMedia also has the following wholly-owned subsidiaries: NeoMedia Micro
Paint Repair, Inc., incorporated in Nevada; 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 October 2004,
NeoMedia established NeoMedia Telecom Services, Inc. in Nevada for the purpose
of acquiring BSD Software, Inc. of Calgary, Alberta, Canada ("BSD").
Recent Developments
Mobot, Inc. ("Mobot")
On July 27, 2005, NeoMedia signed a non-binding Letter of Intent to
acquire Mobot (www.mobot.com), of Lexington, Massachusetts, a pioneer and leader
in mobile visual search technologies. Mobot was founded in 2003 by its CEO
Russell Gocht to pursue the application of advances in image processing on of
camera phones in the consumer marketplace. The Letter of Intent calls for
NeoMedia to acquire all of the outstanding shares of Mobot in exchange for
$3,500,000 cash and $6,500,000 in shares of NeoMedia common stock. The LOI is
subject to due diligence by both parties.
On July 28, 2005, NeoMedia lent Mobot the principal amount of $600,000 in
the form of an unsecured promissory note. The Note accrues interest at a rate of
6% per annum. The Note will be forgiven upon signing of a definitive purchase
agreement for the acquisition of all of the outstanding shares of Mobot by
NeoMedia, as contemplated by the Letter of Intent. In the event the acquisition
is not consummated, the Note will become due 90 days after written notice of
cancellation of the Letter of Intent. In the event the Letter of Intent is
terminated and the Note is note repaid within 90 days of such cancellation, the
note will convert into shares of Mobot common stock with a value equal to the
unpaid principal and accrued interest on the Note.
On September 26, 2005, NeoMedia loaned Mobot an additional $200,000 under
the same terms as the Note. On October 26, 2005, NeoMedia loaned Mobot an
additional $200,000 under the same terms as the Note. Both of the additional
loans were subject to the same terms as the Note.
$100 Million Standby Equity Distribution Agreement with Cornell Capital
Partners LP
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. The shares
would be valued at 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia, and NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment
fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also paid a cash commitment fee of $1 million. NeoMedia also issued 4
million warrants with an exercise price of $0.229 to an independent third party
as a fee for negotiating and structuring the Standby Equity Distribution
Agreement. NeoMedia expects to file a registration statement with the US
Securities and Exchange Commission during 2005 to register the shares underlying
the $100 million Standby Equity Distribution Agreement. The new Standby Equity
Distribution Agreement would become active at the time the SEC declares
effective a registration statement containing such shares.
47
On May 25, 2005, NeoMedia filed a registration statement on Form S-3
(Registration No. 333-125239) to register 54,000,000 shares underlying the
warrants granted in connection with the Standby Equity Distribution Agreement.
$10 Million Secured Promissory Note Payable to Cornell Capital Partners LP
On March 30, 2005, NeoMedia borrowed from Cornell the principal amount of
$10,000,000 before discounts and fees in the form of a secured promissory note.
Cornell withheld structuring and escrow fees of $68,000 related to the note. The
note was scheduled to be repaid at a rate of $1,120,000 per month commencing May
1, 2005 (subsequently changed to $840,000 per month starting on April 1, 2005)
and continuing until principal and interest are paid in full. The note accrues
interest at a rate of 8% per annum on any unpaid principal. NeoMedia has the
option to prepay any remaining principal of the note in cash without penalty. In
connection with the note, NeoMedia and Cornell entered into a security agreement
under which the note is secured by all of NeoMedia's assets other than its
patents and patent applications. NeoMedia also escrowed 25,000,000 shares of its
common stock as security for the note. As of June 30, 2005, NeoMedia had made
payments of $2,730,000 against the principal.
Acquisition of 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 issued 7,000,000 shares of NeoMedia's common
stock, plus $2.5 million cash in exchange for all outstanding shares of CSI.
NeoMedia have centralized the administrative functions in its Fort Myers,
Florida headquarters, and maintain the sales and operations office in Calgary,
Alberta, Canada.
Pending Acquisition of BSD Software, Inc.
On December 21, 2004, NeoMedia signed a Merger Agreement with BSD. Under
the terms of the agreement, each share of BSD stock will be exchanged for
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger.
Closing will occur when all regulatory approvals have been granted, including
effectiveness of a registration statement on Form S-4 whereby the NeoMedia
shares to be granted in the transaction are registered. The number of NeoMedia
shares to be granted in the exchange will change depending on NeoMedia's stock
price at the time of closing. Because a majority of BSD shareholders have
approved the merger prior to the signing of the Merger Agreement, BSD will not
hold a shareholders meeting to vote on the merger.
Acquisition of 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.
iPoint-Media Ltd.
On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering into the service agreement, NeoMedia received 7% ownership in
iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In
addition to the business development agreement, NeoMedia acquired an additional
10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for
$1 million cash.
iPoint-media was founded in April 2001 as a spin-off from Imagine Visual
Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli
holding company, Singapore-based Keppel T&T, and marketing and advertising group
WPP. iPoint-media specializes in Customer Interaction Management and is the
world's 1st developer of IP Video Call Centers for Deutsche Telecom. Muki
Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of
iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European
customer support center in The Netherlands. iPoint-media's mission is to become
the video access platform and application engine of choice for service
providers.
48
On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of iPoint-media Ltd. of
Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435 shares)
of iPoint-media's common stock to NeoMedia shareholders of record as of November
17, 2004. The date of the property dividend payment will be announced after the
United States Securities and Exchange Commission declares iPoint-media's
registration statement on Form SB-2 effective. iPoint-media filed their SB-2
(Registration No. 333-126342) on July 1, 2005.
Pickups Plus / Automotive Preservation, Inc.
On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS
is a retail operator and franchiser of retail automotive parts and accessories
stores catering to the light truck market, and also provides new vehicle
preparation, environmental protection packages, detailing and reconditioning
products and services.
Also on February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") to acquire up to
100% of Automotive Preservation, Inc. ("AP"), a distributor of automotive paint
and accessory products, from AP's parent company, PUPS. The first LOI calls for
NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in
cash, $554,000 in shares of NeoMedia restricted common stock, and $446,000
through the assumption of AP debt by NeoMedia. Under the second LOI, upon
completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia
would have the option to acquire an additional 30% of AP for $1,650,000, payable
in shares of NeoMedia restricted common stock. The second LOI also gives
NeoMedia the option to purchase the final 40% of AP for either: (i) $2,200,000,
payable in shares of NeoMedia restricted common stock, if NeoMedia exercises
this right within 12 months of acquiring the second 30% of AP, or (ii) a price
equivalent to AP's previous quarter EBITDA multiplied by 8, payable in shares of
NeoMedia restricted common stock. Both LOIs are non-binding and subject to due
diligence by NeoMedia and AP
Micro Paint Repair Developments
On October 4, 2005, NeoMedia signed a definitive distribution agreement to
bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement,
signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve
as an exclusive distributor of NeoMedia's micro paint repair products, systems
and licenses to automotive service facilities throughout Denmark, Sweden, and
Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize
in products and services involving micro paint repairs for automobiles in
Denmark, Sweden and Norway.
On September 27, 2005, NeoMedia signed a definitive distribution agreement
to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America,
as well as be a distributor of other automotive aftermarket products. The
agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"),
calls for Micropaint de Mexico to serve as an exclusive distributor of
NeoMedia's micro paint repair products, systems and licenses to automotive
service facilities throughout Mexico and Latin America. The Agreement also calls
for Micropaint de Mexico to buy certain automotive aftermarket repair and
environmental protection products from NeoMedia. Founded earlier this year and
based in Monterrey, Mexico, Micropaint de Mexico specializes in providing
automotive aftermarket products throughout Mexico and Latin America.
On August 30, 2005, NeoMedia signed a distribution agreement with Jinche
Yingang Automobile Co. of Beijing, China ("Jinche"), under which Jinche will act
as a distributor of automtoive products in China. Jinche is a Beijing
PRC-registered company specializing in automobile sales, financing, insurance
and repair. NeoMedia will supply Jinche with its micro paint repair products, as
well as various other automotive aftermarket products from other manufacturers.
49
PaperClick(R) Developments
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc. During July 2005, NeoMedia and AirClic settled the case out of
court, with AirClic agreeing to compensate NeoMedia for past and future
activities. AirClic did not receive a license to use NeoMedia's patented
PaperClick(R) technology.
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore (collectively, "Virgin"). During June 2005, NeoMedia and Virgin
settled the case out of court, with Virgin agreeing to purchase a license to use
NeoMedia's patented PaperClick(R) technology platform through 2016.
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
On April 18, 2005, NeoMedia announced that it named Martin N. Copus, a
global and interactive marketing executive who has worked with many of the
world's leading brands, as its COO and to the newly-created position of chief
executive of its PaperClick wireless business unit. Prior to joining NeoMedia,
Mr. Copus was Managing Director of 12Snap UK, an internationally-acclaimed,
award-winning mobile marketing company focusing on wireless channels, where he
led development and implementation of interactive marketing programs for major
blue-chip companies including McDonald's(R), Kellogg(R), Procter & Gamble(R),
Coca-Cola(R), Safeway(R), Budweiser(R), and 20th Century Fox(R). Prior to
running the U.K. operations of 12Snap, Mr. Copus's background included
assignments as executive director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange; Worldwide Board Director
of Interpublic Group's Ammirati Puris Lintas advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago, responsible for its Marlboro(R)
USA advertising and marketing services account. Mr. Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.
On April 12, 2005, NeoMedia acquired four search-oriented patents issued
in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for $1.5
million cash and 10% royalties on all future sales for a period of ten years.
The first patent (U.S. 6,430,554 B1) covers technology that uses uniquely-coded
objects, such as consumer goods to automatically generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device. The second patent (U.S. 6,651,053 B1) is an extension of the
first, covering additional mechanisms for performing such searches using mobile
devices. The third patent (U.S. 6,675,165 B1) covers uses of location-based
technology to deliver content that is based both on a particular advertisement
and the geographic location in which the advertisement is located. The fourth
patent (U.S. 6,766,363 B1) covers techniques for providing information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team for co-marketing and sales efforts in the U.S., as well as in Europe, the
Middle East, Africa and Latin America.
On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of
Check 21 software products and solutions for the small- to medium-sized
financial institution market, entered into a business development agreement
under which the two companies will develop a database lookup system for
validating codes printed on negotiable instruments (checks). In addition,
NeoMedia invested $250,000 in Intactis convertible preferred stock and warrants
to own up to 25% of Intactis. Intactis also placed an order for an initial 100
copies of NeoMedia's PaperClick Print Encoder software.
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During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar (attached as Exhibit 10.56 hereto). The agreement will give
Shelron Group, Inc. the worldwide rights to use PaperClick(R) on the new
ActivShopper Mobile Edition for cell phones and PDA's. ActivShopper is a free
software download designed to automatically scan, locate and compare prices for
items a consumer selects at an e-commerce site.
On December 13, 2004, NeoMedia introduced PaperClick(R) Mobile Marketing
Services, a tool that allows global marketers and advertising agencies to have
one-on-one contact with consumers through cell phones and other mobile wireless
devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional
content, which can be updated and changed by marketers, while giving consumers
one-click e-commerce buying power. The latest addition to the Mobile Marketing
Services suite lets users of a wide range of already-in-use camera phones "take
pictures" of special created codes on packages and promotional items and connect
in one-click to marketing information. First available for Nokia(R) Series 60
mobile phones, the new capability complements the launch of the PaperClick(R)
Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in
2003.
On December 6, 2004, NeoMedia signed a non-binding Letter of Intent with
Nextcode Corporation to form a strategic partnership, with joint marketing and
sales efforts, involving use of NeoMedia's PaperClick(R) technology and Nextcode
Corporation's barcode reading software. Nextcode, based in Concord,
Massachusetts, provides barcode reading software and technology designed to
enhance the usability of mobile phones and enable access to Internet-based
content, services and commerce. When finalized, the one-year renewable agreement
would give the companies mutual rights to resell PaperClick(R) Client Software,
PaperClick(R) Code Activation, PaperClick(R) Server Software and PaperClick(R)
Integration Services, as well as Nextcode's mobile barcode decoding applications
and Nextcode's code creation and publishing systems.
During October 2004, NeoMedia entered into a marketing alliance with
Science Applications International Corporation ("SAIC") to jointly establish,
launch, develop and promote NeoMedia's PaperClick(R) line of products.
During 2003, NeoMedia unveiled its PaperClick(R) 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. During the second quarter of 2004,
NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a horizontal bar on
the screen of a wireless device where users can enter numeric strings from UPC
or other bar codes to link directly to targeted online information via patented
PaperClick(R) technology and software. The PaperClick(R) Mobile Go-WindowTM
currently works with PalmTM Tungsten C PDA, the HandspringTM Treo 270 and 600
Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent Device Profile)
standard, Microsoft Windows Mobile(TM)-based Smartphones, Nokia(R) Series 60
phones, Sendo(R) X, Panasonic(R) X700, and Siemens(R) SX-1.
During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed
with European advertising agency 12Snap, and worldwide advertising agency Arnold
Worldwide. In June 2004, NeoMedia entered into a collaborative agreement with
Intel Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to
operate on the recently introduced Intel PXA27x processor family-based cellular
phones.
AirClic, Inc. Scanbuy, Inc., and LScan Technologies, Inc. Lawsuits
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, claiming 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, thereby infringing NeoMedia's patents. The
complaint stated that on information and belief, AirClic, Scanbuy and LScan had
actual and constructive notice of the existence of the patents-in-suit, 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. On April 15,
2004, the court dismissed the suit against AirClic and Scanbuy for lack of
personal jurisdiction.
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During July 2005, NeoMedia and AirClic settled the case out of court, with
AirClic agreeing to compensate NeoMedia for past and future activities. AirClic
did not receive a license to use NeoMedia's patented PaperClick(R) technology.
NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004. The Court entered
default judgment on July 7, 2004. During October 2005, the court issued an
injunction that prohibits LScan from using any technology or application that
employs any NeoMedia patent.
On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. During October 2005, the copyright charges were dismissed by the
court. On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the
Southern District of New York alleging patent infringement. Scanbuy filed its
answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on
July 23, 2004. The parties are currently engaged in discovery in both of these
actions.
Virgin Entertainment Group Lawsuit
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore (collectively, "Virgin"). During June 2005, NeoMedia and Virgin
settled the case out of court, with Virgin agreeing to purchase a license to use
NeoMedia's patented PaperClick(R) technology platform through 2016.
Industry Overview
NeoMedia Internet Switching Software
The goal of NeoMedia's Internet Switching Software business segment is to
promote mass adoption of NeoMedia's switch and background computer process to
link physical world objects to the Internet. NeoMedia'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. NeoMedia 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,
NeoMedia 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.
NeoMedia 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. NeoMedia believes
that, with an estimated 1.5 billion mobile phone users worldwide, mobile devices
such as cellular telephones and PDAs are a key device in the development of the
physical world to Internet marketplace. To this end, during 2003, NeoMedia
announced its PaperClick(R) 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. During
2004, NeoMedia introduced PaperClick(R) Mobile Marketing Services, a mobile
solution using PaperClick(R) for Camera Cell Phones that allows global marketers
and advertising agencies to have one-on-one contact with consumers through cell
phones and other mobile wireless devices. PaperClick(R) Mobile Marketing
Services delivers real-time promotional content, which can be updated and
changed by marketers, while giving consumers one-click e-commerce buying power.
The latest addition to the Mobile Marketing Services suite lets users of a wide
range of already-in-use camera phones "take pictures" of special created codes
on packages and promotional items and connect in one-click to marketing
information.
52
NeoMedia Consulting and Integration Services
NeoMedia 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 NeoMedia's NCIS business. 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.
NeoMedia Micro Paint Repair
NMPR serves the light collision and paint repair industry offering
products and processes that are designed to increase customer productivity and
profits. NMPR's products are positioned to augment traditional paint repair
methods commonly used in body shops, as well as allowing non-body shop
operations to expand their service offerings. The micro paint repair industry is
a sub-segment of the aftermarket automotive coatings business.
Strategy
NeoMedia Internet Switching Software
NeoMedia has spent the past decade 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. During the past year-and-half,
NeoMedia has introduced PaperClick(R) for Camera Cell Phones and PaperClick(R)
Mobile Marketing Services, shifting the focus of this dynamic unit to the
rapidly emerging mobile marketing sector. NeoMedia is strategically pursuing
potential licensees of the PaperClick(R) 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.
NeoMedia Consulting and Integration Services
The goal of the NCIS unit is to continue to provide customized technology
infrastructure solutions, as well as act as the integration arm for the
PaperClick(R) family of products.
NeoMedia Micro Paint Repair
NeoMedia's proprietary Micro Paint Repair system can dramatically reduce
costs for current auto body repair facilities, or create a new profit center for
auto-related businesses that do not currently offer paint repair. NeoMedia is
attempting to market its Micro Paint Repair system to a myriad of automotive
industry businesses, from auto dealers to body shops to glass repair shops, and
more.
Products/Services
NeoMedia Internet Switching Software
PaperClick(R) Mobile Marketing Service
PaperClick(R) is a Mobile Marketing Service that enables brand managers
and consumer product manufacturers to market directly to their target customers
via their portable devices such as mobile phones, and PDAs. Using products,
brand names, and marketing collateral, brand managers and consumer product
manufacturers can interact directly with their customers.
By entering a word or phrase (e.g., brand name or tagline) into a mobile
device, or by taking a picture of a barcode on your product or your marketing
collateral, a consumer can retrieve tailored Web content in one click, even
pages deep within a website. PaperClick(R) bypasses long URLs, search engines,
or difficult-to-navigate phone menus. PaperClick(R) can directly link a word or
code to mobile commerce, rebates, contests, coupons, registration, instructional
videos, ad tracking, polling, customer profiling, and more.
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PaperClick(R) links a unique identifier (e.g., barcode or word) to a specific
URL (i.e., Webpage) using a simple 5-step process:
Step 1: Activation - A barcode or word is activated by the product
manufacturer;
Step 2: A PaperClick(R)-enabled device retrieves the code or word;
Step 3: The device's Web browser is automatically launched and connects to
a designated server;
Step 4: The server retrieves the specific URL based on the barcode or
word; and
Step 5: The URL is downloaded to the device's browser.
The PaperClick(R) solution consists of:
Word Activation
1. Register brand names or taglines in the PaperClick(R)
WordRegistryTM. The WordRegistryTM is the official repository for
PaperClick(R) Words;
2. Bid on non-trademarked words. Non-trademarked words (e.g., cola,
burger, car) will be auctioned to the highest bidder via the
PaperClick(R) WordRegistryTM; and
3. Activate your brand names and taglines by linking them to mobile web
content using Link Manager Software.
Created Code Activation. NeoMedia can create custom PaperClick(R) codes to
place on product packaging or literature, a subway poster, a direct
mailer, or other marketing collateral. Consumers with a camera phone
simply snap a picture of the code and link directly to Web content
designated by the product's manufacturer.
Existing Code Activation. As with created codes, PaperClick(R) can link
already-existing product codes, such as UPC, EAN, JAN, and ISBN
codes, to tailored Web content.
With activation, NeoMedia also provides the following word and code link
management tools:
Link Manager Software. Software for a PC that allows a product owner to
link words and codes to a specific URL;
Handset Software. Device software required for a mobile device customers
to read activated codes and words; and
Basic Reporting. Allows product owner to track the number of consumer
"hits" by code, date and time.
NeoMedia also offers the following value-added services with word or code
activation:
Click Management Services
Link Manager Service. NeoMedia will manage the linking of all words
and codes on behalf of a product owner; and
Code Verification. NeoMedia will test each code to ensure that it is
printed properly and that it links to the correct URL.
Web Content Creation Services. NeoMedia assists its customers in
creating Web content for mobile devices in XHTML, WAP and other
mobile formats.
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Mobile Marketing Campaign Services. NeoMedia helps its customers create
mobile advertising campaigns using their products with PaperClick(R)
technology.
Customized Reporting. NeoMedia offers customized reporting and data mining
that allows product owners to receive additional data about their
marketing campaigns.
Server Software. For product owners that are managing a large number of
codes or words, NeoMedia offers Server Software that allows them to
store the links within their organization's network.
Intellectual Property Licensing.
NeoMedia currently holds six United States patents relating to the
physical-world-to-Internet marketplace, and an additional six patents acquired
in 2003 with the purchase of Secure Source Technologies related to document
security. NeoMedia's core physical-world-to-Internet patent portfolio (Patent
Nos. 5,933,829, 5,978,773, 6,108,656, 6,199,048, 6,434,561, and 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(R)-enabled 2D barcodes, 1D barcodes, UPC/EAN
barcodes, magnetic stripes, OCR/ICR, RFID, smartcards, numbers, hot words, and
voice. NeoMedia intends to license this intellectual property portfolio to
companies endeavoring to tap the potential of this emerging market. To date,
NeoMedia has entered into such agreements with Digital:Convergence, A.T. Cross
Company, Symbol Technologies, and Brandkey Systems Corporation. During 2002,
NeoMedia 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.
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
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 and consulting services are offered
through NeoMedia's NCIS business unit. These services fall into two broad
categories:
A. For implementation of PaperClick(R) Mobile Marketing Service.
B. For development and implementation of Customized Applications.
1. Services for implementation of PaperClick(R) Mobile Marketing
Service.
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(R) project deployment. Key functions of
the NCIS business unit are to:
o Create PaperClick(R) Implementation Vision;
o Develop methodology including updating and deployment of
best practices;
o Facilitate team communication through common processes,
deliverables, and terminology;
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(R) technical development; and
o Track status of PaperClick(R) projects, and provide
project visibility to management in a common and
consistent manner.
55
Services complementary to a PaperClick(R) 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.
2. Services for development and implementation of Customized
Applications.
NeoMedia's NCIS business assists clients in developing and
implementing their own customized PaperClick(R) 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.
NeoMedia Micro Paint Repair
NMPR's system utilizes proprietary technology to repair cosmetic
automobile damage such as chips, scratches, spots, blemishes, and oxidized
paint. While competitive paint repair products utilize a mechanical fix, the
NMPR system chemically alters the paint to make the repair invisible to the
naked eye, even with the most lustrous metal flake and pearlized auto paints.
Repairs can be completed in a fraction of the time of conventional methods, and
all of NMPR's products are free of harmful icocyanates.
The products offered through NMPR include:
NMPR Paint System. NMPR offers a license to use its proprietary NMPR
Paint System, along with a training program and ongoing technical
support relating to the system.
NMPR Paint System Products. NMPR supplies the products necessary for a
paint system operator to implement an NMPR Paint System. Products
include NMPR's proprietary chemicals, auto paint, and application
hardware.
NMPR Specialty Products. NMPR offers a variety of non-paint related
specialty products, including dent repair, interior cleaning,
corrosion protection, windshield repair, and warranty programs.
NMPR Paint Repair Services. NMPR currently operates a paint repair
facility in its Calgary office. The facility utilizes the NMPR Paint
System to make cosmetic repairs to automobiles for dealerships,
rental car companies, and consumers.
Strategic Relationships
NeoMedia Internet Switching Software
During January 2002, NeoMedia engaged Baniak Pine and Gannon, a Chicago
law firm specializing in intellectual property licensing and litigation. The
firm assists NeoMedia in seeking out potential licensees of its intellectual
property portfolio, including any resulting litigation. Baniak Pine and Gannon
currently represents NeoMedia in its lawsuit against Scanbuy.
During May 2002, NeoMedia granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey paid NeoMedia a $50,000 upfront licensing fee in 2002, a
$25,000 royalty in 2003, a $50,000 royalty in 2004, 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.
56
On October 30, 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Since that time, NeoMedia has signed contracts
with several key partners outlined in the strategy, including channel partners
Big Gig Strategies, SRP Consulting, and Relyco, systems integrator Science
Applications International Corporation ("SAIC"), and European advertising agency
12Snap.
In June 2004, NeoMedia entered into a collaborative agreement with Intel
Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate
on the recently introduced Intel PXA27x processor family-based cellular phones.
During 2003 and 2004, NeoMedia engaged key partners around the world to
assist in the anticipated roll-out of the PaperClick(R) family of products.
During this time, NeoMedia has partnered with distributors and resellers, such
as Big Gig Strategies (United Kingdom), SRP Consulting (United States), AURA
Digital Communications (Australia), Relyco (United States), E&I Marketing
(Taiwan), Deusto Sistemas (Spain), and Jorge Christen and Partners LLP (Mexico).
NeoMedia Consulting and Integration Services
Through this segment, NeoMedia provides services and products to a
spectrum of customers, ranging from closely held companies to large
corporations.
NeoMedia Micro Paint Repair
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
On June 1, 2004, NeoMedia entered into a distribution agreement with Micro
Paint Systems (Australasia) Limited of New Zealand for exclusive distribution
rights to NeoMedia's Micro Paint Repair products in Australia and New Zealand.
The agreement is contingent upon a minimum purchase of 500 systems over five
years in that territory. NeoMedia received an initial payment on signing of the
contract, which included the fee for four initial systems.
On August 2, 2004, NeoMedia announced that it signed a distribution
agreement with Motor Dealer's Association Co-Auto Ltd. ("MDA Co-Auto") the
largest buying consortium for new car franchised dealers in Western Canada. The
agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro
Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers
in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon.
Sales and Marketing
NeoMedia Internet Switching Software
During 2003 and 2004, NeoMedia has worked to establish a global network of
direct salespeople and resellers to sell and market the PaperClick(R) suite of
products. NeoMedia currently employs eight direct sales and technical
consultants in its Lisle, Illinois office who represent the NISS and NCIS
business units. Additionally, NeoMedia has established reseller relationships
with industry innovators, with a presence in the US, Europe, South America,
Asia, and Australia.
NeoMedia Consulting and Integration Services
NeoMedia, 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 three individuals
as of December 31, 2004. 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.
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NeoMedia Micro Paint Repair
NeoMedia markets its Micro Paint Repair products and services primarily
through a direct sales force and agents. In addition, this business unit is
exploring strategic alliances to help market products and services, provide lead
referrals, and establish informal co-marketing arrangements. This business
segment is also establishing an agent network in the United States and Canada to
sell NeoMedia's products and services. To this end, during 2004 NeoMedia Micro
Paint Repair signed distribution agreements with MDA Co-Auto Ltd., the largest
buying consortium for new car franchised dealers in Western Canada, and Micro
Paint Systems (Australasia) Limited of New Zealand.
Customers
NeoMedia Internet Switching Software
PaperClick(R). NeoMedia's customers for its PaperClick(R)
physical-world-to-Internet offerings have included Amway, Solar Communications,
Inc., and NYCO Products Company.
Intellectual Property Licensing. To date, NeoMedia has entered into IP
licensing agreements with Digital:Convergence Corporation, A.T. Cross Company,
Symbol Technologies, and Brandkey Systems Corporation. NeoMedia intends to
pursue additional license agreements in the future.
NeoMedia Consulting and Integration Services
NCIS 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.
NeoMedia Micro Paint Repair
The customer base for the NMPR business unit consists primarily of auto
dealers and repair shops throughout Canada, the US, and Australia/New Zealand.
In addition, NeoMedia is party to distribution arrangements with several
organizations, including MDA Co-Auto and Novus in Canada, and Micro Paint
Systems Australasia in New Zealand.
Research and Development
NeoMedia Internet Switching Software
NISS employed three persons in the area of product development as of
December 31, 2004. During the years ended December 31, 2004 and 2003, NISS
incurred total software development costs of $462,000 and $332,000,
respectively.
NeoMedia Consulting and Integration Services ?
Any future research or development of products relating to the NCIS
business unit will be performed by the NISS division or outside contractors.
NeoMedia Micro Paint Repair
During October 2004, NeoMedia contracted the founder of the CSI
International to provide research and development services for its Micro Paint
Repair business. In addition, NeoMedia has one employee in its Calgary, Alberta,
Canada office, to assist with research and development. During the years ended
December 31, 2004 and 2003, NMPR incurred total product development costs of
$19,000 and $0, respectively.
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Intellectual Property Rights
NeoMedia'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, NeoMedia must conduct its operations without infringing on the
proprietary rights of third parties. NeoMedia 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, NeoMedia
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. NeoMedia has six United
States patents for its physical-world-to-Internet technology, an additional
patent for which NeoMedia received a notification of issuance from the United
States Patent and Trademark Office in 2005, an additional patent in Mexico for
which NeoMedia received a notification of issuance from the Mexicano de la
Propiedad Industrial in 2005, and an additional six patents acquired with the
purchase of Secure Source Technologies related to document security. NeoMedia
also has several trademarks relating to its proprietary software products.
Competition
NeoMedia Internet Switching Software
Although NeoMedia has been developing its physical-world-to-Internet
technology and offerings since 1996, the market surrounding the technology is
only now beginning to take shape. Over the past year, new technologies and
concepts have emerged in the physical-world-to-Internet space, specifically
relating to mobile commerce and mobile marketing on Internet-enabled cellular
phones and PDAs. NeoMedia 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 NeoMedia
and other companies in this space will raise consumer awareness of this
technology, resulting in a larger, and more rapidly-developing market. NeoMedia
believes its portfolio of physical-world-to-Internet technologies and patents
could provide a barrier to entry for many potential competitors.
NeoMedia Consulting and Integration Services.
Competitors in the consulting and integration services business 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, NeoMedia, in acting as a re-marketer,
may compete with the original manufacturer.
NeoMedia Micro Paint Repair. ?
NeoMedia's competitors in the micro paint repair consist primarily of
suppliers of traditional paint repair methods, such as automotive paint
manufacturers.
Employees
As of December 31, 2004, NeoMedia employed 34 persons, of which 16 are
located at NeoMedia's headquarters in Fort Myers, Florida, eight at NeoMedia's
Lisle, Illinois office, eight at NeoMedia's Calgary, Alberta, Canada office, and
two remote employees. None of NeoMedia's employees are represented by a labor
union or bound by a collective bargaining agreement. NeoMedia believes that its
employee relations are good.
NeoMedia's success depends on a significant extent on the performance of
its senior management and certain key employees. Competition for highly skilled
employees, including sales, technical and management personnel, is intense in
the computer industry. NeoMedia's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
NeoMedia's business.
59
Properties
NeoMedia's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. NeoMedia
occupies approximately 10,000 square feet under terms of a written lease from an
unaffiliated party which expires on June 30, 2008, with monthly rent totaling
approximately $18,000.
NeoMedia 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, 2006, with
monthly rent totaling approximately $7,000.
NeoMedia maintains a production and product development facility for its
Micro Paint Repair Business unit in Calgary, Alberta, Canada, occupying
approximately 4,000 square feet under the terms of a written month-to-month
lease from an affiliated party with monthly rent totaling $2,400.
During February 2005, NeoMedia signed a least to occupy a 10,000 square
foot Micro Paint Repair facility in Ft. Myers, Florida, under the terms of a
written lease from an unaffiliated party expiring on February 28, 2008, with
monthly rent totaling approximately $9,000. The facility will host training,
demonstrations, production, distribution, and retail services for the Micro
Paint Repair business unit.
NeoMedia believes that existing office space is adequate to meet current
and short-term requirements.
Dividend Policy
On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of iPoint-media Ltd. of
Tel Aviv as a property dividend.
60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
NISS (Physical-World-to-Internet Offerings) Business Unit Developments.
Over the past several years, NeoMedia's focus has been aimed toward the
commercialization of its Internet Switching Systems ("NISS") business unit. 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-Internet 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 its end-users, competitive advantage for their
business partners and return-on-investment for their investors.
On September 8, 2003, NeoMedia announced its PaperClick(R) 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(R) 3650 model. During the second
quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a
horizontal bar on the screen of a wireless device where users can enter numeric
strings from UPC or other bar codes to link directly to targeted online
information via patented PaperClick technology and software. The PaperClick(R)
Mobile Go-WindowTM currently works with PalmTM Tungsten C PDA, the HandspringTM
Treo 270 and 600 Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent
Device Profile) standard, and Microsoft Windows Mobile(TM)-based Smartphones.
During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed
with systems integrator SAIC, and European advertising agency 12Snap to provide
click management services for PaperClick(R) products in Europe. In June 2004,
NeoMedia entered into a collaborative agreement with Intel Corporation for
NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently
introduced Intel PXA27x processor family-based cellular phones.
In addition, during June 2004 NeoMedia signed a teaming agreement with
IPSO, an integrator of proprietary solutions developed by its provider companies
for financial institution members and a leader in meeting Check 21 standards.
Enacted by Congress and signed into law last year, Check 21 requires banks to
begin accepting substitute checks (called "IRDs" for image replacement
documents) in lieu of original checks as of October 29, 2004. NeoMedia and IPSO
could partner on proposals and presentations surrounding Check 21. On March 10,
2005, NeoMedia and Intactis Software, Inc., (IPSO's successor), entered into a
business development agreement under which the two companies will develop a
database lookup system for validating codes printed on negotiable instruments
(checks). In addition, NeoMedia invested $250,000 in Intactis convertible
preferred stock and warrants to own up to 25% of Intactis. Intactis also placed
an order for an initial 100 copies of NeoMedia's PaperClick Print Encoder
software.
During October 2004, NeoMedia entered into a marketing alliance with
Science Applications International Corporation ("SAIC") to jointly establish,
launch, develop and promote NeoMedia's PaperClick(R) line of products.
During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick's(R) family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDAs. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.
On April 8, 2005, NeoMedia acquired from Loyaltypoint, Inc.
("Loyaltypoint") four issued United States patents, and two patent applications,
one each in Europe and Japan, relating to mobile search and location-based
advertising. In exchange for the patents and patent applications, NeoMedia paid
$1,500,000 cash. NeoMedia will also pay Loyaltypoint a 10% royalty on all future
licensing revenue earned by NeoMedia from the acquired patents.
61
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
NMPR (Micro Paint Repair) Business Unit Developments.
On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia currently has approximately
50 active paint repair end-user system agreements.
On June 1, 2004, NeoMedia announced that it had entered into a
distribution agreement with Micro Paint Systems (Australasia) Limited of New
Zealand for exclusive distribution rights to NeoMedia's Micro Paint Repair
products in Australia and New Zealand. The agreement is contingent upon a
minimum purchase of 500 systems over five years in that territory. NeoMedia
received an initial payment on signing of the contract, which included the fee
for four initial systems.
On June 22, 2004, NeoMedia announced its new product called "Silver
Solutions," a process created specifically to mend the popular high metallic and
pearl paint finishes on new cars.
On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair
business unit added five more licensees as part of a private label contract with
Crackmaster Distributors Ltd., a Canadian auto aftermarket company.
On August 2, 2004, NeoMedia announced that it signed a distribution
agreement with Motor Dealer's Association Co-Auto Ltd. ("MDA Co-Auto"), the
largest buying consortium for new car franchised dealers in Western Canada. The
agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro
Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers
in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon.
On December 29, 2004, NeoMedia received a $290,000 order for proprietary
paints and related materials from Micro Paint Systems (Australasia) Limited of
New Zealand, which holds distribution rights to NeoMedia's micro paint repair
products in Australia and New Zealand. Micro Paint Systems (Australasia) Limited
of New Zealand is offering NeoMedia's proprietary paint and systems under its
label in that market. The order was shipped during the first quarter of 2005.
On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS
is a retail operator and franchiser of retail automotive parts and accessories
stores catering to the light truck market, and also provides new vehicle
preparation, environmental protection packages, detailing and reconditioning
products and services.
Also on February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") to acquire up to
100% of Automotive Preservation, Inc. ("AP"), a distributor of automotive paint
and accessory products, from AP's parent company, PUPS. The first LOI calls for
NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in
cash, $554,000 in shares of NeoMedia restricted common stock, and $446,000
through the assumption of AP debt by NeoMedia. Under the second LOI, upon
completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia
would have the option to acquire an additional 30% of AP for $1,650,000, payable
in shares of NeoMedia restricted common stock. The second LOI also gives
NeoMedia the option to purchase the final 40% of AP for either: (i) $2,200,000,
payable in shares of NeoMedia restricted common stock, if NeoMedia exercises
this right within 12 months of acquiring the second 30% of AP, or (ii) a price
equivalent to AP's previous quarter EBITDA multiplied by 8, payable in shares of
NeoMedia restricted common stock. Both LOIs are non-binding and subject to due
diligence by NeoMedia and AP.
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
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On August 30, 2005, NeoMedia signed a distribution agreement with Jinche
Yingang Automobile Co. of Beijing, China ("Jinche"), under which Jinche will act
as a distributor of automtoive products in China. Jinche is a Beijing
PRC-registered company specializing in automobile sales, financing, insurance
and repair. NeoMedia will supply Jinche with its micro paint repair products, as
well as various other automotive aftermarket products from other manufacturers.
On September 27, 2005, NeoMedia signed a definitive distribution agreement
to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America,
as well as be a distributor of other automotive aftermarket products. The
agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"),
calls for Micropaint de Mexico to serve as an exclusive distributor of
NeoMedia's micro paint repair products, systems and licenses to automotive
service facilities throughout Mexico and Latin America. The Agreement also calls
for Micropaint de Mexico to buy certain automotive aftermarket repair and
environmental protection products from NeoMedia. Founded earlier this year and
based in Monterrey, Mexico, Micropaint de Mexico specializes in providing
automotive aftermarket products throughout Mexico and Latin America.
On October 4, 2005, NeoMedia signed a definitive distribution agreement to
bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement,
signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve
as an exclusive distributor of NeoMedia's micro paint repair products, systems
and licenses to automotive service facilities throughout Denmark, Sweden, and
Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize
in products and services involving micro paint repairs for automobiles in
Denmark, Sweden and Norway.
NCIS (Systems Integration) Business Unit Developments.
NCIS is the original business line upon which NeoMedia 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.
Acquisitions
CSI International, Inc. On February 6, 2004, NeoMedia acquired 100%
ownership of CSI International, Inc., of Calgary, Alberta, Canada, a
private company in the micro paint repair industry. NeoMedia issued
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 Fort Myers, Florida headquarters, and
maintains a sales office in Calgary, Alberta, Canada.
BSD Software, Inc. On December 21, 2004, NeoMedia and BSD signed a
definitive Agreement and Plan of Merger. BSD owns 90% of the outstanding
shares of Triton Global Business Services, Inc., a provider of live and
automated operator calling services and e-business support, including
billing, clearinghouse and information management services, to companies
in the telecommunications industry. BSD's shareholders will receive, for
each share of BSD stock owned, NeoMedia stock equivalent to .07 divided by
the volume-weighted average price of NeoMedia stock for the five days
prior to the effective time of the merger. The agreement has been approved
by holders of approximately 63% of BSD's outstanding shares and its Board
of Directors. NeoMedia and BSD expect to file a joint
registration/information statement with the United States Securities and
Exchange Commission (the "SEC") in the first quarter of 2005. NeoMedia
expects to complete the merger when the review is complete and the
registration is approved. At this time, the exchange rate will be
determined and closing will be held. Closing is subject to the terms and
conditions outlined in the merger agreement, as well as regulatory
approval of the merger and registration/information statement by the SEC.
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.
63
iPoint-Media Ltd.
On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering into the service agreement, NeoMedia received 7% ownership in
iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In
addition to the business development agreement, NeoMedia acquired an additional
10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for
$1 million cash.
iPoint-media was founded in April 2001 as a spin-off from Imagine Visual
Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli
holding company, Singapore-based Keppel T&T, and marketing and advertising group
WPP. iPoint-media specializes in customer interaction management and is the
world's first developer of IP Video Call Centers for Deutsche Telecom. Muki
Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of
iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European
customer support center in The Netherlands. iPoint-media's mission is to become
the video access platform and application engine of choice for service
providers.
On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of IPoint-media Ltd. of
Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435 shares)
of iPoint-media's common stock to NeoMedia shareholders of record as of November
17, 2004. The date of the property dividend payment will be announced after the
Securities and Exchange Commission declares iPoint-media's registration
statement on Form SB-2 effective. iPoint-media filed their SB-2 (Registration
No. 333-126342) on July 1, 2005.
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.
Critical Accounting Policies
The United States Securities and Exchange Commission (the "SEC") 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 impairment 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,
allowance for doubtful accounts, and stock-based compensation. The methods,
estimates and judgments NeoMedia uses in applying these most critical accounting
policies have a significant impact on the results it 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.
64
Allowance for Doubtful Accounts. NeoMedia maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. 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 historical experience,
NeoMedia's estimates could change and impact its reported results.
Inventory. Inventories are stated at lower of cost (using the first-in,
first-out method) or market. NeoMedia continually evaluates the composition of
its inventories assessing slow-moving and ongoing products and maintains a
reserve for slow-moving and obsolete inventory as well as related disposal
costs.
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 option pricing model on 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.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently evaluating the impact of the
adoption of this Statement.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see the section of this
information statement/prospectus entitled "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. NeoMedia derives revenues from three primary sources:
(1) license revenues and (2) resale of software and technology equipment and
service fee revenues, and (3) sale of its proprietary Micro Paint Repair
solution.
(1) License fees, including Intellectual Property licenses, 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, and Statement of Position 98-9,
Modification of SOP 97-2, "Software Revenue Recognition, With
Respect to Certain Transactions.". License revenue is recognized if
persuasive evidence of an agreement exists, delivery has occurred,
pricing is fixed and determinable, and collectibility is probable.
65
(2) Revenue for resale of software and technology equipment and service
fee is recognized based on guidance provided in SEC Staff Accounting
Bulletin ("SAB") No. 104, "Revenue Recognition in Financial
Statements," as amended (SAB 104). Software and technology equipment
resale revenue is recognized when all of the components necessary to
run software or hardware have been shipped. Service revenues
including maintenance fees for providing system updates for software
products, user documentation and technical support 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. NeoMedia 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 doubtful accounts on a customer-by-customer basis as
appropriate.
In December 2003, the SEC issued SAB 104, "Revenue Recognition." SAB
104 supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue
arrangements, superseded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers (the
"FAQ") issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed
to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104
did not impact NeoMedia's consolidated financial statements.
(3) Revenue for training and certification on NeoMedia's Micro Paint
Repair systems is recognized equally over the term of the contract,
which is currently one year. A portion of the initial fee paid by
the customer is allocated to training costs and initial products
sold with the system, and is recognized upon completion of training
and shipment of the products. Ongoing product and service revenue is
recognized as products are shipped and services performed.
