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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ____________ TO__________
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(EXACT NAME OF ISSUER IN ITS CHARTER)
DELAWARE 36-3680347
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2201 SECOND STREET, SUITE 600
FORT MYERS, FLORIDA 33901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER (INCLUDING AREA CODE) 941-337-3434
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 NASDAQ SMALL CAP MARKET
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-X is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K |X|
Issuer's consolidated revenue for its most recent fiscal year was
$8,142,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the price at which shares of common stock closed on the
Nasdaq SmallCap Stock Market on March 13, 2002 ($0.29) was $9,694,000.
Determination of stock ownership by non-affiliates is made solely for purposes
of responding to the requirements of the form and the registrant is not bound by
this determination for any other purpose.
As of March 13, 2002, there were outstanding 36,927,392_shares of the
issuer's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, are
incorporated by reference into Part III of the Form 10-K.
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements and information relating
to NeoMedia. NeoMedia intends to identify forward-looking statements in this
prospectus by using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates,"
"estimates," "predicts," "potential," "continue," or similar terminology. These
statements are based on the Company's beliefs as well as assumptions the Company
made using information currently available to us. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Because these
statements reflect the Company's current views concerning future events, these
statements involve risks, uncertainties, and assumptions. Actual future results
may differ significantly from the results discussed in the forward-looking
statements.
ITEM 1. BUSINESS
GENERAL
NeoMedia Technologies, Inc. ("NeoMedia" or "the Company") develops
proprietary technologies that link physical information and objects to the
Internet marketed under the "PaperClickTM" brand name. The primary focus of the
Company is to develop and commercialize such technologies. The Company has also
developed an extensive patent portfolio covering convergence of the physical
world and the Internet.
COMPANY STRUCTURE
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS) (formerly named NeoMedia
Application Services), and
NeoMedia Consulting and Integration Services (NCIS) (formerly named
NeoMedia SI)
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports the Company's physical world to
Internet core technology, including our linking "switch" and our application
platforms. NISS also manages the Company's valuable intellectual property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.
NCIS (systems integration service offerings) is the original business line
upon which the Company was organized. This unit resells client-server equipment
and related software, and general and specialized consulting services targeted
at software driven print applications, especially at process automation of
production print facilities through its integrated document factory solution.
Systems integration services also identifies prospects for custom applications
based on our products and services. This unit recently moved its business
offerings to a much higher Value-Add called Storage Area Networks (SAN). The
operations are based in Lisle, Illinois.
COMPANY HISTORY
NeoMedia Technologies, Inc. ("NeoMedia"), was incorporated under the laws of
the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech
Associates, Inc. ("Dev-Tech"), NeoMedia's predecessor, which was organized in
Illinois in December 1989. In March 1996, Dev-Tech's common stock was split,
with an aggregate of 2,551,120 shares of common stock being issued in exchange
for the 164 then issued and outstanding shares of common stock. On August 5,
1996, NeoMedia acquired all of the shares of Dev-Tech in exchange for the
issuance of shares of NeoMedia's common stock to Dev-Tech's stockholders
("Dev-Tech Merger").
NeoMedia also has the following wholly-owned subsidiaries: NeoMedia
Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A.,
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc., incorporated
in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH,
incorporated in Austria; NeoMedia Technologies Holding Company B.V.,
incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V.,
incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated
in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and
NeoMedia Technologies UK Limited, incorporated in the United Kingdom.
RECENT DEVELOPMENTS
In January 2001 the Company entered into an agreement with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products, granting a worldwide, non-exclusive license of the Company's
patents surrounding the manufacture, use, and sale of devices used in
print-to-internet technologies.
In February 2001 the Company won Best of Show at the Internet World
Wireless 2001 in the "Commerce" category. According to the IWW announcement,
this award exemplifies the Company's outstanding achievements as a business
leader in the internet marketplace, and represents broad industry recognition
and appreciation of the Company's achievements.
In March 2001, the Company was granted its fourth patent in nineteen months
by the United States Patent and Trademark Office. The new patent extends the
Company's IP Portfolio with voice link to the web.
In March 2001, the Company purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. In consideration for these assets, NeoMedia issued
274,699 shares of common stock, valued at $1,359,760. On August 31, 2001, the
Company signed a non-binding letter of intent to sell the assets and liabilities
of the Qode business unit to The Finx Group, Inc., a holding company based in
Elmsford, NY. The final contract is contingent upon the completion of due
diligence and definitive terms and conditions stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all inventory, equipment and the ownership and operation of the comprehensive
universal internet database along with the corresponding patents. The Finx Group
will assume $620,000 in Qode payables and $800,000 in long-term leases in
exchange for 500,000 shares of the Finx Group, right to use and sell Qode
services, and up to $5 million in affiliate revenues over the next five years.
(see Footnote 2 of the accompanying financial statements for further detail)
In January 2002, the Company entered into an agreement with the law firm of
Baniak Pine and Gannon, under which the firm will seek potential licensees of
the Company's patent portfolio.
INDUSTRY OVERVIEW
NEOMEDIA INTERNET SWITCHING SERVICES
The goal of our Internet Switching Services business segment is to promote
mass adoption of our switch and background computer process to link physical
world objects to the Internet. Our switching platform is a state-of-the-art open
and extensible cross-media publishing tool serving customers in a variety of
industrial, commercial, and educational applications. This business segment is
also responsible for licensing our intellectual property to others as a means of
promoting this new market as well as providing a revenue and cash resource. We
have been developing our physical world-to-Internet technology and offerings
since 1996 and consider ourselves an innovator and pioneer in this industry. In
the past year, we have seen similar technologies and concepts emerge in the
marketplace, and see these events as a positive validation of the physical
world-to-internet concept.
Press from competitors such as AirClic, Inc. and Digimarc, Inc. is expected
to continue to raise consumer awareness of physical-to-Web convergence. We
believe 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. Our service offering, however,
differs from those of AirClic and other competitors in that, unlike their
products and services, our products do not require the use of a proprietary or
specified device, and we offer our service on a private label basis. We are
2
positioned to provide solutions that preserve the customer's brand and also
provide tailored solutions to fit the customer needs.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
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, systems integration
services and Integrated Document Factory solutions offer a competitive value-add
to our NCIS business. We have unique offerings, which, to the extent that they
meet market needs, offer the potential for growth in this industry. In addition,
our recent high-end storage Area Network Solution allows us to participate in
the higher-margin area of the open systems marketplace.
The NCIS division also sells migration products (tools designed to
"migrate" software code from one platform to another platform) primarily to
mid-sized to large corporations and government agencies. The products include
proprietary products and software tools to migrate Wang, HP3000, Data General,
DEC and IBM DOS/VSE platforms (legacy systems) to a Unix or NT open system
platform.
STRATEGY
NeoMedia has spent the past five years inventing 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 seamlessly bridges these environments.
The Company is now entering a new phase of operations. This market has
been validated with the emergence of other competitors, and the Company is
turning its attention to the next stage of market development in this space; the
implementation of service applications providing complete product solutions to
traditional businesses with offerings related to commerce, publishing, extended
media publishing, e-learning and others.
While pursing these goals NeoMedia must remain aware of strategic
issues, opportunities and constraints that will govern the interplay of
competition and alliances in this rapidly emerging market.
PRODUCTS/SERVICES
NEOMEDIA INTERNET SWITCHING SERVICES
PAPERCLICKTM SWITCHING SERVICE. PaperClickTM is a state-of-the-art
application-switching platform that links physical objects to digital media
through the use of scanned UPC, EAN, or custom PaperClickTM codes. This
dynamic open solution serves a wide variety of customers in industrial,
commercial, and educational applications.
INTELLECTUAL PROPERTY LICENSING. The Company currently holds four
U.S. patents relating to the physical world-to-Internet marketplace.
NeoMedia intends to license this intellectual property portfolio to
companies endeavoring to tap the potential of this emerging market. To
date, the Company has entered into such agreements with
Digital:Convergence, A.T. Cross Company, and Symbol Technologies. During
January 2002, NeoMedia announced that it had 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 the Company's patent portfolio.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
3
NCIS is a group of highly skilled application developers thoroughly
familiar with MSS and other associated NeoMedia technologies who contract to
develop custom applications for clients.
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.
INTEGRATED DOCUMENT FACTORY (IDF). The IDF solution provides design
and implementation of a collection of tested hardware and software
solutions utilizing Xerox's printers and Sun servers to turn document
creation, production, and printing into an assembly line manufacturing
process. The system particularly assists financial service concerns such as
banks, insurance companies, and brokerage firms as well as helps to manage
high-volume printing of statements on a frequent basis.
STORAGE AREA NETWORKS (SAN). SAN is a Storage Management solutions and
consultancy offering consisting of tools and services that insure data
integrity, efficiency and accessibility, achieved through moving data
backup, access and archival functions off of traditional LANs/WANs that are
added on to a highly reliable independent managed network.
SYSTEM INTEGRATION SERVICES SYSTEMS. Integration Services is
responsible for customer identification, pre and post sales relationship
support, proposals, and account management surrounding custom application
development for solutions involving the metered switch services (MSS).
These customized solutions are built and integrated via the NAS business
unit of the Company.
STRATEGIC RELATIONSHIPS
NEOMEDIA INTERNET SWITCHING SERVICES
In January 2001, the Company entered into patent license with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products. Cross obtained the rights under the Company's print-to
Internet patents for personal portable scanning devices used to link bar codes
on documents and other physical consumer goods to corresponding Internet
content. Cross will pay a royalty per device to the Company for license rights
granted under this agreement.
In May 2001, the Company entered into an agreement with Symbol
Technologies, Inc., granting Symbol a worldwide, non-exclusive license of the
Company's patents surrounding the sale and use of scanning devices used in
physical world-to-Internet technologies.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
Although the NCIS business of segment the Company provides services and
products to a spectrum of customers, ranging from closely held companies to
Fortune 500 companies, for the years ended December 31, 2001 and 2000, one
customer, Ameritech Services, Inc. ("Ameritech"), accounted for 36.6% and 29.9%,
respectively, of NeoMedia NCIS revenue. The Company expects sales to Ameritech
as a percentage of total sales to decline in the future. Furthermore, the
Company does not have a written agreement with Ameritech and, therefore, there
are no contractual provisions to prevent Ameritech from terminating its
relationship with the Company at any time. Accordingly, the loss of this
customer, or a significant reduction by it in buying the products and services
offered by NeoMedia, absent diversification, would materially and adversely
affect of NeoMedia NCIS's revenues and results of operations. In addition, a
single supplier provides the equipment and software, which is re-marketed to
this customer. Accordingly, the loss of this supplier would materially adversely
affect NeoMedia NCIS. For these reasons, the Company is seeking, and continues
to seek, to diversify its sources of revenue and vendors from whom it purchases.
SALES AND MARKETING
NEOMEDIA INTERNET SWITCHING SERVICES
4
PAPERCLICKTM. While the Company eliminated the majority of its sales and
marketing staff during the third quarter of 2001, the Company continues to
promote its PaperClickTM line of products to potential customers in a wide array
of industries. Upon receipt of sufficient financing, the Company plans to
re-focus its efforts on the sale of PaperClickTM licenses through the hiring of
additional sales and marketing staff. NeoMedia has refocused its sales efforts
by focusing on signing up channel partners who have industry market presence.
NeoMedia is currently negotiating with a number of industry-focused companies
who will be our "go-to-market" partners.
INTELLECTUAL PROPERTY LICENSING. During January 2002, the Company engaged
Baniak Pine and Gannon, a law firm specializing in intellectual property
licensing and litigation. The firm will assist NeoMedia in seeking out potential
licensees of the Company's intellectual property portfolio, including any
resulting litigation.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
NCIS markets its products and services, as well as those for which it acts
as a remarketer, primarily through its direct sales force, which was composed of
8 personnel as of December 31, 2001. In addition, the business unit also relies
upon its strategic alliances with industry leaders to help market its products
and services, provide lead referrals and establish informal co-marketing
arrangements. Representatives of the Company attend seminars and trade shows,
both as speakers and participants, to help market its products and services.
RESEARCH AND DEVELOPMENT
NEOMEDIA INTERNET SWITCHING SERVICES
NeoMedia believes that its success in the Internet environment depends upon
its ability to quickly develop new products and services, as well as make
enhancements to its existing products. NISS employed 3, 24 and 19 persons in the
area of product development as of December 31, 2001, 2000, and 1999,
respectively. During the years ended December 31, 2001, 2000 and 1999, NeoMedia
NAS incurred total software development costs of $2,064,000, $2,888,000 and
$1,722,000, respectively, of which $1,515,000, $1,787,639 and $807,000,
respectively, were capitalized as software development costs and $549,000,
$1,101,000 and $915,000, respectively, were expensed as research and development
costs.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
All significant research and development relating to NeoMedia NCIS products
was discontinued at the end of 1999 when the Company discontinued its Y2K
business. All employees that were in this area were reassigned or released
during the fourth quarter of 1999.