Results Of Operations For The Three Months Ended June 30, 2005 As Compared To
The Three Months Ended June 30, 2004
Net sales. Total net sales for the three months ended June 30, 2005 were
$538,000, which represented an increase of $90,000, or 20%, from $448,000 for
the three months ended June 30, 2004. This increase resulted from revenue
generated by the Company's micro paint repair business unit acquired in February
2004 and licensing fees from the settlement of the Virgin lawsuit. This increase
in micro paint revenue and licensing fees was offset by reduced resales of Sun
Microsystems equipment, software and services. NeoMedia could realize an
increase in license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy and/or its business plan for
its Micro Paint Repair business unit.
License fees. License fees were $174,000 for the three months ended June
30, 2005, compared with $88,000 for the three months ended June 30, 2004, an
increase of $86,000, or 98%. The increase was due primarily to licensing fees
from settlement of the Virgin lawsuit. NeoMedia could realize an increase in
license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $68,000, or 40%,
to $103,000 for the three months ended June 30, 2005, as compared to $171,000
for the three months ended June 30, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
fewer resources devoted to this product line. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the three months ended June 30,
2005, rather than the three months ended June 30, 2004.
66
Micro paint repair products and services. Sales of micro paint repair
products and services were $261,000 for the three months ended June 30, 2005,
compared with $189,000 for the three months ended June 30, 2004 an increase of
$72,000 or 38%. The increase resulted primarily from a larger number of paint
systems sold since June 30, 2004. NeoMedia expects sales of micro paint to more
closely resemble the results for the three months ended June 30, 2005, rather
for the three months ended three months ended June 30, 2004.
Cost of license fees. Cost of license fees was $160,000 for the three
months ended June 30, 2005, a increase of $79,000, or 98%, compared with $81,000
for the three months ended June 30, 2004. The increase resulted from higher
amortization in 2005 due to the acquisition of patents from Loyaltypoint.
Cost of resales of software and technology equipment and service fees.
Cost of resales of software and technology equipment and service fees was
$53,000 for the three months ended June 30, 2005, a decrease of $120,000, or
69%, compared with $173,000 for the three months ended June 30, 2004. The
decrease resulted from decreased resales in 2005 compared with 2004. Cost of
resales as a percentage of related resales was 51% in 2005, compared to 101% in
2004. This decrease has a direct coloration to the decrease in revenue. NeoMedia
expects costs of resales to fluctuate with the mix of sales of equipment,
software, and services over the next 12 months.
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $237,000 for the three months ended June 30,
2005, compared with $168,000 for the three months ended June 30, 2004, an
increase of $69,000 or 41%. The increase was primarily due to of the cost of
sale of products in relation to increased sales. NeoMedia expects cost of micro
paint to more closely resemble the results for the three months ended June 30,
2005, rather for the three months ended June 30, 2004.
Gross Profit. Gross profit was $88,000 for the three months ended June 30,
2005, an increase of $62,000, or 238%, compared with gross profit of $26,000 for
the three months ended June 30, 2004. This increase was primarily the result of
increased sales of higher-margin micro paint repair products and increased
intellectual property revenue during 2005.
Sales and marketing. Sales and marketing expenses were $1,230,000 for the
three months ended June 30, 2005, compared to $522,000 for the three months
ended June 30, 2004, an increase of $708,000 or 136%. The increase is a result
of the addition of the micro paint business sales force, recognition of
professional services expense due to the cancellation of consulting contract
originally recorded as deferred stock compensation and cost associated with
marketing and promotion of the Company's PaperClick and micro paint repair
products. NeoMedia expects sales and marketing expense to increase over the next
12 months with the continued development and anticipated rollout of the
PaperClick and Micro Paint Repair businesses.
General and administrative. General and administrative expenses increased
by $463,000, or 116%, to $862,000 for the three months ended June 30, 2005,
compared to $399,000 for the three months ended June 30, 2004. The increase
resulted primarily from higher legal and professional fees in 2005 resulting
from pending acquisitions and registration filings. NeoMedia expects general and
administrative expense to increase over the next 12 months with the potential
acquisition of BSD Software.
Research and development. During the three months ended June 30, 2005,
NeoMedia charged to expense $160,000 of research and development costs, an
increase of $38,000 or 31% compared to $122,000 for the three months ended June
30, 2004. The increase is primarily due to the amortization of the micro paint
chemical formulations and proprietary process during 2005, as well as additional
development resources allocated to the PaperClick product line. NeoMedia expects
research and development costs to increase over the next 12 months with the
continued development efforts, and the anticipated rollout of NeoMedia's
PaperClick product suite.
Gain/(loss) on extinguishment of debt. During the three months ended June
30, 2005, NeoMedia recognized a gain on extinguishment of debt of $33,000, an
increase of $36,000 or 1,200% compared to a loss of $3,000 during the three
months ended June 30, 2004. These gains resulted from a discount in settlement
of debt and/or the difference between the cash or market value of stock issued
to settle the debt and the carrying value of the debt at the time of settlement.
67
Amortization of debt discount. During the three months ended June 30,
2004, NeoMedia recognized an amortization of debt issuance cost of $722,000.
This cost is related to the amortization of the fair value of warrants granted
to Cornell Capital Partners in connection with promissory notes issued to
Cornell Capital Partners by NeoMedia during January 2004. No amortization of
debt issuance cost was recognized during the three months ended June 30, 2005.
Interest (expense) / income. Interest expense consists primarily of
interest accrued on notes payable and past due account balances. Interest income
consists primarily of interest earned on cash equivalent investments. During the
three months ended June 30, 2005, NeoMedia recognized interest expense of
$169,000, an increase of $130,000 or 333% compared to interest expense of
$39,000 during the three months ended June 30, 2004. The change is primarily due
to interest accrued on a $10 million note payable to Cornell Capital Partners in
2005.
Net Loss. The net loss for the three months ended June 30, 2005 was
$2,300,000, which represented increase of $469,000, or 26% from a loss of
$1,831,000 for the three months ended June 30, 2004. The increase resulted
primarily from expenses relating to increased sales and marketing, and general
and administrative expenses relating to the rollout of the Company's micro paint
repair and PaperClick business units and increased professional fees.
Results Of Operations For The Six Months Ended June 30, 2005 As Compared To The
Six Months Ended June 30, 2004
Net sales. Total net sales for the six months ended June 30, 2005 were
$1,285,000, which represented an increase of $487,000, or 61%, from $798,000 for
the six months ended June 30, 2004. This increase resulted from revenue
generated by the Company's micro paint repair business unit acquired in February
2004, as well as licensing fees from the settlement of the Virgin lawsuit. This
increase in micro paint revenue and licensing fees was offset by reduced resales
of Sun Microsystems equipment. NeoMedia could realize an increase in license
fees over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy and/or its business plan for its Micro Paint
Repair business unit.
License fees. License fees were $338,000 for the six months ended June 30,
2005, compared with $160,000 for the six months ended June 30, 2004, an increase
of $178,000, or 111%. The increase was due primarily to licensing fees from
settlement of the Virgin lawsuit. NeoMedia could realize an increase in license
fees over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $132,000, or
36%, to $231,000 for the six months ended June 30, 2005, as compared to $363,000
for the six months ended June 30, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
fewer resources devoted to this product line. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the six months ended June 30,
2005, rather than the six months ended June 30, 2004.
Micro paint repair products and services. Sales of micro paint repair
products and services were $716,000 for the six months ended June 30, 2005,
compared with $275,000 for the period between February 6, 2004 through June 30,
2004 an increase of $441,000 or 160%. The increase was primarily from a $290,000
sale of products to Micro Paint Repair Australasia, NeoMedia's distributor in
the Australia and New Zealand market, as well as a larger number of paint
systems sold since June 30, 2004. NeoMedia expects sales of micro paint to more
closely resemble the results for the six months ended six months ended June 30,
2005, rather for the six months ended six months ended June 30, 2004.
Cost of license fees. Cost of license fees was $248,000 for the six months
ended June 30, 2005, a increase of $78,000, or 46%, compared with $170,000 for
the six months ended June 30, 2004. The increase resulted from higher
amortization in 2005 due to the acquisition of patents from Loyaltypoint.
Cost of resales of software and technology equipment and service fees.
Cost of resales of software and technology equipment and service fees was
$141,000 for the six months ended June 30, 2005, a decrease of $192,000, or 58%,
compared with $333,000 for the six months ended June 30, 2004. The decrease
resulted from decreased resales in 2005 compared with 2004. Cost of resales as a
percentage of related resales was 61% in 2005, compared to 92% in 2004. This
decrease is mainly due to revenue in 2005 resulting from higher-margin
maintenance contracts. NeoMedia expects costs of resales to fluctuate with the
mix of sales of equipment, software, and services over the next 12 months.
68
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $510,000 for the six months ended June 30,
2005, compared with $225,000 for the period between February 6, 2004 through
June 30, 2004, an increase of $285,000 or 127%. The increase was primarily due
to of the cost of sale of products to Micro Paint Repair Australasia, NeoMedia's
distributor in the Australia and New Zealand market and the cost of sale of
products in relation to increased sales. NeoMedia expects cost of micro paint to
more closely resemble the results for the six months ended June 30, 2005, rather
for the six months ended June 30, 2004.
Gross Profit. Gross profit was $386,000 for the six months ended June 30,
2005, an increase of $316,000, or 451%, compared with gross profit of $70,000
for the six months ended June 30, 2004. This increase was primarily the result
of increased sales of higher-margin licenses and micro paint repair products
during 2005.
Sales and marketing. Sales and marketing expenses were $2,025,000 for the
six months ended June 30, 2005, compared to $947,000 for the six months ended
June 30, 2004, an increase of $1,078,000 or 114%. The increase is a result of
the addition of the micro paint business sales force, recognization of
professional services expense due to the cancellation of consulting contract
originally recorded as deferred stock compensation and cost associated with
marketing and promotion of the Company's PaperClick and micro paint repair
products. NeoMedia expects sales and marketing expense to increase over the next
12 months with the continued development and anticipated rollout of the
PaperClick and Micro Paint Repair business units.
General and administrative. General and administrative expenses increased
by $784,000, or 101%, to $1,561,000 for the six months ended June 30, 2005,
compared to $777,000 for the six months ended June 30, 2004. The increase
resulted primarily from higher legal and professional fees in 2005 resulting
from pending acquisitions and registration filings. NeoMedia expects general and
administrative expense to increase over the next 12 months with the potential
acquisition of BSD Software.
Research and development. During the six months ended June 30, 2005,
NeoMedia charged to expense $344,000 of research and development costs, an
increase of $104,000 or 43% compared to $240,000 for the six months ended June
30, 2004. The increase is primarily due to the amortization of the micro paint
chemical formulations and proprietary process during 2005, as well as additional
development resources allocated to the PaperClick product line. NeoMedia expects
research and development costs to increase over the next 12 months with the
continued development efforts, and the anticipated rollout of NeoMedia's
PaperClick product suite.
Gain on extinguishment of debt. During the six months ended June 30, 2005,
NeoMedia recognized a gain on extinguishment of debt of $171,000, an increase of
$48,000 or 39% compared to a gain of $123,000 during the six months ended June
30, 2004. These gains resulted from a discount in settlement of debt and/or the
difference between the cash or market value of stock issued to settle the debt
and the carrying value of the debt at the time of settlement.
Amortization of debt discount. During the six months ended June 30, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,166,000. This
cost is related to the amortization of the fair value of warrants granted to
Cornell Capital Partners in connection with promissory notes issued to Cornell
Capital Partners by NeoMedia during January 2004. No amortization of debt
issuance cost was recognized during the six months ended June 30, 2005.
Interest (expense) / income. Interest expense consists primarily of
interest accrued on notes payable and past due account balances. Interest income
consists primarily of interest earned on cash equivalent investments. During the
six months ended June 30, 2005, NeoMedia recognized interest expense of
$146,000, an increase of $30,000 or 26% compared to interest expense of $116,000
during the six months ended June 30, 2004. The change is primarily due to
interest accrued on a $10 million note payable to Cornell Capital Partners in
2005.
Net Loss. The net loss for the six months ended June 30, 2005 was
$3,519,000, which represented decrease of $534,000, or 13% from a loss of
$4,053,000 for the six months ended June 30, 2004. The decrease resulted
primarily from expenses relating to the amortization of debt discount relating
to debt financing through Cornell in 2004, combined with increased gross profit
from the Company's micro paint repair business and intellectual property
licenses in 2005. These items were offset by increased sales and marketing, and
general and administrative expenses relating to the rollout of the Company's
micro paint repair and PaperClick business units.
69
Results of Operations for the Year Ended December 31, 2004 as Compared to the
Year Ended December 31, 2003
Net sales. Total net sales for the year ended December 31, 2004 were
$1,700,000, which represented a $700,000, or 29%, decrease from $2,400,000 for
the year ended December 31, 2003. This decrease primarily resulted from reduced
resales of Sun Microsystems equipment due to increased competition and general
economic conditions, offset by new sales from NeoMedia's Micro Paint Repair
business acquired during February 2004. NeoMedia could realize an increase in
license fees over the next 12 months if NeoMedia is successful in implementing
its PaperClick(R) go-to-market strategy, or if pending court cases involving its
intellectual property are resolved in NeoMedia's favor. NeoMedia could also
realize a material increase in Micro Paint Repair revenue if NeoMedia is
successful in implementing its business plan for that business unit.
License fees. License fees were $343,000 for the year ended December 31,
2004, compared with $414,000 for the year ended December 31, 2003, a decrease of
$71,000, or 17%. The decrease was due to lower sales of internally developed
software licenses in 2004. NeoMedia could realize an increase in license fees
over the next 12 months if NeoMedia is successful in implementing its
PaperClick(R) go-to-market strategy, or if pending court cases involving its
intellectual property are resolved in NeoMedia's favor.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $1,356,000, or
68%, to $630,000 for the year ended December 31, 2004, as compared to $1,986,000
for the year ended December 31, 2003. 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, 2004, rather than
the year ended December 31, 2003.
Micro Paint Repair products and services. Sales of Micro Paint Repair
products and services were $727,000 for the year ended December 31, 2004.
NeoMedia acquired this business on February 6, 2004, and as a result there were
no sales of Micro Paint Repair products and services during the year ended
December 31, 2003. NeoMedia could realize a material increase in Micro Paint
Repair revenue if NeoMedia is successful in implementing its business plan for
that business unit.
Cost of license fees. Cost of license fees was $324,000 for the year ended
December 31, 2004, an increase of $24,000, or 8%, compared with $300,000 for the
year ended December 31, 2003. The increase resulted from increased amortization
of capitalized patent costs during 2004 compared with 2003.
Cost of resales of software and technology equipment and service. Cost of
resales of software and technology equipment and service was $604,000 for the
year ended December 31, 2004, a decrease of $1,225,000, or 67%, compared with
$1,829,000 for the year ended December 31, 2003. The decrease resulted from
decreased resales in 2004 compared with 2003. Cost of resales as a percentage of
related resales was 96% in 2004, compared to 92% in 2003. This increase is due
to revenue declining more rapidly than the fixed portion of costs of resales,
coupled with eroding margins in the resale business. NeoMedia expects costs of
resales to fluctuate with the mix of sales of equipment, software, and services
over the next 12 months.
Cost of Micro Paint Repair products and services. Cost of micro paint
repair products and services was $541,000 for the year ended December 31, 2004.
Cost of micro paint repair products and services as a percentage of related
sales was 74%. NeoMedia acquired this business on February 6, 2004, and as a
result there were no cost of sales of micro paint repair products and services
during the year ended December 31, 2003. NeoMedia expects cost of micro paint
repair products and services to increase with Micro Paint Repair revenue over
the next 12 months as NeoMedia continues its roll-out of this business unit.
Gross Profit. Gross profit was $231,000 for the year ended December 31,
2004, a decrease of $40,000, or 15%, compared with gross profit of $271,000 for
the year ended December 31, 2003. This decrease was primarily the result of
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions.
70
Sales and marketing. Sales and marketing expenses were $2,046,000 for the
year ended December 31, 2004, compared to $523,000 for the year ended December
31, 2003, an increase of $1,523,000 or 291%. This increase resulted primarily
from the addition of recently-acquired Micro Paint Repair business sales force
and cost associated with marketing and as promotion of NeoMedia's PaperClick(R)
and Micro Paint Repair products. NeoMedia expects sales and marketing expense to
increase over the next 12 months with the continued development and anticipated
rollout of the PaperClick(R) and Micro Paint Repair product suites, as well as
the anticipated acquisition of BSD.
General and administrative. General and administrative expenses decreased
by $2,055,000, or 48%, to $2,215,000 for the year ended December 31, 2004,
compared to $4,270,000 for the year ended December 31, 2003. The decrease
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 higher stock-based professional service expense in 2003 as
compared with 2004. NeoMedia expects general and administrative expense to
increase over the next 12 months with the recent acquisition of CSI
International and the potential acquisition of BSD Software.
Research and development. During the year ended December 31, 2004,
NeoMedia charged to expense $651,000 of research and development costs, an
increase of $319,000 or 96% compared to $332,000 charged to expense for the year
ended December 31, 2003. The increase is primarily due to the addition of
development headcount and computer systems during 2004, as well as development
costs associated with the Micro Paint Repair business unit acquired in 2004.
NeoMedia expects research and development costs to increase over the next 12
months with the continued development efforts of its PaperClick(R) and Micro
Paint Repair products and services.
Gain on extinguishment of debt. During the year ended December 31, 2004,
NeoMedia recognized a gain on extinguishment of debt of $140,000, resulting from
the payment of debt at a discount to the book value of the debt, an increase of
$292,000, or 192%, compared with a loss on extinguishment of debt of $152,000
for the year ended December 31, 2003. These gains resulted from a difference
between the cash or market value of stock issued to settle the debt and the
carrying value of the debt at the time of settlement.
Amortization of debt discount. During the year ended December 31, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,500,000 relating
to the fair value of warrants granted to Cornell Capital Partners, LP in
connection with promissory notes issued to Cornell by NeoMedia during January
2004. NeoMedia did not recognize any such expense during the year ended December
31, 2003. During the year ended December 31, 2004, NeoMedia amortized the full
$2.5 million discount value relating to the Cornell warrants, and as a result
does not expect to recognize such expense in the next 12 months.
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 decreased
by $187,000, or 50%, to $189,000 for the year ended December 31, 2004 from
$376,000 for the year ended December 31, 2003, due to reduced expense associated
with vendor settlements and debt in 2004 compared with 2003.
Net Loss. The net loss for the year ended December 31, 2004 was
$7,230,000, which represented a $1,848,000, or 34% increase from a $5,382,000
loss for the year ended December 31, 2003. The increase resulted primarily from
the amortization of debt issuance cost of $2,500,000 in 2004, offset by reduced
general and administrative costs in 2004.
Liquidity and Capital Resources
As of December 31, 2004, NeoMedia's cash balance was $2,634,000, compared
to $61,000 at December 31, 2003, an increase of $2,573,000. As of June 30, 2005,
NeoMedia had cash balances of $7,075,000 as a result of its $10 million secured
promissory note with Cornell funded in March 2005.
NeoMedia's 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.
Net cash used in operating activities was approximately $4,650,000 for the
year ended December 31, 2004, compared with $2,979,000 for the year ended
December 31, 2003, an increase of $1,671,000, or 56%. The increase was primarily
due to increased sales and marketing expenses in 2004 associated with NeoMedia's
PaperClick(R) products, the addition of infrastructure with the acquisition of
CSI, and the continued payment of accounts payable and accruals incurred in
previous years. Net cash used in operating activities was $3,455,000 for the six
months June 30, 2005, compared with $2,261,000 for the six months ended June 30,
2004.
71
NeoMedia's net cash flow used in investing activities for the years ended
December 31, 2004 and 2003, was $1,252,000 and $281,000, respectively, an
increase of $971,000, or 346%. The increase was due to NeoMedia's $1 million
investment in I-Point Media Ltd. during 2004. NeoMedia's net cash flow used in
investing activities for the six months ended June 30, 2005 and 2004 was
$2,211,000 and $155,000, respectively.
Net cash provided by financing activities for the years ended December 31,
2004 and 2003 was $8,535,000 and $3,251,000, respectively, an increase of
$5,284,000, or 163%. The increase was due to increased draws under NeoMedia's
Standby Equity Distribution Agreement with Cornell Capital Partners, LP in 2004
as compared with 2003. Net cash provided by financing activities for the six
months ended June 30, 2005 and 2004 was $10,098,000 and $2,698,000, respectively
During the years ended December 31, 2004 and 2003, NeoMedia's net loss
totaled $7,230,000 and $5,382,000, respectively. As of December 31, 2004,
NeoMedia had accumulated losses from operations of $83,377,000, had a working
capital deficit of $2,597,000, and $2,634,000 in cash balances. During the six
months ended June 30, 2005 and 2004, NeoMedia's net loss totaled $3,519,000 and
$4,053,000, respectively. As of June 30, 2005, NeoMedia had accumulated losses
from operations of $86,896,000, had a working capital deficit of $3,418,000, and
$7,075,000 in cash balances.
As of June 30, 2005, NeoMedia had drawn $12.3 million against its current
$20 million 2003 Standby Equity Distribution Agreement with Cornell Capital
Partners, leaving an available balance of $7.7 million. During the three and six
month periods ended June 30, 2005, NeoMedia sold approximately 7.3 million and
14.3 million shares, respectively, to Cornell under the 2003 SEDA. NeoMedia
expects to use proceeds from the 2003 SEDA to repay all or a portion of the $10
million promissory note funded by Cornell. The Company expects to use the cash
proceeds as future working capital and to fund potential acquisitions.
On March 30, 2005, NeoMedia and Cornell Capital Partners entered into a
Standby Equity Distribution Agreement under which Cornell Capital Partners
agreed to purchase up to $100 million of NeoMedia's common stock over a two-year
period, with the timing and amount of the purchase at NeoMedia's discretion. The
maximum amount of each purchase would be $2,000,000 with a minimum of five
business days between advances. NeoMedia expects to file a registration
statement with the SEC during 2005 to register the shares underlying the $100
million 2005 SEDA. The 2005 SEDA would become available at the time the SEC
declares effective a registration statement containing such shares. In addition,
Cornell Capital Partners holds 50 million warrants to purchase shares of
NeoMedia common stock at an exercise price of $0.20 per share. NeoMedia is
currently in the process of registering the shares underlying the warrants. Upon
registration, NeoMedia can force exercise of the warrants, resulting in an
additional $10 million cash to NeoMedia.
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.
72
NEOMEDIA'S MANAGEMENT
Directors and Executive Officers
As of December 31, 2004, NeoMedia's directors and executive officers were:
Name Age Position
----------------- --- ------------------------------------------------------
Charles W. Fritz 48 Chairman of the Board of Directors
Charles T. Jensen 61 President, Chief Executive Officer, Chief Operating
Officer, and Director
David A. Dodge 29 Vice-President, Chief Financial Officer and Controller
William E. Fritz 74 Secretary and Director
James J. Keil 77 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
Mr. Fritz is a founder of NeoMedia and has served as an officer and as a
Director of NeoMedia since our inception. On August 6, 1996, Mr. Fritz was
appointed Chief Executive Officer and Chairman of the Board of Directors. On
April 2, 2001, Mr. Fritz was appointed as President where he/she served until
June 2002. Mr. Fritz is currently a member of NeoMedia's 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
Mr. Jensen was Chief Financial Officer, Treasurer and Vice-President of
NeoMedia from 1996 through 2002. Mr. Jensen has been a Director since 1996, and
currently is a member of NeoMedia's Compensation Committee. During 2002, Mr.
Jensen was promoted to NeoMedia's President, Chief Operating Officer, and Acting
Chief Executive Officer. During August 2004, Mr. Jensen was made permanent Chief
Executive Officer. Prior to joining NeoMedia in November 1995, Mr. Jensen was
Chief Financial Officer of Jack M. Berry, Inc., a Florida corporation which
grows and processes citrus products, from December 1994 to October 1995, and at
Viking Range Corporation, a Mississippi corporation which manufactures gas
ranges, from November 1993 to December 1994. From December 1992 to February
1994, Mr. Jensen was Treasurer of Lin Jensen, Inc., a Virginia corporation
specializing in ladies clothing and accessories. Prior to that, from January
1982 to March 1993, Mr. Jensen was Controller and Vice-President of Finance of
The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a B.B.A. in
accounting from Western Michigan University and is a Certified Public
Accountant.
David A. Dodge
Mr. 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 two 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
Mr. Fritz is a founder of NeoMedia and has served as a Director of
NeoMedia since our inception. Mr. Fritz also served as Treasurer of NeoMedia
from its inception until May 1, 1996. Since February 1981, Mr. Fritz has been an
officer and either the sole stockholder or a majority stockholder of G.T.
Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark,
Inc.) and EDSCO, three railroad freight car equipment manufacturing companies.
Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the
University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's
former Chief Executive Officer and Chairman of the Board of Directors.
73
James J. Keil
Mr. Keil has been a Director of NeoMedia since August 6, 1996. Mr. Keil
currently is a member of NeoMedia's Compensation Committee, Stock Option
Committee and 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 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
Mr. Barclay has been a Director of NeoMedia since August 6, 1996, and
currently is a member of NeoMedia's Stock Option Committee and 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 bylaws 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/her successor.
Meetings Of The Board Of Directors
During the year ended December 31, 2004, NeoMedia held five directors'
meetings and each incumbent director attended more than 75% of the total of
meetings of the Board of Directors and the committees of which he is a member.
The Board of Directors also acted 20 times by unanimous written consent.
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 Registered Public Accounting Firm for approval by the
Board of Directors, reviewing the scope, results and costs of the audit with
NeoMedia's independent accountants, and reviewing the financial statements,
audit practices and internal controls of NeoMedia. During 2004, members of the
Audit Committee were non-employee directors James J. Keil and A. Hayes Barclay.
During 2004, the Audit Committee held four meetings.
Due to financial constraints, NeoMedia does not currently 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, A. Hayes Barclay and James J.
Keil, were members of NeoMedia's Compensation Committee during 2004. The
Compensation Committee acted by unanimous written consent twice during 2004.
74
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 2004, the Stock Option Committee met once and
acted by unanimous written consent six times.
Director Compensation
Outside directors are currently compensated through the issuance of stock
options from NeoMedia's 2003 Stock Option Plan. During May 2004, each outside
director received one million options with an exercise price of $0.075 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, as amended, requires
NeoMedia's officers and directors, and persons who own more than 10% of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the United States Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% 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 10% beneficial
owners were complied with.
NeoMedia's 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 $100,000 for services rendered to NeoMedia (collectively, the "Named
Executive Officers") during the years ended December 31, 2004 and 2003:
Annual Compensation Long-term Compensation
---------------------------------------- ------------------------------------------------
Other Securities
Annual Restricted Underlying All other
Compens- Stock Options/ LTIP Compens-
Name and Salary Bonus ation Award(s) SARs (1) Payouts ation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
------------------------- ---- -------- ------- --------- ----------- ---------- -------- ----------
Charles T. Jensen 2004 175,000 -- -- -- 4,000,000 -- --
President and Chief 2003 162,000 92,000(2) -- -- 10,000,000 -- 1,000(4)
Executive Officer
Charles W. Fritz 2004 $175,000 -- -- -- 4,000,000 -- --
Chairman of the Board 2003 145,000 110,000(2) $60,000(3) -- 10,000,000 -- 1,000(4)
David A. Dodge 2004 122,000 -- -- -- 2,000,000 -- --
Vice President and 2003 90,000 7,000(2) -- -- 2,300,000 -- --
Chief Financial 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, NeoMedia 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, NeoMedia 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.
75
Employment Agreements
No employment agreements are currently in place for any of NeoMedia's
employees.
Incentive Plan for Management
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan
for Management (the "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.
NeoMedia did not have a formal incentive plan for management in place for
the year ended December 31, 2004.
During the years ended December 31, 2004 and 2003, NeoMedia paid $159,000
and $593,000, respectively, in past due incentive awards relating to its
executive incentive plan for fiscal 2000, through the issuance of common stock.
NeoMedia's 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 (the "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 1.5 million shares of
common stock. All 1.5 million options were granted under NeoMedia's 1996 Stock
Option Plan.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan (the
"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
million shares of common stock. All 8 million options were granted under
NeoMedia's 1998 Stock Option Plan.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan (the
"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 million shares of common stock. All 10 million 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"). 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 million shares of common stock. On October 17,
2003, NeoMedia filed a registration statement on Form S-8 to register all 150
million shares underlying the options in the 2003 Stock Option Plan. As of
December 31, 2004, NeoMedia had issued approximately 69 million shares under the
2003 Stock Option Plan
76
NeoMedia's Stock Incentive Plan
Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan
(the "2003 Stock Plan"). Under the terms of the 2003 Stock Plan, NeoMedia has
set aside up to 30 million 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
registration statement on Form S-8 to register all 30 million shares in the 2003
Stock Plan. As of December 31, 2004, NeoMedia had issued approximately 9.3
million shares under the 2003 Stock 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 or older 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 $13,000 for 2004) to the 401(k)
Plan, although the percentage elected by certain highly compensated participants
may be required to be lower. All amounts contributed to the 401(k) Plan by
employee participants and earnings on these contributions are fully vested at
all times. The 401(k) Plan also provides for matching and discretionary
contributions by NeoMedia. To date, NeoMedia has not made any such
contributions.
Options And Warrants Granted In NeoMedia's Last Fiscal Year
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 2004:
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options/ Annual Rates of Stock
Underlying SARs Price Appreciation
Options Granted to Exercise or for option Term
Named Granted Employees in Base Price Expiration -------------------
Executive Officer (#) Fiscal Year ($/share) Date 5% ($) 10% ($)
----------------- ---------- ------------ ----------- ------------- -------- --------
Charles T. Jensen 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000
Charles W. Fritz 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000
David A. Dodge 2,000,000 2.6% $0.11 March 8, 2014 $138,000 $351,000
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year-End Values
The following table sets forth options exercised by NeoMedia Named
Executive Officers during the year ended December 31, 2004, and the number and
value of all unexercised options at fiscal year end.
77
Number of Unexercised
Securities Underlying Value of Unexercised In-
Shares Options/SARs at the-Money Options/SARs at
Acquired Value December 31, 2004 December 31, 2004 (1)
Named on Exercise Realized --------------------------- ---------------------------
Executive Officer (#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- --------- ----------- ------------- ----------- -------------
Charles T. Jensen 1,505,386 $347,000 11,000,000 3,000,000 $2,705,000 $465,000
Charles W. Fritz 1,549,000 $156,000 12,510,000 3,000,000 $3,030,000 $465,000
David A. Dodge 100,000 $ 25,000 2,700,000 1,500,000 $ 639,000 $233,000
------------
(1) Based on the difference between the closing price of $0.265 of NeoMedia's
common stock as quoted on Over-the-Counter Bulletin Board on December 31,
2004 and the exercise price of the option/SAR.
78
Security Ownership of Certain Beneficial Owners and Management of NeoMedia
The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of October 24, 2005, (i) by each person
or entity known by NeoMedia to own beneficially more than 5% 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
Name and Address of Beneficial Percent of
Class Beneficial Owner Ownership (1) Class (1)
Common Stock Charles W. Fritz (2)(3) 28,610,555 6.0%
Common Stock William Fritz(2)(4) 52,890,944 11.3%
Common Stock Charles T. Jensen(2)(5) 13,001,500 2.7%
Common Stock David A. Dodge(2)(6) 3,225,000 *
Common Stock A. Hayes Barclay(2)(7) 2,405,000 *
Common Stock James J. Keil(2)(8) 4,388,619 *
Common Stock Martin N. Copus(9) 1,682,186 *
--------------------------
Common Stock Officers and Directors
as a Group (9 Persons)(10) 106,203,804 21.1%
==========================
------------
* - 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 462,068,880 shares of
common stock outstanding as of October 24, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
October 24, 2005, 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 October 24, 2005, 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 600, 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 children for an aggregate of 400 shares, 13,000,000
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, 12,557,186 shares of common
stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of
common stock held by the CW/LA II Family Limited Partnership, a family
limited partnership for the benefit of Mr. Fritz's family.
(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: 45,923,735 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 2,750,000 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 13,000,000 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 3,225,000 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
2,400,000 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 beneficially
owned includes 2,500,000 shares issuable upon exercise of options and
1,888,619 shares owned by Mr. Keil directly.
(9) Martin N. Copus is Chief Operating Office. Beneficial ownership includes
1,500,000 shares of common stock issuable upon exercise of options granted
under NeoMedia's stock option plans, and 182,186 shares held by Mr. Copus
directly.
(10) Includes an aggregate of 38,375,000 currently exercisable options to
purchase shares of common stock granted under NeoMedia's stock option
plans, 4,050,000 currently exercisable warrants to purchase shares of
common stock, and 63,778,804 shares owned directly by NeoMedia's officers
and directors.
79
Certain Relationships and Related Transactions of NeoMedia
During February 2002, NeoMedia 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, NeoMedia 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, NeoMedia 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 three 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 Capital Partners, LP
Equity Line of Credit were registered with the United States Securities and
Exchange Commission. 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. NeoMedia repaid Charles Fritz's note in full
during March 2003, and repaid James J. Keil's note in full during April 2003.
NeoMedia 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 also includes a provision under which, as consideration for the loan,
Mr. Fritz will receive a 3% royalty on all future revenue generated from
NeoMedia's intellectual property. The new note was paid in full during April
2004.
During April 2003, NeoMedia's Board of Directors approved the payment in
full of approximately $154,000 of liabilities owed by NeoMedia to Charles W.
Fritz, NeoMedia's Founder and Chairman of the Board of Directors, through the
issuance of 15,445,967 shares of common stock. NeoMedia recognized a discount
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.
During April 2003, NeoMedia 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, NeoMedia also granted the purchaser 25,000,000
warrants to purchase shares of NeoMedia'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
NeoMedia's Board of Directors. Proceeds to NeoMedia from sale of the shares were
$250,000. NeoMedia 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/her warrants and purchased 25,000,000
additional shares of common stock at a price of $0.01 per share.
During April 2003, NeoMedia 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, NeoMedia 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, NeoMedia 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 matured in April 2004, with all other terms of the
note remaining the same. As consideration for the loan, NeoMedia granted Mr.
Fritz 2,500,000 warrants to purchase shares of NeoMedia'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, NeoMedia recorded the
relative fair value of the warrants as a discount against the note, and
amortized the discount over the life of the note.
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On August 29, 2003, NeoMedia 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
NeoMedia's officers and directors, and persons who own more than 10% of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the United States Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% 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 2004 all Section 16(a) filing
requirements applicable to NeoMedia's officers, directors and 10% beneficial
owners were complied with.
Code of Ethics
NeoMedia has adopted a code of ethics that applies to its senior executive
and financial officers. NeoMedia's Code of Ethics seeks to promote (1) honest
and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships, (2) full,
fair, accurate, timely and understandable disclosure of information to the SEC,
(3) compliance with applicable governmental laws, rules and regulations, (4)
prompt internal reporting of violations of the Code of Ethics to predesignated
persons, and (5) accountability for adherence to the Code of Ethics. A copy of
the NeoMedia's Code of Ethics was filed as Exhibit 10.53 to NeoMedia's Form
10-KSB for the year ended December 31, 2004.
Limitations on Director's Liability and Indemnification
As permitted by the Delaware General Corporation Law (the "DGCL"),
NeoMedia has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, except for
liability (i) for any breach of the director's duty of loyalty to NeoMedia or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of this provision is
to eliminate the rights of NeoMedia and its stockholders (through stockholders'
derivative suits on behalf of NeoMedia) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director except in the
situations described in clauses (i) through (iv) above. This provision does not
limit nor eliminate the rights of NeoMedia or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
The Certificate of Incorporation and the bylaws of NeoMedia provide that
NeoMedia is required and permitted to indemnify its officers and directors,
employees and agents under certain circumstances. In addition, if permitted by
law, NeoMedia is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, NeoMedia is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
NeoMedia in which indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers
or controlling persons of NeoMedia pursuant to the foregoing provisions, or
otherwise, NeoMedia has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable.
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DESCRIPTION OF NEOMEDIA'S CAPITAL STOCK
The following description of NeoMedia's capital stock and certain
provisions of NeoMedia's Certificate of Incorporation and bylaws is a summary
and is qualified in its entirety by the provisions of NeoMedia's Certificate of
Incorporation and bylaws, which have been filed as exhibits to NeoMedia's
registration statement of which this prospectus is a part.
On September 24, 2003, NeoMedia's shareholders voted to (i) increase the
number of shares of common stock, par value $0.01 per share, that NeoMedia is
authorized to issue from 200 million to 1 billion; and (ii) implement the 2003
Stock Option Plan, under which NeoMedia is authorized to grant to employeees,
directors, and consultants up to 150 million options to purchase shares of its
common stock. On October, 30, 2003, NeoMedia's board of diretors approved the
2003 Stock Incentive Plan, under which NeoMedia can issue up to 30 million
shares of stock to employees, non-employee directors, consultants for incentive
purposes.
As of October 24, 2005, NeoMedia had 462,068,880 shares of common stock
outstanding, and no shares of preferred stock were outstanding.
Common Stock
Holders of NeoMedia's 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. In the event NeoMedia were to
elect to sell additional shares of common stock following this offering,
investors in this offering would have no right to purchase additional shares. As
a result, their percentage equity interest in us would be diluted.
The shares of NeoMedia's common stock offered in this offering will be,
when issued and paid for, fully paid and not liable for further call and
assessment. Except as otherwise permitted by Delaware law, and subject to the
rights of the holders of preferred stock, all stockholder action is taken by the
vote of a majority of the outstanding shares of common stock voted as a single
class present at a meeting of stockholders at which a quorum consisting of a
majority of the outstanding shares of common stock is present in person or
proxy.
Preferred Stock
NeoMedia may issue preferred stock in one or more series and having the
rights, privileges, and limitations, including voting rights, conversion rights,
liquidation preferences, dividend rights and preferences and redemption rights,
as may, from time to time, be determined by the Board of Directors. Preferred
stock may be issued in the future in connection with acquisitions, financings,
or other matters, as the Board of Directors deems appropriate. In the event that
NeoMedia determines to issue any shares of preferred stock, a certificate of
designation containing the rights, privileges, and limitations of this series of
preferred stock shall be filed with the Delaware Secretary of State. The effect
of this preferred stock designation power is that NeoMedia's Board of Directors
alone, subject to federal securities laws, applicable blue sky laws, and
Delaware law, may be able to authorize the issuance of preferred stock which
could have the effect of delaying, deferring, or preventing a change in control
of NeoMedia without further action by NeoMedia's stockholders, and may adversely
affect the voting and other rights of the holders of NeoMedia's common stock.
The issuance of preferred stock with voting and conversion rights may also
adversely affect the voting power of the holders of NeoMedia's common stock,
including the loss of voting control to others.
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During December 1999, NeoMedia's Board of Directors approved a Certificate
of Resolutions Designating Rights and Preferences of Preferred Stock, filed with
the Delaware Secretary of State on December 20, 1999. By this approval and
filing, 200,000 shares of Series A Preferred Stock were designated. Series A
Preferred Stock carries the following rights:
o The right to receive mandatory cash dividends equal to the greater
of $0.001 per share or 100 times the amount of all dividends (cash
or non-cash, other than dividends of shares of common stock) paid to
holders of the common stock, which dividend is payable 30 days after
the conclusion of each calendar quarter and immediately following
the declaration of a dividend on common stock;
o 100 votes per each share of Series A Preferred on each matter
submitted to a vote of NeoMedia's stockholders;
o The right to elect two directors at any meeting at which directors
are to be elected, and to fill any vacancy on the Board of Directors
previously filled by a director appointed by the Series A Preferred
Stockholders;
o The right to receive an amount, in preference to the holders of
common stock, equal to the amount per share payable to holders of
common stock, plus all accrued and unpaid dividends, and following
payment of 1/100th of this liquidation preference to the holders of
each share of common stock, an additional amount per share equal to
100 times the per share amount paid to the holders of common stock;
o The right to exchange each share of Series A Preferred for 100 times
the consideration received per share of common stock in connection
with any merger, consolidation, combination or other transaction in
which shares of common stock are exchanged for or converted into
cash, securities or other property; and
o The right to be redeemed in accordance with NeoMedia's stockholders
rights plan.
While accrued mandatory dividends are unpaid, NeoMedia may not declare or
pay dividends or distributions on, or redeem, repurchase or reacquire, shares of
any class or series of junior or parity stock.
The Series A Preferred was created to be issued in connection with
NeoMedia's stockholders rights plan, described below. No shares of Series A
Preferred have been issued to date.
On June 19, 2001, NeoMedia's Board of Directors approved a Certificate of
Designations to Create a Class of Series A Convertible Preferred Stock for
NeoMedia Technologies, Inc., filed with the Delaware Secretary of State on June
20, 2001. By this approval and filing, 47,511 shares are designated as Series A
Convertible Preferred Stock. NeoMedia's Series A Convertible Preferred Stock,
par value $0.01 per share, has the following rights:
o Series A Convertible Preferred is convertible into shares of
NeoMedia's common stock at a one-to-one ratio, subject to
proportional adjustments in the event of stock splits or
combinations, and dividends or distributions of shares of common
stock, at the option of the holder; shares are subject to automatic
conversion as determined in each agreement relating to the purchase
of shares of Series A Convertible Preferred;
o Each share of Series A Convertible Preferred is entitled to receive
a liquidation preference equal to the original purchase price of
such share in the event of liquidation, dissolution, or winding up;
o Upon merger or consolidation, or the sale, lease or other conveyance
of all or substantially all of NeoMedia's assets, shares of Series A
Convertible Preferred are automatically convertible into the number
of shares of stock or other securities or property (including cash)
to which the common stock into which it is convertible would have
been entitled; and
o Shares of Series A Convertible Preferred are entitled to one vote
per share, and vote together with holders of common stock.
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In June 2001, 452,489 shares of Series A Convertible Preferred were issued
to About.com, Inc. pursuant to a certain Agreement for Payment in Common Stock,
in lieu of cash payment to About.com for online advertising services. On January
2, 2002, such shares were converted into 452,489 shares of common stock.