INTELLECTUAL PROPERTY RIGHTS
The Company received its first patent from the U.S. Patent and Trademark
Office in August 1999. The patent, number 5,933,829, was allowed for the process
invented by the Company for "automatic access of electronic information through
secure machine-readable codes on printed documents." The Company received its
second patent, number 5,978,773, in November 1999. The patent was allowed for
the broad and innovative process that allows familiar print media such as
magazines, catalogs, advertisements, even product labels themselves, to become
the user interface to the Web. The Company's third U.S. patent, 6,108,656, which
issued in August 2000, is a continuation of 5,933,829 and contains additional
claims that broaden scope and coverage. The Company's fourth patent, 6,199,048,
issued on March 6, 2001 and is a continuation of 5,978,773. The 6,199,048 patent
substantially extends the Company's patent coverage to address voice portals,
multi-media and web portal applications.
5
In addition to these issued patents, the Company continues to develop,
acquire and prosecute a substantial portfolio of domestic and international
patent applications that include broad claims that apply to its core business
and markets.
The Company's proprietary technology based on these patents enables
everyone, regardless of training or experience, to easily access the World Wide
Web on the Internet. These patents and their related proprietary technologies,
along with other pending applications, enhance the use of the Internet for
E-commerce by making it much more user friendly as well as secure. The Company
also has numerous other domestic and international patents and continuations
pending in these and other related areas.
The Company relies upon its patents, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions, all of which
afford only limited protection, to protect its proprietary technology and
products. Although the Company takes steps to protect its trade secrets, such as
requiring employees with access to the Company's proprietary information to
execute confidentiality and non-disclosure agreements, it may be possible for
unauthorized parties to copy or reverse engineer all or part of any one of the
Company's proprietary technology and products. Furthermore, just as there can be
no assurance that a misappropriation of the Company's proprietary technology and
products will not occur, there can be no assurance that copyright, trademark and
trade secret laws will be available in all circumstances to protect the
Company's rights. In addition, although the laws of the United States may
protect the Company's proprietary rights in its technology and products, the
laws of foreign countries where the Company's products may be used may not
protect its proprietary rights at all or to the same extent as the laws of the
United States.
The Company does not believe that its proprietary technology and products
infringe upon the rights of any third parties; however, there can be no
assurance that a third party will not in the future claim infringement by the
Company. Similarly, infringement claims could be asserted against products and
technologies which the Company licenses from third parties.
The Company may provide some of its products to end users using
non-exclusive, non-transferable licenses which provide that the licensee may use
the software solely for internal operations on designated computers at specific
sites or by a specified number of users. The Company generally does not make
source codes available for its products.
Due to the difficulty of doing so, the Company has never policed, nor has
it ever attempted to police, the unauthorized use of its products. Even though
piracy of the Company's proprietary rights could materially adversely affect it,
the Company believes that the threat of piracy, or the unavailability of
protection under applicable laws, is less significant to its competitive and
financial well being than its ability to respond to the rapid change in
technology which characterizes the computer industry.
During January 2002, the Company engaged Baniak Pine and Gannon, a law firm
specializing in intellectual property licensing and litigation. The firm will
assist NeoMedia in seeking out potential licensees of the Company's intellectual
property portfolio, including any resulting litigation.
COMPETITION
NEOMEDIA INTERNET SWITCHING SERVICES
The markets in which the Company competes are relatively new. Recent
competitors in the print-to-web market include Digital:Convergence, Digimarc,
and AirClic. The Company has a significant portfolio of both invented and
acquired patents to support its proprietary technologies and provide a barrier
to entry for potential competitors.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES.
The largest competition, in terms of number of competitors, is for
customers desiring systems integration, including the re-marketing of another
party's products, and document solutions. These competitors range from local,
small privately held companies to large national and international
organizations, including large consulting firms. A large number of companies act
as re-marketers of another party's products, and therefore, the competition in
6
this area is intense. In some instances, the Company, in acting as a
re-marketer, may compete with the original manufacturer.
PRODUCT LIABILITY INSURANCE
The Company has never had any product liability claim asserted against it.
However, the Company could be subject to product liability claims in connection
with the use of the products and services that it sells. There can be no
assurance that the Company would have sufficient resources to satisfy any
liability resulting from these claims or would be able to have its customers
indemnify or insure the Company against such claims. Although the Company
maintains insurance against such claims, there can be no assurance that such
coverage will be adequate in terms and scope to protect the Company against
material adverse effects in the event of a successful claim.
GOVERNMENT REGULATION
Existing or future legislation could limit the growth of use of the
Internet, which would curtail the Company's revenue growth. Statutes and
regulations directly applicable to Internet communications, commerce and
advertising are becoming more prevalent. Congress recently passed laws regarding
children's online privacy, copyrights and taxation. The law remains largely
unsettled, even in areas where there has been legislative action. It may take
years to determine whether and how existing laws governing intellectual
property, privacy, libel and taxation apply to the Internet, e-commerce and
online advertising. In addition, the growth and development of e-commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad.
The Company's website allows for the storage of demographic data from our
users. The European Union recently adopted a directive addressing data privacy
that may limit the collection and use of certain information regarding Internet
users. This directive may limit our ability to collect and use information in
certain European countries. In addition, the Federal Trade Commission and
several state governments have investigated the use by certain Internet
companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if our privacy practices are investigated.
ENVIRONMENTAL PROTECTION COMPLIANCE
The Company has no knowledge of any federal, state or local environmental
compliance regulations which affect its business activities. The Company has not
expended any capital to comply with any environmental protection statutes and
does not anticipate that such expenditures will be necessary in the future.
EMPLOYEES
As of December 31, 2001, the Company employed 21 persons. Of the 21
employees, 9 were located at the Company's headquarters in Fort Myers, FL, and
12 at other domestic locations. Of the 21 employees, 3 are dedicated to the NISS
business unit, 12 are dedicated to the NCIS business unit, and 6 provide shared
services used by both business units. None of the Company's employees are
represented by a labor union or bound by a collective bargaining agreement. The
Company believes that its employee relations are good.
The Company's success depends to a significant extent on the performance of
its senior management and certain key employees. Competition for highly skilled
employees, including sales, technical and management personnel, is intense in
the computer industry. The Company's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
affect the Company's business.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for software products is
7
generally characterized by rapidly changing technology, frequent new product
introductions and changes in customer requirements which can render existing
products obsolete or unmarketable. The statements contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules promulgated pursuant to the Securities Exchange Act of
1934) that are subject to a variety of risks and uncertainties more fully
described in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the Company's management. Accordingly, these statements are subject to
significant risks, uncertainties and contingencies which could cause the
Company's actual growth, results, performance and business prospects and
opportunities in 2001 and beyond to differ materially from those expressed in,
or implied by, any such forward-looking statements. Wherever possible, words
such as "anticipate," "plan," "expect," "believe," "estimate," and similar
expressions have been used to identify these forward-looking statements, but are
not the exclusive means of identifying such statements. These risks,
uncertainties and contingencies include, but are not limited to, the Company's
limited operating history on which expectations regarding its future performance
can be based, competition from, among others, high technology companies that
have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
effectiveness of the Company's efforts to control operating expenses and general
economic and business conditions affecting the Company and its customers in the
United States and other countries in which the Company sells and anticipates to
sell its products and services. The Company is not obligated to update or revise
these forward-looking statements to reflect new events or circumstances.
RISK FACTORS
RISKS SPECIFIC TO NEOMEDIA
THE COMPANY HAD A RETAINED DEFICIT; THE COMPANY ANTICIPATES FUTURE LOSSES.
The Company has incurred substantial losses since our inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
The Company incurred a loss of $25,469,000 in the year ended December 31, 2001,
$5,409,000 in the year ended December 31, 2000, $10,472,000 in the year ended
December 31, 1999, $11,495,000 in the year ended December 31, 1998, and
$5,973,000 in the year ended December 31, 1997. The Company's accumulated losses
were approximately $63,344,000 as of December 31, 2001. As of December 31, 2001
and 2000, we had a working capital (deficit) of approximately $(5,163,000) and
$8,426,000, respectively. The Company had stockholders' equity of $(263,000) and
$19,110,000 at December 31, 2001 and 2000, respectively. The Company generated
revenues of $8,142,000 and $27,565,000 for the years ended December 31, 2001 and
2000. In addition, during years ended December 31, 2001 and 2000, the Company
recorded negative cash flows from operations of $5,202,000 and $6,775,000,
respectively. To succeed, the Company must develop new client and customer
relationships and substantially increase its revenue derived from improved
products and additional value-added services. The Company has expended and will
continue to expend substantial resources to develop and improve its products,
increase its value-added services and to market its products and services. These
development and marketing expenses must be incurred well in advance of the
recognition of revenue. As a result, the Company may not be able to achieve or
sustain profitability.
THE COMPANY'S AUDITORS HAVE QUALIFIED THEIR REPORT ON THE COMPANY FINANCIAL
STATEMENTS WITH RESPECT TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN.
The report of Stonefield Josephson, Inc., the Company's current independent
auditors, with respect to the Company's financial statements and the related
notes for the year ended December 31, 2001, indicate that, at the date of their
report, the Company had suffered recurring losses from operations and the
Company's current cash position raised substantial doubt about the Company's
ability to continue as a going concern. The Company's financial statements do
not include any adjustments that might result from this uncertainty. The report
of Arthur Andersen LLP, the Company's former independent auditors, with respect
to the Company's financial statements and the related notes for the years ended
December 31, 2000 and 1999, indicate that, at the date of their report, the
Company had suffered recurring losses from operations and the Company's current
cash position raised substantial doubt about the Company's ability to continue
as a going concern. The Company's financial statements do not include any
adjustments that might result from this uncertainty.
8
BECAUSE THE PHYSICAL WORLD - TO - INTERNET MARKET IN WHICH THE COMPANY
OPERATES HAS EXISTED FOR A SHORT PERIOD OF TIME, THERE IS LIMITED
INFORMATION UPON WHICH INVESTORS CAN EVALUATE THE BUSINESS.
The physical world-to-Internet market in which the Company operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company may be deemed to have a
relatively limited operating history upon which investors may base an evaluation
of the Company's primary business and determine its prospects for achieving
intended business objectives. To date, the Company has sold our physical
world-to-Internet products to only 12 companies. Further, Digital:Convergence
Corporation, the Company's primary customer for the Company's physical
world-to-Internet products, is facing pressing financial difficulties and is
presently being sued by the Company for default on a promissory note issued to
the Company in lieu of payment. The Company is prone to all of the risks
inherent to the establishment of any new business venture, including unforeseen
changes in its business plan. Investors should consider the likelihood of the
company's future success to be highly speculative in light of the Company's
limited operating history in its primary market, as well as the limited
resources, problems, expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies in new and rapidly evolving markets, such as the physical
world-to-Internet space. To address these risks, the Company must, among other
things,
o Maintain and increase the Company's client base;
o Implement and successfully execute the Company's business and
marketing strategy;
o Continue to develop and upgrade the Company's products;
o Continually update and improve the Company's service offerings and
features;
o Respond to industry and competitive developments; and
o Attract, retain, and motivate qualified personnel.
The Company may not be successful in addressing these risks. If the Company
were unable to do so, the Company's business, prospects, financial condition,
and results of operations would be materially and adversely affected.
FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS MAY AFFECT THE COMPANY'S
STOCK PRICE.
As a result of the emerging and evolving nature of the markets in which the
Company competes, as well as the current nature of the public markets and the
Company's current financial condition, the Company believes its operating
results may fluctuate materially, as a result of which quarter-to-quarter
comparisons of the Company's results of operations may not be meaningful. If in
some future quarter, whether as a result of such a fluctuation or otherwise, the
Company results of operations fall below the expectations of securities analysts
and investors, the trading price of the Company's common stock would likely be
materially and adversely affected. Investors should not rely on the Company's
results of any interim period as an indication of the Company's future
performance. Additionally, the Company's quarterly results of operations may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may cause the Company's
quarterly results to fluctuate include, among others:
o The Company's ability to retain existing clients and customers;
o The Company's ability to attract new clients and customers at a
steady rate;
o The Company's ability to maintain client satisfaction;
o The Company's ability to motivate potential clients and customers to
acquire and implement new technologies;
o The extent to which the Company's products gain market acceptance;
o The timing and size of client and customer purchases;
o Introductions of products and services by competitors;
o Price competition in the markets in which the Company competes;
o The pricing of hardware and software which the Company resells or
integrates into it's products;
o The level of use of the Internet and online services and the rate of
market acceptance of physical world-to-Internet marketing;
o The Company's ability to upgrade and develop it's systems and
infrastructure in a timely and effective manner;
9
o The Company's ability to attract, train, and retain skilled
management, strategic, technical, and creative professionals;
o The amount and timing of operating costs and capital expenditures
relating to the expansion of the Company's business, operations, and
infrastructure;
o Unanticipated technical, legal, and regulatory difficulties with
respect to use of the Internet; and
o General economic conditions and economic conditions specific to
Internet technology usage and electronic commerce.
THE COMPANY IS UNCERTAIN OF THE SUCCESS OF THE COMPANY'S INTERNET SWITCHING
SERVICES BUSINESS UNIT AND THE FAILURE OF THIS UNIT WOULD NEGATIVELY AFFECT
THE PRICE OF THE COMPANY'S STOCK.
The Company provides products and services that provide a seamless link from
physical objects, including printed material, to the Internet. The Company can
provide no assurance that:
o This application services business unit will ever achieve
profitability;
o The Company's current product offerings will not be adversely
affected by the focusing of the Company resources on the physical
world-to-Internet space; or
o The products the Company develops will obtain market acceptance.