On January 16, 2002, NeoMedia's Board of Directors approved a Certificate
of Designation, Preferences, Rights and Limitations of Series B 12% Convertible
Redeemable Preferred Stock of NeoMedia Technologies, Inc., filed with the
Delaware Secretary of State on February 28, 2002. By this approval and filing,
100,000 shares are designated as Series B 12% Convertible Redeemable Preferred
Stock. NeoMedia's Series B 12% Convertible Redeemable Preferred Stock, par value
$0.01 per share, has the following rights:
o Series B Preferred shares accrue dividends at a rate of 12% per
annum, or $1.20 per share, between the date of issuance and the
first anniversary of issuance;
o Series B Preferred is redeemed to the maximum extent permitted by
law (based on NeoMedia's funds legally available for redemption) at
a price per share of $15.00, plus accrued dividends (a total of
$16.20 per share) on the first anniversary of issuance;
o Series B Preferred receive proceeds of $12.00 per share upon
NeoMedia's liquidation, dissolution or winding up;
o To the extent, not redeemed on the first anniversary of issuance,
Series B Preferred is automatically convertible into NeoMedia's then
existing general class of common stock on the first anniversary of
issuance at a price equal to $16.20 divided by the greater of $0.20
and the lowest publicly-sold share price during the 90 day period
preceding the conversion date, but in no event more than 19.9% of
NeoMedia's outstanding capital stock as of the date immediately
prior to conversion.
o Upon merger or consolidation, or the sale, lease or other conveyance
of all or substantially all of NeoMedia's assets, shares of Series B
Preferred are automatically convertible into the number of shares of
stock or other securities or property (including cash) to which the
common stock into which it is convertible would have been entitled;
and
o Shares of Series B Preferred are entitled to one vote per share and
vote with common stock, except where the proposed action would
adversely affect the Series B Preferred or where the non-waivable
provisions of applicable law mandate that the Series B Preferred
vote separately, in which case Series B Preferred vote separately as
a class, with one vote per share.
NeoMedia's Preferred Stock is currently comprised of 25 million shares,
par value $0.01 per share, of which 200,000 shares are designated as Series A
Preferred Stock, none of which are issued or outstanding, and, following the
conversion into common stock of 452,489 shares of Series A Convertible Preferred
Stock issued to About.com, of which 47,511 shares are designated as Series A
Convertible Preferred Stock, none of which are issued and outstanding, and of
which 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock,
none of which are issued and outstanding. NeoMedia has no present agreements
relating to or requiring the designation or issuance of additional shares of
preferred stock.
Warrants And Options of NeoMedia
As of October 24, 2005, NeoMedia had outstanding options and warrants to
purchase 78,529,221 and 71,375,000, shares of NeoMedia's common stock,
respectively, with exercise prices ranging from $0.01 to $6.00. The number of
shares issuable upon exercise and the exercise prices of the warrants are
subject to adjustment in the event of certain events such as stock dividends,
splits and combinations, capital reorganization and with respect to certain
warrants, issuance of shares of common stock at prices below the then exercise
price of the warrants.
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On March 30, 2005, NeoMedia issued 50 million warrants to Cornell Capital
Partners with an exercise price of $0.20 per share, and a term of three years,
as a commitment fee for Cornell to enter into a $100 million Standby Equity
Distribution Agreement with NeoMedia. NeoMedia also issued 4 million warrants
with an exercise price of $0.229 to an independent third party as a fee for
negotiating and structuring the Standby Equity Distribution Agreement.
On September 24, 2003, NeoMedia's shareholders approved the 2003 Stock
Option Plan. Under this plan, NeoMedia is authorized to grant to employees,
directors, and consultants up to 150,000,000 options to share of common stock.
As of December 31, 2004, NeoMedia had issued approximately 69 million options
under the 2003 Stock Option Plan, of which approximately 15 million had been
exercised.
During May 2003, NeoMedia re-priced approximately 8 million stock options
under a repricing program. Under the terms of the program, the exercise price
for outstanding options under NeoMedia's 2002, 1998, and 1996 Stock Option Plans
was restated to $0.01 per share for an original period of 6 months. The program
was subsequently extended through December 31, 2004. In accordance with FASB
Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock
Transactions, the award was accounted for as variable from May 19, 2003 through
the period ended December 31, 2004. Accordingly, NeoMedia recognized
approximately $104,000 and $746,000 as compensation in general and
administrative expense during the years ended December 31, 2004 and 2003,
respectively. Approximately 3.5 million and 4.4 million options were exercised
under the program during the years ended December 31, 2004 and 2003,
respectively. The repricing program expired on December 31, 2004.
During April 2003, NeoMedia repriced approximately 1.9 million warrants
held by Thornhill Capital LLC, an outside consultant. 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. NeoMedia 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.
In June 2002, NeoMedia repriced 3 million of NeoMedia's common stock
warrants from $0.12 to $0.05 per share. All of the warrants were exercised
immediately. NeoMedia 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's common stock on the Over-the-Counter 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, NeoMedia repriced approximately 1.2 million of
NeoMedia's 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
Over-the-Counter Bulletin Board, 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.
Registration Rights
None.
Anti-Takeover Provisions Under bylaws and Laws
On December 10, 1999, NeoMedia's Board of Directors adopted a stockholders
rights plan and declared a non-taxable dividend of one right on each outstanding
share of NeoMedia common stock to stockholders of record on December 10, 1999
and each share of common stock issued prior to the rights plan trigger date. The
stockholder rights plan was adopted as an anti-takeover measure, commonly
referred to as a "poison pill." The stockholder rights plan was designed to
enable all stockholders to receive fair and equal treatment in any proposed
takeover of the corporation and to guard against partial or two-tiered tender
offers, open market accumulations and other hostile takeover tactics to gain
control of NeoMedia. The stockholders rights plan, which is similar to plans
adopted by many public companies, was not adopted in response to any effort to
acquire control of NeoMedia at the time of adoption. Certain of NeoMedia'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 NeoMedia's poison pill plan, as a result of
the fact that, as of the plans adoption, their holdings might have otherwise
triggered the poison pill.
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Transfer Agent
NeoMedia's stock transfer agent is American Stock Transfer & Trust
Company, 59 Maiden Lane, Plaza Level, New York, NY 10038.
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DESCRIPTION OF BSD'S BUSINESS
Business Development
BSD was incorporated in Florida on February 7, 1989 under the name "Park
Avenue Marketing, Inc." On February 2, 1998, as a result of its acquisition of
100% of the common stock of two commonly controlled entities, Respiratory Care
Services, Inc. ("RCS") and RCS Subacute, Inc. ("RCSS"), that were engaged in the
respiratory care industry the name was changed to BSD Healthcare Industries,
Inc. Prior to these acquisitions, BSD did not conduct any operations.
On July 1, 1999, principally as a result of a change in Medicare
reimbursement rates for respiratory services, BSD Healthcare Industries sold RCS
and RCSS.
On December 17, 2001 BSD changed its name to BSD Software, Inc.
As a result of the sale of RCS and RCSS, BSD had no operations until its
acquisition of 90% of Triton Global Business Services Inc. ("TGBSI") on November
4, 2002. TGBSI is the 100% owner of Triton Global Communications Inc. ("Triton")
through which it conducts its business operations.
BSD's/Triton's Business
Triton was incorporated in April 1998 as a next generation Internet
protocol ("IP") 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.
Triton focuses on helping its clients improve profitability by enabling
them to quickly deploy new services, streamline operations and make quicker,
more informed business decisions. Triton has aligned itself with strategic
partners allowing BSD to offer advanced services in the telecom industry. Triton
is a customer service oriented organization providing service to direct
customers and service providers, both within North America and internationally.
Triton was the first fully implemented alternate billing agent within the
Local Exchange Carriers ("LECs") billing system in Canada. Triton's business
plan is to continue expanding its live and automated operator service
capability, focusing on making emerging web based information and transaction
services easier to access and pay for.
BSD's management and staff are trained to assist and provide clients with
the best solutions for their business. Triton is currently operating with eight
employees.
BSD does not have any patents, trademarks, licenses, franchises,
concessions, royalty agreements. The business of BSD is not subject to
government approval or special regulation and BSD is not aware of any probable
or proposed regulations that would affect BSD's operations. BSD has two major
customers that account for 73% of its accounts receivable at July 31, 2004.
Triton's technology platforms are capable of providing its customers with
the ability to integrate traditional telecommunication services, internet
information and subscriptions services and e-commerce transactions and place the
charges on the billing medium of the end users choice. Given the recent general
increase in overall demand for these services by consumers, Triton has
positioned itself with the intent of becoming a significant provider of these
services in the future.
Triton Recent Developments
Audio Text
On September 23, 2003, BSD announced that its' majority owned subsidiary
TGBSI has signed an exclusive contract to provide new customer activation and
billing services for a leading global provider of audio-text services and has
divested itself of its Canadian hotel operations. On November 18, 2003 BSD
announced signing of an exclusive contract with a leading global provider of
audio-text services and subsequently announced that expected revenues would
increase from $100,000 per month to $200,000 per month. Under the terms of the
agreement TGBSI will provide the underlying network, caller validation and
billing and collection services for new subscribers to various audio-text
services. BSD continues to provide services for these customers.
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1010
On June 1, 2004, BSD announced signing of an agreement with Bell Canada
Inc. to become an inter-exchange carrier ("IXC"). As an IXC carrier, TGBSI is
able to offer multiple network service solutions to complement its core billing
capacity. On June 6, 2004 BSD announced that TGBSI signed an International
Termination and Call Record Management Agreement with a major LEC. Under the
terms of the three year Agreement, TGBSI will provide international termination,
billing and clearing, customer service and direct billing.
900
On February 23, 2004, BSD announced that it secured the ability to provide
900 Services to North America. On August 4, 2004 BSD announced that TGBSI signed
a new $3,000,000 yearly contract with a leading provider of International
audio-text services to providing National 900 Services in Canada. As well as
providing the National 900 network, TGBSI will also provide the LEC billing
services, bad debt management and handle all customer service inquiries. BSD
continues to perform its contracted services.
Billing & Collections
On December 3, 2003, BSD announced the signing of 18 independent LECs to
Billing and Collection Agreements. On April 4, 2004, BSD announced that TGBSI
has completed an agreement with one of the largest United States providers of
operator services to provide customized billing and clearing for Canadian-billed
collect and third party calls. The potential aggregate value of this contract is
in excess of $800,000 per year. BSD continues to streamline its offerings to
remain competitive in the industry.
Triton's Products & Services
Triton has sophisticated proprietary software and hardware services that
are capable of processing call records for telecommunications companies
worldwide. They track and process bills for a wide range of services, from local
and long distance operator services as well as paging, voice mail, caller ID,
phone cards and other "ease of access" 0+Plus dialing solutions. Triton has also
developed flat-fee billing solutions that it believes will benefit Internet
content and service providers. With the addition of services for the Internet
community, Triton anticipates that it will be able to meet the needs of an even
broader range of communications companies.
Triton's products and services include, in the operator/agent service
field: global and domestic origination, hospitality providers, payphone
providers, directory assistance, North America service, international service,
enhanced information services, e-business support services, e-commerce
transaction support, "Click-2-Talk" web-based voice routing, and call center ASP
solutions
Triton's billing services include: North American LEC billing, online
subscription based billing, and web-based transaction billing (e-commerce).
Triton's Strategic Technology Alliances
Triton has developed and secured strategic alliances within the industry
that Triton believes are key to the successful service and maintenance of its
client support systems and the delivery of advanced features. The strategic
partnerships are expected to promote global solutions with billing as the core
function or source of revenue. Triton continually enhances and streamlines its
service offerings to remain competitive in an evolving marketplace. Triton has
completed the development of a state of the art IP e-commerce platform described
below for future deployment.
Next Generation IP-Enabled Operator Services Platform
Triton's International Operator Services Platform, which is not yet
deployed, has been created by integrating hardware and software applications
from Cisco's IP Gateway, CosmoCom's IP-based Next Generation CosmoCall Universe
Platform, and the Enhanced Operator Services ("EOS") from Intelis.
88
Triton is currently formulating its plan of implementation and the
required marketing strategies and service offerings.
CosmoCall Universe is a multimedia, multi-channel call center system that
goes far beyond the capabilities of traditional call center technology.
Traditional call centers are based on circuit-switched automatic call
distributors ("ACDs"), and support only voice telephone calls. CosmoCall has all
the capabilities of a modern telephone call center, but as a multimedia,
multi-channel interaction center, CosmoCall supports not only voice telephone
calls, but also live multimedia communication sessions via the Internet. It
manages and distributes not only live calls, but also messages, including voice,
fax, and e-mail messages. CosmoCall supports remote agents and multiple site
operation transparently via a managed IP WAN. Agents are location-independent,
and multiple call center sites can be managed as a single entity capable of
distributing calls to any agent in any site or location.
The Intelis EOS software is fully integrated on top of the CosmoCall
Universe Platform and inspects incoming calls on a call-by-call basis to
determine how a call should be processed. The system uses all data presented by
the switch to determine call treatment, including: ANI, Ingress Trunk Group,
Info Digit, State of the ANI, NPA NXX of the ANI and DNIS.
Based upon the incoming characteristics of a call, the system determines
what application is used to process the call and the carrier for that
application. For example, the application may be Enhanced EOS or prepaid whereas
the carrier defines characteristics of that application such as branding
information, rating information, and validation rules.
Integrated together these products provide Triton the capability to launch
web-based services as well as support for traditional telephony including
collect, third party and calling card supported calls.
Triton's Telco Grade Billing Platform
Highland Lakes Software ("Highland") is an independent global service
provider for core billing services for competitive LECs ("CLECs") and LECs.
Triton has been able to achieve continued market penetration by employing
Highlands' core billing software at the root of its billing infrastructure.
Highland will continue to provide billing solutions to Triton as the industry
matures and demands more technically enhanced functionality. Triton works
closely with Highland to provide extended electronic billing services to meet
the demands of service providers and the Internet end-user. With the
coordination of Highland engineers, Triton has developed proprietary modules to
enhance allowable billing types and to provide an effective direct billing
service as well as an aggressive revenue recovery service for our customers.
Sales and Marketing Approach
Direct sales and strategic sales alliances are used as the business
strategy for Triton as it continues to grow.
As a provider of billing, clearinghouse and information management
services to the telecommunications industry, Triton has attempted to position
itself to take advantage of the current disarray in the telecommunications
sector. Historically many of the international collect calling and international
billing and clearing contracts have been controlled by intermediary agents.
Triton's sales team will be segmented between target customer segments and
over the long-term by geography (domestic and international).
Triton anticipates that initially, incremental business development
representatives will be added to target North American carriers including
clearing houses, alternative operator service providers, local exchange
carriers, long distance voice and data providers, wireless carriers and internet
and e-business service providers. While this will involve primarily direct
marketing and selling, it is anticipated that alliances can be established where
Triton's products and services can be positioned as part of a bundled offering
in conjunction with other complementary services.
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Competitive Analysis
Third Party Billing Companies
The majority of clearinghouse competitors are United States-based or are
part of an incumbent LEC. Triton believes that its position as an independent
Canadian operation makes it unique among those in the third party billing market
in North America.
Triton may not be able to compete with large telecommunication providers
on a revenue scale, but Triton believes that it does have the ability to meet
the evolving telecom market's needs quickly and efficiently.
Most of these competitors are restricted from entering the Canadian
marketplace due to regulatory issues. This means that these competitors can also
become Triton customers in certain segments of their business, particularly when
it comes to providing services to all outside competitors who wish to bill for
Canadian Services.
Alternative Operator Services Providers ("AOSPs")
In addition to providing sophisticated billing and clearing, the
technology platform currently being developed will allow Triton to compete with
carriers and companies providing live and automated operator services both
domestically and, with multi-language capabilities, on an international basis.
In addition to specific AOSPs, the majority of the LECs in the United
States and Canada provide operator services as part of their core offerings. In
1997, the Federal Communications Commission ruled that in order to be an
eligible telecommunications carrier a service provider would have to provide the
basic universal services as laid out in the Telecommunications Act of 1996,
including: voice grade access to the PSTN, single party service, access to
emergency service (i.e., 911), and access to both operator services and
directory assistance (i.e., 411).
While telecommunication carriers are mandated to provide these services,
they do not have to providing it themselves. Triton believes that this provides
opportunity for Triton to look to these competitors as prospective customers for
its AOSP and future IP-enabled service offerings.
Triton's Canadian-based low cost infrastructure, fewer regulatory
encumbrances than United States-based carriers and the ability to provide a
fully-bundled suite of services on a single IP enabled platform allows it to
compete for both traditional services as well as future services.
Triton's E-Business/Commerce Support Services "Click-2-Talk" and Virtual Call
Centers
Platform Advantages
Triton's Click-2-Talk operator services platform has been created by
integrating hardware and software applications from Cisco's IP Gateway, an
IP-based next generation universal CRM platform, and EOS functionality. Triton
believes that the market advantages inherent with a 100% IP platform include,
but are not limited to:
o Intelligent multi-media routing to and from the Internet.
Click-2-Talk enables a computer user to connect or conference using
voice over internet protocol ("VOIP") to communicate with a live
agent. By connecting the consumer's computer to a live agent, the
Triton IP platform will minimize fraud risk and anxiety associated
with inputting personal credit card information on the Internet.
o Due to the fact that Triton's platform is fully IP-enabled, "Virtual
Agents" can be supported via a simple internet connection. This
means that Triton can eliminate the cost and challenges associated
with traditional brick-and-mortar call centers. Agents can be
located virtually anywhere in the world including a customer's
existing contact center or specific geographic regions, providing
24x7 coverage and an understanding of local language and cultures.
o Triton's platform supports multiple "live agents" as well as
fully-automated billing methods including credit card, calling card,
collect, person to person and bill to third party. Call accepts or
"voice prints" are stored for billing and collection audit purposes.
o The platform provides fully integrated multi-language support,
removing the barriers of communication that impede international
e-business, telecommunications and emerging IP service transactions.
90
o Cost of operation is significantly reduced by utilizing least cost
routing ("LCR") and commodity priced VOIP transport inbound and
outbound without the traditional requirement of changing protocols
from IP to time division multiplexing ("TDM") and back again.
o Carrier grade quality is guaranteed by using dedicated bandwidth,
redundant architecture and by co-locating technology within a robust
data center facility.
o Support for ASP deployment of customer applications.
Triton/BSD Legal Matters
BSD or its subsidiaries are aware of the following legal proceedings:
In December 2002, Triton Global Communications sued CanTalk for breach of
contract. The action was brought before the Court of Queen's Bench, Winnipeg,
Canada. The case is styled "Triton Global Communications v. CanTalk." The action
alleges that CanTalk failed to perform under an outsource agreement pursuant to
which CanTalk was to provide support for Triton's entry into the international
operator service market. In response to the suit, CanTalk filed a counterclaim
against Triton for $10,000 alleging breach of contract. Triton believes that
CanTalk's counterclaim is without merit and it intends to defend the
counterclaim; however, there is no certainty that Triton/BSD will be successful
in their defense of this action.
In June 2003, PBJ Holdings Inc. filed a Statement of Claim against Triton
Global Business Services Inc. in the Court Of Queen's Bench of Alberta for
breach of contract alleging that Triton Global Business Services Inc. failed to
pay $125,000 for the introduction of Triton Global Business Services Inc. to BSD
Software Inc. On December 17, 2004, this matter was settled. The amount Triton
agreed to pay in settlement totaled $125,000. The first payment of $12,000 was
paid on December 17, 2004. The balance of $113,000 is payable in twenty-four
consecutive $4,708 monthly installments, which commenced January 10, 2005. The
full amount is included in notes payable.
On May 2, 2005, four shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia, claiming that the purchase price as outlined in the
purchase agreement between NeoMedia and BSD is too low. The plaintiffs are
seeking unspecified damages and injunctive relief against the merger. BSD is
currently reviewing the case with its attorneys.
91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
BSD Software, Inc. (the "Company") entered into a Share Exchange Agreement (the
"Agreement") dated October 23, 2002 with Triton Global Business Services, Inc.
("TGBSI") and four stockholders of TGBSI, who owned approximately 90% of the
issued and outstanding shares (the "TGBSI Shareholders"). TGBSI is the sole
shareholder of Triton Global Communications Inc. ("TGCI"), which is a provider
of billings, clearing house and information management services to the
telecommunications industry. Pursuant to the Agreement, on November 4, 2002, the
TGBSI Shareholders exchanged their shares for an aggregate of 26,613,891 common
shares of BSD at a par value $0.001 per share. In addition, an aggregate of
1,615,760 common shares were issued for nominal consideration to certain
persons, principally shareholders of BSD, who owned shares of BSD prior to the
share exchange.
As a result of these transactions, TGBSI became a majority-owned subsidiary of
BSD and the TGBSI Shareholders became the holders of 88.3% of the 30,123,251
common shares of BSD issued and outstanding immediately subsequent to the Share
Exchange transaction. Accordingly, financial information included herein for
prior years is that of TGBSI, consolidated with BSD from November 4, 2002, the
date of completion of the arrangement.
In connection with the share exchange, Jeffrey Spanier, the President and sole
employee and director of BSD, surrendered 4,000,000 shares of common stock,
constituting 67.9% of the common stock which was issued and outstanding prior to
the share exchange.
BSD will seek to acquire the remaining TGBSI common shares as soon as is
practical. After such additional exchange a total of 34,154,946 common shares
will be issued and outstanding, of which 29,084,240 shares will have been issued
to the former shareholders of TGBSI and the former shareholders of TGBSI will
own 85.15% of the issued and outstanding common shares. In connection with the
contemplated additional exchange of shares, the four majority shareholders of
TGBSI have agreed to return to BSD for cancellation, on a pro rata basis, that
number of common shares as may be necessary such that when all shares of TGBSI
are exchanged, the total number of common shares outstanding shall equal
32,593,600 shares plus any issuances of common shares after November 4, 2002. As
the TGBSI shareholders ultimately control BSD, TGBSI has been designated as the
acquirer in the transaction. The fair value of the assets and liabilities
acquired are as follows:
Investments and marketable securities $ 404
Accounts payable and accrued liabilities (2,040)
-------
Working capital deficiency assumed $(1,636)
=======
The above deficiency has been charged to BSD's deficit account and the financial
statements reflect the financial position and results of TGBSI from the date of
its incorporation on May 28, 2002 forward. Additional paid-in capital reflects
the increase in share capital attributable to the carrying value of TGBSI's
share capital.
TGBSI acquired TGCI effective October 31, 2002. The acquisition was accounted
for using the purchase method with the results of operations being included from
the date of acquisition. Details of the acquisition are as follows:
NET DEFICIENCY ACQUIRED:
Current liabilities $ 2,655,306
Current assets (1,008,743)
Property, plant and equipment (1,171,081)
-----------
475,482
CONSIDERATION PAID:
Note payable to Guy Fietz 401,250
Shares of TGBSI issued 1,248,750
Acquisition costs 486,197
-----------
Goodwill upon acquisition of TGCI $ 2,611,679
92
Subsequent to the acquisition the entire amount of goodwill has been written off
and charged to operations.
Although BSD currently owns 90% of TGBSI, operations have resulted in cumulative
losses to July 31, 2005 and as a result the entire amount of these losses have
been reflected in these financial statements and no minority interest has been
calculated. Until such time as operations recover the deficiency in minority
interest of $213,000 the full 100% of operating results will be reported with no
off-setting minority interest.
Background Of Triton
Triton was incorporated in April 1998 as a next generation Internet Protocol
(IP) 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.
Triton is a fully implemented alternate billing agent within the Local Exchange
Carriers (LEC's) billing system in Canada. BSD's vision is to continue expanding
its "live" and "automated" operator service capability focusing on making
emerging web based information and transaction services easier to access and pay
for.
Triton has aligned itself to provide globally accessible products, coupled with
sophisticated proprietary technology, allowing it to offer this global
marketplace fully-integrated or unbundled solutions. Triton's management
believes that the future growth of the industry is largely based upon the
ability of service providers to offer multiple billing options for consumer
services thus increasing market penetration.
Triton's technology platforms are capable of providing its customers with the
ability to integrate traditional telephony services, internet information and
subscription services and e-Commerce transactions and place the charges on the
billing medium of the end users choice.
Products and Services
Triton has sophisticated proprietary software and hardware services that are
capable of processing call records for telecommunications companies worldwide.
They track and process bills for a wide range of services, from local and long
distance operator services as well as paging, voice mail, caller ID, phone cards
and other "ease of access", 0+Plus dialing solutions. Triton has also developed
"flat-fee" billing solutions that are expected to benefit Internet content and
service providers. With the addition of services for the Internet community, we
believe Triton has moved to meeting the needs of an even broader range of
communications companies.
The following is a list of Triton's products and services:
OPERATOR/AGENT SERVICES
- Global and Domestic Origination
- Hospitality Providers
- Payphone Providers
- Directory Assistance
- North America
- International
- Enhanced Information Services
93
BILLING SERVICES
- North American Local Exchange Carrier (LEC) Billing
- Online Subscription Based Billing
- Web-Based Transaction Billing (e-Commerce)
PLANNED SERVICE OFFERINGS
- E-Business Support Services
- E-Commerce Transaction Support
- Click To Talk(TM)" Web-Based Voice Routing
- Call Centre "ASP" Solutions
Triton provides comprehensive billing and collection programs that help
inter-exchange carriers, operator service providers, and other
telecommunications providers' reach thousands of telecommunications consumers.
Triton acts as an agent for Incumbent Local Exchange Carriers (ILECs) and
Competitive Local Exchange Carriers (CLECs) across the nation. Throughout their
billing and collection programs, they have the ability to bill for an array of
telecommunication services on a customer's local telephone bill.
Next Generation Internet Protocol (IP) Enabled Operator Services Platform
Triton's International Operator Services Platform, which is not yet deployed,
has been created by integrating hardware and software applications from Cisco's
Internet Protocol (IP) Gateway, CosmoCom's IP based Next Generation CosmoCall
Universe Platform, and the Enhanced Operator Services (EOS) from Intelis.
Triton is currently formulating its plan of implementation and the required
marketing strategies and service offerings.
CosmoCall Universe is a multimedia, multi-channel call center system that goes
far beyond the capabilities of traditional call center technology. Traditional
call centers are based on circuit-switched Automatic Call Distributors (ACDs),
and support only voice telephone calls. CosmoCall has all the capabilities of a
modern telephone call center. But as a multimedia, multi-channel interaction
center, CosmoCall supports not only voice telephone calls, but also live
multimedia communication sessions via the Internet. It manages and distributes
not only live calls, but also messages, including voice, fax, and e-mail
messages. CosmoCall supports remote agents and multiple site operation
transparently via a managed IP WAN. Agents are location-independent, and
multiple call center sites can be managed as a single entity capable of
distributing calls to any agent in any site or location.
The Intelis Enhanced Operator Services (EOS) software is fully integrated on top
of the CosmoCall Universe Platform and inspects incoming calls on a call-by-call
basis to determine how a call should be processed. The system uses all data
presented by the switch to determine call treatment including ANI, Ingress Trunk
Group, Info Digit, State of the ANI, NPA NXX of the ANI and DNIS.
Based upon the incoming characteristics of a call, the system determines what
application is used to process the call and the Carrier for that application.
For example, the application may be Enhanced Operator Services or Prepaid
whereas the Carrier defines characteristics of that application such as branding
information, rating information, and validation rules.
Integrated together these products provide Triton with unique capabilities to
launch web-based services as well as support for traditional telephony including
collect, third party and calling card supported calls.
94
Results of Operations For The Year Ended July 31, 2005, as Compared to the Year
Ended July 31, 2004
Revenue
The Company had revenue of $7,350,000 for the year ended July 31, 2005 compared
to revenue of $6,091,000 for the year ended July 31, 2004. This increase is
primarily attributable to marketing activities resulting in new business in call
records. The change in the US dollar also affected revenues. Triton's revenue
consisted primarily of fees for processing Canadian and U.S. terminated call
records for telecommunications companies. Revenue is recognized at the time that
calls are transferred to the clearinghouse for billing to customers. Provisions
are recorded for management's estimate of calls that cannot be billed or
collected.
Cost Of Revenues
Triton had cost of revenues of $5,856,000, or 79.7% of revenue, for the year
ended July 31, 2005 compared to $4,618,000 or 75.8% of revenue for the year
ended July 31, 2004. In the year ended July 31, 2005, we had a gross margin of
$1,495,000 or 20.3% of revenue, compared to a gross margin of $1,473,000, or
24.2% of revenue, for the year ended July 31, 2004. Cost of revenues, for the
year ended July 31, 2005, consists of settlement fees to customers, carrier line
charges and clearing costs levied by the LEC's. The reason for the decrease in
gross profit is due to rewriting one of our contracts that resulted in lower
margin of 10% on that contract, and a change in contract mix that resulted in
diminishing gross profits.
Operating Expenses
For the year ended July 31, 2005, Triton had operating expenses of $1,061,000
compared to $1,223,000 for the year ended July 31, 2004. This difference was
primarily attributable to, reduced legal fees and reduced rent expense as Triton
relocated into smaller premises at a lower lease rate and subleased the previous
premises for the full amount of the lease, as well as increased payroll costs
due to having 2 additional staff than in the comparative period.
Year
Ended
Description July 31, 2005
------------------------------ ----------------
Administration $ 140,000
Professional Fees 187,000
Rent 57,000
Payroll 604,000
Depreciation and amortization 73,000
----------------
TOTAL $ 1,061,000
================
Rent expense consists of the rent paid for Triton's administrative offices
located in Calgary, Canada. Payroll expense relates to the payroll of our 8
employees and includes wages and benefits. Depreciation and amortization expense
consists of the depreciation and amortization of office furniture, computer
equipment, fixtures and leasehold improvements.
Net Income
The items specified above resulted in a net income of $271,000 for the year
ended July 31, 2005 after recognizing other expenses including interest expense
of $154,000 and a loss on disposal of assets in the amount of $9,000. In the
comparable period in the prior year, Triton had a net income of $45,000 after
recognizing interest expense of $253,000 and a loss on disposal of assets in the
amount of $3,000 and recording a gain on the sale of contracts in the amount of
$51,000.
95
Critical Accounting Policies
Going Concern
The attached financial statements have been prepared on a going concern
basis in accordance with United States generally accepted accounting principles.
The going concern basis of presentation assumes that BSD will continue in
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities and commitments in the normal course of business. The
Company has reported net income of $271,000 and $45,000 for the years ended July
31, 2005 and 2004 respectively and has an accumulated deficit of $5,705,000 as
of July 31, 2005. As of July 31, 2005 the Company had a working capital deficit
of $3,205,000
The Company's ability to continue as a going concern is dependent upon
management's ability to raise additional financing. During the year ended July
31, 2005, management continued to take actions to reduce operating losses and is
in the process of securing additional financing. There is no assurance that
additional financing will be obtained.
The ability of the Company to continue as a going concern and to realize
the carrying value of its assets and discharge its liabilities when due is
dependent on the successful completion of the actions taken or planned, some of
which are described above, which management believes will mitigate the adverse
conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing the attached financial statements. There
is no certainty that these and other strategies will be sufficient to permit BSD
to continue beyond July 31, 2006.
The financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption were not appropriate. If the "going
concern" basis was not appropriate for these financial statements, adjustments
would be necessary to the carrying value of assets and liabilities, the reported
revenues and expenses, and the balance sheet classifications used
Minority Interest in TGBSI
Although BSD currently owns 90% of TGBSI, operations have resulted in a
loss for the current period and as a result the entire amount of this loss has
been reflected in these financial statements and no reduction for the minority
interest therein has been calculated. Until such time as operations recover the
deficiency in minority interest of $213,000, the full 100% of operating results
will be reported in BSD's statement of operations.
Property Plant & Equipment
Property, plant and equipment are stated at cost. Amortization is provided
using the straight-line method at the following rates:
========================================================
Asset Method
--------------------------------------------------------
Office furniture and equipment Straight line 5 years
Computer equipment Straight line 5 years
Computer software Straight line 3 years
Leasehold improvements Straight line 5 years
========================================================
Property, plant and equipment are assessed for potential impairment when
triggering events occur that indicate the carrying value may not be recoverable.
If the undiscounted estimated future net cash flows are less than the carrying
value of the asset, the impairment loss is calculated as the amount by which the
carrying value of the asset exceeds its fair value. Fair value has been
calculated as the present value of estimated future net cash flows.
Revenue Recognition
Revenue is recognized at the time that calls are accepted by the clearing
house for billing to customers.
96
BSD's Liquidity and Capital Resources
At July 31, 2005, BSD had a cash balance of $23,000. Historically, BSD has
met cash needs through a combination of cash from operations and proceeds from
the sale of equity and debt securities, and loans from the former stockholders
of TGBSI. At July 31, 2005, BSD had negative working capital of $3,205,000. BSD
anticipates that its cash needs over the next 12 months will be for general
working capital needs of $1,400,000, consisting primarily of payroll,
administration (including the costs of defending the lawsuits discussed below)
and other miscellaneous expenses, and the satisfaction of a portion its current
liabilities of $4,824,000 as they come due. Of the total current liabilities,
BSD expects that a portion of the shareholder loans will be satisfied by
converting into equity. BSD expects that it will be able to satisfy its cash
needs over the next 12 months from cash generated by operations and by
negotiating to pay some of its commitments over time.
Currently BSD has entered into debt for equity agreements or amortized
payment agreements with most of its creditors. BSD has the ability to perform on
all of its finalized agreements and will be able to perform on the commitments
it agrees to with its creditors. On June 9, 2004 BSD was relisted to the OTCBB
and consequently has the ability to execute formal agreements on the letters of
intent mentioned below.
BSD's consolidated financial statements have been prepared assuming BSD
will continue as a going concern. Accordingly, the consolidated financial
statements do not include any adjustments that might result from BSD's inability
to continue as a going concern.
Net Cash From Operations. Net cash provided from operations was $109,000
for the year ended July 31, 2005, a decrease of $24,000, or 18.3%, compared with
net cash provided from operations of $134,000 for the year ended July 31, 2004.
The use of cash by operations was principally the result of operations, an
increase in accounts payable of $465,000, amortization of $73,000, non-cash
expenses of $30,000, a reduction of prepaid expenses in the amount of $9,000
offset by an increase in accounts receivable of $748,000.
Net Cash Used in Financing. Net cash used in financing was $232,000 for
the year ended July 31, 2005, an increase of $119,000, or 105%, compared with
net cash used in financing activities of $113,000 for the year ended July 31,
2004. This is entirely due to the paying down of notes payable, shareholder
loans and the amount owed to Wayside Solutions Inc.
Net Cash From Investing. Net cash from investing was $17,000 for the year
ended July 31, 2005 , a decrease of $16,000 or 49% compared with net cash
provided from investing for the year ended July 31, 2004 of $33,000, resulting
from proceeds on sale of property, plant and equipment in the amount of $17,000.
Net cash from investing was the result of selling excess office furnishings no
longer needed due to us relocating to smaller premises.
97
BSD'S MANAGEMENT
Directors and Executive Officers
As of July 31, 2005, BSD's directors and executive officers were:
Name Age Position
-------------- --- ---------------------------------------------------------
Guy Fietz 40 President, Director of BSD Software, Inc., Director of
Triton Global Business Services, Inc. (as of 5/29/02),
Director of Triton Global Communications, Inc. (as of
4/30/98)
Gordon Ellison 53 Chief Financial Officer of BSD Software, Inc., Director
of Triton Global Business Services Inc. (as of 4/26/04)
The following is certain summary information with respect to the directors
and executive officers of BSD:
GUY FIETZ. Mr. Fietz has been in the telecommunications industry for over
five years. Since launching Triton, he has managed operations and lead growth.
Prior to his work in telecommunications, Mr. Fietz operated ventures in the
hospitality market. Prior to establishing Triton, Mr. Fietz was an entrepreneur.
His most recent ventures prior to Triton included establishing a restaurant in
1994-1998, a wholesale sportswear manufacturer, Ganz Enterprises Inc., from
1988-1994, as well as Ganz retail sportswear 1992-1994.
GORDON ELLISON. Mr. Ellison joined Triton in 2003 as the Chief Financial
Officer. Prior to this Mr. Ellison was employed for 18 months as controller for
a private company in the liquid storage industry. From 1994 to 2002, Mr. Ellison
was first the controller and subsequently the CFO for a private distribution
company with operations located in cities through out western Canada. Mr Ellison
is a graduate of the University of Calgary holding a Bachelor of Science degree
and subsequently received his designation as a Chartered Accountant and is a
member of the Institute of Chartered Accountants of Alberta. He has presented
seminars on various tax and management related topics throughout western Canada.
BSD's Director Compensation
BSD directors are not currently compensated for their services as members
of BSD's Board of Directors. BSD does not have a written compensation policy for
its directors at this time.
Election Of BSD's Directors And Officers
BSD's 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. BSD's officers are appointed
annually by the Board of Directors and hold office at the discretion of the
Board of Directors. BSD's bylaws 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/her successor.
Meetings Of BSD's Board Of Directors
During the year ended July 31, 2005, BSD held eight directors' meetings
and each incumbent director attended all meetings of the Board of Directors. The
Board of Directors also acted twice by unanimous written consent.
Committees Of BSD's Board Of Directors
Messrs. Fietz and Ellison are the members of BSD's Audit Committee, which
reviews the internal accounting procedures of BSD and consult with and review
the services provided by BSD's independent registered public accounting firm.
BSD intends to establish an independent audit committee. BSD has no other
committees.
98
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the total
compensation earned by, or paid to, the person's serving as BSD's and its
subsidiaries President, Chief Executive Officer, and Chief Financial Officer
(collectively, the "Named Executive Officers") during 2005, 2004, and 2003.
Summary Compensation Table
Annual Compensation (2) 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 ($) ($) ($) ($) (#) ($) ($)
-------------------------------------- ---- ------- ------- --------- ----------- ---------- -------- -------------
Guy Fietz, President, Chief Executive
Officer, Director; President at Triton
Global Business Services, Inc. and
Triton Global Communications, Inc.
(both subsidiaries of BSD) 2005 168,842 -- -- -- -- --
2004 144,285 116,362 -- -- -- -- --
2003 95,846 -- -- -- -- -- --
Gordon Ellison, Chief Financial
Officer, Director; Chief Financial
Officer at Triton Global Business
Services, Inc. and Triton Global
Communications, Inc. (both
subsidiaries of BSD) 2005 50,080 -- -- -- -- -- --
2004 24,129 -- -- -- -- -- --
Les Hammond, former CFO of BSD 2004 38,890 -- -- -- -- -- --
2003 17,084 -- -- -- -- -- --
(1) All amounts were paid through Triton Global Communications Inc. in
Canadian dollars. The amounts for the current year have been converted at
.80552 and previous years have been converted at a .711845 exchange rate.
Employment Agreements
BSD currently has employment agreements that cover base salary and allow
for an annual review of remuneration and do not have an expiry date. The
agreements also allow for commissions and bonuses to be added to monthly
remuneration as described in BSD's polices and procedures. Agreements may be
terminated with cause by BSD without notice.
Stock Option Plan
BSD does not currently have a stock option plan.
Options And Warrants Granted In BSD's Last Fiscal Year
BSD did not issue stock options to any of the Named Executive Officers for
the year ended July 31, 2005.
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year end Values
None of BSD's Named Executive Officers exercised options during the year
ended July 31, 2005, or held any stock options as of July 31, 2005.
Security Ownership of Certain Beneficial Owners and Management of BSD
The following table sets forth, as of July 31, 2005, certain information
with respect to BSD's equity securities owned of record or beneficially by (i)
each officer and director of BSD and its subsidiaries; and (ii) each person who
owns beneficially more than 5% of each class of BSD's outstanding equity
securities.
99
Name and Address Amount and Nature of
Title of Class Of Beneficial Owner Beneficial Ownership (1) Percent of Class
---------------- -------------------------------------- ------------------------ ----------------
Common Stock Guy Fietz (2) 16,218,992 49.8%
90 Mt. Assiniboine Circle, S.E.
Calgary, Alberta
Canada T2Z 2N8
Common Stock SunTzu Trust 7,328,701 22.5%
ANZ House, P.O. Box 11
Rarotonga, Cook Islands
Common Stock Trans Research International Trust (3) 8,168,620 25.1%
ANZ House, P.O. Box 11
Rarotonga, Cook Islands
Common Stock Merlexis Trust (3) 3,381,633 10.4%
ANZ House, P.O. Box 11
Rarotonga, Cook Islands
Common Stock Blair J. McInnes (4) 8,168,620 25.1%
78 Kinkora Drive
Winnipeg, Manitoba
Canada R3R 2L6
Common Stock David Worrall (5) 3,381,633 10.4%
58 Amalia Crescent
R.R. # 5
Belwood, Ontario
Canada N0B 1J0
------------
(1) Based on 32,560,897 shares issued and outstanding at July 31, 2005.
Applicable percentage of ownership is based on 32,560,897 shares of common
stock outstanding as of July 31, 2005 for each stockholder. Beneficial
ownership is determined in accordance within the rules of the United
States Securities and Exchange Commission and generally includes voting of
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 July
31, 2005 are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of such
persons, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Guy Fietz is the Protector of SunTzu Trust and has voting authority over
the stock held by the Trust. Consequently, the 7,328,701 shares owned by
the Trust are also included in the number of shares owned by Guy Fietz.
(3) Trans Research International Trust holds 1,405,354 shares in beneficial
trust for the Merlexis Trust and consequently Merlexis Trust also includes
the additional 1,405,354 shares.
(4) Blair McInnes is the Protector of Trans Research International Trust and
has voting authority over the stock held by the Trust. Consequently, the
8,168,620 shares owned by the Trust are also included in the number of
shares owned by Blair McInnes.
(5) David Worrall is the Protector of Merlexis Trust and has voting authority
over the stock held by the Trust. Consequently, the 3,381,633 shares owned
by the Trust are also included in the number of shares owned by David
Worrall.