In the event that the application Services business unit should never achieve
profitability, that the Company's current product offerings should so suffer, or
that the Company's products fail to obtain market acceptance, the Company's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
THE COMPANY DEPENDS ON THE RESALE OF SOFTWARE AND EQUIPMENT FOR REVENUE AND
A REDUCTION IN THESE SALES WOULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S
OPERATIONS AND THE VALUE OF THE COMPANY'S STOCK.
During the years ended December 31, 2001, 2000, 1999, 1998, and 1997, we
derived 73%, 66%, 78%, 72%, and 78%, respectively, of the Company's revenues
from the resale of computer software and technology equipment. A loss or a
reduction of this revenue would have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations, as well as
the Company's stock price. The Company can provide no assurance that:
o The market for the Company's products and services will continue;
o The Company will be successful in marketing these products due to
competition and other factors; o The Company will continue to be able
to obtain short-term financing for the purchase of the products that
the Company resells; or
o The Company's relationship with companies whose products and services
it sells will continue, the Company's relationship with Sun
Microsystems Computer Company.
Further, the technology and equipment resale business is becoming a
commodity industry for products undifferentiated by value-added proprietary
elements and services. A large number of companies act as re-marketers of
another party's products, and therefore, the competition in this area is
intense. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels. In some instances, the Company, in
acting as a re-marketer, may compete with the original manufacturer. An
inability to effectively compete and generate revenues in this industry would
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
A LARGE PERCENTAGE OF THE COMPANY'S ASSETS ARE INTANGIBLE ASSETS, WHICH WILL
HAVE LITTLE OR NO VALUE IF THE COMPANY'S OPERATIONS ARE UNSUCCESSFUL.
At December 31, 2001, approximately 56% of the Company's total assets were
intangible assets, consisting primarily of rights related to the Company's
patents and other intellectual property. If the Company operations are
unsuccessful, these assets will have little or no value, which will materially
adversely affect the value of the Company's stock and the ability of the
Company's stockholders to recoup their investments in the Company's capital
stock.
10
THE COMPANY'S MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN
SUCCESS.
To date, the Company has conducted limited-marketing efforts directly. All
of the Company's marketing efforts have been largely untested in the
marketplace, and may not result in sales of the Company's products and services.
To penetrate the markets in which the Company competes, the Company will have to
exert significant efforts to create awareness of, and demand for, the Company's
products and services. With respect to the Company's marketing efforts conducted
directly, the Company intends to expand the Company's sales staff upon receipt
of adequate financing. The Company's failure to further develop it's marketing
capabilities and successfully market it's products and services would have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
THE COMPANY RELIES ON INTERNALLY DEVELOPED SYSTEMS, WHICH ARE INEFFICIENT,
WHICH MAY PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE.
The Company uses internally developed technologies for a portion of it's
systems integration services, as well as the technologies required to
interconnect it's clients' and customers' physical world-to-Internet systems and
hardware with the Company's own. As the Company has developed these systems in
order to integrate disparate systems and hardware on a case-by-case basis, these
systems are inefficient and require a significant amount of customization. Such
client and customer specific customization is time-consuming and costly and may
place the Company at a competitive disadvantage when compared to competitors
with more efficient systems. The Company intends to upgrade and expand it's
systems and technologies and to integrate newly-developed and purchased
technologies with it's own in order to improve the efficiency of the company's
systems and technologies, although the Company is unable to predict whether
these upgrades will improve the Company's competitive position when compared to
it's competitors.
THE COMPANY HAS LIMITED HUMAN RESOURCES; THE COMPANY NEEDS TO ATTRACT AND
RETAIN HIGHLY SKILLED PERSONNEL; AND THE COMPANY MAY BE UNABLE TO
EFFECTIVELY MANAGE COMPANY GROWTH WITH THE COMPANY'S LIMITED RESOURCES.
The Company's future success will depend in large part on the Company's
ability to attract, train, and retain additional highly skilled executive level
management, creative, technical, and sales personnel. Competition is intense for
these types of personnel from other technology companies and more established
organizations, many of which have significantly larger operations and greater
financial, marketing, human, and other resources than the Company has currently.
The Company may not be successful in attracting and retaining qualified
personnel on a timely basis, on competitive terms, or at all. Due to the
Company's current working capital deficiency, the Company is currently unable to
afford a directors' and officers' liability insurance policy with a term of
greater than six months. The Company's existing policy expires on July 25, 2002.
To the extent that sufficient resources are available, the Company intends to
maintain a directors' and officers' liability insurance policy at all times.
However, any inability to maintain such liability insurance in the future would
materially adversely affect the Company's ability to attract and retain
qualified director and officer candidates. If the Company is not successful in
attracting and retaining qualified personnel, it's business, prospects,
financial condition, and results of operations would be materially adversely
affected.
THE COMPANY DEPENDS UPON THE COMPANY'S SENIOR MANAGEMENT AND THEIR LOSS OR
UNAVAILABILITY COULD PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE.
The Company's success depends largely on the skills of certain key
management and technical personnel. The loss or unavailability of any of these
individuals for any significant period of time could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations. None of the Company's key management or technical personnel is
presently subject to employment agreements. The Company has recently awarded
stock options to key members of management. All key management personnel are
required to sign non-solicitation and confidentiality agreements. However, there
is no guarantee that these option incentives or contractual restrictions will
discourage the Company's key management and technical personnel from leaving. If
the Company were not successful in retaining it's key personnel, the Company's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
THE COMPANY MAY BE UNABLE TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY
RIGHTS AND THE COMPANY MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
11
The Company's success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon the Company's proprietary
technology, including the Company's patents and other intellectual property, and
on the Company's ability to protect the Company's proprietary technology and
other intellectual property rights. In addition, the Company must conduct the
Company's operations without infringing on the proprietary rights of third
parties. The Company also intends to rely upon unpatented trade secrets and the
know-how and expertise of the Company's employees, as well as the Company's
patents. To protect the Company's proprietary technology and other intellectual
property, the Company relies primarily on a combination of the protections
provided by applicable patent, copyright, trademark, and trade secret laws as
well as on confidentiality procedures and licensing arrangements. The Company
has four patents for it's physical world-to-Internet technology. The Company
also has several trademarks relating to the Company's proprietary products.
Although the Company believes that the Company has taken appropriate steps to
protect the Company's unpatented proprietary rights, including requiring that
the Company's employees and third parties who are granted access to the
Company's proprietary technology enter into confidentiality agreements with the
Company, the Company can provide no assurance that these measures will be
sufficient to protect the Company's rights against third parties. Others may
independently develop or otherwise acquire patented or unpatented technologies
or products similar or superior to the Company.
The Company licenses from third parties certain software tools that it
includes in the Company's services and products. If any of these licenses were
terminated, the Company could be required to seek licenses for similar software
from other third parties or develop these tools internally. The Company may not
be able to obtain such licenses or develop such tools in a timely fashion, on
acceptable terms, or at all. Companies participating in the software and
Internet technology industries are frequently involved in disputes relating to
intellectual property. The Company may in the future be required to defend the
Company's intellectual property rights against infringement, duplication,
discovery, and misappropriation by third parties or to defend against
third-party claims of infringement. Likewise, disputes may arise in the future
with respect to ownership of technology developed by employees who were
previously employed by other companies. Any such litigation or disputes could
result in substantial costs to, and a diversion of effort by, the Company. An
adverse determination could subject the Company to significant liabilities to
third parties, require the Company to seek licenses from, or pay royalties to,
third parties, or require the Company to develop appropriate alternative
technology. Some or all of these licenses may not be available to the Company on
acceptable terms or at all, and the Company may be unable to develop alternate
technology at an acceptable price or at all. Any of these events could have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations. See "Risks Specific To NeoMedia -
Currently Pending Legal Actions Threaten To Divest The Company Of Critical
Intellectual Property."
CURRENTLY PENDING LEGAL ACTIONS THREATEN TO DIVEST THE COMPANY OF CRITICAL
INTELLECTUAL PROPERTY.
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the
Company in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking,
among other things, the accelerated repayment of a $500,000 loan it advanced to
the Company under the terms of a letter of intent entered into between AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain representations made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note issued by the Company in respect of AirClic's $500,000 advance is
secured by substantially all of the Company's intellectual property, including
its core physical world-to-Internet technologies. If the Company is deemed to
have defaulted under the note, and does not pay the judgment, AirClic, which is
one of NeoMedia's key competitors, could acquire the Company's core intellectual
property, which would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
vigorously defending this lawsuit and has interposed counterclaims against
AirClic. The lawsuit is in its preliminary stages and, as such, at this time it
is difficult to assess the outcome. Whether or not AirClic is successful in
asserting its claims that the Company breached certain representations made by
the Company in the note, the note became due and payable in accordance with its
terms on January 11, 2002. Based on the cash currently available to the Company,
payment of the note and related interest would have a material adverse effect on
the Company's financial condition. If the Company fails to pay such note,
AirClic could proceed against the Company's intellectual property securing the
note, which would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
aggressively seeking bridge financing to enable it to pay the principal and
interest remaining under the note following the resolution of the counterclaims
12
against AirClic. The Company has not accrued any additional liability over and
above the note payable and related accrued interest.
AirClic has also filed suit against the Company in the United States
District Court for the Eastern District of Pennsylvania. In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic, some of which is patented and others for
which a patent application is pending is invalid and unenforceable. Any
declaration that the Company's core patented or patentable technology is invalid
and unenforceable would have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. The Company
is vigorously defending against this lawsuit as well. The Company has not
accrued any liability in connection with this matter. See "Risks Specific to
NeoMedia - The Company May Be Unable To Protect It's Intellectual Property
Rights And The Company May Be Liable For Infringing The Intellectual Property
Rights Of Others".
THE COMPANY IS EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH INSURANCE
COVERAGE IS LIMITED, POTENTIALLY INADEQUATE AND IN SOME CASES UNAVAILABLE,
AND AN UNINSURED CLAIM COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION, AND RESULTS OF
OPERATIONS, AS WELL AS THE VALUE OF THE COMPANY STOCK.
Many of the Company's projects are critical to the operations of the
Company's clients' businesses. Any failure in a client's information system
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. The Company could, therefore,
be subject to claims in connection with the products and services that it sells.
The Company currently maintains product liability and errors and omissions
insurance. There can be no assurance that:
o The Company has contractually limited our liability for such claims
adequately or at all;
o The Company would have sufficient resources to satisfy any liability
resulting from any such claim;
o The Company coverage, if available, will be adequate in term and
scope to protect it against material adverse effects in the event of
a successful claim; or
o The Company insurer will not disclaim coverage as to any future
claim.
The successful assertion of one or more large claims against the Company
that exceed available insurance coverage could materially adversely affect the
Company's business, prospects, financial condition, and results of operations.
THE COMPANY CANNOT PREDICT ITS FUTURE CAPITAL NEEDS AND THE COMPANY MAY NOT
BE ABLE TO SECURE ADDITIONAL FINANCING.
The Company expects to receive up to $500,000 attributable to the payment of
the exercise prices of options for shares of common stock that the Company is in
the process of registering for public resale. The Company also expects to
receive up to $3,230,000, plus interest at a rate of 6% per annum, upon
repayment of promissory notes issued to the Company, in each case as
consideration for 19,000,000 shares of Company common stock, sold at $0.17 per
share. Despite the anticipated infusion of such capital, and because the Company
cannot reliably predict when or if such warrant exercises, cash payments and
note repayments will occur, if at all, the Company is unable to determine
whether and for how long the Company will be able to meet its capital
requirements. The Company anticipates offerings up to 10,000,000 additional
shares of common stock within six months of the date of this filing and offering
of convertible debt and preferred stock securities in order to obtain short-term
financing. As is typical with short-term, bridge financing, this capital may be
obtained upon terms highly unfavorable to the Company. Further, the Company
cannot be certain that anticipated revenues from operations would be sufficient
to satisfy its capital requirements. The Company believes that it will have
sufficient capital to sustain operations through December 31,2002. The Company's
belief is based on its operating plan, which in turn is based on assumptions
that may prove to be incorrect. If capital raised from financing efforts and the
Company's financial resources are insufficient it may require additional
financing in order to execute on the Company operating plan and continue as a
going concern. The Company cannot predict whether this additional financing will
be in the form of equity or debt, or be in 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. In the event that any future financing should take the
13
form of a sale of equity securities, the holders of the common stock may
experience additional dilution.
BECAUSE THE COMPANY WILL NOT PAY CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL
THEIR SHARES IN ORDER TO REALIZE THEIR INVESTMENT.
The Company has not paid any cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future. The Company intends to
retain future earnings, if any, for reinvestment in the development and
marketing of its products and services. Any credit agreements into which the
Company may enter with institutional lenders may restrict the Company's ability
to pay dividends. Whether the Company pays cash dividends in the future will be
at the discretion of the Company's Board of Directors and will be dependent upon
the Company's financial condition, results of operations, capital requirements,
and any other factors that the Board of Directors decides is relevant. As a
result, investors may have to sell their shares of common stock to realize their
investment.
SOME PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
MAY DETER TAKEOVER ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF THE
COMPANY'S STOCKHOLDERS TO SELL THEIR SHARES AT A PREMIUM TO THE THEN MARKET
PRICE.