100
Certain Relationships and Related Transactions
Wayside Solutions, Inc., a Corporation affiliated with the Company,
provided financing services to the Company. Amounts due to Wayside Solutions
Inc., bear interest at 10% per annum and are due on demand. A general security
agreement against all current and future assets of the Company has been provided
by TGBSI to Wayside Solutions Inc. as collateral. Accrued interest relating to
these services is included in interest and finance charges, aggregating $61,485
in the year ended July 31, 2005 and $66,766 in the year ended July 31, 2004.
Accrued interest calculated at 10% on the amount owing to Guy Fietz has
been recorded at $35,335 for the year ended July 31, 2005 and an amount of
$34,119 was recorded in the year ended July 31, 2004.
Amounts due to shareholders bear interest at rates varying from 0%-10% per
annum, are unsecured and due on demand. Payments in 2005 totaled $105,158,
including interest of $11,206 (2004 - $12,000, principal only). During the
current year 126,300 shares were issued to pay down amounts owing to
shareholders of $39,153 including interest of 4,353. A similar transaction did
not occur in the prior year.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
BSD's officers and directors, and persons who own more than 10% of a registered
class of BSD's equity securities, to file reports of ownership and changes in
ownership with the United States Securities and Exchange Commission (the "SEC")
and with the NASDAQ Stock Market. Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish BSD with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to BSD, or
written representations received by BSD, BSD believes that during its fiscal
year ended July 31, 2005, all Section 16(a) filing requirements applicable to
the officers, directors and 10% beneficial owners were met, except for shares
disposed of by Guy Fietz on February 23, 2005, which has since been filed on the
appropriate form.
Code of Ethics
BSD has adopted a code of ethics that applies to its senior executive and
financial officers. BSD's Code of Ethics seeks to promote: (1) honest and
ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships, (2) full, fair,
accurate, timely and understandable disclosure of information to the United
States Securities and Exchange Commission, (3) compliance with applicable
governmental laws, rules and regulations, (4) prompt internal reporting of
violations of the Code of Ethics to predesignated persons, and (5)
accountability for adherence to the Code of Ethics. A copy of BSD's Code of
Ethics is incorporated by reference to this information statement/prospectus.
Limitations on Director's Liability and Indemnification
Under Florida law, if directors, officers, employees or agents of a
Florida corporation are sued in their corporate capacities, the corporation must
indemnify them against their defense costs if they are successful on the merits
or otherwise.
Although BSD's bylaws do not contain additional mandatory director
indemnification provisions, Florida law states that Florida corporations have
the power to indemnify any person who was or is a party to any proceeding (other
than an action by, or in the right of, the corporation), by reason of the fact
that he/she is or was a director, officer, employee, or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise against liability incurred in connection with such proceeding,
including any appeal thereof, if he/she acted in good faith and in a manner
he/she reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his/her conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he/she reasonably
believed to be in, or not opposed to, the best interests of the corporation or,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his/her conduct was unlawful.
101
In addition, Florida corporations have power to indemnify any person, who
was or is a party to any proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or was
a director, officer, employee, or agent of the corporation or is or was serving
at the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the Board of Directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he/she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable unless, and only to the extent
that, the court in which such proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such courts shall deem proper.
Insofar as indemnification for liabilities arising under the United States
Securities Act of 1933, as amended (the "1933 Act") may be permitted to
directors, officers, and controlling persons of BSD pursuant to the foregoing
provisions of Florida law, or otherwise, the United States Securities and
Exchange Commission has nevertheless held that such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the corporation of expenses incurred or paid by a director,
officer, or controlling person of the corporation in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person connected with the securities being registered, the
corporation will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
102
DESCRIPTION OF BSD'S CAPITAL STOCK
The following description of BSD's capital stock and certain provisions of
BSD's Articles of Incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of BSD's Articles of Incorporation and bylaws, which
have been filed as exhibits to the Registration Statement on Form S-4, of which
this information statement/prospectus is a part.
As of July 31, 2005, BSD had 32,560,897 shares of common stock
outstanding, and no shares of preferred stock were outstanding.
Common Stock
Holders of BSD 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 BSD's outstanding shares of common stock, subject to
the rights of the holders of preferred stock, can elect all of BSD'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 BSD'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. In the event BSD were to elect to sell additional shares of
common stock following this offering, investors in this offering would have no
right to purchase additional shares. As a result, their percentage equity
interest in us would be diluted.
Preferred Stock
As of July 31, 2005, BSD had 5,000,000 shares of preferred stock
authorized, par value $0.001, none of which were issued or outstanding.
Warrants And Options
As of July 31, 2005, BSD had outstanding warrants to purchase 1,000,000
shares of BSD's common stock, and outstanding options to purchase 150,000 shares
of BSD's common stock. All options and warrants will be converted or cancelled
prior to the effective time of the merger. The number of shares issuable upon
exercise and the exercise prices of the warrants are subject to adjustment in
the event of certain events such as stock dividends, splits and combinations,
capital reorganization and with respect to certain warrants, issuance of shares
of common stock at prices below the then exercise price of the warrants.
Registration Rights
None.
Anti-Takeover Provisions Under bylaws and Laws
The Florida Control Share Act (the "FCSA") generally provides that shares
acquired in a control share acquisition will not possess any voting rights
unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an acquisition,
directly or indirectly, by any person of ownership of, or the power to direct
the exercise of voting power with respect to, issued and outstanding control
shares of a publicly held Florida corporation. "Control shares" are shares
which, except for the FCSA, would have voting power that, when added to all
other shares owned by a person or in respect to which such person may exercise
or direct the exercise of voting power, would entitle such person immediately
after acquisition of such shares, directly or indirectly, alone or as part of a
group, to exercise or direct the exercise of voting power in the election of
directors within any of the following ranges: (i) at least 20% but less than
33.33% of all voting power; (ii) at least 33.33% but less than a majority of all
voting power; or (iii) a majority or more of all voting power.
103
Under the FCSA, a Florida corporation may expressly opt out of the
application of the terms of the FCSA in its bylaws, in which case the shares
acquired in a control share acquisition will automatically possess full voting
rights without the requirement of the approval of a majority of the
corporation's disinterested shareholders. BSD has not opted out of the FCSA in
its bylaws.
Transfer Agent
The transfer agent for BSD is Florida Atlantic Stock Transfer, 7130 Nob
Hill Road, Tamarac, Florida, 33321.
104
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for
NeoMedia by Kirkpatrick & Lockhart Nicholson Graham LLP.
EXPERTS
The audited consolidated financial statements of NeoMedia Technologies,
Inc. and its subsidiaries for the years ended December 31, 2004 and 2003 have
been audited by Stonefield Josephson, Inc., independent registered public
accounting firm, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report. Reference is made to said report, which includes an explanatory
paragraph with respect to the uncertainty regarding NeoMedia's ability to
continue as a going concern, as discussed in Note 1 to the consolidated
financial statements.
The audited consolidated financial statements of BSD Software, Inc. and
its subsidiaries for the year ended July 31, 2005 have been audited by
Stonefield Josephson, Inc., independent registered public accounting firm, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes an explanatory paragraph with
respect to the uncertainty regarding BSD's ability to continue as a going
concern, as discussed in Note 1 to the consolidated financial statements.
The audited consolidated financial statements of BSD Software, Inc. and
its subsidiaries for the year ended July 31, 2004 have been audited by KPMG LLP,
chartered accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said report. Reference is made to said report, which includes an
explanatory paragraph with respect to the uncertainty regarding BSD's ability to
continue as a going concern.
The audited consolidated financial statements of CSI International, Inc.
for the years ended August 31, 2003 and 2002 have been audited by Eisner LLP,
Independent Registered Public Accounting Firm, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The audited consolidated financial statements of Mobot, Inc. (a
development stage company) for the year ended December 31, 2004 and for the
period from September 8, 2003 (date of inception) to Decebmer 31, 2003 have been
audited by Stonefield Josephson, Inc., independent registered public accounting
firm, as indicated in their report with respect thereto, and are included herein
in reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes an explanatory paragraph with
respect to the uncertainty regarding NeoMedia's ability to continue as a going
concern, as discussed in Note 1 to the consolidated financial statements.
105
WHERE YOU CAN FIND MORE INFORMATION
NeoMedia and BSD file annual, quarterly and current reports, proxy
statements, and other documents with the United States Securities and Exchange
Commission (the "SEC"). You may read and copy any document NeoMedia or BSD files
at the SEC's public reference room at Judiciary Plaza Building, 100 F Street,
N.E., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the operation of the Public Reference Room. The SEC maintains a
website at www.sec.gov where certain information regarding issuers, including
NeoMedia and BSD, may be found. NeoMedia's website is www.neom.com. BSD's
website is www.tritonglobal.ca.
This information statement/prospectus is part of a registration statement
filed with the SEC on Form S-4. The registration statement contains more
information than this information statement/prospectus regarding NeoMedia and
BSD and their common stock, including certain exhibits and schedules. You can
get a copy of the registration statement from the SEC at the address listed
above or from its website, www.sec.gov.
Statement made in this information statement/prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to this information statement/prospectus, reference is made to
such exhibit for a more complete description of matter involved, and each such
statement is qualified in its entirety by such reference. Copies of the
information statement/prospectus and exhibits may be inspected, without charge,
at the offices of the Commission, or obtained at prescribed rates from the
Public Reference Section of the Commission at the address set forth above.
No person has been authorized to give any information or make any
representation not contained or incorporated by reference in this information
statement/prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This
information statement/prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than those shares of
NeoMedia common stock to which it relates, or an offer to sell or a solicitation
of an offer to buy any securities in any jurisdiction where, to any persons to
whom it is unlawful to make such an offer or solicitation. Neither the delivery
of this information statement/prospectus nor the sale of any security hereunder
shall imply that the information contained herein is correct at any time
subsequent to the date hereof.
106
INDEX TO FINANCIAL STATEMENTS
Financial Statement Page
NeoMedia Technologies, Inc. Consolidated Financial Statements For The
Years Ended December 31, 2004 And 2003 F-2
NeoMedia Technologies, Inc. Consolidated Financial Statements For The
Three- and Six-Month Periods Ended June 30, 2005 And 2004 F-41
BSD Software, Inc. Consolidated Financial Statements For The Years
Ended July 31, 2005 And 2004 F-53
Pro Forma Financial Information F-68
Financial Statements Of Acquired Business, CSI International, Inc.,
For The Years Ended August 31, 2003 And 2002 F-74
Financial Statements Of Probable Material Acquisition, Mobot, Inc.,
For The Years Ended December 31, 2004 and 2003 F-84
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors
NeoMedia Technologies, Inc.
We have audited the accompanying consolidated balance sheet of NeoMedia
Technologies, Inc. as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
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
and working capital deficit 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 11, 2005
F-2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
2004
------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,634
Trade accounts receivable, net of allowance for doubtful
accounts of $46 282
Inventories, net of allowance for obsolete & slow-moving
inventory of $0 115
Prepaid expenses and other current assets 386
------------
Total current assets
3,417
Property and equipment, net 110
Capitalized patents, net 2,174
Micro paint repair chemical formulations and proprietary
process, net 1,630
Goodwill 1,099
Other Intangible assets, net 221
Investment in iPoint-media, Ltd. 1,000
Cash surrender value of life insurance policy 728
Other long-term assets 27
------------
Total assets $ 10,406
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,911
Amounts payable under settlement agreements 103
Liabilities of discontinued business unit 676
Sales taxes payable 108
Accrued expenses 1,566
Deferred revenues and other 514
Notes payable 1,136
------------
Total current liabilities 6,014
------------
Shareholders' equity:
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, 436,746,758 shares issued and
432,525,053 outstanding 4,325
Additional paid-in capital 84,728
Deferred stock-based compensation (445)
Accumulated deficit (83,377)
Accumulated other comprehensive loss - foreign
currency translation adjustment (60)
Treasury stock, at cost, 201,230 shares of common stock (779)
------------
Total shareholders' equity 4,392
------------
Total liabilities and shareholders' equity $ 10,406
============
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
------------------------------
2004 2003
------------- -------------
NET SALES:
License fees $ 343 $ 414
Resale of software and technology equipment and service fees 630 1,986
Micro paint repair products and services 727 --
------------- -------------
Total net sales 1,700 2,400
------------- -------------
COST OF SALES:
License fees 324 300
Resale of software and technology equipment and service fees 604 1,829
Micro paint repair products and services 541 --
------------- -------------
Total cost of sales 1,469 2,129
------------- -------------
GROSS PROFIT 231 271
Sales and marketing expenses 2,046 523
General and administrative expenses 2,215 4,270
Research and development costs 651 332
------------- -------------
Loss from operations (4,681) (4,854)
Gain (loss) on extinguishment of debt 140 (152)
Amortization of debt discount (2,500) --
Interest expense, net (189) (376)
------------- -------------
NET LOSS (7,230) (5,382)
Other comprehensive loss:
Foreign currency translation adjustment (60) --
------------- -------------
COMPREHENSIVE LOSS $ (7,290) $ (5,382)
============= =============
LOSS PER SHARE--BASIC AND DILUTED $ (0.02) $ (0.04)
============= =============
Weighted average number of common shares--basic and diluted 329,362,127 125,029,723
============= =============
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
December 31,
------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($7,230) ($5,382)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable 2,500 --
Depreciation and amortization 674 470
Inventory reserve -- 13
Bad debt 24 191
Expense (decrease of fair value) for repriced options 104 773
Fair value of expense portion of stock-based
compensation granted for professional services 626 1,000
Interest expense allocated to debt 3 56
Discount related to common stock issuance -- 50
Loss on payment of accounts payable in stock -- 152
(Increase)/decrease in value of life insurance policies (1) (35)
Changes in operating assets and liabilities
Trade accounts receivable, net (82) 212
Inventory (58) (3)
Other current assets 68 273
Accounts payable (421) (1,064)
Amounts payable under settlement agreements (669) 772
Liabilities of discontinued business unit 19 (838)
Sales taxes payable (29) (189)
Accrued expenses (177) 936
Deferred revenue other current liabilities (1) (366)
------- -------
Net cash used in operating activities (4,650) (2,979)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Amounts issued under notes receivable -- (209)
Investment in iPoint-media, Ltd. (1,000) --
Capitalization of software development and purchased intangible assets (141) (28)
Acquisition of property and equipment (111) (44)
------- -------
Net cash used in investing activities (1,252) (281)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $620 in
2004 and $226 in 2003 7,906 250
Net proceeds from exercise of stock options and warrants 2,687 406
Borrowings under notes payable and long-term debt 9,085 3,350
Repayments on notes payable and long-term debt (8,753) (755)
Cash paid to acquire CSI International, Inc. (net of cash acquired) (2,390) --
------- -------
Net cash provided by financing activities 8,535 3,251
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (60) --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,573 (9)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 61 70
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,634 $ 61
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the period $ 111 $ 6
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock 190 1,509
Reduction of note payable paid in stock 32 --
Reduction of long-term debt and accrued interest paid in stock -- 904
Fair value of stock issued for services and deferred to future periods 653 282
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) 695 --
Change in net assets resulting from acquisition of CSI (net of cash acquired) 3,090 --
Value of stock granted to acquire Secure Source Technologies, Inc. -- 500
Gain (loss) on extinguishment of debt 140 (152)
Direct costs associated with Standby Equity Distribution Agreement and Equity
Line of Credit 2,216 6,772
Fair value of warrants issued as a direct incremental cost of financing -- 93
Discount recognized on the issuance of stock with notes payable -- 56
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Common Stock
--------------------------------- Accumulated
Additional Deferred Other
Paid-in Stock Comprehensive Accumulated
Shares Amount Capital Compensation Loss Deficit
----------- ------ ---------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 2002 30,746,968 $307 $65,442 (231) $0 ($70,765)
Shares issued to Cornell
Capital Partners under
Equity line of Credit 98,933,244 990 1,803 -- -- --
Issuance of Common Stock
through private
Placement, Net of $6,818
of issuance costs 25,000,000 250 50 -- -- --
Exercise of employee
options 15,599,175 156 0 -- -- --
Exercise of Warrants 28,904,900 289 (39) -- -- --
Expense associated with
option & warrant repricing -- -- 774 -- -- --
Fair value stock,
options, & warrants
issued for professional
services rendered 4,030,424 40 385 -- -- --
Stock issued to pay past
due liabilities 40,776,546 408 2,505 -- -- --
Issuance of warrants and
stock with debt -- -- 19 -- -- --
Expense recognized for
options issued with
exercise price below
market price -- -- 626 -- -- --
Change in Deferred Stock
Compensation -- -- -- (51) -- --
Net Loss -- -- -- -- -- (5,382)
----------- ------ ---------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 2003 243,991,257 $2,440 $71,565 ($282) $0 ($76,147)
Shares issued to Cornell
Capital Partners under
ELOC and SEDA 112,743,417 1,127 6,864 -- -- --
Exercise of stock options 12,860,616 129 43 -- -- --
Exercise of stock warrants 51,510,000 515 2,000 -- -- --
Fair value stock,
options, & warrants
issued for professional
services rendered 2,013,375 20 785 -- -- --
Stock issued to pay past
due liabilities 2,406,388 24 242 -- -- --
Stock issued in
connection with
acquisition of CSI
International 7,000,000 70 625 -- -- --
Expense associated with
option repricing -- -- 104 -- -- --
Fair value of warrants
issued with debt -- -- 2,500 -- -- --
Change in Deferred Stock
Compensation -- -- -- (163) -- --
Comprehensive loss -
foreign currency
translation adjustment -- -- -- -- (60) --
Net Loss -- -- -- -- -- (7,230)
----------- ------ ---------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 2004 432,525,053 $4,325 $84,728 (445) ($60) ($83,377)
=========== ====== ========== ============ ============= ===========
Treasury Stock
-----------------
Total
Stockholders'
Shares Amount Equity
------- ------- -------------
BALANCE, DECEMBER 31, 2002 201,230 ($779) ($6,026)
Shares issued to Cornell
Capital Partners under
Equity line of Credit -- -- 2,793
Issuance of Common Stock
through private
Placement, Net of $6,818
of issuance costs -- -- 300
Exercise of employee
options -- -- 156
Exercise of Warrants -- -- 250
Expense associated with
option & warrant repricing -- -- 774
Fair value stock,
options, & warrants
issued for professional
services rendered -- -- 425
Stock issued to pay past
due liabilities -- -- 2,913
Issuance of warrants and
stock with debt -- -- 19
Expense recognized for
options issued with
exercise price below
market price -- -- 626
Change in Deferred Stock
Compensation -- -- (51)
Net Loss -- -- (5,382)
------- ------- -------------
BALANCE, DECEMBER 31, 2003 201,230 ($779) ($3,203)
Shares issued to Cornell
Capital Partners under
ELOC and SEDA -- -- 7,991
Exercise of stock options -- -- 172
Exercise of stock warrants -- -- 2,515
Fair value stock,
options, & warrants
issued for professional
services rendered -- -- 805
Stock issued to pay past
due liabilities -- -- 266
Stock issued in
connection with
acquisition of CSI
International -- -- 695
Expense associated with
option repricing -- -- 104
Fair value of warrants
issued with debt -- -- 2,500
Change in Deferred Stock
Compensation -- -- (163)
Comprehensive loss -
foreign currency
translation adjustment -- -- (60)
Net Loss -- -- (7,230)
------- ------- -------------
BALANCE, DECEMBER 31, 2004 201,230 ($779) $4,392
======= ======= =============
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
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, NeoMedia
Technologies UK Limited incorporated in the United Kingdom, NeoMedia Micro Paint
Repair, Inc. a Nevada corporation, and NeoMedia Telecom Services, Inc. a Nevada
corporation, and are collectively referred to as "NeoMedia" or the "Company".
The consolidated financial statements of NeoMedia are presented on a
consolidated basis for all years 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 $7,230,000 and $5,382,000 for
the years ended December 31, 2004 and 2003, respectively, and has an accumulated
deficit of $83,377,000 as of December 31, 2004. In addition, the Company had
working capital deficit of $2,597,000 as of December 31, 2004.
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 profitability from
the Company's PaperClick(R) business, intellectual property portfolio and Micro
Paint Repair business.
F-7
Nature of Business Operations
During 2004, NeoMedia was structured as three distinct business units:
NeoMedia Internet Software Service (NISS), NeoMedia Consulting and Integration
Services (NCIS), and NeoMedia Micro Paint Repair (NMPR).
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 NeoMedia's physical
world to Internet core technology, including the linking "switch" and
application platforms. NISS also manages NeoMedia'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 NeoMedia 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.
NMPR (Micro Paint Repair offerings) is the business unit
encompassing the recently-acquired CSI International chemical line. NMPR
is attempting to commercialize its unique micro-paint repair solution. The
Company completed its acquisition of CSI on February 6, 2004. As a result,
NeoMedia's results for the year ended December 31, 2003 do not include
operations from this business unit.
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 sheet and consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents. The Company maintains
bank accounts with balances which, at times, may exceed federally insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant risk on bank deposit accounts. As
of December 31, 2004, the Company had cash balances of $2,692,000 which were not
insured by the FDIC.
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts receivable,
prepaid expenses, other current assets, cash surrender value of life insurance
policy, 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.
It is not practicable to estimate the fair value of the Company's 17%
investment in the common stock of i-Point Media Ltd., which distributes video,
audio and data over IP networks, because of the lack of quoted market prices and
the inability to estimate fair value without incurring excessive costs. However,
management believes that the carrying amount (on the cost method) of $1,000,000
at December 31, 2004 was not impaired.
F-8
Pertinent financial information reported by iPoint Media Ltd. is as follows:
(in thousands of
US dollars)
-----------------------
2004 2003
--------- ---------
Total assets $ 1,119 $ 193
Stockholders' deficit (341) (1,451)
Revenues 514 618
Net loss (695) (544)
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, 2004, the allowance for doubtful accounts was $46,000.
Inventories
Inventories are stated at the lower of cost or market, and at December 31,
2003 was comprised of purchased computer technology resale products and micro
paint repair products. Cost is determined using the first-in, first-out method.
At December 31, 2003, the reserve for obsolescence was $13,000. There was no
reserve as of December 31, 2004.
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.
Micro Paint Chemical Formulations and Proprietary Processes
Micro Paint Repair chemical formulations and proprietary processes
consists of the estimated fair value of the formulations acquired from CSI
International, Inc. that are used in NeoMedia's Micro Paint Repair business
unit. The estimated fair value was determined using an independent appraisal of
the assets and liabilities acquired in the transaction. This value is being
amortized using the straight-line method over its estimated useful life of 10
years.
F-9
Goodwill
Goodwill consists of the excess fair value of purchase price paid for CSI
International, Inc. over the identifiable net assets and liabilities acquired.
Goodwill was determined using an independent appraisal of the assets and
liabilities acquired in the transaction. Goodwill was not assigned a life and
will be tested for impairment as defined by Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
Other Intangible Assets
Other intangible assets consists of customer base/contracts, copyrighted
material and acquired software products, which are amortized over the expected
life of the product, generally three to five years.
Investments
Investments consist of NeoMedia's investment in iPoint-media. On September
7, 2004, NeoMedia acquired 17% ownership of iPoint-media, consisting of 69,196
shares of common stock, for $1 million cash. NeoMedia has recorded the
investment at cost as of December 31, 2004.
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
During 2004 and 2003, NeoMedia derived revenues from three primary
sources: (1) license revenues, (2) resale of software and technology equipment
and service fee revenues, and (3) Micro Paint Repair sales.
(1) 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, and
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. License revenue is recognized if persuasive evidence of an
agreement exists, delivery has occurred, pricing is fixed and determinable, and
collectibility is probable.
F-10
(2) 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. 104, "Revenue Recognition in
Financial Statements," as amended (SAB 104). 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.
(3) NeoMedia's Micro Paint Repair business unit derives revenue from: (a)
the right to use NeoMedia's proprietary Micro Paint Repair system, (b) paint
products and services, (c) training, and (d) technical support.
(a) Paint system revenue is a one-time fee paid by NeoMedia's customer
to use NeoMedia's proprietary paint system, and is deferred and
recognized over the expected life of the relationship, which was
estimated at one year during 2004.
(b) Paint product and service revenue is recognized when products are
shipped or when services are performed.
(c) Training revenue is recognized upon completion of a
company-certified training course. (d) Technical support revenue is
recognized on a monthly basis as support services are provided.
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.
F-11
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.
Years Ended
December 31,
-----------------------
2004 2003
--------- ---------
Net Loss, as reported ($ 7,230) ($ 5,382)
Compensation recognized under APB 25 -- 623
Compensation recognized under SFAS 123 (1,445) (962)
-----------------------
Pro-forma net loss ($ 8,675) ($ 5,721)
=======================
Net Loss per share:
Basic and diluted - as reported ($ 0.02) ($ 0.04)
=======================
Basic and diluted - pro-forma ($ 0.03) ($ 0.05)
=======================
For grants in 2004 and 2003, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5%; (iii) expected
volatility ranging from 438% to 451% for 2004 and from 253% to 457% for 2003,
and (iv) an expected life of the shorter of 3 years or the stated life of the
option for options granted in 2004 and 2003. 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, 2004.
Translation of Foreign Currency
The functional currency of the Company's Micro Paint Repair business is
the Canadian dollar. Financial statements from the Micro Paint Repair business
unit are translated to United States dollars at the exchange rates in effect at
the balance sheet date for assets and liabilities and at average rates for the
period for revenues and expenses. Resulting exchange differences are accumulated
as a component of accumulated other comprehensive loss.
F-12
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, 2004 December 31, 2003
----------------- -----------------
Outstanding Stock Options 52,804,121 33,512,507
Outstanding Warrants 18,825,000 26,195,000
Reclassifications
Certain reclassifications have been made to the 2002 consolidated
financial statements to conform to the 2003 presentation.
F-13
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.
In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until after further deliberations by the FASB.
The disclosure requirements are effective only for annual periods ending after
June 15, 2004. The Company has evaluated the impact of the adoption of the
disclosure requirements of EITF 03-1 and does not believe the impact will be
significant to the Company's overall results of operations or financial
position. Once the FASB reaches a final decision on the measurement and
recognition provisions, the company will evaluate the impact of the adoption of
EITF 03-1.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. . The Company has evaluated the impact
of the adoption of SFAS 151, and does not believe the impact will be significant
to the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152). The amendments made by Statement 152 amend FASB Statement No. 66,
Accounting for Sales of Real Estate, to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005 with earlier application encouraged. The Company
has evaluated the impact of the adoption of SFAS 152, and does not believe the
impact will be significant to the Company's overall results of operations or
financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
F-14
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently evaluating the impact of the
adoption of this Statement.
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.
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.
F-15
During the years ended December 31, 2004 and 2003, the Company sold
112,743,417 and 98,933,244 shares, respectively, of its common stock to Cornell
under the Standby Equity Distribution Agreement and Equity Line of Credit. The
following table summarizes funding received and from, and shares sold to,
Cornell during the years ended December 31, 2004 and 2003:
Year Ended December 31,
----------------------------------
2004 2003
-------------- --------------
Number of shares sold to Cornell 112,743,417 98,933,244
Gross Proceeds from sale of shares to Cornell 10,123,000 9,565,000
Less: discounts and fees* (1,967,000) (6,772,000)
-------------- --------------
Net Proceeds from sale of shares to Cornell $ 8,156,000 $ 2,793,000
-------------- --------------
* - In accordance with terms of Standby Equity Distribution Agreement, stock is
valued at 98% of the lowest closing bid price during the week it is sold
5. PROPERTY AND EQUIPMENT
As of December 31, 2004, property and equipment consisted of the
following:
(dollars
in
thousands)
----------
2004
----------
Furniture and fixtures $ 273
Equipment 149
----------
Total 422
Less: accumulated depreciation
Furniture and fixtures (262)
Equipment (50)
----------
Total property and equipment, net $ 110
==========
Depreciation expense was $66,000 and $83,000 for the years ended December
31, 2004 and 2003, respectively.
F-16
6. INTANGIBLE ASSETS
As of December 31, 2004, intangible assets consisted of the following:
(dollars
in
thousands)
2004
----------
Patents and related costs $ 3,645
Micro paint repair chemical formulations and proprietary process 1,800
Goodwill 1,099
Other intangible assets 788
----------
Total 7,332
Less: accumulated amortization
Patents and related costs (1,471)
Micro paint repair chemical formulations and proprietary process (170)
Other intangibles (567)
----------
Intangible assets, net $ 5,124
==========
Capitalized patent activity for the year ended December 31, 2004 was as
follows:
(dollars
in
thousands)
----------
2004
----------
Beginning balance $ 2,415
Additions 80
Amortization (321)
----------
Ending balance $ 2,174
==========
Amortization expense of capitalized patents was $321,000 and $273,000 for
the years ended December 31, 2004 and 2003, respectively. The weighted-average
amortization period of capitalized patents as of December 31, 2004 was 7.6
years.
Capitalized Micro Paint Repair chemical formulations and propriety process
activity for the year ended December 31, 2004 was as follows:
(dollars
in
thousands)
----------
2004
----------
Beginning balance $ --
Micro paint repair chemical formulations and propriety
process obtained through acquisition of CSI International 1,800
Amortization (170)
----------
Ending balance $ 1,630
==========
Amortization expense of Micro Paint Repair chemical formulations and
propriety process was $170,000 and $0 for the years ended December 31, 2004 and
2003, respectively. The weighted-average amortization period of capitalized
repair chemical formulations and propriety process as of December 31, 2004 was
10 years.
F-17
Capitalized goodwill activity for the year ended December 31, 2004 was as
follows:
(dollars
in
thousands)
----------
2004
----------
Beginning balance $ --
Goodwill obtained through acquisition of CSI International 1,099
----------
Ending balance $ 1,099
==========
There was no amortization expense of goodwill for the years ended December
31, 2004 and 2003, respectively.
Other intangible assets activity for the year ended December 31, 2004 was
as follows:
(dollars
in
thousands)
----------
2004
----------
Beginning balance $ 118
Additions 220
Amortization (117)
----------
Ending balance $ 221
==========
Amortization expense of capitalized and purchased software costs and other
intangible assets was $117,000 and $114,000 for the years ended December 31,
2004 and 2003, respectively. The weighted-average amortization period of
capitalized and purchased software costs as of December 31, 2004 was 4.7 years.
As of December 31, 2004, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:
(In Thousands)
--------------
2005 598
2006 525
2007 498
2008 487
2009 437
F-18
7. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE
Allowance for doubtful accounts activity for the year ended December 31,
2004 was as follows:
(dollars
in
thousands)
----------
2004
----------
Beginning balance $ 49
Bad debt 24
Write-off of uncollectible accounts (27)
----------
Ending balance $ 46
==========
Inventory reserve for the year ended December 31, 2004 was $0.
8. FINANCING AGREEMENTS
As of December 31, 2004, 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. 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, 2004 the amount payable under this financing
arrangement was approximately $17,000.
9. NOTES PAYABLE
On March 13, 2003, the Company borrowed from Cornell the gross amount of
$262,000 before discounts and fees. The note was repaid in full during 2003.
On May 27, 2003, the Company borrowed from Cornell the gross amount of
$245,000 before discounts and fees. The note was repaid in full during 2003.
On June 24, 2003, the Company borrowed from Cornell the gross amount of
$400,000 before discounts and fees. The note was repaid in full during 2003.
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 was paid in full
during April 2004.
On July 21, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before discounts and fees. The note was repaid in full during 2003.
On August 1, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before discounts and fees. The note was repaid in full during 2003.
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 discounts and fees. The note was repaid in full during 2003.
F-19
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 discounts
and fees. The note was repaid in full during 2003.
On September 29, 2003, the Company borrowed from Cornell the gross amount
of $1,500,000 before discounts and fees. The note was repaid in full during
2003.
On January 20, 2004, the Company borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was
used to fund the acquisition of CSI International, Inc. during February 2004.
Cornell withheld a $315,000 retention fee related to the issuance of stock to
pay off the debt in the future. The Company paid this note in full during 2004.
The Company also granted to Cornell 40,000,000 warrants to purchase shares
of NeoMedia stock with an exercise price of $0.05 per share during January 2004.
In April 2004, the Company filed a Form SB-2 to register 40 million shares
underlying warrants granted to Cornell (and subsequently transferred by Cornell
to Stone Street Asset Management LLC) in connection with a promissory note
issued by the Company to. In May 2004, the Form SB-2 was declared effective by
the Securities and Exchange Commission. The fair value of the warrants using the
Black-Scholes pricing model was $5,000,000. In accordance with APB 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
the Company has compared the relative fair values of the warrants and the face
value of the notes, and has allocated a value of $2.5 million to the warrants.
Of the $2.5 million, $2 million was allocated to the $4 million note issued in
January 2004 and $0.5 million against the $1 million note in April 2004. The
$2.5 million was recorded as a discount against the carrying value of the note.
The $2.5 million that was allocated to the notes is considered a discount on the
promissory notes, and therefore was amortized over the life of the notes using
the effective interest method, in accordance with Staff Accounting Bulletin No.
77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141, "Business Combinations".
Accordingly, the Company recorded an amortization of discount of $2,500,000
related to the warrants during the year ended December31, 2004. Stone Street
Asset Management LLC exercised the warrants during November 2004, resulting in
net funds to NeoMedia of $2 million.
On April 8, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. The Company
paid this note in full during 2004.
On July 2, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. The Company
paid this note in full during 2004.
On August 6, 2004, the Company borrowed from Cornell the gross amount of
$2,000,000 before discounts and fees. Cornell withheld a retention fee of
$153,000 related to the issuance of stock to pay off the debt in the future. The
Company paid this note in full during 2004.
On October 18, 2004, the Company borrowed from Cornell the gross amount of
$1,085,000 before discounts and fees. Cornell withheld a retention fee of
$85,000 related to the issuance of stock to pay off the debt in the future. As
of December 31, 2004, the Company had not made any payments against this note.
The Company paid this note in full during the first quarter of 2005. The Company
invested the proceeds from the note in iPoint-media pursuant to the investment
agreement between NeoMedia and I-Point Media Ltd.
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 $46,000 in its December
31, 2004 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 supplier could materially adversely
affect the Company's operations. 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 37% and
83% of NeoMedia's revenue for the years ended December 31, 2004 and 2003,
respectively.
F-20
11. ACQUISITIONS
Acquisition of CSI International, Inc. ("CSI")
On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia paid a purchase price
including an issuance of 7,000,000 shares of its common stock, and cash of
$2,500,000 in exchange for all outstanding shares of CSI. The shares were valued
at $0.10 per share, which was the market price of NeoMedia's common stock on the
Over-the-counter Bulletin Board exchange around the acquisition date. NeoMedia
also incurred direct costs of the business combination totaling $5,000, which
are included in the purchase price for purposes of allocating assets acquired
and liabilities assumed.
The acquisition was accounted for under the purchase method. The actual
purchase price was based on cash paid, the fair value of NeoMedia stock around
the date of the acquisition, and direct costs associated with the combination.
The purchase price was allocated as follows:
(Dollars
in
Thousands)
----------
Value of 7 Million Shares Issued ($0.10 per share) $ 700
Cash paid 2,500
Direct costs of acquisition 5
----------
Total Fair Value of Purchase Price $ 3,205
----------
Assets Purchased:
Cash $ 115
Accounts receivable, net 67
Inventory 54
Other current assets 12
Investments 25
Property, plant & equipment 8
Micro paint repair chemical formulations and proprietary process 1,800
Goodwill 1,099
Customer base / contracts 110
Copyrighted materials 50
----------
Total Assets Purchased 3,340
----------
Less Liabilities Assumed:
Accounts payable (23)
Accrued liabilities (12)
Notes payable (100)
----------
Total Liabilities Assumed (135)
----------
F-21
The combination is being accounted for as a purchase business combination
as defined by Statement of Financial Accounting Standards No. 141, Business
Combinations. The final allocation of the excess purchase price over net
tangible assets was determined based on independent appraisal of the assets
purchased. The values assigned to intangible assets, aside from goodwill, are
subject to amortization. The intangible assets were assigned the following lives
for amortization purposes:
(life in
Intangible asset years)
--------
Micro paint repair chemical formulations and proprietary process 10
Customer base / contracts 5
Copyrighted materials 5
Goodwill was not assigned a life and will be tested for impairment as
defined by Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.
The accompanying consolidated statement of operations presented herein
contains the results of operations for CSI for the period February 6, 2004,
through December 31, 2004
Pro-forma results of operations as if NeoMedia and CSI had combined as of
January 1, 2004 and 2003 are as follows:
Year Ended December 31, 2004 Year Ended December 31, 2003
----------------------------------------------- -----------------------------------------------------
(A) (A)
Pro- Pro-
forma Pro- forma Pro-
CSI Adjust- forma CSI Adjust- forma
NeoMedia Int'l ments Combined NeoMedia Int'l ments Combined
--------- -------- ------- ----------- ----------- ----------- --------- -----------
Total net sales $1,700 791 (727)(A) $1,764 $2,400 654 -- (A) $3,054
Loss from operations ($4,681) (1,746) 1,720 (A) ($4,707) ($4,854) 34 -- (A) ($4,820)
Net loss ($7,230) (2,639) 2,613 (A) ($7,256) ($5,382) 34 -- (A) ($5,348)
Net loss per share-basic
and diluted ($0.02) ($0.02) ($0.04) (A) ($0.04)
Weighted average number
of common shares -
basic and diluted 329,362,127 690,411 (B) 330,052,538 125,029,723 7,000,000 (B) 132,029,723
Pro-forma Adjustments
(A) - Adjustments are to reflect operations of CSI from February 6, 2004 through
December 31, 2004, which are included in NeoMedia's operations for year
ended December 31, 2004.
(B) - To adjust weighted average shares outstanding as if the 7,000,000 shares
issued as part of the purchase price of CSI on February 6, 2004, had been
issued on January 1, 2004 and 2003
F-22
BSD Software, Inc. ("BSD)
On December 21, 2004, NeoMedia Technologies, Inc. ("NeoMedia")
(OTCBB:NEOM) and BSD Software Inc. ("BSD") (OTCBB: BSDS) signed a definitive
Agreement and Plan of Merger, the form of which is attached as Exhibit 16.1
hereto.
BSD owns 90% of the outstanding shares of Triton Global Business Services,
Inc., a provider of live and automated operator calling services and e-business
support, including billing, clearinghouse and information management services,
to companies in the telecommunications industry.
BSD's shareholders will receive, for each share of BSD stock owned,
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger.
The agreement has been approved by holders of approximately 63% of BSD's
outstanding shares and its Board. NeoMedia and BSD intend to file a joint
registration/information statement with the SEC for review.
Upon effectiveness of the registration, the exchange rate will be
determined, a closing meeting will be held, and the acquisition and merger will
be completed. Closing is subject to the terms and conditions outlined in the
merger agreement, as well as regulatory review of the merger and
registration/information statement by the United States Securities and Exchange
Commission.
Prior to closing, the merger can be terminated by BSD if more than 5% of
BSD's outstanding shares dissent to the merger. The merger can be terminated
prior to closing by NeoMedia if, at the time of closing, BSD has: (i) less than
$850,000 in assets, (ii) more than $5,000,000 in liabilities, or (iii) more than
35,000,000 shares of common stock outstanding. Either party can terminate the
merger if the merger has not closed by July 31, 2005, which date may be extended
by mutual consent of NeoMedia and BSD.
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 final 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 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, 2004.
F-23
13. 2000 EXECUTIVE INCENTIVE
During the years ended December 31, 2004 and 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 $160,000 and $692,000 of the liability
through the issuance of approximately 1.5 and 15.4 million shares during the
years ended December 31, 2004 and 2003, respectively. The excess of the fair
value of the common stock issued over the outstanding accrued bonuses was
included in the gain (loss) on extinguishment of debt.
14. COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and
losses affecting shareholders' investment that, under accounting principles
generally accepted in the United States, are excluded from net income. Changes
in the components of other comprehensive loss are as follows:
2004
----------
Beginning balance $ --
Additions:
Foreign currency translation adjustment (60)
----------
Ending Balance $ (60)
==========
F-24
15. INCOME TAXES
For the years ended December 31, 2004 and 2003, the components of income
tax expense were as follows:
2004 2003
---- ----
(In thousands)
Current $ -- $ --
Deferred -- --
Foreign -- --
---- ----
Income tax expense/(benefit) $ -- $ --
==== ====
As of December 31, 2004 and 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:
2004 2003
-------- --------
Accrued employee benefits $ -- $8
Provisions for doubtful accounts 18 20
Capitalized software development costs and fixed assets 799 740
Net operating loss carryforwards (NOL) 30,319 27,014
Accruals 501 578
Write-off of long-lived assets 2070 2,070
State taxes 156 107
Alternative minimum tax credit carryforward 45 45
-------- --------
Total deferred tax assets 33,908 30,582
Valuation Allowance (33,908) (30,582)
-------- --------
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 allowance has been established
against them.
For the years ended December 31, 2004 and 2003, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:
2004 2003
------- -------
Benefit at federal statutory rate $(2,458) $(1,830)
State income taxes, net of federal (286) (213)
Permanent and other, net (582) 142
Change in valuation allowance 3,326 1,901
------- -------
Income tax expense/(benefit) $ -- $ --
======= =======
As of December 31, 2004, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $76 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-25
16. 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. The full principle of $35,000 plus interest
was paid in full during 2004.
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 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. The Company's stock price at the time of the sale was $0.012. 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 repaid the balance on William Fritz's note during
2004. The new note also included 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 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.
F-26
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.
17. 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, 2004 and 2003, NeoMedia's rent expense was $229,000 and
$265,000, 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, 2004:
Payments
(In thousands)
--------------
2005 89
2006 --
Thereafter --
--------------
Total $ 89
==============
As of December 31, 2004, none of the Company's employees were under
contract. Additionally, as of December 31, 2004, the Company was not a party to
any long-term consulting agreements that are required 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.
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, claiming 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, thereby infringing NeoMedia's patents. The
complaint stated that on information and belief, AirClic, Scanbuy and LScan had
actual and constructive notice of the existence of the patents-in-suit, 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. On April 15,
2004, the court dismissed the suit against AirClic and Scanbuy for lack of
personal jurisdiction.
On April 19, 2004, AirClic filed a declaratory judgment action against
NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and
counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June
10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in
Pennsylvania for patent infringement. AirClic answered and counterclaimed on May
13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004.
NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and
counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims
was filed on August 3, 2004.
F-27
NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004.
On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004,
NeoMedia re-filed its suit against Scanbuy in the Southern District of New York
alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004.
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,
by Baniak Pine & Gannon, NeoMedia'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. The 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. Virgin answered NeoMedia's complaint on March 1,
2004.
Other Litigation
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia 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, NeoMedia 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. NeoMedia had a remaining liability of
approximately $33,000 relating to this matter as of December 31, 2004, which was
included in accrued expenses.
On December 7, 2004, Reitler Brown & Rosenblatt LLC, filed a complaint
against NeoMedia seeking payment of approximately $422,000 in past due legal
services and accrued interest. NeoMedia had a remaining liability of
approximately $422,000 relating to this matter as of December 31, 2004, which
was included in accounts payable and accrued expenses.
18. 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.
F-28
19. 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. 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.
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.
F-29
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, 2004 and
2003:
2004 2003
---------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- -------------- --------------
(In thousands) (In thousands)
Outstanding at beginning of year 33,512 $ 0.23 10,801 $ 1.11
Granted 32,752 $ 0.09 39,018 $ 0.01
Exercised (12,860) $ 0.23 (15,605) $ 0.01
Forfeited (600) $ 0.09 (702) $ 1.26
-------------- -------------- -------------- --------------
Outstanding at end of year 52,804 $ 0.06 33,512 $ 0.23*
============== ============== ============== ==============
Options exercisable at year-end 34,680 33,512
Weighted-average fair value of
options granted during the year $ 0.10 $ 0.10
Available for grant at the end
of the year 81,873 114,025
* - Includes 3,644,382 options that had a restated exercise price of $0.01 under
option repricing program that was in place as of December 31, 2004. For
purposes of this table, options subject to repricing are shown at their
original exercise price.
The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- -------------- ---------------- --------- -------------- ---------
(In thousands) (In thousands)
$-- to $0.010 26,568 8.8 years $0.01 26,568 $0.01
0.011 to 0.087 4,640 9.4 years $0.07 3,516 $0.07
0.088 to 0.160 21,575 9.1 years $0.11 4,575 $0.11
0.170 to 7.000 21 4.8 years $6.89 21 $6.89
--------------- -------------- ---------------- --------- -------------- ---------
$-- to $7.000 52,804 9.0 years $0.06 34,680 $0.03
=============== ============== ================ ========= ============== =========
F-30
During the years ended December 31, 2004 and 2003, NeoMedia made the
following option grants:
2004 2003
--------------------------------- ---------------------------------
Range of Options Range of Options
Exercise Granted Exercise Granted
Recipients Prices (In thousands) Prices (In thousands)
---------------------- ---------------- -------------- ---------------- --------------
Employees $0.062 to $0.128 23,290 $0.010 to $0.010 31,725
Non-employee directors $0.010 to $0.075 3,357 $0.010 to $0.010 3,000
Non-employees $0.025 to $0.100 6,105 $0.010 to $0.160 4,293
---------------- -------------- ---------------- --------------
Total $0.010 to $0.128 32,752 $0.010 to $0.160 39,018
---------------- -------------- ---------------- --------------
Option-Related Expense
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-31
In January 2004, the Company issued 50,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.025 per share
for consulting services rendered to the Company. The Company recognized $7,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2004.
During the period January through June 2004, the Company issued 106,674
options to buy shares of the Company's common stock to James J. Keil, an outside
director, at a price of $0.01 per share for consulting services rendered to the
Company during that time. The Company recognized $9,000 in general and
administrative expense in the accompanying consolidated financial statements for
the year ended December 31, 2004.
In February 2004, the Company issued 5,555,556 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 to the Company's Micro Paint Repair
business over a period of three years from the date of issuance. The Company
recorded $550,000 as deferred stock compensation at the time of issuance, and is
recognizing this amount over the period of the contract. Accordingly, the
Company recognized $182,000 in general and administrative expense in the
accompanying consolidated financial statements for the year ended December 31,
2004.
Warrants
Warrant activity as of December 31, 2004 and 2003 was as follows:
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
Warrants issued 44,150,000
Warrants exercised (51,510,000)
Warrants expired (10,000)
-----------
Warrants Outstanding as of December 31, 2004 18,825,000
===========
The following table summarizes information about warrants outstanding at
December 31, 2004, all of which are exercisable:
Weighted- Weighted-
Average Average
Range of Warrants Remaining Exercise
Exercise Prices Outstanding Contractual Life Price
---------------- -------------- ---------------- ---------
(In thousands)
$--- to $0.05 13,050 3.5 years $0.01
0.06 to 3.56 4,375 4.2 years $0.28
3.57 to 6.00 1,400 0.8 years $6.00
---------------- -------------- ---------------- ---------
$--- to $6.00 18,825 3.4 years $0.52
================ ============== ================ =========
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 exercised during
2004
F-32
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 exercised during the year ended
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,
2004.
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.
During January 2004, the Company granted to Cornell 40,000,000 warrants to
purchase shares of NeoMedia stock with an exercise price of $0.05 per share, as
consideration for the issuance of two promissory notes by Cornell to NeoMedia.
The first note was for a face amount of $4 million and was issued in January
2004; the second was for a face amount of $1 million issued in April 2004. The
fair value of the warrants using the Black/Scholes pricing model was $5 million.
In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants", the Company compared the relative fair values of the
warrants and the face value of the notes, and allocated a value of $2.5 million
to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million
note issued in January 2004 and $0.5 million against the $1 million note in
April 2004. The $2.5 million was recorded as a discount against the carrying
value of the note. The $2.5 million that was allocated to the notes is
considered a discount on the promissory notes, and therefore was amortized over
the life of the notes using the effective interest method, in accordance with
Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141,
"Business Combinations". Accordingly, the Company recorded an amortization of
discount of $2,500,000 related to the warrants during the year ended December
31, 2004. The warrants were subsequently assigned by Cornell to Stone Street
Asset Management LLC. Stone Street Asset Management LLC exercised the warrants
during November 2004, resulting in net funds to NeoMedia of $2 million.
During February 2004, the Company granted 150,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.102 per share to an
outside consultant. The Company recognized approximately $15,000 in expense in
the 2004 consolidated financial statements relating to the warrant issuance. The
warrants were not exercised as of December 31, 2004.
During March 2004, the Company granted 4,000,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.11 per share to an
outside consultant as a finder fee related to financing received by NeoMedia.
The Company charged the fair value of the warrants of $440,000 as a reduction to
capital accounts. The warrants were not exercised as of December 31, 2004.
Option and Warrant Repricing Programs
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, NeoMedia re-priced approximately 8.0 million stock
options under a repricing program. Under the terms of the program, the exercise
price for outstanding options under NeoMedia's 2002, 1998, and 1996 Stock Option
Plans was restated to $0.01 per share for an original period of 6 months. The
program was subsequently extended through December 31, 2004. In accordance with
FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock
Transactions, the award was accounted for as variable from May 19, 2003 through
the period ended December 31, 2004. Accordingly, NeoMedia recognized
approximately $104,000 and $746,000 as compensation in general and
administrative expense during the years ended December 31, 2004 and 2003,
respectively. Approximately 3.5 million and 4.4 million options were exercised
under the program during the years ended December 31, 2004 and 2003,
respectively. The repricing program expired on December 31, 2004.
F-33
20. SEGMENT AND GEOGRAPHICAL 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.
NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR). 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.
F-34
Operational results for the three segments for the years ended December
31, 2004 and 2003 are presented below:
(in thousands)
-----------------------
Years Ended
December 31,
-----------------------
2004 2003
--------- ---------
Net Sales:
NeoMedia Consulting & Integration Services $ 910 $ 2,354
NeoMedia Internet Switching Service 62 46
NeoMedia Micro Paint Repair 728 --
--------- ---------
$ 1,700 $ 2,400
--------- ---------
Net Loss:
NeoMedia Consulting & Integration Services ($ 1,862) ($ 4,331)
NeoMedia Internet Switching Service (2,755) (1,051)
NeoMedia Micro Paint Repair (2,613) --
--------- ---------
($ 7,230) ($ 5,382)
--------- ---------
Identifiable Assets
NeoMedia Consulting & Integration Services $ 274
NeoMedia Internet Switching Service 2,423
NeoMedia Micro Paint Repair 3,183
Corporate 4,526
---------
$ 10,406
---------
Net revenues, loss, and identifiable assets by geographic area are
presented based upon the country of destination. During 2004, NeoMedia had
operations and assets in the United States and Canada. During 2003, NeoMedia
operated within the United States only. No other foreign country represented 10%
or more of net revenues for the years ended December 31, 2004 or 2003. Net
revenues, loss, and identifiable assets by geographic area were as follows:
(in thousands)
------------------------
Years Ended
December 31,
------------------------
2004 2003
--------- ---------
Net Sales:
United States $ 1,063 $ 2,400
Canada 637 --
--------- ---------
$ 1,700 $ 2,400
--------- ---------
Net Loss:
United States ($ 6,516) ($ 5,382)
Canada (714) --
--------- ---------
($ 7,230) ($ 5,382)
--------- ---------
Identifiable Assets
United States $ 7,272 $ 3,876
Canada 3,134 --
--------- ---------
$ 10,406 $ 3,876
--------- ---------
F-35
21. 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 September 24, 2003, 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 200,000,000 to 1,000,000,000.
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.
22. 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. Additionally,
47,511 shares are designated as Series A Convertible Preferred Stock, none of
which are issued and outstanding, and 100,000 shares are designated as 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.
23. SUBSEQUENT EVENTS
During January 2005, NeoMedia introduced the newest PaperClick(R) Mobile
Go Window(TM) for Nokia(R) Series 60 cell phones and other cell phones which use
Series 60 software. This introduction became the fifth Go Window from NeoMedia,
making the product line available across five mobile operating environments, on
over 35 models of cell phones.
During January 2005, NeoMedia signed a reseller agreement with Jorge
Christen & Partners LLP of Mexico. The reseller agreement gives Jorge Christen &
Partners LLP the rights to resell PaperClick(R) products in Mexico and Latin
America.
During January 2005, NeoMedia signed a reseller agreement with Deusto
Sistemas of Bilbao, Spain. The reseller agreement gives Deusto Sistemas the
rights to resell PaperClick(R) products in Europe.
F-36
During January 2005, NeoMedia signed a reseller agreement with E&I
Marketing and Consulting Co. of Taipei, Taiwan. The reseller agreement gives E&I
Marketing and Consulting Co. the rights to resell PaperClick(R) products in
Asia.
During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDA's. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.
24. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
In February 2005, NeoMedia was awarded a patent in Mexico from the
Instituto Mexicano de la Propiedad Industrial, the patent office in Mexico, for
the process invented by NeoMedia for "automatic access of electronic information
through secure machine readable codes on printed documents." The patent
recognizes NeoMedia's innovation in creating a secure link between printed
documents and the Internet using an obfuscated bar code and its technology. The
U.S. Patent and Trademark Office had previously awarded patent No. 5,933,829 to
NeoMedia for the same technology.
In February 2005, NeoMedia was awarded an allowance for another new patent
in the U.S. from the U.S. Patent and Trademark Office. The application is serial
no. 09/821,677 which covers 44 claims and is an adaptation of NeoMedia's U.S.
Patent 6,542,933, applying to technology that accesses Internet content from
wireless devices. NeoMedia expects the patent to be issued shortly.
On February 22, 2005, NeoMedia and IT-Global signed a one-year renewable
agreement giving IT-Global rights to sell and license PaperClick(R) products,
including client and server software, code activation and integration services.
IT-Global will focus on the New York tri-state area, where it is based, as well
as other areas, domestically and internationally, it serves.
On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS
is a retail operator and franchiser of retail automotive parts and accessories
stores catering to the light truck market, and also provides new vehicle
preparation, environmental protection packages, detailing and reconditioning
products and services. The 8,333,333 shares represent approximately 6% of PUPS
outstanding shares (based on 125,249,954 PUPS shares outstanding as of September
30, 2004). Because the investment represents less than 20% of PUPS outstanding
shares, NeoMedia will record the investment at cost and analyze it for
impairment going forward.
On February 25, 2005, NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first LOI calls for NeoMedia to initially acquire 30% of AP for $1,600,000, to
be paid $600,000 in cash, $554,000 in shares of NeoMedia restricted common
stock, and $446,000 through the assumption of AP debt by NeoMedia. Under the
second LOI, upon completion of the acquisition of the initial 30% of AP by
NeoMedia, NeoMedia would have the option to acquire an additional 30% of AP for
$1,650,000, payable in shares of NeoMedia restricted common stock. The second
LOI also gives NeoMedia the option to purchase the final 40% of AP for either:
(i) $2,200,000, payable in shares of NeoMedia restricted common stock, if
NeoMedia exercises this right within 12 months of acquiring the second 30% of
AP, or (ii) a price equivalent to AP's previous quarter EBITDA multiplied by 8,
payable in shares of NeoMedia restricted common stock. Both LOIs are non-binding
and subject to due diligence by NeoMedia and AP.
On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of
Check 21 software products and solutions for the small- to medium-sized
financial institution market, entered into a business development agreement
under which the two companies will develop a database lookup system for
validating codes printed on negotiable instruments (checks). In addition,
NeoMedia invested $250,000 in Intactis convertible preferred stock and warrants
to own up to 25% of Intactis. Intactis also placed an order for an initial 100
copies of NeoMedia's PaperClick Print Encoder software.
F-37
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team for co-marketing and sales efforts in the U.S., as well as in Europe, the
Middle East, Africa and Latin America.
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
On March 30, 2005, NeoMedia borrowed from Cornell the gross amount of
$10,000,000 before discounts and fees. Cornell withheld structuring and escrow
fees of $68,000 related to the note. As of June 1, 2005, NeoMedia had made
payments against the principal totaling $1,680,000. The note is scheduled to be
repaid at a rate of $1,120,000 per month commencing May 1, 2005 (subsequently
changed to $840,000 per month starting on April 1, 2005) and continuing until
principal and interest are paid in full. The note accrues interest at a rate of
8% per annum on any unpaid principal. NeoMedia has the option to prepay any
remaining principal of the note in cash without penalty. In connection with the
note, NeoMedia and Cornell entered into a security agreement under which the
note is secured by all of NeoMedia's assets other than its patents and patent
applications. NeoMedia also escrowed 25,000,000 shares of its common stock as
security for the note.
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. The shares
would be valued at 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia. NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment
fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also paid a cash commitment fee of $1 million. NeoMedia also issued 4
million warrants with an exercise price of $0.229 to an independent third party
as a fee for negotiating and structuring the Standby Equity Distribution
Agreement. NeoMedia expects to file a registration statement with the US
Securities and Exchange Commission during 2005 to register the shares underlying
the $100 million Standby Equity Distribution Agreement. The Standby Equity
Distribution Agreement would become active at the time the SEC declares
effective a registration statement containing such shares.
On April 12, 2005, NeoMedia acquired four search-oriented patents issued
in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for $1.5
million cash and 10% royalties on all future sales for a period of ten years.
The first patent (U.S. 6,430,554 B1) covers technology that uses uniquely-coded
objects, such as consumer goods to automatically generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device. The second patent (U.S. 6,651,053 B1) is an extension of the
first, covering additional mechanisms for performing such searches using mobile
devices. The third patent (U.S. 6,675,165 B1) covers uses of location-based
technology to deliver content that is based both on a particular advertisement
and the geographic location in which the advertisement is located. The fourth
patent (U.S. 6,766,363 B1) covers techniques for providing information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.
F-38
On April 18, 2005, NeoMedia announced that it named Martin N. Copus, a
global and interactive marketing executive who has worked with many of the
world's leading brands, as its COO and to the newly-created position of chief
executive of its PaperClick wireless business unit. Prior to joining NeoMedia,
Mr. Copus was Managing Director of 12Snap UK, an internationally-acclaimed,
award-winning mobile marketing company focusing on wireless channels, where he
led development and implementation of interactive marketing programs for major
blue-chip companies including McDonald's(R), Kellogg(R), Procter & Gamble(R),
Coca-Cola(R), Safeway(R), Budweiser(R), and 20th Century Fox(R). Prior to
running the U.K. operations of 12Snap, Mr. Copus's background included
assignments as executive director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange; Worldwide Board Director
of Interpublic Group's Ammirati Puris Lintas advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago, responsible for its Marlboro(R)
USA advertising and marketing services account. Mr. Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.
On May 2, 2005, NeoMedia announced that it had signed a letter of intent
with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under which
Jinche will act as a distributor of NeoMedia's micro paint repair products in
China. Jinche is a Beijing PRC-registered company specializing in automobile
sales, financing, insurance and repair.
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
On June 17, 2005, NeoMedia signed a Letter of Intent with the WI-THO AS
("WI-THO") of Oslo, Norway, which calls for WI-THO to become the exclusive
master distributor of NeoMedia's micro paint repair products, systems and
licenses to automotive service facilities throughout Denmark, Sweden and Norway.
When finalized, the agreement calls for WI-THO AS to pay $500,000 for NeoMedia
micro paint repair products and its exclusive distributor license.
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore (collectively, "Virgin"). During June 2005, NeoMedia and Virgin
settled the case out of court, with Virgin agreeing to purchase a license to use
NeoMedia's patented PaperClick(R) technology platform through 2016.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc. During July 2005, NeoMedia and AirClic settled the case out of
court, with AirClic agreeing to compensate NeoMedia for past and future
activities. AirClic did not receive a license to use NeoMedia's patented
PaperClick(R) technology.
On July 27, 2005, NeoMedia signed a non-binding Letter of Intent to
acquire Mobot, of Lexington, Massachusetts. Mobot develops and commercializes
mobile visual search technologies. The Letter of Intent calls for NeoMedia to
acquire all of the outstanding shares of Mobot in exchange for $3,500,000 cash
and $6,500,000 in shares of NeoMedia common stock. The LOI is subject to due
diligence by both parties.
On July 28, 2005, NeoMedia lent Mobot the principal amount of $600,000 in
the form of an unsecured promissory note. The Note accrues interest at a rate of
6% per annum. The Note will be forgiven upon signing of a definitive purchase
agreement for the acquisition of all of the outstanding shares of Mobot by
NeoMedia, as contemplated by the Letter of Intent. In the event the acquisition
is not consummated, the Note will become due 90 days after written notice of
cancellation of the Letter of Intent. In the event the Letter of Intent is
terminated and the Note is note repaid within 90 days of such cancellation, the
note will convert into shares of Mobot common stock with a value equal to the
unpaid principal and accrued interest on the Note.
On August 30, 2005, NeoMedia signed a distribution agreement with Jinche
Yingang Automobile Co. of Beijing, China ("Jinche"), under which Jinche will act
as a distributor of automtoive products in China. Jinche is a Beijing
PRC-registered company specializing in automobile sales, financing, insurance
and repair. NeoMedia will supply Jinche with its micro paint repair products, as
well as various other automotive aftermarket products from other manufacturers.
F-39
On September 27, 2005, NeoMedia signed a definitive distribution agreement
to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America,
as well as be a distributor of other automotive aftermarket products. The
agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"),
calls for Micropaint de Mexico to serve as an exclusive distributor of
NeoMedia's micro paint repair products, systems and licenses to automotive
service facilities throughout Mexico and Latin America. The Agreement also calls
for Micropaint de Mexico to buy certain automotive aftermarket repair and
environmental protection products from NeoMedia. Founded earlier this year and
based in Monterrey, Mexico, Micropaint de Mexico specializes in providing
automotive aftermarket products throughout Mexico and Latin America.
On September 30, 2005, NeoMedia entered into a mobile marketing alliance
and co-marketing agreement with advertising agency Arnold Worldwide, centered on
NeoMedia's patented PaperClick(R) technology platform. The agreement calls for
Arnold and NeoMedia to work together to develop opportunities and marketing
campaigns utilizing PaperClick. NeoMedia will provide technical and sales
support for presentations, marketing programs and campaigns conceived and
developed by Arnold for its clients.
On October 4, 2005, NeoMedia signed a definitive distribution agreement to
bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement,
signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve
as an exclusive distributor of NeoMedia's micro paint repair products, systems
and licenses to automotive service facilities throughout Denmark, Sweden, and
Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize
in products and services involving micro paint repairs for automobiles in
Denmark, Sweden and Norway.
During October 2005, the copyright lawsuit brought by Scanbuy, Inc.
against NeoMedia was dismissed by the U.S. District Court for the Eastern
District of Pennsylvania. The court also issued an injunction that prohibits
LScan, Inc., against whom NeoMedia won a default judgment in 2004 in its patent
infringement case against LScan, from using any technology or application that
employs any NeoMedia patents.
F-40
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
(In Thousands, Except Share Data)
June 30,
2005
--------
ASSETS
Current assets:
Cash and cash equivalents $ 7,075
Trade accounts receivable, net of allowance for doubtful
accounts of $80 786
Inventories 136
Investment in marketable securities 121
Prepaid expenses and other current assets 288
--------
Total current assets 8,406
Property and equipment, net 179
Leasehold improvements, net 40
Capitalized patents, net 3,542
Micro paint chemical formulations and proprietary process, net 1,540
Goodwill 1,099
Other Intangible assets, net 191
Investment in IPoint-media, Ltd. 1,000
Cash surrender value of life insurance policy 719
Other long-term assets 277
--------
Total assets $ 16,993
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,588
Amounts payable under settlement agreements 78
Sales taxes payable 55
Accrued expenses 1,675
Deferred revenues and other 453
Notes payable 7,299
--------
Total current liabilities 11,148
--------
Liabilities of discontinued business unit 676
--------
Shareholders' equity:
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,
473,949,163 shares issued and 453,984,483 outstanding 4,540
Additional paid-in capital 102,009
Deferred stock-based compensation (269)
Deferred equity financing costs (13,256)
Accumulated deficit (86,896)
Accumulated other comprehensive loss (180)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' equity 5,169
--------
Total liabilities and shareholders' equity $ 16,993
========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-41
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Loss (Unaudited)
(In Thousands, Except per Share Data)
Three Months Ended June 30,
----------------------------
2005 2004
------------ ------------
NET SALES:
License fees $ 174 $ 88
Resale of software and technology equipment and service fees 103 171
Micro paint repair products and services 261 189
------------ ------------
Total net sales 538 448
------------ ------------
COST OF SALES:
License fees 160 81
Resale of software and technology equipment and service fees 53 173
Micro paint repair products and services 237 168
------------ ------------
Total cost of sales 450 422
------------ ------------
GROSS PROFIT 88 26
Sales and marketing expenses 1,230 522
General and administrative expenses 862 399
Research and development costs 160 122
------------ ------------
Loss from operations (2,164) (1,017)
Gain / (loss) on extinguishment of debt 33 (3)
Amortization of debt discount -- (772)
Interest expense, net (169) (39)
------------ ------------
NET LOSS (2,300) (1,831)
Other comprehensive loss:
Unrealized loss on marketable securities (87) --
Foreign currency translation adjustment (2) 6
------------ ------------
COMPREHENSIVE LOSS $ (2,389) $ (1,825)
============ ============
LOSS PER SHARE--BASIC AND DILUTED $ (0.00) $ (0.01)
============ ============
Weighted average number of common shares--basic and diluted 448,777,048 305,327,410
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-42
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Loss (Unaudited)
(In Thousands, Except per Share Data)
Six Months Ended June 30,
------------------------------
2005 2004
------------- -------------
NET SALES:
License fees $ 338 $ 160
Resale of software and technology equipment and service fees 231 363
Micro paint repair products and services 716 275
------------- -------------
Total net sales 1,285 798
------------- -------------
COST OF SALES:
License fees 248 170
Resale of software and technology equipment and service fees 141 333
Micro paint repair products and services 510 225
------------- -------------
Total cost of sales 899 728
------------- -------------
GROSS PROFIT 386 70
Sales and marketing expenses 2,025 947
General and administrative expenses 1,561 777
Research and development costs 344 240
------------- -------------
Loss from operations (3,544) (1,894)
Gain on extinguishment of debt 171 123
Amortization of debt discount -- (2,166)
Interest expense, net (146) (116)
------------- -------------
NET LOSS (3,519) (4,053)
Other comprehensive loss:
Unrealized loss on marketable securities (129) --
Foreign currency translation adjustment 9 (16)
------------- -------------
COMPREHENSIVE LOSS $ (3,639) $ (4,069)
============= =============
LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.01)
============= =============
Weighted average number of common shares--basic and diluted 443,301,430 287,733,421
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-43
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended
June 30,
-------------------------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 3,519) ($ 4,053)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable -- 2,166
Depreciation and amortization 354 263
Stock issued to reacquire rights under a contract -- 24
Fair value of expense portion of stock-based
compensation granted for professional services 514 381
Interest expense allocated to debt -- 3
Decrease in value of life insurance policies 9 11
Decrease of fair value of repriced options -- (243)
Changes in operating assets and liabilities
Trade accounts receivable, net (504) (39)
Inventory (21) (7)
Other current assets 65 64
Accounts payable, amounts due under financing agreements, liabilities in excess
of assets of discontinued business unit, accrued expenses and stock liability (292) (919)
Deferred revenue other current liabilities (61) 88
---------- ----------
Net cash used in operating activities (3,455) (2,261)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in iPoint-media (500) --
Capitalization of software development and purchased intangible assets (1,549) (74)
Acquisition of property and equipment (162) (81)
---------- ----------
Net cash used in investing activities (2,211) (155)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $105 in 2005
and $391 in 2004 4,302 3,675
Net proceeds from exercise of stock options and warrants 701 581
Borrowings under notes payable and long-term debt 9,932 5,000
Repayments on notes payable and long-term debt (3,837) (4,168)
Cash commitment fee for $100 million Standby Equity Distribution Agreement (1,000) --
Cash paid to acquire CSI International, Inc. (net of cash acquired) -- (2,390)
---------- ----------
Net cash provided by financing activities 10,098 2,698
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 9 (16)
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,441 266
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,634 61
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,075 $ 327
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 47 $ 50
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock -- 190
Fair value of stock issued for services and deferred to future periods 239 585
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) -- 695
Change in net assets resulting from acquisition of CSI (net of cash acquired) -- 3,090
Gain on extinguishment of debt 138 123
Direct costs associated with Standby Equity Distribution Agreement and Equity
Line of Credit 1,204 965
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-44
NeoMedia Technologies, Inc. and Subsidiaries
Unaudited Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Business Operations
Basis of Presentation
The condensed consolidated financial statements include the financial
statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete consolidated financial statements. These condensed consolidated
financial statements and related notes should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended December 31, 2004. In the
opinion of management, these condensed consolidated financial statements reflect
all adjustments which are of a normal recurring nature and which are necessary
to present fairly the consolidated financial position of NeoMedia as of June 30,
2005, the results of operations for the three-month and six-month periods ended
June 30, 2005 and 2004, and cash flows for the six-month periods ended June 30,
2005 and 2004. The results of operations for the three-month and six-month
periods ended June 30, 2005 and 2004 are not necessarily indicative of the
results which may be expected for the entire fiscal year. All significant
intercompany accounts and transactions have been eliminated in preparation of
the condensed consolidated financial statements.
Going Concern
The accompanying condensed 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 $2,300,000 and
$1,831,000 for the three months ended June 30, 2005 and 2004, respectively, and
net losses of $3,519,000 and $4,053,000 for the six months ended June 30, 2005
and 2004, respectively, and has an accumulated deficit of $86,896,000 as of June
30, 2005. In addition, the Company had working capital deficit of $3,418,000 as
of June 30, 2005.
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. The financial statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary, should the
Company be unable to continue as a going concern.
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 the profitability from
the Company's PaperClick business, intellectual property portfolio and Micro
Paint Repair business.
Nature of Business Operations
NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR).
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 NeoMedia's physical world to Internet
core technology, including the linking "switch" and application platforms. NISS
also manages NeoMedia's intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
F-45
NCIS (systems integration service offerings) is the original business line
upon which NeoMedia 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.
NMPR (micro paint repair offerings) is the business unit encompassing the
CSI International chemical line acquired during 2004. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.
In addition, on December 21, 2004, NeoMedia signed a definitive Agreement
and Plan of Merger to acquire and merge with BSD Software, Inc. BSD owns 90% of
the outstanding shares of Triton Global Business Services, Inc., a provider of
live and automated operator calling services and e-business support, including
billing, clearinghouse and information management services, to companies in the
telecommunications industry. On April 4, 2005 NeoMedia and BSD filed a joint
registration/information statement with the United States Securities and
Exchange Commission (the "SEC"). NeoMedia expects to complete the merger when
the SEC review is complete, the registration is declared effective and the
information statement is mailed to BSD's shareholders of record. At this time,
the exchange rate will be determined and closing will be held. Closing is
subject to the terms and conditions outlined in the merger agreement, as well as
regulatory approval of the merger and registration/information statement by the
SEC. Upon the anticipated closing of the merger, NeoMedia expects to integrate a
new business unit called "NeoMedia Telecom Services" encompassing Triton's
business.
Reclassifications
Certain amounts in the 2004 condensed consolidated financial statements
have been reclassified to conform to the 2005 presentation.
Standby Equity Distribution Agreements with Cornell Capital Partners, LP
("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.
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement (the "2003 SEDA") 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 commitment
fee for Cornell to enter into the 2003 SEDA, 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 registered
200 million shares underlying this $20 million 2003 SEDA. In April 2004, the
Company registered 40 million shares of common stock underlying warrants granted
to Cornell in connection with a promissory note issued by the Company to Cornell
(see "Notes Payable to Cornell" below).
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100 million of NeoMedia's common stock over a two-year period, with the
timing and amount of the purchase at NeoMedia's discretion. The maximum amount
of each purchase would be $2,000,000 with a minimum of five business days
between advances. The shares would be valued at 98% of the lowest closing bid
price during the five-day period following the delivery of a notice of purchase
by NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell. As a commitment fee for Cornell to enter into the 2005 SEDA, NeoMedia
issued 50 million warrants to Cornell with an exercise price of $0.20 per share,
and a term of three years, and also paid a cash commitment fee of $1 million.
NeoMedia also issued 4 million warrants with an exercise price of $0.227 to a
consultant as a fee for negotiating and structuring the 2005 SEDA. NeoMedia has
recorded the $12.3 million fair value of the warrants to "Deferred equity
financing costs" and, upon effectiveness of the 2005 SEDA, will amortize this
amount to additional paid-in capital straight-line over the two-year life of the
2005 SEDA. NeoMedia expects to file a registration statement with the SEC during
2005 to register the shares underlying the $100 million 2005 SEDA. The new SEDA
would become available at the time the SEC declares effective a registration
statement containing such shares.
F-46
During the six months ended June 30, 2005, the Company sold 14,257,025
shares of its common stock to Cornell under the 2003 SEDA. The following table
summarizes funding received from Cornell during the six-month periods ended June
30, 2005 and 2004:
2005 2004
-------------------------------------- --------------------------------------
Six Six
Months Months
First Second Ended First Second Ended
Quarter Quarter June 30 Quarter Quarter June 30
---------- ---------- ---------- ---------- ---------- ----------
Number of shares sold to Cornell 6,998,931 7,258,094 14,257,025 21,282,203 29,819,873 51,102,076
Gross Proceeds from sale of shares $1,709,000 $3,219,000 $4,928,000 $2,332,000 $2,308,000 $4,640,000
Less: discounts and fees* (204,000) (489,000) (693,000) (500,000) (465,000) (965,000)
---------- ---------- ---------- ---------- ---------- ----------
Net Proceeds from sale of shares $1,505,000 $2,730,000 $4,235,000 $1,832,000 $1,843,000 $3,675,000
---------- ---------- ---------- ---------- ---------- ----------
* Pursuant to the terms of the 2003 SEDA , stock is valued at 98% of the lowest
closing bid price during the week it is sold
Promissory Notes Payable to Cornell
On March 30, 2005, NeoMedia borrowed from Cornell the principal amount of
$10,000,000 before discounts and fees in the form of a secured promissory note.
Cornell withheld structuring and escrow fees of $68,000 related to the note. The
note was originally scheduled to be repaid at a rate of $1,120,000 per month
commencing May 1, 2005, which was subsequently changed to $840,000 per month,
continuing until principal and interest are paid in full. The note accrues
interest at a rate of 8% per annum on any unpaid principal. NeoMedia has the
option to prepay any remaining principal of the note in cash without penalty. In
connection with the note, NeoMedia and Cornell entered into a Security Agreement
under which the note is secured by all of NeoMedia's assets other than its
patents and patent applications. NeoMedia also escrowed 25,000,000 shares of its
common restricted stock as security for the note. As of June 30, 2005, NeoMedia
had made payments of $2,730,000 against the principal, reducing the principal
balance to $7,270,000.
On April 8, 2004, NeoMedia borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. NeoMedia
paid this note in full during 2004.
On January 20, 2004, NeoMedia borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was
used to fund the acquisition of CSI International, Inc. during February 2004.
Cornell withheld a $315,000 retention fee related to the issuance of stock to
pay off the debt in the future. NeoMedia paid this note in full during 2004.
In connection with the January 20, 2004 note, NeoMedia also granted to
Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an
exercise price of $0.05 per share during January 2004. In April 2004, NeoMedia
registered 40 million shares underlying the warrants granted to Cornell (and
subsequently transferred by Cornell to Stone Street Asset Management LLC). The
fair value of the warrants using the Black-Scholes pricing model was $5,000,000.
In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants", NeoMedia compared the relative fair values of the
warrants and the face value of the notes, and allocated a value of $2.5 million
to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million
note issued in January 2004 and $0.5 million against the $1 million note in
April 2004. The $2.5 million was recorded as a discount against the carrying
value of the note. The $2.5 million that was allocated to the notes was
considered a discount on the promissory notes, and therefore was amortized over
the life of the notes using the effective interest method, in accordance with
Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141,
"Business Combinations". Accordingly, NeoMedia recorded an amortization of
discount of $2,500,000 related to the warrants during the year ended December31,
2004. Stone Street Asset Management LLC exercised the warrants during November
2004, resulting in net funds to NeoMedia of $2 million.
F-47
Other Events
During February 2004, the Company entered into a Consulting Agreement with
an unrelated third party, under which the consultant will provide sales and
marketing services relating to the Company's Micro Paint business unit over a
period of three years. As consideration for the contract, the Company issued
6,055,556 options with an exercise price of $0.01 to the consultant. The fair
value of the options at the time of issuance was $550,000. The Company is
recognizing the fair value as sales and marketing expense over the term of the
contract (three years). The contract was terminated during the second quarter of
2005, accordingly, the Company recognized professional services expense of
$267,000 to write off the remaining deferred stock compensation. The Company
recognized $368,000 and $81,000 in expense relating the contract during the six
month periods ended June 30, 2005 and 2004, respectively.
On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS
is a retail operator and franchiser of retail automotive parts and accessories
stores catering to the light truck market, and also provides new vehicle
preparation, environmental protection packages, detailing and reconditioning
products and services. The 8,333,333 shares represent approximately 6% of PUPS
outstanding shares (based on 125,249,954 PUPS shares outstanding as of September
30, 2004). Because the investment represents less than 20% of PUPS outstanding
shares, NeoMedia has recorded the investment at cost and analyze it for
impairment going forward. As of June 30, 2005, NeoMedia has recorded an
impairment of $129,000 due to the decrease in the quoted market price.
On February 25, 2005, NeoMedia signed two non-binding Letters of Intent to
acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first Letter of Intent calls for NeoMedia to initially acquire 30% of AP for
$1,600,000, to be paid $600,000 in cash, $554,000 in shares of NeoMedia
restricted common stock, and $446,000 through the assumption of AP debt by
NeoMedia. Under the second Letter of Intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia, NeoMedia would have the option to acquire
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common stock. The second Letter of Intent also gives NeoMedia the option to
purchase the final 40% of AP for either: (i) $2,200,000, payable in shares of
NeoMedia restricted common stock, if NeoMedia exercises this right within 12
months of acquiring the second 30% of AP, or (ii) a price equivalent to AP's
previous quarter EBITDA multiplied by 8, payable in shares of NeoMedia
restricted common stock. Both Letter of Intent are non-binding and subject to
due diligence by NeoMedia and AP.
On April 12, 2005, NeoMedia acquired four search-oriented patents issued
in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for $1.5
million cash and 10% royalties on all future sales for a period of ten years.
The first patent (U.S. 6,430,554 B1) covers technology that uses uniquely-coded
objects, such as consumer goods to automatically generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device. The second patent (U.S. 6,651,053 B1) is an extension of the
first, covering additional mechanisms for performing such searches using mobile
devices. The third patent (U.S. 6,675,165 B1) covers uses of location-based
technology to deliver content that is based both on a particular advertisement
and the geographic location in which the advertisement is located. The fourth
patent (U.S. 6,766,363 B1) covers techniques for providing information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.
On May 2, 2005, NeoMedia announced that it had signed a Letter of Intent
with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under which
Jinche will act as a distributor of NeoMedia's micro paint repair products in
China. Jinche is a Beijing PRC-registered company specializing in automobile
sales, financing, insurance and repair.
F-48
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
On June 20, 2005, NeoMedia announced that it has signed a letter of intent
with WI-THO AS of Oslo, Norway, where WI-THO AS will become the exclusive master
distributor of NeoMedia's micro paint repair products, systems and licenses to
automotive service facilities throughout Demark, Sweden and Norway.
On June 29, 2005, NeoMedia announced that it had reached an out-of-court
agreement with Virgin Entertainment Group, Inc. whom it sued for patent
infringement. In the agreement, Virgin agreed to purchase a license of
NeoMedia's PaperClick(R) technology platform through 2006.
Investment in Marketable Securities
On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares, or approximately 5.8% of Pickups Plus, Inc. ("PUPS") restricted common
stock. PUPS is a retail operator and franchiser of retail automotive parts and
accessories stores catering to the light truck market, and also provides new
vehicle preparation, environmental protection packages, detailing and
reconditioning products and services. In accordance with Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the investment in PUPS is being recorded as
available-for-sale securities and reported at fair value. Accordingly,
unrealized gains and losses on the equity securities are reflected in the
condensed consolidated statement of operations and comprehensive income (loss).
The investments in marketable securities are summarized as follows:
As of June 30, 2005
-------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Holding Gain Holding Losses Value
---------- ------------ -------------- ---------
Available-for-sale $250,000 $ -- ($129,000) $121,000
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender value of life
insurance policy, 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.
It is not practicable to estimate the fair value of the Company's 17%
investment in the common stock of i-Point Media Ltd. and its investments of
250,000 shares of preferred stock of Intactis Software, Inc., because of the
lack of quoted market prices and the inability to estimate fair value without
incurring excessive costs. However, management believes that the total carrying
amount of $1,250,000 in the investments in iPoint Media Ltd. and Intactis
Software, Inc. at June 30, 2005 was not impaired.
For all available-for-sale investment securities, the carrying values
represents fair value of the securities and unrealized gain (losses) that are
other than temporary are recognized as other comprehensive income (loss). The
Company does not hold these securities for speculative or trading purposes.
F-49
Pro-forma Information Required by SFAS 148
At June 30, 2005, the Company has five stock-based employee compensation
plans (the 2003 Stock Incentive Plan, the 2003 Stock Option Plan, the 2002 Stock
Option Plan, the 1998 Stock Option Plan, and the 1996 Stock Option Plan). The
Company accounts for those 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.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
Net Loss, as reported ($2,300) ($1,831) ($3,519) ($4,053)
Compensation recognized under APB 25 -- 5 -- 9
Compensation recognized under SFAS 123 (1,051) (368) (1,404) (711)
------- ------- ------- -------
Pro-forma net loss ($3,351) ($2,194) ($4,923) ($4,755)
======= ======= ======= =======
Net Loss per share:
Basic and diluted - as reported ($0.00) ($0.01) ($0.01) ($0.01)
======= ======= ======= =======
Basic and diluted - pro-forma ($0.00) ($0.01) ($0.01) ($0.02)
======= ======= ======= =======
Subsequent Events
On July 8, 2005, NeoMedia reached an out-of-court agreement with AirClic,
Inc. whom it sued for patent infringement. In the agreement, AirClic agreed to
compensate NeoMedia for past and future activities. AirClic did not receive a
license to use NeoMedia's patented PaperClick(R) technology as part of the
settlement.
On July 12, 2005, NeoMedia entered into a consulting agreement with
Silicon Space, Inc., under which Silicon Space is developing NeoMedia's
PaperClick(R) WordRegistry interface. Silicon Space replaces Science
Applications International, Inc., who NeoMedia engaged in October 2004 on a
contingency basis to build and host the interface. NeoMedia intends host the
WordRegistry internally upon its completion.
On July 27, 2005, NeoMedia signed a non-binding Letter of Intent to
acquire Mobot(TM), Inc. ("Mobot"), of Lexington, Massachusetts, a pioneer and
leader in mobile visual search technologies.
The Letter of Intent calls for NeoMedia to acquire all of the outstanding
shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in shares of
NeoMedia common stock. The LOI is subject to due diligence by both parties.
On July 28, 2005, NeoMedia lent Mobot the principal amount of $600,000 in
the form of an unsecured promissory note. The Note accrues interest at a rate of
6% per annum. The Note will be forgiven upon signing of a definitive purchase
agreement for the acquisition of all of the outstanding shares of Mobot by
NeoMedia, as contemplated by the Letter of Intent. In the event the acquisition
is not consummated, the Note will become due 90 days after written notice of
cancellation of the Letter of Intent. In the event the Letter of Intent is
terminated and the Note is note repaid within 90 days of such cancellation, the
note will convert into shares of Mobot common stock with a value equal to the
unpaid principal and accrued interest on the Note.
In the event a definitive purchase agreement is not executed by the
parties, or the Letter of Intent is not terminated, by September 26, 2005, Mobot
has the right to demand an additional $200,000 loan from NeoMedia. In the event
a definitive purchase agreement is not executed by the parties, or the Letter of
Intent is not terminated, by October 26, 2005, Mobot has the right to demand an
additional $200,000 loan from NeoMedia. Both of the additional loans would be in
the form of a unsecured promissory notes subject to the same terms as the Note.