Some of the provisions of the Company's certificate of incorporation and
by-laws could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to the Company's stockholders by providing them
with the opportunity to sell their shares at a premium to the then market price.
On December 10, 1999, the Company's Board of Directors adopted a stockholders
rights plan and declared a non-taxable dividend of one right to acquire Series A
Preferred Stock of the Company, par value $0.01 per share, on each outstanding
share of the Company's common stock to stockholders of record on December 10,
1999 and each share of common stock issued thereafter until a pre-defined
hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure commonly referred to as a "poison pill." The stockholder
rights plan was designed to enable all stockholders not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
the corporation 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, which is similar to plans adopted by many leading
public companies, 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 our directors, officers and principal stockholders, Charles
W. Fritz, William E. Fritz and The Fritz Family Limited Partnership were
exempted from triggering the "poison pill" as a result of their significant
holdings at the time of the plan's adoption, which otherwise might have
triggered the "poison pill."
In addition, the Company's certificate of incorporation authorizes the Board
of Directors to designate and issue preferred stock, in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting
rights, including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion, and redemption rights,
and sinking fund provisions.
The Company is authorized to issue a total of 10,000,000 shares of Preferred
Stock, par value $0.01 per share. The Company's designated Preferred Stock is
comprised of 200,000 shares of Series A Preferred Stock, par value $0.01 per
share, which shares are issuable in connection with the Company's stockholders
rights plan, and 500,000 shares of Series B Convertible Preferred Stock, par
value $0.01 per share, of which 452,289 shares were issued as of December 31,
2001. The 452,489 Series B shares outstanding as of December 31, 2001
automatically converted into the same number of common shares on January 2,
2002.
THE COMPANY'S COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF THE
COMMON STOCK IS ARBITRARY, THE MARKET PRICE OF THE SECURITIES MAY BE
VOLATILE, AND THE COMPANY MUST SATISFY THE APPLICABLE REQUIREMENTS FOR THE
COMMON STOCK TO TRADE ON THE NASDAQ SMALL CAP MARKET.
The Company's common stock currently trades sporadically on the Nasdaq
Small Cap Market. The market for the Company's common stock may continue to be
14
an inactive market. Accordingly, unless and until an active public market
develops, investors may have difficulty selling their shares of common stock
into which the preferred stock offered is automatically convertible at a price
that is attractive to the investor.
The Company's common stock has traded as low as $0.11 and as high as $6.75
between June 30, 2000 and March 5, 2002. From time to time after this filing,
the market price of the common stock may experience significant volatility. The
Company's quarterly results, failure to meet analysts expectations,
announcements by the Company or the Company'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. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. This type of litigation, regardless of the outcome, could result in
substantial costs and a diversion of management's attention and resources, which
could materially adversely affect the Company's business, prospects, financial
condition, and results of operations. The Nasdaq Stock Market has net capital
surplus and stock price maintenance criterion for trading on the Nasdaq Small
Cap Market. The Company is currently below the minimum requirements for Net
Tangible Assets and Stockholder equity. The Company's ability to continue to be
listed on the Nasdaq Stock Market will depend on whether the Company is able to
maintain net tangible assets of at least $2,000,000 and maintain a minimum stock
price of $1.00.
If the Company cannot maintain the standards for continued listing, the
Company's common stock could be subject to delisting from the Nasdaq Small Cap
Market. Trading, if any, in the common stock would then be conducted in the
over-the-counter market on the OTC Bulletin Board established for securities
that do not meet the Nasdaq Small Cap Market listing requirements, or in what
are commonly referred to as the "pink sheets." As a result, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's shares.
INVESTORS MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS
AND WARRANTS ARE EXERCISED.
The Company also has outstanding stock options to purchase approximately
5.0 million shares of common stock and warrants to purchase approximately 3.2
million shares of common stock, some of which may in the future, but do not
currently, have exercise prices at or significantly below the price at which the
preferred stock converts into common stock or the price of the Company'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.
FUTURE SALES OF COMMON STOCK BY THE COMPANY'S EXISTING STOCKHOLDERS COULD
ADVERSELY AFFECT THE COMPANY'S STOCK PRICE.
The market price of the Company's common stock could decline as a result of
sales of a large number of shares of the Company's common stock in the market as
a result of offerings of common stock or securities convertible, exercisable or
exchangeable for common stock, or the perception that these sales could occur.
These sales also might make it more difficult for the Company to sell equity
securities in the future at a time and at a price that the Company deems
appropriate. The Company's officers and directors are not currently subject to
lock-up agreements preventing them from selling their shares. Two of the
Company's officers and directors, Charles W. Fritz and William E. Fritz intend
to sell an aggregate of 3,945,551 shares of common stock in connection with a
registration that we are currently in the process of making effective.
Additionally, shares issued upon the exercise of stock options granted under the
Company's stock option plans will be eligible for resale in the public market
from time to time subject to vesting.
In addition, the Company may offer for sale up to 10,000,000 additional
shares of common stock within six months from the date of this filing, as
necessary to raise capital to sustain Company operations. While applicable law
provides that unregistered securities may not generally be resold within one
year of their purchase, market conditions may require the Company to register
such shares for public sale earlier than such shares would otherwise become
freely tradable, thereby creating the possibility of further dilution to
purchasers of the Company shares.
15
RISKS RELATING TO THE COMPANY'S INDUSTRY
INTERNET SECURITY POSES RISKS TO THE COMPANY'S ENTIRE BUSINESS.
Concerns over the security of the Internet and other electronic
transactions and the privacy of consumers and merchants may inhibit the growth
of the Internet and other online services generally, especially as a means of
conducting commercial transactions, which may have a material adverse effect on
the Company's physical world-to-Internet business.
THE COMPANY WILL ONLY BE ABLE TO EXECUTE ITS PHYSICAL WORLD-TO-INTERNET
BUSINESS PLAN IF INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW.
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of information and commerce. If use of
the Internet and other online services does not continue to grow or grows more
slowly than the Company expects, if the infrastructure for the Internet and
other online services does not effectively support the growth that may occur, or
if the Internet and other online services do not become a viable commercial
marketplace, the Company's physical world-to-Internet business, and therefore
the Company'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 Web, and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services as a
medium of information retrieval or commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and few services and products have generated profits.
For the Company to be successful, consumers and businesses must be willing to
accept and use novel and cost efficient ways of conducting business and
exchanging information.
In addition, the public in general may not accept the Internet and other
online services as a viable commercial or information marketplace for a number
of reasons, including potentially inadequate development of the necessary
network infrastructure or delayed development of enabling technologies and
performance improvements. To the extent that the Internet and other online
networks continue to experience significant growth in the number of users, their
frequency of use, or in their bandwidth requirements, the infrastructure for the
Internet and online networks may be unable to support the demands placed upon
them. In addition, the Internet or other online networks could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Significant issues concerning the commercial
and informational use of the Internet and online networks technologies,
including security, reliability, cost, ease of use, and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies. Changes in, or insufficient availability of,
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online networks generally and the Company's physical
world-to-Internet product and networks in particular.