F-50
Segment Reporting
As of June 30, 2005 NeoMedia was structured and evaluated by its Board of
Directors and Management as three distinct business units:
NeoMedia Internet Switching Services (NISS), 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 valuable intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NeoMedia Consulting and Integration Services (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software, and general and specialized consulting services. NCIS also
identifies prospects for custom applications based on NeoMedia's products and
services. The operations are based in Lisle, Illinois.
NeoMedia Micro Paint Repair (NMPR) is the business unit encompassing the
Company's micro paint repair products and services acquired in 2004.
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. NCIS operates principally in the
United States. NISS operates principally in the United States and Europe. NMPR
is headquartered in Ft. Myers, Florida, and currently sells into Canada, the
United States, Australia, and New Zealand, and has entered into letters of
intent to begin distribution in China and Scandinavia.
Consolidated net sales, net operating losses by geographic area for the
three-month and six-month periods ended June 30, 2005 and 2004, and long-lived
assets by geographic area as of June 30, 2005, were as follows:
(in thousands)
---------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Sales:
United States $ 350 $ 259 $ 960 $ 523
Canada 188 189 325 275
--------- --------- --------- ---------
$ 538 $ 448 $ 1,285 $ 798
--------- --------- --------- ---------
Net Loss:
United States ($ 1,882) ($ 1,435) ($ 2,882) ($ 3,490)
Canada (418) (396) (637) (563)
--------- --------- --------- ---------
($ 2,300) ($ 1,831) ($ 3,519) ($ 4,053)
--------- --------- --------- ---------
Long-Lived Assets
United States $ 5,706
Canada 2,881
---------
$ 8,587
---------
F-51
Consolidated net sales, net operating losses for the three-month and
six-month periods ended June 30, 2005 and 2004, and identifiable assets as of
June 30, 2005, were as follows:
(in thousands)
---------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Sales:
NeoMedia Consulting & Integration Services $ 124 $ 230 $ 396 $ 481
NeoMedia Internet Switching Service 153 29 173 42
NeoMedia Micro Paint Repair 261 189 716 275
---------------------------------------------------
$ 538 $ 448 $ 1,285 $ 798
---------------------------------------------------
Net Loss:
NeoMedia Consulting & Integration Services ($ 874) ($ 227) ($ 1,388) ($ 483)
NeoMedia Internet Switching Service (778) (436) (1,223) (841)
NeoMedia Micro Paint Repair (648) (396) (908) (563)
Amortization of Cornell Debt Discount -- (772) -- (2,166)
---------------------------------------------------
($ 2,300) ($ 1,831) ($ 3,519) ($ 4,053)
---------------------------------------------------
Identifiable Assets
NeoMedia Consulting & Integration Services $ 453
NeoMedia Internet Switching Service 3,700
NeoMedia Micro Paint Repair 3,482
Corporate 9,358
---------
$ 16,993
---------
Effect Of Recently Issued Accounting Pronouncements
In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations in SAB
107 express views of the staff regarding the interaction between Statement of
Financial Accounting Standards Statement No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") and certain SEC rules and regulations and provide
the staff's views regarding the valuation of share-based payment arrangements
for public companies. In particular SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the transition from public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123(R) in an interim period, capitalization of compensation cost
related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of Statement 123(R),
the modification of employee share options prior to adoption of Statement 123(R)
and disclosures in Management's Discussion and Analysis subsequent to adoption
of Statement 123(R).
In May 2005, the FASB issued SFAS No.154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 "
("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion No. 20 "Accounting Changes," previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005; however earlier adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after the date
of issuance of SFAS No 154. The Company is in the process of evaluating whether
the adoption of SFAS 154 will have a significant impact on the Company's overall
results of operations or financial position.
F-52
Report of Independent Registered Public Accounting Firm
To the Board of Directors of BSD Software, Inc and Subsidiaries
We have audited the accompanying consolidated balance sheet of BSD Software,
Inc. (the "Company") as of July 31, 2005, and the related consolidated
statements of operations and comprehensive loss, cash flows, and shareholders'
deficit for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of BSD Software, Inc. as of July 31, 2004,
were audited by other auditors whose report, dated September 24, 2004, on those
statements included an explanatory paragraph that presented that the
consolidated financial statements had been prepared assuming that the Company
would continue as a going concern, as discussed in Note 2 to the consolidated
financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of July 31, 2005, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced operating losses
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANT
Irvine, California
September 28, 2005
F-53
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the Board of Directors of BSD Software, Inc.
We have audited the accompanying consolidated balance sheets of BSD Software,
Inc. (the "Company") as at July 31, 2004 and July 31, 2003, and the related
statements of operations and deficit and cash flows for the periods then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
July 31, 2004 and July 31, 2003, and the results of its operations and its cash
flows for the periods then ended in conformity with U.S. generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced operating losses
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
Chartered Accountants
Regina, Canada
September 24, 2004
F-54
BSD SOFTWARE, INC.
Consolidated Balance Sheet
-------------------------------------------------------------------------
(U.S. dollars) July 31, 2005
-------------------------------------------------------------------------
Assets
Current assets:
Cash $23,184
Accounts receivable 1,582,891
Prepaid expenses 12,452
-------------------------------------------------------------------------
1,618,527
Property and equipment 87,392
-------------------------------------------------------------------------
$1,705,919
-------------------------------------------------------------------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $3,187,028
Shareholder loans 243,256
Due to Officer 463,973
Due to Wayside Solutions Inc. 827,041
Notes payable 102,445
-------------------------------------------------------------------------
4,823,743
Stockholders' deficiency:
Share capital:
Authorized:
Preferred stock 5,000,000 shares at $.001 par value
Common stock 50,000,000 shares at $.001 par value
Issued and outstanding:
32,560,897 common shares (July 31, 2004 - 31,684,597) 32,561
Additional paid-in capital 3,762,704
Accumulated Deficit (5,704,542)
Accumulated other comprehensive loss (1,208,547)
-------------------------------------------------------------------------
(3,117,824)
Commitments and contingencies
-------------------------------------------------------------------------
$1,705,919
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
BSD SOFTWARE, INC.
Consolidated Statements of Operations and Comprehensive Loss
---------------------------------------------------------------------------
Years Ended July 31,
---------------------------------------------------------------------------
(U.S. dollars) 2005 2004
---------------------------------------------------------------------------
Revenue $7,350,409 $6,091,101
Cost of revenues 5,855,723 4,618,371
---------------------------------------------------------------------------
1,494,686 1,472,730
Operating expenses:
Administration 140,209 182,938
Professional fees 186,736 334,946
Rent 57,244 90,396
Payroll 603,260 537,391
Depreciation and amortization 73,187 77,093
---------------------------------------------------------------------------
1,060,636 1,222,764
---------------------------------------------------------------------------
Income from operations 434,050 249,966
Other income (expenses)
Interest expense (153,533) (253,328)
Loss on sales of assets (9,167) (3,179)
Gain on sale of contracts -- 51,090
---------------------------------------------------------------------------
Total other income (expense) (162,700) (205,417)
Income before provision for taxes 271,350 44,549
Income taxes -- --
---------------------------------------------------------------------------
Net Income 271,350 44,549
Other comprehensive loss
Foreign currency translation adjustment (528,693) (331,583)
---------------------------------------------------------------------------
Comprehensive loss (257,343) (287,034)
---------------------------------------------------------------------------
Basic and diluted earnings (loss) per share $0.01 $0.00
---------------------------------------------------------------------------
Weighted average shares outstanding, basic 31,780,707 30,494,009
---------------------------------------------------------------------------
Weighted average shares outstanding, diluted 31,921,884 31,494,009
---------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
BSD SOFTWARE, INC.
Consolidated Statements of Cash Flows
------------------------------------------------------------------------
Years Ended July 31,
------------------------------------------------------------------------
(U.S. dollars) 2005 2004
------------------------------------------------------------------------
Cash flows from (used in):
Operations:
Net income $ 271,350 $ 44,549
Items not involving cash:
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Non-cash financing costs -- 98,550
Shares issued to non-executive employees 30,000 --
Loss on sale of assets 9,167 3,179
Depreciation and amortization 73,187 77,093
Change in non-cash operating working capital:
Accounts receivable (747,954) (350,352)
Income taxes recoverable -- 33,048
Prepaid expenses 9,013 2,053
Accounts payable and accrued liabilities 464,584 225,666
------------------------------------------------------------------------
109,347 133,786
Investing:
Proceeds on sale of property and equipment 16,677 35,188
Purchase of property and equipment -- (2,259)
------------------------------------------------------------------------
16,677 32,929
Financing:
Repayment of shareholder loans (93,952) (38,395)
Repayment of notes payable (69,027) (10,599)
Repayment of due to Wayside Solutions Inc. (68,806) (63,706)
------------------------------------------------------------------------
(231,785) (112,700)
------------------------------------------------------------------------
Net decrease in cash and cash equivalents (105,761) 54,015
Cash, beginning of period 128,945 74,930
------------------------------------------------------------------------
Cash, end of period $ 23,184 $ 128,945
------------------------------------------------------------------------
Supplemental Cash Flow Information
Interest Paid $ 11,527 $ 723
Taxes Paid $ -- $ --
Non-cash investing and financing activities:
Reduction of accounts payable and accrued
liabilities in lieu of stock issuance $ 4,348 $ --
Reduction of shareholder loans in lieu of
stock issuance $ 39,153 $ --
Shares issued to employees $ 30,000 $ --
------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
BSD SOFTWARE, INC.
Consolidated Statements of Shareholders' Deficit
Common Stock Accumulated
Additional Other
Paid-in Comprehensive Accumulated
Shares Amount Capital Loss Deficit Total
--------------------------------------------------------------------------------------------------------------------------------
Balance July 31, 2003 30,710,427 $30,710 $ 2,213,161 $ (349,020) $(6,020,441) $(4,125,590)
Shares issued of subsidiary company $ 1,113,540 $ 1,113,540
Stock issued re: extension of financing
agreements 252,170 $ 253 $ 100,616 $ 100,869
Stock issued for employee salary 30,000 $ 30 $ 9,527 $ 9,557
Stock issued for professional services
rendered 35,000 $ 35 $ 13,965 $ 14,000
Stock issued re: Accomodation Agreements 657,000 $ 657 $ 97,893 $ 98,550
Foreign Currency adjustment for share
capital of subsidiary $ (115,577) $ (115,577)
Comprehensive loss - foreign currency
translation adjustment $ (331,583) $ (331,583)
Net Income $ -- $ 44,549 $ 44,549
--------------------------------------------------------------------------------------------------------------------------------
Balance July 31, 2004 31,684,597 $31,685 $ 3,433,125 $ (680,603) $(5,975,892) $(3,191,685)
Stock issued to pay debt 126,300 $ 126 $ 39,027 $ 39,153
Restricted stock issued to employees 750,000 $ 750 $ 29,250 $ 30,000
Foreign Currency adjustment for share
capital of subsidiary $ 261,302 $ 261,302
Comprehensive loss - foreign currency
translation adjustment $ (527,944) $ (527,944)
Net Income $ 271,350 $ 271,350
--------------------------------------------------------------------------------------------------------------------------------
Balance July 31, 2005 32,560,897 $32,561 $ 3,762,704 $(1,208,547) $(5,704,542) $(3,117,824)
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
1. Nature of business:
BSD Software, Inc. (the "Company") operates as a holding company of Triton
Global Communications Inc. ("TGCI"), which is a provider of billings,
clearing house and information management services to the
tele-communications industry.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for financial information. The preparation of financial
statements in accordance with United States generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
On December 21, 2004, NeoMedia Technologies, Inc. (NeoMedia) and the
Company signed a definitive Agreement and Plan of Merger. Upon the closing
of the merger transaction discussed therein, the Company's shareholders
will receive, for each share of the Company's stock owned, NeoMedia common
stock equivalent to $0.07 divided by the volume-weighted average price of
NeoMedia common stock for the five trading days immediately prior to the
effective time of the merger. The agreement has been approved by holders
of approximately 63% of the Company's outstanding shares and its Board.
Closing is subject to the terms and conditions outlined in the merger
agreement, as well as regulatory approval of the merger and
registration/information statement by the United States Securities and
Exchange Commission. Prior to closing, the merger can be terminated by the
Company if more than 5% of the Company's outstanding shares dissent to the
merger. The merger can be terminated prior to closing by NeoMedia if, at
the time of closing, the Company has: (i) less than $850,000 in assets,
(ii) more than $5,000,000 in liabilities, or (iii) more than 38,000,000
shares of common stock outstanding. Either party can terminate the merger
if the merger has not closed by December 31, 2005, which date may be
extended by mutual consent of NeoMedia and the Company. There is no
assurance that the merger will be completed.
2. Going concern:
These financial statements have been prepared on a going concern basis in
accordance with United States generally accepted accounting principles.
The going concern basis of presentation assumes that the Company will
continue in operation for the foreseeable future and be able to realize
its assets and discharge its liabilities and commitments in the normal
course of business. The Company has reported net income of $271,350 and
$44,549 for the years ended July 31, 2005 and 2004 respectively and has an
accumulated deficit of $5,704,542 as of July 31, 2005. As of July 31, 2005
the Company had a working capital deficit of $3,205,216.
The Company's ability to continue as a going concern is dependent upon
management's ability to raise additional financing and continue profitable
operations. During the year ended July 31, 2005, management continued to
take actions to reduce operating losses and is in the process of securing
additional financing. There is no assurance that additional financing will
be obtained.
F-59
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
2. Going concern (continued):
The ability of the Company to continue as a going concern and to realize
the carrying value of its assets and discharge its liabilities when due is
dependent on the successful completion of the actions taken or planned,
some of which are described above, which management believes will mitigate
the adverse conditions and events which raise doubt about the validity of
the "going concern" assumption used in preparing these financial
statements. There is no certainty that these and other strategies will be
sufficient to permit the Company to continue beyond July 31, 2006.
The financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption were not appropriate. If the
"going concern" basis was not appropriate for these financial statements,
adjustments would be necessary to the carrying value of assets and
liabilities, the reported revenues and expenses, and the balance sheet
classifications used.
3. Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial statements include the accounts of Triton
Global Communications Inc. ("TGCI") and Triton Global Business
Services Inc. ("TGBSI"). TGCI was acquired by TGBSI on October 22,
2002 and these financial statements reflect the results of
operations for TGCI from that date forward. TGBSI acquired the
Company in a reverse takeover transaction effective November 4,
2002. As a result, the Company changed its year end to July 31,
2003. These statements reflect the consolidated operations of TGBSI
from August 1, 2002 forward consolidated with the Company from
November 4, 2002. All significant inter-company balances and
transactions have been eliminated upon consolidation.
Use of 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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and
expenses during the reporting period. Significant estimates made by
management include, among others, realization of long lived assets,
accrued liabilities, and valuation allowance for deferred income
taxes. Actual results could differ from those estimates.
Fair Value of Financial Instruments:
The Company has adopted SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments." SFAS No. 107 requires disclosure of fair
value information about financial instruments when it is practicable
to estimate that value.
For certain of the Company's financial instruments including cash,
accounts receivable, and accounts payable and accrued liabilities,
the carrying amounts approximate fair value due to their short
maturities. The amounts shown for notes payable also approximate
fair value because current interest rates and terms offered to the
Company for similar debt are substantially the same.
F-60
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
3. Significant accounting policies (continued):
(b) Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Amortization is provided using the
straight-line method at the following rates:
====================================================================
Asset Method
--------------------------------------------------------------------
Office furniture and equipment Straight line 5 years
Computer equipment Straight line 5 years
Computer software Straight line 3 years
Leasehold improvements Straight line 5 years
====================================================================
Property and equipment are assessed for potential impairment when
triggering events occur that indicate the carrying value may not be
recoverable. If the undiscounted estimated future net cash flows are
less than the carrying value of the asset, the impairment loss is
calculated as the amount by which the carrying value of the asset
exceeds its fair value. Fair value has been calculated as the
present value of estimated future net cash flows.
(c) Translation of foreign currency:
The functional currency of the operations is the Canadian dollar.
The financial statements are reported in United States dollars and
are translated to United States dollars at the exchange rates in
effect at the balance sheet date for assets and liabilities and at
average rates for the period for revenues and expenses. Resulting
exchange differences are accumulated as a component of accumulated
other comprehensive loss.
Revenue and expense transactions originating in U.S. dollars are
translated to Canadian dollars at rates in effect at the time of the
transaction. Foreign exchange gains and losses are included in
income.
(d) Revenue recognition:
We record revenue in accordance with SEC SAB No. 104 "Revenue
Recognition in Financial Statements." SAB No. 104 requires that
service sales be recognized when there is persuasive evidence of an
arrangement which states a fixed and determinable price and terms,
delivery of the product has occurred in accordance with the terms of
the sale, and collectibility of the sale is reasonably assured.
Revenue is recognized at the time that calls are accepted by the
clearing house for billing to customers.
(e) Reclassification:
Certain reclassifications have been made to the prior year balance
sheet to conform to the current year presentation.
F-61
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
3. Significant accounting policies (continued):
(f) Stock-based compensation:
Under the fair value based method, stock-based payments to
non-employees are measured at the fair value of the consideration
received, or the fair value of the equity instruments issued, or
liabilities incurred, whichever is more reliably measurable. The
fair value of stock-based payments to non-employees is periodically
re-measured until counterparty performance is complete, and any
change therein is recognized over the period and in the same manner
as if the Company had paid cash instead of paying with or using
equity instruments. The cost of stock-based payments to
non-employees that are fully vested and non-forfeitable at the grant
date is measured and recognized at that date. In November of 2004
the Company issued 126,300 common shares to pay down debt owed to
shareholders of Triton Global Business Services Inc for which there
was no gain or loss recorded as a result of this transaction. In
July of 2005 the Company issued 750,000 common shares to employees
as compensation. These transactions were recorded at their fair
value and are included in the consolidated financial statements of
the Company.
July 31, 2005 July 31, 2004
Outstanding Stock Options 150,000 750,000
Outstanding Warrants 1,000,000 1,000,000
(g) Earnings (loss) per common share:
Basic earnings (loss) per common share is calculated by dividing the
net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common
share is calculated by dividing the applicable net earnings (loss)
by the sum of the weighted average number of common shares
outstanding and all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued
during the period. The treasury stock method is used to compute the
dilutive effect of options, warrants and similar instruments.
(g) Deferred Income Taxes:
The company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, 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. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the date of enactment. To the extent that
realization of deferred tax assets is not considered to be "more
likely than not", a valuation allowance is provided.
(i) Minority Interest:
Although the Company currently owns only 90% of TGBSI, operations
have resulted in cumulative losses to July 31, 2005 and as a result
the entire amount of these losses have been reflected in these
financial statements and no minority interest has been calculated.
Until such time as operations recover the deficiency in minority
interest of $212,804 the full 100% of operating results will be
reported with no off-setting minority interest.
F-62
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
3. Significant accounting policies (continued):
(j) New Accounting Pronouncements:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". The amendments made by
Statement 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current period charges and require the
allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23,
2004. The Company has evaluated the impact of the adoption of SFAS
151, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions, an amendment of FASB Statements
No. 66 and 67 (SFAS 152)". The amendments made by Statement 152
amend FASB Statement No. 66, Accounting for Sales of Real Estate, to
reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement
of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends FASB Statement No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate
Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply
to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal years
beginning after June 15, 2005, with earlier application encouraged.
The Company does not believe this will have any effect to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions." The amendments made by Statement 153
are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar
productive assets. The Board believes that exception required that
some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on
exchanges that lack commercial substance, the Board believes this
Statement produces financial reporting that more faithfully
represents the economics of the transactions. The Statement is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this
Statement shall be applied prospectively. The Company has evaluated
the impact of the adoption of SFAS 152, and does not believe the
impact will be significant to the Company's overall results of
operations or financial position.
F-63
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
3. Significant accounting policies (continued):
(j) New Accounting Pronouncements (continued):
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment". Statement 123(R) will provide investors and
other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost
relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase
plans. Statement 123(R) replaces FASB Statement No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as
originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what
net income would have been had the preferable fair-value-based
method been used. Public entities (other than those filing as small
business issuers) will be required to apply Statement 123(R) as of
the first interim or annual reporting period that begins after
December 15, 2005. The Company has evaluated the impact of the
adoption of SFAS 123(R), and does not believe the impact will be
significant to the Company's overall results of operations or
financial position.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive
guidance related to the interaction between SFAS 123(R) and certain
SEC rules and regulations. It also provides the SEC staff's views
regarding valuation of share-based payment arrangements. In April
2005, the SEC amended the compliance dates for SFAS 123(R), to allow
companies to implement the standard at the beginning of their next
fiscal year, instead of the next reporting period beginning after
June 15, 2005. Management is currently evaluating the impact SAB 107
will have on our consolidated financial statements.
In May 2005, the FASB issued FASB Statement No. 154, Accounting
Changes and Error Corrections. This new standard replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and
represents another step in the FASB's goal to converge its standards
with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do
so. Statement 154 also provides that (1) a change in method of
depreciating or amortizing a long-lived nonfinancial asset be
accounted for as a change in estimate (prospectively) that was
effected by a change in accounting principle, and (2) correction of
errors in previously issued financial statements should be termed a
"restatement." The new standard is effective for accounting changes
and correction of errors made in fiscal years beginning after
December 15, 2005. Early adoption of this standard is permitted for
accounting changes and correction of errors made in fiscal years
beginning after June 1, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations" ("FIN
47"). FIN 47 provides guidance relating to the identification of and
financial reporting for legal obligations to perform an asset
retirement activity. The Interpretation requires recognition of a
liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be
reasonably estimated. FIN 47 also defines when an entity would have
sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The provision is effective no later
than the end of fiscal years ending after December 15, 2005. The
Company will adopt FIN 47 and does not believe the adoption will
have a material impact on its consolidated financial position or
results of operations or cash flows.
F-64
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
4. Property and equipment:
==================================================================================
2005
----------------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
----------------------------------------------------------------------------------
Office furniture and equipment $ 68,301 $ 46,780 $ 21,521
Computer equipment 151,630 95,493 56,137
Computer software 66,366 62,761 3,605
Leasehold improvements 17,978 11,849 6,129
----------------------------------------------------------------------------------
$ 304,275 $ 216,883 $ 87,392
==================================================================================
Estimated depreciation expense over the next 5 years is as follows:
2006 $49,822
2007 34,724
2008 2,846
2009 --
2010 --
-------
$87,392
=======
5. Notes payable:
Notes payable bear interest at rates varying from 0%-5% per annum, are
unsecured and due on demand. Payments in 2005 totaled $69,290, including
interest of $321 (2004 - $16,814, including interest of $723).
6. Income taxes:
Income tax recovery differs from the amount that would be computed by
applying the statutory income tax rate of 35% (2004 - 35%) for the
following reasons:
==========================================================================
2005 2004
--------------------------------------------------------------------------
Computed income tax (recovery) $ 94,973 15,592
Non taxable items and other differences (144,426) (305,289)
Adjustment to future tax assets for enacted
changes in tax losses and rates 20,038 20,038
Change in valuation allowance 29,415 269,659
--------------------------------------------------------------------------
$ -- $ --
==========================================================================
F-65
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
6. Income taxes (continued):
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
======================================================================================
2005 2004
--------------------------------------------------------------------------------------
Deferred tax assets:
Non-capital losses carried forward $ 785,520 $ 788,659
Property, plant and equipment - difference in net
book value and undepreciated capital cost 155,261 181,537
Tax value of investment greater than accounting 450,621 450,621
--------------------------------------------------------------------------------------
1,391,402 1,420,817
Less valuation allowance (1,391,402) (1,420,817)
--------------------------------------------------------------------------------------
-- --
Deferred tax liabilities -- --
--------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
======================================================================================
The Corporation had approximately $2,337,856 of non-capital losses
available at July 31, 2005 to reduce taxable income of future years. These
losses expire in periods from 2006 through 2020.
7. Commitments and contingencies:
Operating Leases
The Company leases its business premises and certain office equipment
under operating leases under non-cancelable operating lease agreements
expiring through 2009. Total lease payments during the current period
totaled $59,028 (2004 - $91,950), net of sublease revenue of $152,157(2004
- $81,977). Future lease payments will aggregate $226,406 as follows:
2006 $ 64,155
2007 60,111
2008 59,933
2009 42,207
2010 --
--------
$226,406
========
In addition, the Company leases premises with future lease payments of
approximately: 2006 - $153,417; 2007 - $130,041; 2008 - $121,051 which are
subleased for corresponding amounts over corresponding lease terms.
F-66
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
7. Commitments and contingencies (continued):
Payment Commitments
The Company has made payment plans to pay down certain of its current
liabilities. All of the items are shown as current even though these
commitments extend over a one year period as the Company would be subject
to immediate repayment terms if the commitments are not kept.
Accounts Payable Notes Payable Shareholder Loans Total
---------------- ------------- ----------------- --------
2006 $ 201,380 $ 68,500 $ 105,397 $375,277
2007 163,754 34,484 36,909 235,147
2008 -- -- 4,849 4,849
2009 -- -- -- --
---------------- ------------- ----------------- --------
$ 365,134 $ 102,984 $ 147,155 $615,273
================ ============= ================= ========
Litigation
In the normal course of operations the Company is subject to claims and
lawsuits. The Company is currently involved in various claims and
litigation, which they are defending. The Company or its subsidiaries are
aware of the following legal proceedings:
In December 2002, TGCI sued CanTalk for breach of contract. The action was
brought before the Court of Queen's Bench, Winnipeg, Canada. The case is
styled "Triton Global Communications v. CanTalk." The action alleges that
CanTalk failed to perform under an outsource agreement pursuant to which
CanTalk was to provide support for Triton's entry into the international
operator service market. In response to the suit, CanTalk filed a
counterclaim against TGCI for $10,000 alleging breach of contract. TGCI
believes that CanTalk's counterclaim is without merit and it intends to
defend the counterclaim.
On May 2, 2005, four shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia, claiming that the purchase price as outlined in
the purchase agreement between NeoMedia and BSD is too low. The plaintiffs
are seeking unspecified damages and injunctive relief against the merger.
BSD is currently reviewing the case with its attorneys. BSD believes that
the action is without merit and intends to defend the claim.
8. Stock options and warrants:
On May 14, 2003 the Company entered into an agreement to issue warrants
for 1,000,000 common shares, at an exercise price of $0.25 to a
corporation as consideration for consulting services. These warrants were
issued on August 20, 2003. Management's best estimate of the fair value of
the shares at the time of the Agreement was approximately $0.40, as a
result a charge for $150,000 was recorded as professional fees expense for
the year ended July 31, 2003. These warrants were excluded from the
Diluted Weighted Average Shares Outstanding for the year ended July 31,
2005, since the strike price exceeds the average annual market price.
On August 2, 2003 the Board of Directors granted stock options to purchase
150,000 shares at a strike price of $0.01 per share to a non-employee for
services performed that are to expire on August 2, 2005. Subsequent to
year end the options have expired.
F-67
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2005 and July 31, 2004
8. Stock options and warrants (continued):
On August 2, 2003 the Board of Directors granted stock options to purchase
450,000 shares at a strike price of $0.01 per share to key employees. On
December 19, 2003 the Board of Directors approved stock options to
purchase 150,000 shares at a strike price of $0.01 per share to a key
employee. At the present time the Company had not adopted a Stock Option
Plan, thus no granted stock options could be exercised. As a result of
this, the Company did not recognize the compensation cost in accordance
with Accounting Principles Board ("APB") Opinion No. 25. "Accounting for
Stock Issued to Employees" as the Company did not have a qualified plan.
In July of 2005, the Company's Board of Directors adopted and approved a
Stock Bonus Plan, which included the issuance of 750,000 restricted shares
to key employees of the Company at a price of $0.04 per share. The Stock
Bonus Plan included a provision that replaced the options granted to key
employees in August and December 2003 aforementioned.
9. Related party transactions:
Wayside Solutions, Inc., a Corporation affiliated with the Company,
provided financing services to the Company. Amounts due to Wayside
Solutions Inc., bear interest at 10% per annum and are due on demand. A
general security agreement against all current and future assets of the
Company has been provided by TGBSI to Wayside Solutions Inc. as
collateral. Accrued interest relating to these services is included in
interest and finance charges, aggregating $61,485 in the current period
(2004 - $66,766).
Amounts due to Guy Fietz, CEO, President and a shareholder of the Company,
bear interest at 10% per annum, are unsecured and due on demand. Included
in interest and finance charges is accrued interest of $35,335 (2004 -
$34,119).
Amounts due to shareholders bear interest at rates varying from 0%-10% per
annum, are unsecured and due on demand. Payments in 2005 totaled $105,158,
including interest of $11,206 (2004 - $12,000, principal only). During the
current year 126,300 shares were issued to pay down amounts owing to
shareholders of $39,153 including interest of $4,353. A similar
transaction did not occur in the prior year.
These transactions are in the normal course of operations and are measured
at the exchange amount of consideration established and agreed to by the
related parties.
10. Concentration of Risk:
Accounts receivable with three customers represent approximately 90% (2004
- 2 customers represented 73%) of the balance of accounts receivable as at
July 31, 2005. It is the opinion of management that these accounts do not
represent a significant credit risk.
A majority, approximately 47% (2004 - 57%), of the Company's purchases are
from three (2004 - three) specific vendors. The Company has significant
sales and purchases denominated in U.S. currency, and is therefore exposed
to financial risk resulting from fluctuations in exchange rates and the
degree of volatility of these rates.
F-68
PRO FORMA FINANCIAL INFORMATION
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)
1. Basis of Presentation
Acquisition of CSI International
On February 6, 2004, NeoMedia acquired CSI International, Inc., of Calgary,
Alberta, Canada ("CSI"), a private technology products company in the micro
paint repair industry. NeoMedia paid 7,000,000 shares of NeoMedia's common
stock, plus $2.5 million cash in exchange for all outstanding shares of CSI.
NeoMedia have centralized the administrative functions in its Ft. Myers, Florida
headquarters, and maintain the sales and operations office in Calgary, Alberta,
Canada.
Pending Acquisition of BSD Software, Inc.
On December 21, 2004, NeoMedia signed a merger agreement with BSD Software Inc.,
("BSD") of Calgary, Alberta, Canada (OTCBB: BSDS). Under the terms of the
agreement, each share of BSD stock will be exchanged for NeoMedia stock
equivalent to .07 divided by the volume-weighted average price of NeoMedia stock
for the five days prior to the effective time of the merger. Closing will occur
when all regulatory approvals have been granted, including effectiveness of a
Form S-4 information/registration statement registering the NeoMedia shares to
be granted in the transaction. The number of NeoMedia shares to be granted in
the exchange will change depending on NeoMedia's stock price at the time of
closing.
The pro forma condensed combined historical statement of operations gives effect
to the acquisitions of BSD and CSI as if they had occurred as of January 1,
2004, combining the historical results of NeoMedia for the year ended December
31, 2004 with the historical results of the same period for BSD and CSI.
The pro forma condensed combined balance sheet gives effect to the acquisitions
of BSD and CSI as if they had occurred as of December 31, 2004.
The pro forma combined financial statements included in this filing have been
prepared by the managements of NeoMedia, BSD and CSI without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, the managements of NeoMedia, BSD and CSI
believe that the disclosures are adequate to make the information not
misleading.
The pro forma adjustments are based on currently available information and upon
estimates and assumptions that we believe are reasonable under the
circumstances. The pro forma financial data do not purport to represent what
NeoMedia's financial position or results of operations would actually have been
if such transactions had occurred on those dates and are not necessarily
representative of NeoMedia's financial position or results of operations for any
future period. The pro forma financial statements should be read in conjunction
with the separate historical financial statements and footnotes of NeoMedia
included in Form 10-KSB for the year ended December 31, 2004 (included herein),
with the separate historical financial statements and footnotes of BSD included
in Form 10-KSB for the year ended July 31, 2004 (included herein), and CSI.
Acquisition of Mobot, Inc.
On July 27, 2005, NeoMedia signed a non-binding Letter of Intent to acquire
Mobot, of Lexington, Massachusetts, a pioneer and leader in mobile visual search
technologies. Mobot was founded in 2003 by its CEO Russell Gocht to pursue the
application of advances in image processing on of camera phones in the consumer
marketplace. The Letter of Intent calls for NeoMedia to acquire all of the
outstanding shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in
shares of NeoMedia common stock. The LOI is subject to due diligence by both
parties.
F-69
On July 28, 2005, NeoMedia lent Mobot the principal amount of $600,000 in the
form of an unsecured promissory note. The Note accrues interest at a rate of 6%
per annum. The Note will be forgiven upon signing of a definitive purchase
agreement for the acquisition of all of the outstanding shares of Mobot by
NeoMedia, as contemplated by the Letter of Intent. In the event the acquisition
is not consummated, the Note will become due 90 days after written notice of
cancellation of the Letter of Intent. In the event the Letter of Intent is
terminated and the Note is note repaid within 90 days of such cancellation, the
note will convert into shares of Mobot common stock with a value equal to the
unpaid principal and accrued interest on the Note.
On September 26, 2005, NeoMedia loaned Mobot an additional $200,000 under the
same terms as the Note. On October 26, 2005, NeoMedia loaned Mobot an additional
$200,000 under the same terms as the Note.
2. Preliminary Purchase Price Allocation
A final determination of the allocation of the purchase price to the assets
acquired and liabilities assumed has not been made for BSD or Mobot, and the
allocation reflected in the unaudited pro forma combined financial statements
should be considered preliminary and is subject to the closing of each
acquisitions and the completion of a more comprehensive valuation of the assets
acquired and liabilities assumed. The final allocation of purchase price could
differ materially from the pro forma allocation included herein.
3. Pro forma Net Loss Per Share
The pro forma basis and dilutive net loss per share are based on the weighted
average number of shares of pro forma NeoMedia's common stock as if the shares
issued to acquire BSD and Mobot had taken place at the beginning of each of the
reporting periods. Dilutive shares are not included in the computation of pro
forma dilutive net loss per share as their effect would be anti-dilutive.
F-70
NeoMedia Technologies, Inc.
Pro-forma Condensed Combined Balance Sheet
June 30, 2005
(In thousands of US Dollars)
(Unaudited)
Pro-forma
Adjust- Pro-forma
ASSETS NeoMedia(A) BSD (B) Mobot (C) ments Consolidated
---------------------------------------------- -------------
Current assets:
Cash and cash equivalents $7,075 $23 $649 -- $7,747
Trade accounts receivable, net 786 1,583 12 -- 2,381
Inventories, net 136 -- -- -- 136
Investment in marketable securities 121 -- -- -- 121
Prepaid expenses and other current assets 288 12 -- -- 300
---------------------------------------------- -------------
Total current assets 8,406 1,618 661 -- 10,685
Property and equipment, net 219 87 4 -- 310
Capitalized patents, net 3,542 -- -- -- 3,542
Micro paint repair chemical formulations and
proprietary process 1,540 -- -- -- 1,540
Goodwill 1,099 -- -- 12,651 (D) 13,750
Other intangible assets 191 -- 3 -- 194
Investment in iPoint-media, Ltd. 1,000 -- -- -- 1,000
Cash surrender value of life insurance policy 719 -- -- -- 719
Other long-term assets 277 -- 7 -- 284
---------------------------------------------- -------------
Total assets $16,993 $1,705 $675 $12,651 $32,024
============================================== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,588 $3,187 $21 -- $4,796
Amounts payable under settlement agreements 78 -- -- -- 78
Liabilities in excess of assets of discontinued
business unit 676 -- -- -- 676
Income taxes payable -- -- -- -- --
Sales taxes payable 55 -- -- -- 55
Accrued expenses 1,675 -- 208 -- 1,883
Deferred revenues and other 453 -- -- -- 453
Shareholder loans -- 243 -- -- 243
Due to officer -- 464 -- -- 464
Due to Wayside Solutions, Inc. -- 827 -- -- 827
Bonuses payable -- -- -- -- 0
Notes payable 7,299 102 700 -- 8,101
---------------------------------------------- -------------
Total liabilities 11,824 4,823 929 -- 17,576
---------------------------------------------- -------------
Convertible debentures -- -- 500 -- 500
Shareholders' deficit:
Preferred stock -- -- -- -- --
Common stock (E) 4,540 33 -- 154 (D) 4,727
Additional paid-in capital 102,009 3,763 1 4,828 (D) 110,601
Deferred equity financing costs (13,256) -- -- -- (13,256)
Deferred stock-based compensation (269) -- -- -- (269)
Accumulated other comprehensive loss (180) (1,209) -- 1,209 (D) (180)
Retained earnings (accumulated deficit) (86,896) (5,705) (755) 6,460 (D) (86,896)
Treasury stock (779) -- -- -- (779)
---------------------------------------------- -------------
Total shareholders' deficit 5,169 (3,118) (754) 12,651 13,948
---------------------------------------------- -------------
Total liabilities and shareholders' deficit $16,993 $1,705 $675 $12,651 $32,024
============================================== =============
F-71
Pro-forma Adjustments
(A) - NeoMedia balance sheet is presented as of June 30, 2005
(B) - BSD balance sheet is presented as of July 31, 2005
(C) - Mobot balance sheet is presented as of July 31, 2005
(D) - Adjustment for stock and cash issued for the following purposes: (i) to
acquire BSD Software, Inc., assuming acquisition occurred as of June 30,
2005. Purchase price is calculated as:(Number of BSD shares outstanding) x
(0.07) / (NeoMedia stock price at the time of acquisition). Pro-forma
purchase price is calculated using NeoMedia's closing stock price on June
30, 2005 of $0.469, and is subject to final allocation upon consummation
of the merger; and (ii) to acquire Mobot, Inc. assuming acquisition
occurred as of June 30, 2005. Purchase price is calculated as: ($6,500,000
stock portion of purchase price) / (NeoMedia stock price at June 30, 2005
of $0.469). The final purchase price is subject to final allocation upon
consummation of the merger..
(E) - As of June 30, 2005, NeoMedia's $0.01 par value common stock consists of
1,000,000,000 authorized shares, 473,949,163 shares historical and
492,668,273 shares pro forma issued; and 453,984,483 historical and
472,703,593 pro forma outstanding as of June 30, 2005.
F-72
NeoMedia Technologies, Inc.
Pro-forma Combined Condensed Statement of Operations
For the Six Months Ended June 30, 2005
(In thousands of US Dollars, except per share data)
(Unaudited)
Pro-forma
Adjust- Pro-forma
NeoMedia(A) BSD(B) Mobot ments Consolidated
----------------------------------------------- ------------
NET SALES:
License fees $338 -- -- -- $338
Resale of software and --
technology equipment and
service fees 231 -- -- -- 231
Micro paint revenue 716 -- -- -- 716
Telecom services revenue 4,094 -- -- 4,094
Mobot revenue -- -- 88 -- 88
----------------------------------------------- ------------
Total net sales 1,285 4,094 88 -- 5,467
----------------------------------------------- ------------
COST OF SALES:
License fees 248 -- -- -- 248
Resale of software and --
technology equipment and
service fees 141 -- -- -- 141
Micro paint direct cost of revenue 510 -- -- -- 510
Telecom services direct cost of
revenue 3,301 -- -- 3,301
Mobot revenue -- -- 5 -- 5
----------------------------------------------- ------------
Total cost of sales 899 3,301 5 -- 4,205
----------------------------------------------- ------------
GROSS PROFIT 386 793 83 -- 1,262
Selling, general and administrative
expenses 3,586 578 93 -- 4,257
Research and development costs 344 -- 90 -- 434
----------------------------------------------- ------------
Income (loss) from operations (3,544) 215 (100) -- (3,429)
Loss on extinguishment of debt, net 171 -- -- -- 171
Loss on sale of assets 0 -- -- 0
Amortization of debt discount -- -- -- 0
Interest expense, net (146) (93) -- -- (239)
----------------------------------------------- ------------
Income before provision for income taxes (3,519) 122 (100) -- (3,497)
Provision for income taxes -- -- -- -- --
----------------------------------------------- ------------
Net income (loss) (3,519) 122 (100) -- (3,497)
Other comprehensive income (loss):
Unrealized loss on marketable
securities (129) -- -- -- (129)
Foreign currency translation
adjustment 9 (91) -- -- (82)
----------------------------------------------- ------------
Comprehensive income (loss) ($3,639) $31 ($100) $-- ($3,708)
=============================================== ============
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED ($0.01) ($0.01)
============= ============
COMPREHENSIVE INCOME (LOSS)
PER SHARE--BASIC AND DILUTED ($0.01) ($0.01)
============= ============
Weighted average number
of common shares-basic and diluted 443,301,430 32,897,818 (C) 476,199,248
============= =========== ============
F-73
(A) - NeoMedia results include operations of CSI International for the period
January 1, 2005 through June 30, 2005, so CSI results are not shown
separately.
(B) - BSD results are for the six months ended July 31, 2005.
(C) - Adjustment for: (i) 8,369,516 shares that would have been issued in
connection with BSD acquisition if it had occurred on January 1, 2005; and
(ii) 24,528,302 shares that would have been issued in connection with
Mobot acquisition if it had occurred on January 1, 2005.
F-74
NeoMedia Technologies, Inc.
Pro-forma Combined Condensed Statement of Operations
For the Twelve Months Ended December 31, 2004
(In thousands of US Dollars, except per share data)
(Unaudited)
CSI Pro-forma Pro-forma
NeoMedia(A) BSD Int'l(B) Mobot Adjustments Consolidated
------------------------------------------------------------ -------------
NET SALES:
License fees $343 -- -- -- -- $343
Resale of software and technology
equipment and service fees 630 -- -- -- -- 630
Micro paint revenue 727 -- 64 -- -- 791
Telecom services revenue -- 6,511 -- -- -- 6,511
------------------------------------------------------------ -------------
Total net sales 1,700 6,511 64 -- -- 8,275
------------------------------------------------------------ -------------
COST OF SALES:
License fees 324 -- -- -- -- 324
Resale of software and technology
equipment and service fees 604 -- -- -- -- 604
Micro paint direct cost of revenue 541 -- 35 -- -- 576
Telecom services direct cost of
revenue -- 5,068 -- -- -- 5,068
------------------------------------------------------------ -------------
Total cost of sales 1,469 5,068 35 -- -- 6,572
------------------------------------------------------------ -------------
GROSS PROFIT 231 1,443 29 -- -- 1,703
Selling, general and administrative
expenses 4,261 1,218 55 213 -- 5,747
Research and development costs 651 -- -- -- -- 651
------------------------------------------------------------ -------------
Income (loss) from operations (4,681) 225 (26) (213) -- (4,695)
Loss on extinguishment of debt, net 140 -- -- -- -- 140
Loss on sale of assets -- (12) -- -- -- (12)
Amortization of debt discount (2,500) -- -- -- -- (2,500)
Interest expense, net (189) (144) -- (5) -- (338)
------------------------------------------------------------ -------------
Income before provision for income taxes (7,230) 69 (26) (218) -- (7,405)
Provision for income taxes -- -- -- -- -- --
------------------------------------------------------------ -------------
Net income (loss) (7,230) 69 (26) (218) -- (7,405)
Other comprehensive income (loss):
Foreign currency translation
adjustment (60) -- -- -- -- (60)
------------------------------------------------------------ -------------
Comprehensive income (loss) ($7,290) $69 ($26) ($218) -- ($7,465)
============================================================ =============
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED ($0.02) ($0.02)
============= =============
COMPREHENSIVE INCOME (LOSS)
PER SHARE--BASIC AND DILUTED ($0.02) ($0.02)
============= =============
Weighted average number
of common shares-basic and diluted 329,362,127 64,324,876(C) 393,687,003
============= =========== =============
F-75
Pro-forma Adjustments
(A) - NeoMedia results include operations of CSI International for the period
February 6, 2004 (the date of acquisition) through December 31, 2004
(B) - Results of CSI International, Inc. are for the period January 1, 2004
through February 6, 2004 (the date of acquisition)
(C) - Adjustment for: (i) 7,000,000 shares issued in connection with CSI
acquisition as if shares were issued on January 1, 2004; (ii) 16,189,210
shares that would have been issued in connection with BSD acquisition if
it had occurred on January 1, 2004 and been based on the price of NeoMedia
common stock at that time; and (iii) 47,445,255 shares that would have
been issued in connection with Mobot acquisition if it had occurred on
January 1, 2004 and been based on the price of NeoMedia common stock at
that time.
F-76
INDEPENDENT AUDITORS' REPORT
Board of Directors
CSI International Inc.
Calgary, Alberta Canada
We have audited the accompanying balance sheets of CSI International Inc. as of
August 31, 2003 and 2002, and the related statements of income and comprehensive
income, changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
respects, the financial position of CSI International Inc. as of August 31, 2003
and 2002, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Eisner LLP
New York, New York
January 23, 2004
F-77
CSI INTERNATIONAL INC.
Balance Sheets
(in U.S. dollars)
August 31,
--------------------
2003 2002
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $136,000 $126,000
Accounts receivable, net of allowance for
doubtful accounts of $13,000 for 2003
and $9,000 for 2002 60,000 38,000 60,000 38,000
Inventories 13,000 10,000
Other current assets 1,000 1,000
-------- ---------
Total current assets 210,000 175,000
Investments 51,000
Property and equipment, net 7,000 2,000
-------- ---------
$268,000 $177,000
======== =========
LIABILITIES
Current liabilities:
Accounts payables $22,000 $17,000
Accrued expenses 36,000 12,000
Income taxes payable 12,000 8,000
Due to stockholder 14,000
-------- ---------
Total current liabilities 70,000 51,000
-------- ---------
Commitments (Note F)
STOCKHOLDERS' EQUITY
Common stock - no par value: 20,000 shares
authorized; 100 shares issued and
outstanding in 2003 and 2002, respectively
Accumulated other comprehensive income
(loss) - currency translation adjustment 7,000 (7,000)
Retained earnings 191,000 133,000
-------- ---------
198,000 126,000
-------- ---------
$268,000 $177,000
======== =========
See notes to financial statements
F-78
CSI INTERNATIONAL INC.
Statements of Income and Comprehensive Income
(in U.S. dollars)
August 31,
----------------------
2003 2002
--------- ---------
Revenue $544,000 $438,000
Direct cost of revenue 338,000 283,000
--------- ---------
Gross profit 206,000 155,000
--------- ---------
Operating costs and expenses:
Selling, general and administrative 148,000 122,000
Depreciation and amortization 2,000 1,000
--------- ---------
150,000 123,000
--------- ---------
Income from operations 56,000 32,000
Gain on equity securities received in connection with advances (net) 13,000
Interest expense (4,000)
Loss on sale of assets (19,000)
--------- ---------
Income before provision for income taxes 69,000 9,000
Provision for income taxes (11,000) (6,000)
--------- ---------
Net income 58,000 3,000
Other comprehensive income:
Foreign currency translation adjustment 14,000 6,000
--------- ---------
Comprehensive income $72,000 $9,000
========= =========
See notes to financial statements
F-79
CSI INTERNATIONAL INC.
Statements of Changes in Stockholders' Equity
(in U.S. dollars)
Accumulated
Other
Comprehensive
Number of Retained (Loss) Stockholders'
Shares Amount Earnings Income Equity
--------- -------- -------- ------------- -------------
Balance - September 1, 2001 100 $ -- $130,000 ($13,000) $117,000
Net income -- 3,000 3,000
Translation adjustment -- 6,000 6,000
--------- -------- -------- ------------- -------------
Balance - August 31, 2002 100 -- 133,000 (7,000) 126,000
Net income -- 58,000 58,000
Translation adjustment -- 14,000 14,000
--------- -------- -------- ------------- -------------
Balance - August 31, 2003 100 $ -- $191,000 $7,000 $198,000
========= ======== ======== ============= =============
See notes to financial statements
F-80
CSI INTERNATIONAL INC.
Statement of Cash Flows
(in U.S. dollars)
Year Ended August 31,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $58,000 $3,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,000 1,000
Loss on disposal of assets 19,000
Gain on equity securities received in connection with advances (13,000)
Changes in:
Accounts receivable (22,000) 11,000
Inventories (3,000) 2,000
Other current assets (1,000)
Accounts payable and accrued expenses 29,000 12,000
Income taxes payable 4,000 8,000
--------- ---------
Net cash provided by operating activities 55,000 55,000
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (7,000)
Investment in equity securities (6,000)
Proceeds from disposal of property 120,000
Advances to third party (45,000)
Repayments from third party 13,000
--------- ---------
Net cash (used in) provided by investing activities (45,000) 120,000
--------- ---------
Cash flows from financing activities:
Repayment of mortgage payable (82,000)
Repayments of amounts due to stockholder (14,000) (72,000)
--------- ---------
Net cash used in financing activities (14,000) (154,000)
--------- ---------
Effect of exchange rate changes on cash 14,000 31,000
--------- ---------
Net increase in cash and cash equivalents 10,000 52,000
Cash and cash equivalents, beginning of year 126,000 74,000
--------- ---------
Cash and cash equivalents, end of year $136,000 $126,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Income taxes $7,000
Interest $4,000
Supplemental disclosure of noncash financing information:
Reduction in due to stockholder in lieu of payment from sale of building $41,000
See notes to financial statements
F-81
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) COMPANY:
CSI International Inc. (the "Company") was incorporated in Calgary, Alberta
Canada in 1992 under the name Chip Repair Systems of Canada, Inc. In 1993, the
Company changed its name to Chip Repair Systems International Inc. and in 1996,
the Company changed its name to CSI International Inc.
The Company licenses a technology developed by its founder and significant
stockholder. The technology provides for a more efficient and economical method
to repair paint related damage to vehicles.
The Company conducts its business primarily in the province of Alberta.
(2) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
The financial position and results of operations of the Company are determined
using local currency as the functional currency (Canadian dollar). Assets and
liabilities are translated at the prevailing exchange rate in effect at each
year end. Investments, property and equipment, due to stockholder and
contributed capital accounts are translated using the historical rates of
exchange when the transaction is completed. Income statement amounts are
translated at the average exchange rate during the year. Translation adjustments
arising from the use of different exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders equity
under comprehensive income. Gains and losses resulting from foreign currency
transactions are included in operations. There were no gains or losses from
foreign currency transactions in 2003 or 2002.
(3) REVENUE RECOGNITION:
Revenue related to product sales is recognized when the products are shipped to
customers and collection is reasonably assured. Revenue related to service
repairs is recognized upon customer acceptance.
(4) CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(5) INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined on a
first-in, first-out method.
(6) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 7 years. Leasehold
improvements are amortized on a straight-line basis over the useful lives or the
term of the related lease, whichever is shorter.
F-82
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(7) LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
records impairment losses on long-lived assets used in operations or expected to
be disposed of when indicators of impairment exist and the cash flows expected
to be derived from those assets are less than carrying amounts of those assets.
No such indicators existed and the Company did not record any impairment charge
for the years ended August 31, 2003 and 2002.
(8) INCOME TAXES:
Deferred income taxes are determined based upon enacted tax laws in Canada and
rates applied to the differences between the financial statements and tax basis
of assets and liabilities.
(9) USE OF ESTIMATES:
The preparation of 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any adjustments when necessary.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, accounts receivable, investments, accounts payable
and accrued expenses approximate fair value due to the short-term nature of
those instruments.
(11) ADVERTISING COSTS:
Advertising costs incurred during the years ended August 31, 2003 and 2002 were
$5,000 and $3,000, respectively.
NOTE B - INVESTMENTS
In fiscal 2003, the Company invested $6,000 in exchange for 4,257 shares of
common stock of Triton Global Business Services, Inc. ("Triton"), an unrelated
third party. These shares are restricted and are recorded at cost as of August
31, 2003. The Company's ownership percentage in Triton is de minimis.
During fiscal 2003, the Company advanced $45,000 to Triton, a subsidiary of BSD
Software, Inc. ("BSDS"), a public company. The general terms of the advances
included repayment within 30 days with interest at a rate of 8% per annum. In
connection with these advances, the Company received 61, 684 restricted common
shares of BSDS. In addition, the Company received an additional 48,160 shares of
BSDS as consideration for extending the notes. As of the advance dates, the
Company ascribed no value to the notes. The Company accredited the value of the
notes as interest income over the repayment period (30 days). The Company
received payment of $13,000 during fiscal 2003 and wrote the remaining balance
($32,000) off as noncollectible.
F-83
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE B - INVESTMENTS (CONTINUED)
The Company ascribed a value of $45,000 in connection with the advances based
upon the share price at the date of each advance limited to the amounts advanced
to the third party. In addition, the Company ascribed a value of $53,000 and a
corresponding increase to interest income for the additional shares recieved as
consideration for extending the repayment date of the advances. As of August 31,
2003, the Company determined that a decline in the market value of such shares
was other than temporary and recorded a loss of $53,000 to reduce the recorded
value to its then market value.
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
August 31,
-----------------
2003 2002
------- -------
Computers $8,000 $8,000
Equipment 33,000 33,000
Leasehold improvements 7,000
------- -------
48,000 41,000
Less accumulated depreciation and amortization 41,000 39,000
------- -------
$7,000 $2,000
======= =======
Depreciation and amortization expense for the years ended August 31, 2003 and
2002 was $2,000 and $1,000, respectively.
NOTE D - RELATED PARTY
A stockholder and a founder had advanced funds to the Company prior to fiscal
2002 for working capital purposes. The advances were noninterest bearing and due
on demand. The amount due to stockholder was repaid in fiscal 2003.
The Company leases its facility from a stockholder and founder (see Note G).
NOTE E - INCOME TAXES
Provision for income taxes for the years ended August 31, 2003 and 2002 consists
of the following:
Year Ended August 31,
---------------------
2003 2002
------- ------
Current $11,000 $6,000
======= ======
F-84
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE F - COMMITMENTS
The Company leases premises under a long-term operating lease (as extended in
September 2003) from a rleated party (see Note D) expiring August 31, 2008.
Under this lease, the Company has the following obligations for annual rentals:
2004 $21,000
2005 21,000
2006 21,000
2007 21,000
2008 21,000
--------
$105,000
========
Rent expense for the years ended August 31, 2003 and 2002 amounted to
approximately $14,000 and $4,000, respectively.
NOTE G - LOSS ON DISPOSAL OF ASSETS
(1) BUILDING:
During fiscal 2002, the Company sold the building it occupied to a stockholder
and founder. The sale price of the building was $161,000. The sales price
consisted of $120,000 of cash and a reduction of $41,000 in amount due to
stockholder. The net book value of the building at the date of sale was $139,000
resulting in a gain of $22,000.
(2) MARKETABLE SECURITIES:
During fiscal 2002, the Company recorded a loss on marketable securities of
$41,000 as such securities expired worthless.
NOTE H - CONCENTRATION OF CREDIT RISK
As of August 31, 2003, two customers accounted for 24% and 12% of total accounts
receivable.
As of August 31, 2003, one vendor accounted for 37% of accounts payable.
NOTE I - SUBSEQUENT EVENTS
(1) LETTER OF INTENT:
The Company has entered into a letter of intent as of November 2, 2003 to enter
into a merger agreement with Neomedia Technologies, Inc. ("Neomedia"), a public
company, located in Florida, USA, in which the Company would become a wholly
owned subsidiary of Neomedia. Consideration for this transaction will consist of
$2,500,000 in cash and 7 million newly issued shares of common stock of
Neomedia.
(2) LEASE:
The Company leased a new automobile in December 2003. The lease is for a term of
4 years with a monthly rental of $1,000.
F-85
(3) INVESTMENTS:
As of January 23, 2004, the closing price of BSDS of common stock was $.22 per
share, resulting in a decrease in market value of such shares of $21,000.
F-86
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Mobot, Inc.
Lexington, Massachusetts
We have audited the accompanying balance sheet of Mobot, Inc. (a development
stage company) as of December 31, 2004, and the related statements of operations
and stockholders' deficit and cash flows for the year then ended and for the
period from September 8, 2003 (inception) to December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mobot, Inc. as of December 31,
2004, and the results of its operations and its cash flows for the year then
ended and for the period from September 8, 2003 (inception) to December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses and working
capital deficit 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 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
October 11, 2005
F-87
Mobot, Inc.
(A Development Stage Company)
Balance Sheet
--------------------------------------------------------------------------------
December 31,
2004
---------------
Assets
Current assets:
Cash $ 290,000
Prepaid expenses 2,937
---------------
Total current assets 292,937
---------------
Property and equipment, net 4,055
Intangible assets, net 4,668
Security deposit 7,303
---------------
Total assets $ 308,963
===============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 16,071
Accrued expenses 4,613
Accrued interest 5,945
---------------
Total current liabilities 26,629
---------------
Convertible debentures 500,000
Stockholders' deficit:
Common stock, $0.01 par value,
10,000 shares authorized
1,659 shares outstanding 17
Additional paid-in capital 652
Deficit accumulated in the
development stage (218,335)
---------------
Total stockholders' deficit (217,666)
---------------
Total liabilities and stockholders'
deficit $ 308,963
===============
The accompanying notes form an integral part of these consolidated financial
statements.
F-88
Mobot, Inc.
(A Development Stage Company)
Statement of Operations
--------------------------------------------------------------------------------
From Inception
of Development
Stage
(September 8,
Year Ended 2003 to
December 31, December 31,
2004 2004)
---------------- ----------------
Net sales $ -- $ --
Cost of goods sold -- --
---------------- ----------------
Gross profit -- --
Operating, general and administrative expenses:
Selling and marketing expenses 22,448 22,448
General and administrative expenses 190,245 190,245
---------------- ----------------
Total operating expenses 212,693 212,693
---------------- ----------------
Operating loss (212,693) (212,693)
Interest expense (5,642) (5,642)
---------------- ----------------
Net loss $ (218,335) $ (218,335)
================ ================
The accompanying notes form an integral part of these consolidated financial
statements.
F-89
Mobot, Inc.
(A Development Stage Company)
Statement of Stockholders' Deficit
--------------------------------------------------------------------------------
From Inception of Development Stage (September 8, 2003 to December 31, 2004)
Deficit
Accumulated
Common Stock Additional in the
------------------------ Paid In Development
Shares Amount Capital Stage Totals
--------- --------- ------------ -------------- ---------
Balance at September 8, 2003
(inception), stock issued
at $0.01 per share 1,000 $ 10 $ -- $ -- $ 10
--------- --------- ------------ -------------- ---------
Balance, December 31, 2003 1,000 $ 10 $ -- $ -- $ 10
Restricted stock issued on
September 24, 2004 for sale
at $1.00 per share 70 1 69 -- 70
Restricted stock issued on
September 24, 2004 and
November 29, 2004 for sale at
$1.00 per share with a
forfeiture clause 560 6 554 -- 560
Restricted stock issued on
November 29, 2004 for sale
at $1.00 per share 29 -- 29 -- 29
Net loss -- -- -- (218,335) (218,335)
--------- --------- ------------ -------------- ---------
Balance, December 31, 2004 1,659 $ 17 $ 652 $ (218,335) $(217,666)
========= ========= ============ ============== =========
The accompanying notes form an integral part of these consolidated financial
statements.
F-90
Mobot, Inc.
(A Development Stage Company)
Statement of Cash Flows
Increase (Decrease) in Cash
--------------------------------------------------------------------------------
From Inception
of Development
Stage
(September 8,
Year Ended 2003 to
December 31, December 31,
2004 2004)
---------------- ----------------
Cash flows from operating activities:
Net loss $ (218,335) $ (218,335)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 555 555
Changes in operating assets and liabilities:
Prepaid expenses (2,937) (2,937)
Security deposit (7,303) (7,303)
Accounts payable 16,071 16,071
Accrued expenses 4,613 4,613
Accrued interest 5,945 5,945
---------------- ----------------
Net cash used for operating activities (201,391) (201,391)
Cash flows used for investing activities:
Purchase of property and equipment (4,278) (4,278)
Purchase of intangible asset (5,000) (5,000)
---------------- ----------------
Net cash used for investing activities (9,278) (9,278)
Cash flows provided by financing activities:
Convertible debenture 500,000 500,000
Proceeds from issuance of stock 659 669
---------------- ----------------
Net cash provide by financing activities 500,659 500,669
Net increase in cash 289,990 290,000
Cash, beginning of period 10 --
---------------- ----------------
Cash, end of period $ 290,000 $ 290,000
================ ================
The accompanying notes form an integral part of these consolidated financial
statements.
F-91
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(1) Basis of Presentation and Summary of Operations:
Basis of Presentation
Mobot, Inc., a Massachusetts corporation referred to as "Mobot" or
the "Company," was originally incorporated under the laws of
Delaware under the name Ilumena Corporation on September 8, 2003
(inception) and had no activity during the year ended December 31,
2003. On September 16, 2004 the Board of Directors approved to have
the Company's name officially changed to Mobot, Inc. Mobot is in the
business of connecting consumers using any camera phone on any
wireless carrier to brands, mobile content and commerce. No complex
codes, navigation or changes to cross-media campaigns are required.
The accompanying 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 $218,335 for the year ended December 31, 2004, and has
retained deficit of $218,335 as of December 31, 2004. In addition,
the Company has a cash balance of $290,000 and working capital of
$266,308 as of December 31, 2004.
Going Concern
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.
(2) Summary of Significant Accounting Policies:
Development Stage Company
The Company has not generated any significant revenue since
inception. The accompanying financial statements have been prepared
using the accounting formats prescribed for development stage
companies.
F-92
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued):
Use of Estimates
The preparation of the financial statements in accordance with
accounting principles generally accepted in the United States of
America requires the Company's management to make a number of
estimates and assumptions relating to the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses during the period.
Significant items subject to such estimates and assumptions include
the carrying amount of property and equipment, intangibles,
valuation allowances for deferred income tax assets, accounts
receivable, accruals and other factors. Actual results could differ
from those estimates.
Cash
For the purposes of the balance sheet and statement of cash flows,
all highly liquid investments with original maturities of three
months or less are considered cash equivalents. The Company
maintains bank accounts with balances which, at times, that may
exceed federally insured limits. The Company has not experienced any
losses on such accounts. The Company believes it is not exposed to
any significant risk on bank deposit accounts. The Company had a
cash balance of $290,000 as of December 31, 2004, which exceeded
federally insured limit.
Property and Equipment
Property and equipment consists primarily of computer equipment
having a useful life of 3 years and are carried at cost, net of
accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related
assets. Repairs and maintenance are charged to expense as incurred.
Upon retirement or sale, cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in the
statement of operations. Material expenditures, which increase the
life of an asset, are capitalized and depreciated over the estimated
remaining life of the asset.
Intangible Asset
Intangible asset consists of a domain name and is carried at cost,
net of accumulated amortization. Amortization is calculated using
the straight-line method over estimated useful life of 5 years. Upon
retirement or sale, cost and accumulated amortization are removed
from the accounts and any gain or loss is reflected in the statement
of operations.
F-93
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued):
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, 2004.
Advertising Costs
The Company expenses the cost of advertising and promoting its
services as incurred. There were no advertising expenses incurred
for the year ended December 31, 2004.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash,
short-term bank borrowings, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to
their short-term maturities. The fair value of long-term obligations
approximates its carrying value as the existing contract interest
rates are comparable to market rates currently offered to the
Company for similar debt instruments with similar maturities.
(3) Recently Issued Accounting Pronouncements:
In May 2005, the FASB issued FASB Statement No. 154, Accounting
Changes and Error Corrections. This new standard replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and
represents another step in the FASB's goal to converge its standards
with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do
so. Statement 154 also provides that (1) a change in method of
depreciating or amortizing a long-lived nonfinancial asset be
accounted for as a change in estimate (prospectively) that was
effected by a change in accounting principle, and (2) correction of
errors in previously issued financial statements should be termed a
"restatement." The new standard is effective for accounting changes
and correction of errors made in fiscal years beginning after
December 15, 2005.
F-94
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(3) Recently Issued Accounting Pronouncements (Continued):
Early adoption of this standard is permitted for accounting changes
and correction of errors made in fiscal years beginning after June
1, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations" ("FIN
47"). FIN 47 provides guidance relating to the identification of and
financial reporting for legal obligations to perform an asset
retirement activity. The Interpretation requires recognition of a
liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be
reasonably estimated. FIN 47 also defines when an entity would have
sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The provision is effective no later
than the end of fiscal years ending after December 15, 2005. The
Company will adopt FIN 47 beginning the first quarter of fiscal year
2006 and does not believe the adoption will have a material impact
on its consolidated financial position or results of operations or
cash flows.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive
guidance related to the interaction between SFAS 123(R) and certain
SEC rules and regulations. It also provides the SEC staff's views
regarding valuation of share-based payment arrangements. In April
2005, the SEC amended the compliance dates for SFAS 123(R), to allow
companies to implement the standard at the beginning of their next
fiscal year, instead of the next reporting period beginning after
June 15, 2005. Management is currently evaluating the impact SAB 107
will have on our consolidated financial statements.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions." The amendments made by Statement 153
are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar
productive assets. The Board believes that exception required that
some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on
exchanges that lack commercial substance, the Board believes that
SFAS 153 produces financial reporting that more faithfully
represents the economics of the transactions. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning
F-95
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(3) Recently Issued Accounting Pronouncements (Continued):
after the date of issuance. The provisions of this Statement shall
be applied prospectively. The Company has evaluated the impact of
the adoption of SFAS 153, and does not believe the impact will be
significant to the Company's overall results of operations or
financial position.
In December 2004, the FASB issued SFAS No.123 "Share-Based Payment".
SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability
instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Statement
123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what
net income would have been had the preferable fair-value-based
method been used. Public entities (other than those filing as small
business issuers) will be required to apply Statement 123(R) as of
the first interim or annual reporting period that begins after June
15, 2005. The adoption of this standard will not have any impact on
the Company's results of operations or financial position as the
Company does not participate in the related activities.
In December 2004 the Financial Accounting Standards Board issued two
FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement
109 "Accounting for Income Taxes" to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of
2004, and FSP FAS 109-2 Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004. Neither of these affected the Company as it
does not participate in the related activities.
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151,
"Inventory Costs" an amendment of Accounting Research Bulletin
("ARB") No. 43, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material
(spoilage). This SFAS requires that those items be recognized as
current-period charges regardless of whether they meet the criterion
of "so abnormal". In addition, this SFAS requires that allocation of
fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. Companies are
required to adopt the provisions of this Statement for fiscal years
beginning after June 15, 2005. The adoption of this standard will
not have any impact on the Company's results of operations or
financial position.
F-96
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(4) Property and Equipment:
December 31,
2004
--------------
Computer equipment $ 4,278
Less accumulated depreciation 223
--------------
Computer equipment, net $ 4,055
==============
Depreciation expense was $223 for the year ended December 31, 2004.
(5) Intangible Asset:
December 31,
2004
--------------
Domain name $ 5,000
Less accumulated amortization 332
--------------
Domain name, net $ 4,668
==============
Amortization expense was $332 for the year ended December 31, 2004.
(6) Income Taxes:
The Company had net operating loss carry forwards of approximately
$193,400. The loss expires in 2024. The Company believes it is more likely
than not that it will not realize the future tax benefits of its operating
loss carry forwards and has provided a full valuation allowance as of
December 31, 2004.
The components of current and deferred income tax expense (benefit) are as
follows:
December 31,
2004
--------------
Current:
State $ --
Federal --
Deferred:
State --
Federal --
--------------
Net income tax expense $ --
==============
F-97
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(6) Income Taxes (Continued):
A reconciliation of income taxes between the statutory and effective tax
rates on income before income taxes is as follows:
December 31,
2004
--------------
Computed statutory income tax expense (benefit) $ (74,234)
State income tax, net of federal (20,742)
Meals and entertainment 720
Depreciation (179)
Accrual to cash 10,306
Change in valuation allowance (84,129)
--------------
$ --
==============
The components of deferred income taxes are as follows:
December 31,
2004
--------------
Deferred tax assets:
Net operating loss carry forward $ (84,129)
Deferred tax liabilities:
Accelerated depreciation on property & equipment (179)
Accrual to cash 10,306
--------------
Net deferred tax assets (74,002)
Valuation allowance 74,002
--------------
$ --
==============
(7) Equity:
Common Stock
Each of the eight holders of our common stock are entitled to one
vote for each share held of record on each matter submitted to a
vote of stockholders. 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 non-assessable.
F-98
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(7) Equity:
Forfeiture Clause
During the year, the Company issued 560 shares to key employees. If
employment with the Company terminates before four years from the
date of issuance, the employee will be required to forfeit a certain
number of shares, based upon a predetermined schedule. The Company
retains the right to purchasing back these forfeited shares at the
original purchase price.
Equity Incentive Plan
On September 16, 2004, the Company adopted an incentive plan called
the "2004 Equity Incentive Plan" providing for the issuance of up to
900 shares of the Company's common stock pursuant to grants of
restricted stock or stock options under the plan.
(8) Commitments and Contingencies:
The Company leases its office facility under an operating lease with an
expiration date of April 30, 2006. For the year ended December 31, 2004,
Mobot incurred rent expense of $5,817.
The following is a schedule of the future minimum payments under the
non-cancelable operating lease in effect as of December 31, 2004:
Operating
Leases
----------
Year Ended December 31,
-----------------------
2005 $ 46,788
2006 17,577
----------
Total minimum payments $ 64,365
==========
In the normal course of business the Company is subject to various claims
and litigation. The Company does not currently have any pending or
threatening litigation.
F-99
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(9) Convertible Debentures:
In August and October of 2004, the Company entered into two five-year
$250,000 convertible debenture financing agreements. These agreements
accrue interest at 4% per annum and can be paid after twelve months with
no prepayment penalties. As of December 31, 2004, the Company recognized
accrued interest on the debentures in the amount of $5,945. Neither
agreement has a repayment schedule and are payable in full, including
accrued interest, at August and October of 2009.
The debentures have conversion rights that allows for the debentures to be
converted into 333 shares of the Company's common stock only as follows:
(1) from and after the date that is twelve months following the closing if
the Company has not completed a major equity financing producing proceeds
to the Company of at least $3 million prior to such date, (2) in the event
of an initial public offering, (3) in the event of a sale of the Company.
In the event of an initial public offering a sale of the Company, the
Company will notify the debenture holders they have the right to convert
the debentures within ten days of such notice at a conversion rate of
$1,500 per share. The debentures do not have a beneficial conversion
feature.
The debentures also have stock warrants that are issuable upon conversion
or exchange of the debentures at 50% of the number of shares converted to
common shares.
(10) Subsequent Events:
On July 27, 2005, Mobot signed a non-binding Letter of Intent to be
purchased by NeoMedia Technologies, Inc. ("NeoMedia"), of Fort Myers,
Florida. NeoMedia has three distinct business units, NeoMedia Internet
Software Service that offers technologies if linking the physical world to
the internet, NeoMedia Consulting and Intergration Services that offers
resale of computer hardware and software and NeoMedia Micro Paint Repair
that offers technologies in the micro paint industry.
The Letter of Intent calls for NeoMedia to acquire all of the outstanding
shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in shares
of NeoMedia common stock. The LOI is subject to due diligence by both
parties.
F-100
Mobot, Inc.
(A Development Stage Company)
Notes to Financial Statements
Year Ended December 31, 2004
--------------------------------------------------------------------------------
(10) Subsequent Events (Continued):
On July 28, 2005, Mobot borrowed from NeoMedia the principal amount of
$600,000 in the form of an unsecured promissory note. The Note accrues
interest at a rate of 6% per annum. The Note will be forgiven upon signing
of a definitive purchase agreement for the acquisition of all of the
outstanding shares of Mobot by NeoMedia, as contemplated by the Letter of
Intent. In the event the acquisition is not consummated, the Note will
become due 90 days after written notice of cancellation of the Letter of
Intent. In the event the Letter of Intent is terminated and the Note is
not repaid within 90 days of such cancellation, the note will convert into
shares of Mobot common stock with a value equal to the unpaid principal
and accrued interest on the Note.
In the event a definitive purchase agreement is not executed by the
parties, or the Letter of Intent is not terminated by September 26, 2005,
Mobot has the right to demand an additional $200,000 loan from NeoMedia.
On September 26, 2005, Mobot exercised its right and received the
additional $200,000 loan. Further, in the event a definitive purchase
agreement is not executed by the parties or the Letter of Intent is not
terminated by October 26, 2005, Mobot has the right to demand an
additional $200,000 loan from NeoMedia. On October 26, 2005, Mobot
exercised its right and received the additional $200,000 loan. Both of the
additional loans are in the form of unsecured promissory notes subject to
the same terms as the original $600,000 note.
F-101
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
As permitted by the Delaware General Corporation Law (the "DGCL"),
NeoMedia has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, except for
liability (i) for any breach of the director's duty of loyalty to NeoMedia or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of this provision is
to eliminate the rights of NeoMedia and its stockholders (through stockholders'
derivative suits on behalf of NeoMedia) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director except in the
situations described in clauses (i) through (iv) above. This provision does not
limit nor eliminate the rights of NeoMedia or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
The Certificate of Incorporation and the bylaws of NeoMedia provide that
it is required and permitted to indemnify our officers and directors, employees
and agents under certain circumstances. In addition, if permitted by law,
NeoMedia is required to advance expenses to our officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, NeoMedia is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
NeoMedia in which indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers
or controlling persons of NeoMedia pursuant to the foregoing provisions, or
otherwise, NeoMedia has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable.
II-1
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith or incorporated herein by
reference:
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
3.1 Articles of Incorporation of Dev-Tech Incorporated by reference to Exhibit 3.1
Associates, 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 Incorporated by reference to Exhibit 3.3
DevSys, Inc. to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.4 Bylaws 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, to Registrant's Registration Statement
Inc. No. 333-5534 as filed with the SEC on
November 25, 1996
3.6 Certificate of Merger of Dev-Tech Associates, Incorporated by reference to Exhibit 3.6
Inc. 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 Incorporated by reference to Exhibit 3.7
Migration, Inc. and amendment thereto to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.8 Bylaws of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit 3.8
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
3.9 Restated Certificate of Incorporation of DevSys Incorporated by reference to Exhibit 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 Bylaws of DevSys Migration, Inc. Incorporated by reference to Exhibit 3.10
to Registrant's Registration Statement
No. 333-5534 as filed with the SEC on
November 25, 1996
II-2
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
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
5.1 Opinion re: legality Provided Herewith
8.1 Tax Opinion Provided Herewith
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
10.4 Dev-Tech Migration, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit
10.47 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.5 First Amendment and Restatement of Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. 10.48 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
II-3
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
10.6 Form of Stock Option Agreement - Dev-Tech Incorporated by reference to Exhibit
Migration, Inc. 10.49 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.7 Dev-Tech Associates, Inc. 401(k) Plan and Incorporated by reference to Exhibit
amendments 10.50 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.8 First Amendment and Restatement of NeoMedia Incorporated by reference to Exhibit
Technologies, Inc. 1996 Stock Option Plan 10.60 to the Registrant's Registration
Statement No. 333-5534 as filed with the
SEC on November 25, 1996
10.9 NeoMedia Technologies, Inc. 1998 Stock Option Incorporated by reference to Exhibit 10.9
Plan to the Registrant's Form 10-KSB as filed
on March 9, 2004
10.10 Amendment to NeoMedia Technologies 1998 Stock Incorporated by reference to Form 14A as
Option Plan filed with the SEC on July 2, 1999
10.11 Sale and Purchase Agreement between Qode.com, Incorporated by reference to Exhibit
Inc. and NeoMedia Technologies, Inc. 10.48 to the Registrant's Current Report
on Form 8-K as filed with the SEC on
March 15, 2001
10.12 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
between NeoMedia and A.T. Cross Company 10.18 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
10.15 Intellectual Property licensing agreement Incorporated by reference to Exhibit
between NeoMedia and Symbol Technologies, Inc. 10.19 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
10.16 Sponsorship and Advertising Agreement between Incorporated by reference to Exhibit
NeoMedia and About.com, Inc. 10.20 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
10.17 Letter of Intent regarding proposed strategic Incorporated by reference to Exhibit
transaction between NeoMedia and AirClic, Inc. 10.21 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
10.18 Form of Promissory Note issued to AirClic, Inc. Incorporated by reference to Exhibit
10.22 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
II-4
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
10.19 Form of Limited Recourse Promissory Note issued Incorporated by reference to Exhibit
in exchange for 19 Million Shares of Common 10.23 to the Registrant's Form S-1/A as
Stock filed with the SEC on April 24, 2002
10.20 Nasdaq Staff Determination Letter with respect Incorporated by reference to Exhibit
to de-listing of NeoMedia securities from the 10.24 to the Registrant's Form S-1/A as
Nasdaq SmallCap market filed with the SEC on April 24, 2002
10.21 Revised warrant repricing letter dated April 3, Incorporated by reference to Exhibit
2002 10.25 to the Registrant's Form S-1/A as
filed with the SEC on April 24, 2002
10.22 Equity Line of Credit Agreement, dated May 6, Incorporated by reference to Exhibit
2002, between NeoMedia Technologies and Cornell 10.17 to the Registrant's Quarterly
Capital Partners, LP Report on Form 10-Q as filed with the SEC
on August 14, 2002
10.23 Nasdaq Staff delisting notification letter Incorporated by reference to Exhibit
dated May 16, 2002 10.18 to the Registrant's Quarterly
Report on Form 10-Q as filed with the SEC
on August 14, 2002
10.24 Settlement Agreement relating to wrongful Incorporated by reference to Exhibit
termination lawsuit brought by former president 10.19 to the Registrant's Form 10-Q as
and Chief Operating Officer filed with the SEC on August 14, 2002
10.25 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and 2150 Western Court 10.20 to the Registrants Form 10-Q as
Company, LLC filed on November 14, 2002
10.26 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Ripfire, Inc. 10.21 to the Registrants Form 10-Q as
filed on November 14, 2002
10.27 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Wachovia Bank, N.A. 10.22 to the Registrants Form 10-Q as
filed on November 14, 2002
10.28 Mutual settlement agreement by and between Incorporated by reference to Exhibit
NeoMedia Technologies and Marianne LePera, 10.23 to the Registrants Form 10-Q as
NeoMedia Technologies' former General Counsel filed on November 14, 2002
10.29 Equity Line of Credit Agreement, dated February Incorporated by reference to Exhibit
11, 2003, between NeoMedia Technologies and 10.80 to the Registrants Form S-1/A as
Cornell Capital Partners filed on February 14, 2003
10.30 Form of Placement Agent Agreement, dated Incorporated by reference to Exhibit
November 2002, between NeoMedia Technologies 10.84 to the Registrant's Form S-1 as
and Westrock Advisors, Inc. filed on February 12, 2003
10.31 Form of Escrow Agreement, dated November 2002, Incorporated by reference to Exhibit
between NeoMedia Technologies and Cornell 10.85 to the Registrant's Form S-1 as
Capital Partners filed on February 12, 2003
II-5
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
10.32 Form of Registration Rights Agreement, dated Incorporated by reference to Exhibit
November 2002, between NeoMedia Technologies 10.86 to the Registrant's Form S-1 as
and Cornell Capital Partners filed on February 12, 2003
10.33 Promissory Note, dated February 23, 2001, Incorporated by reference to Exhibit
between Digital Convergence Corporation and 10.87 to the Registrant's Form S-1 as
NeoMedia filed on February 12, 2003
10.34 Termination Agreement, dated August 21, 2001, Incorporated by reference to Exhibit
between About.com and NeoMedia 10.88 to the Registrant's Form S-1 as
filed on February 12, 2003
10.35 Memorandum of Terms to merge, dated March 7, Incorporated by reference to Exhibit 3.1
2003, between NeoMedia and Loch Energy, Inc. to the Registrant's Form 8-K as filed on
March 19, 2003
10.36 Binding Letter of Intent to merge, dated July Incorporated by reference to Exhibit 99.5
25, 2003, between NeoMedia and Secure Source to the Registrant's Form 10-QSB as filed
Technologies, Inc. on August 14, 2003
10.37 Definitive Merger Agreement, dated October 3, Incorporated by reference to Exhibit 99.1
2003, between NeoMedia and Secure Source to the Registrant's Form 8-K as filed on
Technologies, Inc October 8, 2003
10.38 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit
October 27, 2003, between NeoMedia and Cornell 10.91 to the Registrant's Form SB-2/A as
Capital Partners filed on December 19, 2003
10.39 Form of Placement Agent Agreement, dated Incorporated by reference to Exhibit
October 27, 2003, between NeoMedia and 10.92 to the Registrant's Form SB-2/A as
Newbridge Securities Corporation filed on December 19, 2003
10.40 Form of Registration Rights Agreement, dated Incorporated by reference to Exhibit
October 27, 2003, between NeoMedia and Cornell 10.93 to the Registrant's Form SB-2/A as
Capital Partners filed on December 19, 2003
10.41 Form of Escrow Agreement, dated October 27, Incorporated by reference to Exhibit
2003, between NeoMedia and Cornell Capital 10.94 to the Registrant's Form SB-2/A as
Partners filed on December 19, 2003
10.42 2003 Stock Compensation Plan Incorporated by reference to Exhibit 4.1
to the Registrant's Form S-8 as filed on
October 31, 2003
10.43 Letter of Intent to acquire CSI International, Incorporated by reference to Exhibit 3.1
Inc., dated November 8, 2003 to the Registrant's Form 8-K as filed on
November 13, 2003
10.44 Letter of Intent to acquire BSD Software, Inc., Incorporated by reference to Exhibit 3.1
dated December 9, 2003 to the Registrant's Form 8-K as filed on
December 11, 2003
10.45 Definitive Merger Agreement, dated February 6, Incorporated by reference to Exhibit 3.1
2004, between NeoMedia and CSI International, to the Registrant's Form 8-K as filed on
Inc. February 10, 2004
II-6
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
10.46 $4 million Promissory note payable to Cornell Incorporated by reference to Exhibit
Capital Partners, dated January 15, 2004 10.49 to the Registrant's Form 10-KSB as
filed on March 9, 2004
10.47 Form of Business Development Agreement Incorporated by reference to Exhibit 2.2
between NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.48 Form of Investment Agreement between NeoMedia Incorporated by reference to Exhibit 2.3
and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.49 Form of Registration Rights Agreement between Incorporated by reference to Exhibit 2.4
NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.50 Form of Indemnification Agreement between Incorporated by reference to Exhibit 2.5
NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.51 Form of Merger Agreement among NeoMedia Incorporated by reference to Exhibit 16.1
Technologies, Inc., NeoMedia Telecom Services, to the Registrant's Form 8-K as filed on
Inc., and BSD Software, Inc. December 22, 2004
10.52 Form of NeoMedia's Policy Statement on Ethical Incorporated by reference to Exhibit
Behavior 10.53 to the Registrant's Form 10-KSB as
filed on March 7, 2005
10.53 Form of Term Sheet with Nextcode Corporation Incorporated by reference to Exhibit
10.54 to the Registrant's Form 10-KSB as
filed on March 7, 2005
10.54 Form of Letter of Intent With Shelron Group, Incorporated by reference to Exhibit
Inc. 10.55 to the Registrant's Form 10-KSB as
filed on March 7, 2005
10.54 Form of Letters of Intent With Pickups Plus, Incorporated by reference to Exhibits
Inc. 16.1 and 16.2 to the Registrant's Form
8-K as filed on March 1, 2005
10.55 Form of Merger Agreement among NeoMedia Provided Herewith
Technologies, Inc., NeoMedia Telecom Services,
Inc., and BSD Software, Inc.
10.56 Letter of extension of outside date between Provided Herewith
NeoMedia and BSD
10.57 Co-Marketing Partner Agreement between NeoMedia Incorporated by reference to Exhibit 16.1
Technologies, Inc. and Foote Cone & Belding, a to the Registrant's Form 8-K as filed on
division of FCB Worldwide L.L.C. March 24, 2005
10.58 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit 16.1
March 30,2005, between NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
10.59 Placement Agent Agreement, dated March 30, Incorporated by reference to Exhibit 16.2
2005, between NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
II-7
Exhibit No. Description Location
----------- ------------------------------------------------ ------------------------------------------
10.60 Escrow Agreement, dated March 30, 2005, between Incorporated by reference to Exhibit 16.3
NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
10.61 Registration Rights Agreement, dated March 30, Incorporated by reference to Exhibit 16.4
2005, between NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
10.62 Promissory Note, dated March 30, 2005, between Incorporated by reference to Exhibit 16.5
NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
10.63 Security Agreement, dated March 30, 2005, Incorporated by reference to Exhibit 16.6
between NeoMedia and Cornell to the Registrant's Form 8-K as filed on
April 1, 2005
10.64 Patent Purchase Agreement, dated April 8, 2005, Incorporated by reference to Exhibit 16.1
between NeoMedia and Loyaltypoint, Inc. to the Registrant's Form 8-K as filed on
April 13, 2005
10.65 Letter Amending Section 7.3(g) of the Merger Provided Herewith
Agreement between NeoMedia and BSD
10.66 Letter of extension of outside date between Provided Herewith
NeoMedia and BSD
10.67 Letter of extension of outside date between Provided Herewith
NeoMedia and BSD
10.68 Distribution Agreement between NeoMedia and Incorporated by reference to Exhibit 16.1
Beijing Sino-US Jinche Yingang Auto to the Registrant's Form 8-K as filed on
Technological Services Limited August 31, 2005
10.69 Distribution Agreement between NeoMedia and Incorporated by reference to Exhibit 16.1
Micropaint de Mexico, S.A. to the Registrant's Form 8-K as filed on
September 29, 2005
10.70 Distribution Agreement between NeoMedia and Incorporated by reference to Exhibit 16.1
WITHO-AS to the Registrant's Form 8-K as filed on
October 6, 2005
23.1 Consent of Stonefield Josephson, Inc., Provided Herewith
independent auditors of NeoMedia Technologies,
Inc.
23.2 Consent of KPMG, LLP, independent auditors of Provided Herewith
BSD Software, Inc.
23.3 Consent of Eisner LLP, independent auditors of Provided Herewith
CSI International, Inc.
23.4 Consent of Stonefield Josephson, Inc., Provided Herewith
independent auditors of BSD Software Inc.
Annex A BSD Initial Dissenters' Notice Letter, Provided Herewith
Dissenters' Demand Notice Form, and Copies of
Sections 607.1301 through 607.1333 of the
Florida Business Corporation Act Concerning
Dissenters' Rights
II-8
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933, as amended (the "1933 Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing this Registration Statement on Form
S-4 and authorized this Registration Statement to be signed on our behalf by the
undersigned, on October 31, 2005.
NEOMEDIA TECHNOLOGIES, INC.
By: /s/ Charles T. Jensen
------------------------------------
Charles T. Jensen
President, Chief Executive Officer,
Chief Operating Officer and Director
/s/ David A. Dodge
------------------------------------
David A. Dodge
Vice-President, Chief Financial Officer,
and principal accounting officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ Charles T. Jensen President, Chief Executive Officer,
--------------------- and Director October 31, 2005
Charles T. Jensen
/s/ William E. Fritz Director October 31, 2005
---------------------
William E. Fritz
/s/ Charles W. Fritz Chairman of the Board October 31, 2005
---------------------
Charles W. Fritz
/s/ David A. Dodge Vice-President, Chief Financial
--------------------- Officer,and principal accounting
David A. Dodge officer October 31, 2005
/s/ Hayes Barclay Director October 31, 2005
---------------------
Hayes Barclay
/s/ James J. Keil Director October 31, 2005
---------------------
James J. Keil
II-10
Annex A
Initial Dissenters' Notice Letter to BSD Shareholders
[ON BSD LETTERHEAD]
_______________, 2005
Re: Initial Notice of Dissenters' Rights under the FBCA
Dear BSD Software, Inc. Shareholder:
As you may be aware, BSD Software, Inc. ("BSD") has entered into an
agreement and plan of merger with NeoMedia Technologies, Inc. (NeoMedia"), which
provides for NeoMedia to acquire from you and the other BSD shareholders 100% of
BSD's common stock. When the merger is completed, BSD will become a wholly-owned
subsidiary of NeoMedia.
Upon completion of the merger, BSD's shareholders will receive, for each
share of BSD stock owned, NeoMedia stock equivalent to .07 divided by the
volume-weighted average price of NeoMedia stock for the five days prior to the
effective time of the merger. NeoMedia common stock is publicly traded on the
Over-the-Counter Bulletin Board exchange under the symbol "NEOM". On March 21,
2005, the closing price of NeoMedia common stock was $0.232. In 2004, NeoMedia's
common stock traded between a low of $0.05 and a high of $0.299.
Following the merger, based on 31,810,897 outstanding shares of BSD common
stock and 432,525,053 outstanding shares of NeoMedia common stock as of December
31, 2004, and assuming a NeoMedia stock price of $0.25, BSD shareholders would
hold approximately 2% of the outstanding shares of NeoMedia and existing
NeoMedia shareholders would hold the remaining 98% of NeoMedia's outstanding
shares. The actual exchange ratio will vary due to changes in NeoMedia's stock
price and any additional issuances of common stock by BSD prior to the effective
time of the merger.
Shareholders holding approximately 62.7% of the outstanding shares of BSD
common stock have each entered into an agreement with NeoMedia to vote to
approve and adopt the Merger Agreement and the merger. BSD's Board of Directors
has also approved the Merger Agreement.
For those BSD shareholder who do NOT vote in favor of the merger
("Potential Dissenters"), we hereby inform you that you may be entitled to
assert dissenters' rights under Section 607.1301 et seq. of the Florida Business
Corporation Act (the "FBCA"), copies of which are attached to the end of this
notice letter. Potential Dissenters are urged to carefully read the enclosed
FBCA as perfection of your rights as a dissenter thereunder requires you to
strictly satisfy all requirements of the FBCA. To reiterate, in order to assert
your dissenters' rights under the FBCA, you must NOT vote in favor of the merger
and you must comply with the requirements of the FBCA.
The FBCA requires, among other things, that BSD furnish you with this
initial notice of dissenters' rights (the "Initial Notice"), copies of the
relevant portions of the FBCA concerning dissenters' rights, and the attached
Dissenters' Demand Form, which you should fill-out and return to BSD if you
desire to assert your dissenters' rights under the FBCA in lieu of receiving
your pro rata share of NeoMedia stock as described above. BSD must receive your
completed Dissenters' Demand Form no later than twenty (20) days after your
receipt of this Initial Notice (the "Deadline"). Failure to complete or sign the
Dissenters' Demand Form or return it to BSD's offices by the Deadline will be
deemed a waiver of your dissenters' rights in accordance with the FBCA, and in
such instances you will instead receive your pro rata share of NeoMedia stock as
outlined above.
As required under the FBCA, once the merger becomes effective, BSD will
send a second notice of Dissenters' Rights (the "Second Notice") only to those
shareholders of BSD who have submitted their signed Dissenters' Demand Form to
BSD by the Deadline indicated above. The Second Notice will, among other things,
provide you with details concerning the date on which the merger became
effective, an estimate of the fair value of your BSD shares immediately prior to
the effective date of the merger, copies of the relevant provisions of the FBCA
concerning dissenter's rights, and a Appraisal Notice Form, that you must
complete and return to BSD by the deadline indicated in the Second Notice. To
clarify, as required under the FBCA, the fair value of dissenters' shares will
NOT reflect any change in value attributed to the merger or any subsequent
event; rather, the fair value determination is made immediately prior to the
effective date of the merger.
In the event that holders of more than 5% of BSD's outstanding shares of
common stock elect to exercise their dissenters' rights under the FBCA, NeoMedia
may, in its discretion as provided in the Merger Agreement, elect to terminate
the consummation of the merger.
IN LIGHT OF THE FOREGOING, BSD'S BOARD OF DIRECTORS URGES YOU TO NOT
ASSERT YOUR DISSENTERS' RIGHTS AND INSTEAD ELECT TO RECEIVE YOUR PRO RATA SHARE
OF NEOMEDIA STOCK AS DESCRIBED ABOVE. However, if you do elect to assert your
dissenters' rights, you are urged to (i) carefully review the attached excerpts
from the FBCA, (ii) not vote in favor of the merger, (iii) complete and sign the
attached Dissenters' Demand Form, and (iv) return the Dissenters' Demand Form to
BSD by the Deadline. Failure to strictly comply with the requirements of the
FBCA will be deemed a waiver of your dissenters' rights thereunder and you will
instead receive your pro rata share of NeoMedia stock as described at the
beginning of this letter.
Sincerely,
The Board of Directors
BSD Software, Inc.
DISSENTERS' DEMAND FORM
TO: BSD Software, Inc.
5824 Second Street SW, Suite 300
Calgary, Alberta, Canada, T2H-0H2
Attention: CFO
I, the undersigned, am a shareholder of BSD Software, Inc., a Florida
corporation ("BSD" or the "Company"), on __________________, 2005, (the "Initial
Notice Date") the date on which the Company first informed its shareholders of
the proposed merger (the "Contemplated Merger") by and among BSD, NeoMedia
Technologies, Inc., a Delaware corporation, and NeoMedia Telecom Services, Inc.,
a Nevada corporation.
I HEREBY REPRESENT AND WARRANT TO THE COMPANY THE FOLLOWING:
1. I currently own ______________________________ shares of common stock of
(insert number of shares owned)
BSD (the "BSD Shares") as follows:
a. ____ Solely, with no other person or entity, or
b. ____ Jointly, with ____________________________, or
c. ____ Through the following entity: __________________________________.
(check one only and fill-in blank to the right as necessary)
o No person or entity owns the BSD Shares other than as I have indicated in
my response to No. 1 above.
2. I acquired the BSD Shares on or about the following
date(s):_______________________________________.
(insert dates(s))
3. ______ I did _____ did not hold the BSD Shares as of the Initial Notice
(check one only)
Date
4. I did not vote in favor of the Contemplated Merger at any time
5. I hereby serve notice upon the Company that I object to the Contemplated
Merger, and that I demand payment for my BSD Shares pursuant to Section
607.1321 of the Florida Business Corporation Act (the "FBCA") as a
dissenting shareholder of BSD.
6. I hereby acknowledge that it order for me to be entitled to assert my
dissenters' rights under the FBCA, I must complete, execute and return
this Dissenters' Demand Form to the Company at the address noted above by
no later than 20 days after the date on which I received the accompanying
Initial Dissenters' Notice from BSD.
7. I hereby acknowledge that I received the accompanying Initial Dissenters'
Notice, this Dissenters' Demand Form, and copies of Sections 607.1301 et
seq., inclusive, of the FBCA on or before the date hereof.
8. I hereby acknowledge that in order for me to perfect the exercise of my
dissenters' rights under the FBCA, I must strictly comply with all
requirements of the FBCA and I understand that my failure to do so may
result in my being deemed to have irrevocably waived such rights.
THE UNDERSIGNED:
Signature: _____________________________
Print Name: ____________________________
Address: _______________________________
________________________________________
Phone Number: __________________________
SECTIONS 607.1301 THROUGH 607.1333 OF THE FLORIDA BUSINESS CORPORATION ACT
CONCERNING DISSENTERS' RIGHTS
607.1301. Appraisal rights; definitions
The following definitions apply to ss. 607.1302-607.1333:
(1) "Affiliate" means a person that directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with
another person or is a senior executive thereof. For purposes of s.
607.1302(2)(d), a person is deemed to be an affiliate of its senior executives.
(2) "Beneficial shareholder" means a person who is the beneficial owner of
shares held in a voting trust or by a nominee on the beneficial owner's behalf.
(3) "Corporation" means the issuer of the shares held by a shareholder demanding
appraisal and, for matters covered in ss. 607.1322-607.1333, includes the
surviving entity in a merger.
(4) "Fair value" means the value of the corporation's shares determined:
(a) Immediately before the effectuation of the corporate action to which the
shareholder objects.
(b) Using customary and current valuation concepts and techniques generally
employed for similar businesses in the context of the transaction requiring
appraisal, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable to the corporation and
its remaining shareholders.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the rate of interest on judgments in this state on
the effective date of the corporate action.
(6) "Preferred shares" means a class or series of shares the holders of which
have preference over any other class or series with respect to distributions.
(7) "Record shareholder" means the person in whose name shares are registered in
the records of the corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with the corporation.
(8) "Senior executive" means the chief executive officer, chief operating
officer, chief financial officer, or anyone in charge of a principal business
unit or function.
(9) "Shareholder" means both a record shareholder and a beneficial shareholder.
CREDIT(S)
Amended by Laws 2003, c. 2003-283, ss. 21, eff. Oct. 1, 2003.
HISTORICAL AND STATUTORY NOTES
Derivation:
Laws 1989, c. 89-154, ss. 118.
Amendment Notes:
Laws 2003, c. 2003-283, ss. 21, rewrote this section, which formerly read:
"The following definitions apply to ss. 607.1302 and 607.1320:
"(1) 'Corporation' means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
"(2) 'Fair value,' with respect to a dissenter's shares, means the value of the
shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be inequitable.
"(3) 'Shareholders' authorization date' means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on which
the corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of a
merger pursuant to s. 607.1104, the day prior to the date on which a copy of the
plan of merger was mailed to each shareholder of record of the subsidiary
corporation."
607.1302. Right of shareholders to appraisal
(1) A shareholder is entitled to appraisal rights, and to obtain payment of the
fair value of that shareholder's shares, in the event of any of the following
corporate actions:
(a) Consummation of a merger to which the corporation is a party if shareholder
approval is required for the merger by s. 607.1103 and the shareholder is
entitled to vote on the merger or if the corporation is a subsidiary and the
merger is governed by s. 607.1104;
(b) Consummation of a share exchange to which the corporation is a party as the
corporation whose shares will be acquired if the shareholder is entitled to vote
on the exchange, except that appraisal rights shall not be available to any
shareholder of the corporation with respect to any class or series of shares of
the corporation that is not exchanged;
(c) Consummation of a disposition of assets pursuant to s. 607.1202 if the
shareholder is entitled to vote on the disposition, including a sale in
dissolution but not including a sale pursuant to court order or a sale for cash
pursuant to a plan by which all or substantially all of the net proceeds of the
sale will be distributed to the shareholders within 1 year after the date of
sale;
(d) Any other amendment to the articles of incorporation, merger, share
exchange, or disposition of assets to the extent provided by the articles of
incorporation, bylaws, or a resolution of the board of directors, except that no
bylaw or board resolution providing for appraisal rights may be amended or
otherwise altered except by shareholder approval; or
(e) With regard to a class of shares prescribed in the articles of incorporation
prior to October 1, 2003, including any shares within that class subsequently
authorized by amendment, any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such amendment would
adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his or her
shares;
2. Altering or abolishing the voting rights pertaining to any of his or her
shares, except as such rights may be affected by the voting rights of new shares
then being authorized of any existing or new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any of his or her
shares, when such exchange, cancellation, or reclassification would alter or
abolish the shareholder's voting rights or alter his or her percentage of equity
in the corporation, or effecting a reduction or cancellation of accrued
dividends or other arrearages in respect to such shares;
4. Reducing the stated redemption price of any of the shareholder's redeemable
shares, altering or abolishing any provision relating to any sinking fund for
the redemption or purchase of any of his or her shares, or making any of his or
her shares subject to redemption when they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of the
shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the shareholder's preferred
shares; or
7. Reducing any stated preferential amount payable on any of the shareholder's
preferred shares upon voluntary or involuntary liquidation.
(2) Notwithstanding subsection (1), the availability of appraisal rights under
paragraphs (1)(a), (b), (c), and (d) shall be limited in accordance with the
following provisions:
(a) Appraisal rights shall not be available for the holders of shares of any
class or series of shares which is:
1. Listed on the New York Stock Exchange or the American Stock Exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.; or
2. Not so listed or designated, but has at least 2,000 shareholders and the
outstanding shares of such class or series have a market value of at least $10
million, exclusive of the value of such shares held by its subsidiaries, senior
executives, directors, and beneficial shareholders owning more than 10 percent
of such shares.
(b) The applicability of paragraph (a) shall be determined as of:
1. The record date fixed to determine the shareholders entitled to receive
notice of, and to vote at, the meeting of shareholders to act upon the corporate
action requiring appraisal rights; or
2. If there will be no meeting of shareholders, the close of business on the day
on which the board of directors adopts the resolution recommending such
corporate action.
(c) Paragraph (a) shall not be applicable and appraisal rights shall be
available pursuant to subsection (1) for the holders of any class or series of
shares who are required by the terms of the corporate action requiring appraisal
rights to accept for such shares anything other than cash or shares of any class
or any series of shares of any corporation, or any other proprietary interest of
any other entity, that satisfies the standards set forth in paragraph (a) at the
time the corporate action becomes effective.
(d) Paragraph (a) shall not be applicable and appraisal rights shall be
available pursuant to subsection (1) for the holders of any class or series of
shares if:
1. Any of the shares or assets of the corporation are being acquired or
converted, whether by merger, share exchange, or otherwise, pursuant to the
corporate action by a person, or by an affiliate of a person, who:
a. Is, or at any time in the 1-year period immediately preceding approval by the
board of directors of the corporate action requiring appraisal rights was, the
beneficial owner of 20 percent or more of the voting power of the corporation,
excluding any shares acquired pursuant to an offer for all shares having voting
power if such offer was made within 1 year prior to the corporate action
requiring appraisal rights for consideration of the same kind and of a value
equal to or less than that paid in connection with the corporate action; or
b. Directly or indirectly has, or at any time in the 1-year period immediately
preceding approval by the board of directors of the corporation of the corporate
action requiring appraisal rights had, the power, contractually or otherwise, to
cause the appointment or election of 25 percent or more of the directors to the
board of directors of the corporation; or
2. Any of the shares or assets of the corporation are being acquired or
converted, whether by merger, share exchange, or otherwise, pursuant to such
corporate action by a person, or by an affiliate of a person, who is, or at any
time in the 1-year period immediately preceding approval by the board of
directors of the corporate action requiring appraisal rights was, a senior
executive or director of the corporation or a senior executive of any affiliate
thereof, and that senior executive or director will receive, as a result of the
corporate action, a financial benefit not generally available to other
shareholders as such, other than:
a. Employment, consulting, retirement, or similar benefits established
separately and not as part of or in contemplation of the corporate action;
b. Employment, consulting, retirement, or similar benefits established in
contemplation of, or as part of, the corporate action that are not more
favorable than those existing before the corporate action or, if more favorable,
that have been approved on behalf of the corporation in the same manner as is
provided in s. 607.0832; or
c. In the case of a director of the corporation who will, in the corporate
action, become a director of the acquiring entity in the corporate action or one
of its affiliates, rights and benefits as a director that are provided on the
same basis as those afforded by the acquiring entity generally to other
directors of such entity or such affiliate.
(e) For the purposes of paragraph (d) only, the term "beneficial owner" means
any person who, directly or indirectly, through any contract, arrangement, or
understanding, other than a revocable proxy, has or shares the power to vote, or
to direct the voting of, shares, provided that a member of a national securities
exchange shall not be deemed to be a beneficial owner of securities held
directly or indirectly by it on behalf of another person solely because such
member is the recordholder of such securities if the member is precluded by the
rules of such exchange from voting without instruction on contested matters or
matters that may affect substantially the rights or privileges of the holders of
the securities to be voted. When two or more persons agree to act together for
the purpose of voting their shares of the corporation, each member of the group
formed thereby shall be deemed to have acquired beneficial ownership, as of the
date of such agreement, of all voting shares of the corporation beneficially
owned by any member of the group.
(3) Notwithstanding any other provision of this section, the articles of
incorporation as originally filed or any amendment thereto may limit or
eliminate appraisal rights for any class or series of preferred shares, but any
such limitation or elimination contained in an amendment to the articles of
incorporation that limits or eliminates appraisal rights for any of such shares
that are outstanding immediately prior to the effective date of such amendment
or that the corporation is or may be required to issue or sell thereafter
pursuant to any conversion, exchange, or other right existing immediately before
the effective date of such amendment shall not apply to any corporate action
that becomes effective within 1 year of that date if such action would otherwise
afford appraisal rights.
(4) A shareholder entitled to appraisal rights under this chapter may not
challenge a completed corporate action for which appraisal rights are available
unless such corporate action:
(a) Was not effectuated in accordance with the applicable provisions of this
section or the corporation's articles of incorporation, bylaws, or board of
directors' resolution authorizing the corporate action; or
(b) Was procured as a result of fraud or material misrepresentation.
CREDIT(S)
Amended by Laws 1994, c. 94-327, ss. 5, eff. June 2, 1994; Laws 1997, c. 97-102,
ss. 31, eff. July 1, 1997; Laws 2003, c. 2003-283, ss. 22, eff. Oct. 1, 2003;
Laws 2004, c. 2004-378, ss. 1, eff. June 24, 2004.
HISTORICAL AND STATUTORY NOTES
Derivation:
Laws 1989, c. 89-154, ss. 119.
Amendment Notes:
Laws 1994, c. 94-327, ss. 5, eff. June 2, 1994, inserted in subsec. (4) "or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.".
Laws 1997, c. 97-102, eff. July 1, 1997, removed gender-specific references
applicable to human beings from volume 4 of the Florida Statutes without
substantive changes in legal effect.
Laws 2003, c. 2003-283, ss. 22, rewrote this section, which formerly read:
"(1) Any shareholder of a corporation has the right to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of the
following corporate actions:
"(a) Consummation of a plan of merger to which the corporation is a party:
"1. If the shareholder is entitled to vote on the merger, or
"2. If the corporation is a subsidiary that is merged with its parent under s.
607.1104, and the shareholders would have been entitled to vote on action taken,
except for the applicability of s. 607.1104;
"(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation, other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange
pursuant to s. 607.1202, including a sale in dissolution but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to the
shareholders within 1 year after the date of sale;
"(c) As provided in s. 607.0902(11), the approval of a control-share
acquisition;
"(d) Consummation of a plan of share exchange to which the corporation is a
party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
"(e) Any amendment of the articles of incorporation if the shareholder is
entitled to vote on the amendment and if such amendment would adversely affect
such shareholder by:
"1. Altering or abolishing any preemptive rights attached to any of his or her
shares;
"2. Altering or abolishing the voting rights pertaining to any of his or her
shares, except as such rights may be affected by the voting rights of new shares
then being authorized of any existing or new class or series of shares;
"3. Effecting an exchange, cancellation, or reclassification of any of his or
her shares, when such exchange, cancellation, or reclassification would alter or
abolish the shareholder's voting rights or alter his or her percentage of equity
in the corporation, or effecting a reduction or cancellation of accrued
dividends or other arrearages in respect to such shares;
"4. Reducing the stated redemption price of any of the shareholder's redeemable
shares, altering or abolishing any provision relating to any sinking fund for
the redemption or purchase of any of his or her shares, or making any of his or
her shares subject to redemption when they are not otherwise redeemable;
"5. Making noncumulative, in whole or in part, dividends of any of the
shareholder's preferred shares which had theretofore been cumulative;
"6. Reducing the stated dividend preference of any of the shareholder's
preferred shares; or
"7. Reducing any stated preferential amount payable on any of the shareholder's
preferred shares upon voluntary or involuntary liquidation; or
"(f) Any corporate action taken, to the extent the articles of incorporation
provide that a voting or nonvoting shareholder is entitled to dissent and obtain
payment for his or her shares.
"(2) A shareholder dissenting from any amendment specified in paragraph (1)(e)
has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
"(3) A shareholder may dissent as to less than all the shares registered in his
or her name. In that event, the shareholder's rights shall be determined as if
the shares as to which he or she has dissented and his or her other shares were
registered in the names of different shareholders.
"(4) Unless the articles of incorporation otherwise provide, this section does
not apply with respect to a plan of merger or share exchange or a proposed sale
or exchange of property, to the holders of shares of any class or series which,
on the record date fixed to determine the shareholders entitled to vote at the
meeting of shareholders at which such action is to be acted upon or to consent
to any such action without a meeting, were either registered on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held of record by not fewer than 2,000 shareholders.
"(5) A shareholder entitled to dissent and obtain payment for his or her shares
under this section may not challenge the corporate action creating his or her
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation."
Laws 2004, c. 2004-378, ss. 1, in subsec. (1)(e), substituted "a class of shares
prescribed in the articles of incorporation prior to October 1, 2003, including
any shares within that class subsequently authorized by amendment," for "shares
issued prior to October 1, 2003," following "With regard to" in the introductory
paragraph.
Prior Laws:
Fla.St.1989, ss. 607.244.
Laws 1987, c. 87-257, ss. 4.
Laws 1981, c. 81-155, ss. 10.
Laws 1975, c. 75-250, ss. 81.
Fla.St.1975, ss. 608.23.
Laws 1969, c. 69-23, ss. 4.
Laws 1953, c. 28170, ss. 1.
Fla.St.1951, ss. 612.40.
Comp.Gen.Laws 1927, ss. 6564.
Laws 1925, c. 10096, ss. 38.
607.1303. Assertion of rights by nominees and beneficial owners
(1) A record shareholder may assert appraisal rights as to fewer than all the
shares registered in the record shareholder's name but owned by a beneficial
shareholder only if the record shareholder objects with respect to all shares of
the class or series owned by the beneficial shareholder and notifies the
corporation in writing of the name and address of each beneficial shareholder on
whose behalf appraisal rights are being asserted. The rights of a record
shareholder who asserts appraisal rights for only part of the shares held of
record in the record shareholder's name under this subsection shall be
determined as if the shares as to which the record shareholder objects and the
record shareholder's other shares were registered in the names of different
record shareholders.
(2) A beneficial shareholder may assert appraisal rights as to shares of any
class or series held on behalf of the shareholder only if such shareholder:
(a) Submits to the corporation the record shareholder's written consent to the
assertion of such rights no later than the date referred to in s.
607.1322(2)(b)2.
(b) Does so with respect to all shares of the class or series that are
beneficially owned by the beneficial shareholder.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 23, eff. Oct. 1, 2003.
607.1320. Notice of appraisal rights
(1) If proposed corporate action described in s. 607.1302(1) is to be submitted
to a vote at a shareholders' meeting, the meeting notice must state that the
corporation has concluded that shareholders are, are not, or may be entitled to
assert appraisal rights under this chapter. If the corporation concludes that
appraisal rights are or may be available, a copy of ss. 607.1301-607.1333 must
accompany the meeting notice sent to those record shareholders entitled to
exercise appraisal rights.
(2) In a merger pursuant to s. 607.1104, the parent corporation must notify in
writing all record shareholders of the subsidiary who are entitled to assert
appraisal rights that the corporate action became effective. Such notice must be
sent within 10 days after the corporate action became effective and include the
materials described in s. 607.1322.
(3) If the proposed corporate action described in s. 607.1302(1) is to be
approved other than by a shareholders' meeting, the notice referred to in
subsection (1) must be sent to all shareholders at the time that consents are
first solicited pursuant to s. 607.0704, whether or not consents are solicited
from all shareholders, and include the materials described in s. 607.1322.
CREDIT(S)
Amended by Laws 1993, c. 93-281, ss. 35, eff. May 15, 1993; Laws 1997, c.
97-102, ss. 32, eff. July 1, 1997; Laws 2003, c. 2003-283, ss. 24, eff. Oct. 1,
2003.
HISTORICAL AND STATUTORY NOTES
Derivation:
Laws 1989, c. 89-154, ss. 120.
Amendment Notes:
Laws 1993, c. 93-281, ss. 35, eff. May 15, 1993, in subsec. (10), substituted
"authorized but unissued shares of the corporation" for "in the case of other
treasury shares".
Laws 1997, c. 97-102, eff. July 1, 1997, removed gender-specific references
applicable to human beings from volume 4 of the Florida Statutes without
substantive changes in legal effect.
Laws 2003, c. 2003-283, ss. 24, rewrote this section, which formerly read:
"(1)(a) If a proposed corporate action creating dissenters' rights under s.
607.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A
shareholder who wishes to assert dissenters' rights shall:
"1. Deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for his or her shares if the proposed
action is effectuated, and
"2. Not vote his or her shares in favor of the proposed action. A proxy or vote
against the proposed action does not constitute such a notice of intent to
demand payment.
"(b) If proposed corporate action creating dissenters' rights under s. 607.1302
is effectuated by written consent without a meeting, the corporation shall
deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to each shareholder
simultaneously with any request for the shareholder's written consent or, if
such a request is not made, within 10 days after the date the corporation
received written consents without a meeting from the requisite number of
shareholders necessary to authorize the action.
"(2) Within 10 days after the shareholders' authorization date, the corporation
shall give written notice of such authorization or consent or adoption of the
plan of merger, as the case may be, to each shareholder who filed a notice of
intent to demand payment for his or her shares pursuant to paragraph (1)(a) or,
in the case of action authorized by written consent, to each shareholder,
excepting any who voted for, or consented in writing to, the proposed action.
"(3) Within 20 days after the giving of notice to him or her, any shareholder
who elects to dissent shall file with the corporation a notice of such election,
stating the shareholder's name and address, the number, classes, and series of
shares as to which he or she dissents, and a demand for payment of the fair
value of his or her shares. Any shareholder failing to file such election to
dissent within the period set forth shall be bound by the terms of the proposed
corporate action. Any shareholder filing an election to dissent shall deposit
his or her certificates for certificated shares with the corporation
simultaneously with the filing of the election to dissent. The corporation may
restrict the transfer of uncertificated shares from the date the shareholder's
election to dissent is filed with the corporation.
"(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5), to pay for his
or her shares. After such offer, no such notice of election may be withdrawn
unless the corporation consents thereto. However, the right of such shareholder
to be paid the fair value of his or her shares shall cease, and the shareholder
shall be reinstated to have all his or her rights as a shareholder as of the
filing of his or her notice of election, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim,
if:
"(a) Such demand is withdrawn as provided in this section;
"(b) The proposed corporate action is abandoned or rescinded or the shareholders
revoke the authority to effect such action;
"(c) No demand or petition for the determination of fair value by a court has
been made or filed within the time provided in this section; or
"(d) A court of competent jurisdiction determines that such shareholder is not
entitled to the relief provided by this section.
"(5) Within 10 days after the expiration of the period in which shareholders may
file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value for
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
"(a) A balance sheet of the corporation, the shares of which the dissenting
shareholder holds, as of the latest available date and not more than 12 months
prior to the making of such offer; and
"(b) A profit and loss statement of such corporation for the 12-month period
ended on the date of such balance sheet or, if the corporation was not in
existence throughout such 12-month period, for the portion thereof during which
it was in existence.
"(6) If within 30 days after the making of such offer any shareholder accepts
the same, payment for his or her shares shall be made within 90 days after the
making of such offer or the consummation of the proposed action, whichever is
later. Upon payment of the agreed value, the dissenting shareholder shall cease
to have any interest in such shares.
"(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in the county in this state where the registered office of the
corporation is located requesting that the fair value of such shares be
determined. The court shall also determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his or her shares. If the corporation fails to
institute the proceeding as herein provided, any dissenting shareholder may do
so in the name of the corporation. All dissenting shareholders (whether or not
residents of this state), other than shareholders who have agreed with the
corporation as to the value of their shares, shall be made parties to the
proceeding as an action against their shares. The corporation shall serve a copy
of the initial pleading in such proceeding upon each dissenting shareholder who
is a resident of this state in the manner provided by law for the service of a
summons and complaint and upon each nonresident dissenting shareholder either by
registered or certified mail and publication or in such other manner as is
permitted by law. The jurisdiction of the court is plenary and exclusive. All
shareholders who are proper parties to the proceeding are entitled to judgment
against the corporation for the amount of the fair value of their shares. The
court may, if it so elects, appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as is specified in the order of their
appointment or an amendment thereof. The corporation shall pay each dissenting
shareholder the amount found to be due him or her within 10 days after final
determination of the proceedings. Upon payment of the judgment, the dissenting
shareholder shall cease to have any interest in such shares.
"(8) The judgment may, at the discretion of the court, include a fair rate of
interest, to be determined by the court.
"(9) The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of such
costs and expenses may be apportioned and assessed as the court deems equitable
against any or all of the dissenting shareholders who are parties to the
proceeding, to whom the corporation has made an offer to pay for the shares, if
the court finds that the action of such shareholders in failing to accept such
offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
"(10) Shares acquired by a corporation pursuant to payment of the agreed value
thereof or pursuant to payment of the judgment entered therefor, as provided in
this section, may be held and disposed of by such corporation as authorized but
unissued shares of the corporation, except that, in the case of a merger, they
may be held and disposed of as the plan of merger otherwise provides. The shares
of the surviving corporation into which the shares of such dissenting
shareholders would have been converted had they assented to the merger shall
have the status of authorized but unissued shares of the surviving corporation."
Prior Laws:
Fla.St.1989, ss. 607.247.
Laws 1987, c. 87-257, ss. 5.
Laws 1977, c. 77-174, ss. 1.
Laws 1975, c. 75-250, ss. 82.
Fla.St.1975, ss. 608.23.
Laws 1969, c. 69-23, ss. 4.
Laws 1953, c. 28170, ss. 1.
Fla.St.1951, ss. 612.40.
Comp.Gen.Laws 1927, ss. 6564.
Laws 1925, c. 10096, ss. 38.
607.1321. Notice of intent to demand payment
(1) If proposed corporate action requiring appraisal rights under s. 607.1302 is
submitted to a vote at a shareholders' meeting, or is submitted to a shareholder
pursuant to a consent vote under s. 607.0704, a shareholder who wishes to assert
appraisal rights with respect to any class or series of shares:
(a) Must deliver to the corporation before the vote is taken, or within 20 days
after receiving the notice pursuant to s. 607.1320(3) if action is to be taken
without a shareholder meeting, written notice of the shareholder's intent to
demand payment if the proposed action is effectuated.
(b) Must not vote, or cause or permit to be voted, any shares of such class or
series in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) is not
entitled to payment under this chapter.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 25, eff. Oct. 1, 2003. Amended by Laws
2004, c. 2004-378, ss. 7, eff. June 24, 2004.
HISTORICAL AND STATUTORY NOTES
Amendment Notes:
Laws 2004, c. 2004-378, ss. 7, reenacted this section for the purpose of
incorporating the amendment to ss. 607.1302 in a reference thereto.
607.1322. Appraisal notice and form
(1) If proposed corporate action requiring appraisal rights under s. 607.1302(1)
becomes effective, the corporation must deliver a written appraisal notice and
form required by paragraph (2)(a) to all shareholders who satisfied the
requirements of s. 607.1321. In the case of a merger under s. 607.1104, the
parent must deliver a written appraisal notice and form to all record
shareholders who may be entitled to assert appraisal rights.
(2) The appraisal notice must be sent no earlier than the date the corporate
action became effective and no later than 10 days after such date and must:
(a) Supply a form that specifies the date that the corporate action became
effective and that provides for the shareholder to state:
1. The shareholder's name and address.
2. The number, classes, and series of shares as to which the shareholder asserts
appraisal rights.
3. That the shareholder did not vote for the transaction.
4. Whether the shareholder accepts the corporation's offer as stated in
subparagraph (b)4.
5. If the offer is not accepted, the shareholder's estimated fair value of the
shares and a demand for payment of the shareholder's estimated value plus
interest.
(b) State:
1. Where the form must be sent and where certificates for certificated shares
must be deposited and the date by which those certificates must be deposited,
which date may not be earlier than the date for receiving the required form
under subparagraph 2.
2. A date by which the corporation must receive the form, which date may not be
fewer than 40 nor more than 60 days after the date the subsection (1) appraisal
notice and form are sent, and state that the shareholder shall have waived the
right to demand appraisal with respect to the shares unless the form is received
by the corporation by such specified date.
3. The corporation's estimate of the fair value of the shares.
4. An offer to each shareholder who is entitled to appraisal rights to pay the
corporation's estimate of fair value set forth in subparagraph 3.
5. That, if requested in writing, the corporation will provide to the
shareholder so requesting, within 10 days after the date specified in
subparagraph 2., the number of shareholders who return the forms by the
specified date and the total number of shares owned by them.
6. The date by which the notice to withdraw under s. 607.1323 must be received,
which date must be within 20 days after the date specified in subparagraph 2.
(c) Be accompanied by:
1. Financial statements of the corporation that issued the shares to be
appraised, consisting of a balance sheet as of the end of the fiscal year ending
not more than 15 months prior to the date of the corporation's appraisal notice,
an income statement for that year, a cash flow statement for that year, and the
latest available interim financial statements, if any.
2. A copy of ss. 607.1301-607.1333.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 26, eff. Oct. 1, 2003.
607.1323. Perfection of rights; right to withdraw
(1) A shareholder who wishes to exercise appraisal rights must execute and
return the form received pursuant to s. 607.1322(1) and, in the case of
certificated shares, deposit the shareholder's certificates in accordance with
the terms of the notice by the date referred to in the notice pursuant to s.
607.1322(2)(b)2. Once a shareholder deposits that shareholder's certificates or,
in the case of uncertificated shares, returns the executed forms, that
shareholder loses all rights as a shareholder, unless the shareholder withdraws
pursuant to subsection (2).
(2) A shareholder who has complied with subsection (1) may nevertheless decline
to exercise appraisal rights and withdraw from the appraisal process by so
notifying the corporation in writing by the date set forth in the appraisal
notice pursuant to s. 607.1322(2)(b)6. A shareholder who fails to so withdraw
from the appraisal process may not thereafter withdraw without the corporation's
written consent.
(3) A shareholder who does not execute and return the form and, in the case of
certificated shares, deposit that shareholder's share certificates if required,
each by the date set forth in the notice described in subsection (2), shall not
be entitled to payment under this chapter.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 27, eff. Oct. 1, 2003.
607.1324. Shareholder's acceptance of corporation's offer
(1) If the shareholder states on the form provided in s. 607.1322(1) that the
shareholder accepts the offer of the corporation to pay the corporation's
estimated fair value for the shares, the corporation shall make such payment to
the shareholder within 90 days after the corporation's receipt of the form from
the shareholder.
(2) Upon payment of the agreed value, the shareholder shall cease to have any
interest in the shares.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 28, eff. Oct. 1, 2003.
607.1326. Procedure if shareholder is dissatisfied with offer
(1) A shareholder who is dissatisfied with the corporation's offer as set forth
pursuant to s. 607.1322(2)(b)4. must notify the corporation on the form provided
pursuant to s. 607.1322(1) of that shareholder's estimate of the fair value of
the shares and demand payment of that estimate plus interest.
(2) A shareholder who fails to notify the corporation in writing of that
shareholder's demand to be paid the shareholder's stated estimate of the fair
value plus interest under subsection (1) within the timeframe set forth in s.
607.1322(2)(b)2. waives the right to demand payment under this section and shall
be entitled only to the payment offered by the corporation pursuant to s.
607.1322(2)(b)4.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 29, eff. Oct. 1, 2003.
607.1330. Court action
(1) If a shareholder makes demand for payment under s. 607.1326 which remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and petition the court to determine the fair value
of the shares and accrued interest. If the corporation does not commence the
proceeding within the 60-day period, any shareholder who has made a demand
pursuant to s. 607.1326 may commence the proceeding in the name of the
corporation.
(2) The proceeding shall be commenced in the appropriate court of the county in
which the corporation's principal office, or, if none, its registered office, in
this state is located. If the corporation is a foreign corporation without a
registered office in this state, the proceeding shall be commenced in the county
in this state in which the principal office or registered office of the domestic
corporation merged with the foreign corporation was located at the time of the
transaction.
(3) All shareholders, whether or not residents of this state, whose demands
remain unsettled shall be made parties to the proceeding as in an action against
their shares. The corporation shall serve a copy of the initial pleading in such
proceeding upon each shareholder party who is a resident of this state in the
manner provided by law for the service of a summons and complaint and upon each
nonresident shareholder party by registered or certified mail or by publication
as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) is plenary and exclusive. If it so elects, the court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers shall have the powers described in
the order appointing them or in any amendment to the order. The shareholders
demanding appraisal rights are entitled to the same discovery rights as parties
in other civil proceedings. There shall be no right to a jury trial.
(5) Each shareholder made a party to the proceeding is entitled to judgment for
the amount of the fair value of such shareholder's shares, plus interest, as
found by the court.
(6) The corporation shall pay each such shareholder the amount found to be due
within 10 days after final determination of the proceedings. Upon payment of the
judgment, the shareholder shall cease to have any interest in the shares.
CREDIT(S)
Added by Laws 2004, c. 2004-378, ss. 2, eff. June 24, 2004.
607.1331. Court costs and counsel fees
(1) The court in an appraisal proceeding shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
shareholders demanding appraisal, in amounts the court finds equitable, to the
extent the court finds such shareholders acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this chapter.
(2) The court in an appraisal proceeding may also assess the fees and expenses
of counsel and experts for the respective parties, in amounts the court finds
equitable:
(a) Against the corporation and in favor of any or all shareholders demanding
appraisal if the court finds the corporation did not substantially comply with
ss. 607.1320 and 607.1322; or
(b) Against either the corporation or a shareholder demanding appraisal, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this chapter.
(3) If the court in an appraisal proceeding finds that the services of counsel
for any shareholder were of substantial benefit to other shareholders similarly
situated, and that the fees for those services should not be assessed against
the corporation, the court may award to such counsel reasonable fees to be paid
out of the amounts awarded the shareholders who were benefited.
(4) To the extent the corporation fails to make a required payment pursuant to
s. 607.1324, the shareholder may sue directly for the amount owed and, to the
extent successful, shall be entitled to recover from the corporation all costs
and expenses of the suit, including counsel fees.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 30, eff. Oct. 1, 2003. Amended by Laws
2004, c. 2004-5, ss. 98, eff. June 29, 2004.
HISTORICAL AND STATUTORY NOTES
Amendment Notes:
Laws 2004, c. 2004-5, a reviser's bill, deleted obsolete and expired provisions,
corrected grammatical and typographical errors, and made other similar changes.
607.1332. Disposition of acquired shares
Shares acquired by a corporation pursuant to payment of the agreed value thereof
or pursuant to payment of the judgment entered therefor, as provided in this
chapter, may be held and disposed of by such corporation as authorized but
unissued shares of the corporation, except that, in the case of a merger or
share exchange, they may be held and disposed of as the plan of merger or share
exchange otherwise provides. The shares of the surviving corporation into which
the shares of such shareholders demanding appraisal rights would have been
converted had they assented to the merger shall have the status of authorized
but unissued shares of the surviving corporation.
CREDIT(S)
Added by Laws 2003, c. 2003-283, ss. 31, eff. Oct. 1, 2003.