THE COMPANY MAY NOT BE ABLE TO ADAPT AS THE INTERNET, PHYSICAL
WORLD-TO-INTERNET, EQUIPMENT RESALES, AND SYSTEMS INTEGRATIONS MARKETS, AND
CUSTOMER DEMANDS, CONTINUE TO EVOLVE.
The Company may not be able to adapt as the Internet, physical
world-to-Internet, equipment resales and systems integration markets, and
consumer demands, continue to evolve. The Company's failure to respond in a
timely manner to changing market conditions or client requirements would have a
material adverse effect on the Company's 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
The Company's success will depend, in part, on its ability to:
o Enhance and improve the responsiveness and functionality of the
Company's products and services;
o License or develop technologies useful in the Company's business on a
timely basis;
o Enhance the Company's existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of the Company's prospective or current customers; and
o Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
THE COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE MARKETS IN WHICH
IT COMPETES.
While the market for physical world-to-Internet technology is relatively
new, it is already highly competitive and characterized by an increasing number
of entrants that have introduced or developed products and services similar to
those offered by the Company. NeoMedia believes that competition will intensify
and increase in the future. The Company's target market is rapidly evolving and
is subject to continuous technological change. As a result, the Company's
competitors may be better positioned to address these developments or may react
more favorably to these changes, which could have a material adverse effect on
the Company's business, prospects, financial condition, and results of
operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. The Company competes in these industries on the basis
of a number of factors, including the attractiveness of the services offered,
the breadth and quality of these services, creative design and systems
engineering expertise, pricing, technological innovation, and understanding
clients' needs. A number of these factors are beyond the Company's control.
Existing or future competitors may develop or offer products or services that
provide significant technological, creative, performance, price, or other
advantages over the products and services offered by NeoMedia.
Many of the Company's competitors have longer operating histories, larger
customer bases, and longer relationships with clients, and significantly greater
financial, technical, marketing, and public relations resources than the Company
does. Based on total assets and annual revenues, the Company is significantly
smaller than its two largest competitors in the physical world-to-Internet
industry, the primary focus of the Company's business. Similarly, the Company
competes against significantly larger and better-financed companies in the
Company's systems integration and resales businesses, including the
manufacturers of the equipment and technologies that the Company integrates and
resells. If NeoMedia competes with its primary competitors for the same
geographical or institutional markets, their financial strength could prevent
the Company from capturing those markets. The Company may not successfully
compete in any market in which 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, the Company believes that it will not be able to
compete effectively in these markets in the future. It is for this reason, that
the Company has increasingly focused its business plan on competing in the
emerging market for physical world-to-Internet products.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM THE COMPANY'S BUSINESS.
The Company is not currently subject to direct regulation by any government
agency other than laws or regulations applicable generally to electronic
commerce. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services, could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
Due to the increasing popularity and use of the Internet and other online
services, federal, state, and local governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the Internet or other
online services covering issues such as taxation, user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. The growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
services and increase the Company's cost of doing business, or otherwise have a
material adverse effect on its business, prospects, financial condition, and
results of operations. Moreover, the relevant governmental authorities have not
17
resolved the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership and
personal privacy and it may take time to resolve these issues definitively.
Certain of the Company's proprietary technology allow for the storage of
demographic data from its users. In 2000, the European Union adopted a directive
addressing data privacy that may limit the collection and use of certain
information regarding Internet users. This directive may limit the Company's
ability to collect and use information collected by the Company's technology in
certain European countries. In addition, the Federal Trade Commission and
several state governments have investigated the use by certain Internet
companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if the Company's privacy practices are investigated.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. The Company
occupies approximately 15,000 square feet under terms of a written lease from an
unaffiliated party which expired on January 31, 2001. The Company signed a
renewal for three years at this facility during the first quarter of 2001. The
Company has a sales facility at 2150 Western Court, Suite 230, Lisle, Illinois
60532, where the Company occupies approximately 6,000 square feet under the
terms of a written lease from an unaffiliated party expiring on October 31,
2003. In March 2001, with the acquisition of the assets of Qode.com, Inc., the
Company added an additional 8,388 square feet office lease at 4850 N. State Road
7, Suite 104, Ft. Lauderdale, Florida, with monthly rent totaling approximately
$9,200. The lease expires March, 2005. This lease is being terminated subject to
a settlement agreement between the Company and Headway associates, the landlord
(see "Legal Proceedings").
During 2001, we closed our office in Monterrey, Mexico, which was primarily
used for sales and consulting efforts.
The Company believes that its existing office space is adequate to meet its
current and short-term requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal actions arising in the
normal course of business, both as claimant and defendant.
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the
Company in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking,
among other things, the accelerated repayment of a $500,000 loan it advanced to
the Company under the terms of a letter of intent entered into between AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain representations made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note issued by the Company in respect of AirClic's $500,000 advance is
secured by substantially all of the Company's intellectual property, including
its core physical world-to-Internet technologies. If the Company is deemed to
have defaulted under the note, and does not pay the judgment, AirClic, which is
one of the NeoMedia's key competitors, could acquire the Company's core
intellectual property, which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is vigorously defending this lawsuit and has interposed
counterclaims against AirClic. The lawsuit is in its preliminary stages and, as
such, at this time it is difficult to assess the outcome. Whether or not AirClic
is successful in asserting its claims that the Company breached certain
representations made by the Company in the note, the note became due and payable
in accordance with its terms on January 11, 2002. Based on the cash currently
available to the Company, payment of the note and related interest would have a
material adverse effect on the Company's financial condition. If the Company
faisl to pay such note, AirClic could proceed against the Company's intellectual
property securing the note, which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is aggressively seeking bridge financing to enable it to pay the
principal and interest remaining under the note following the resolution of the
18
counterclaims against AirClic. The Company has not accrued any additional
liability over and above the note payable and related accrued interest.
AirClic has also filed suit against the Company in the United States
District Court for the Eastern District of Pennsylvania. In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic, some of which is patented and others for
which a patent application is pending is invalid and unenforceable. Any
declaration that the Company's core patented or patentable technology is invalid
and unenforceable would have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. The Company
is vigorously defending against this lawsuit as well. The Company has not
accrued any liability in connection with this matter.
On June 26, 2001, the Company filed a $3 million lawsuit in the U.S.
District Court, Northern District of Texas, Dallas Division, against
Digital:Convergence Corporation for breach of contract regarding a $3 million
promissory note due on June 24, 2001 that was not paid. The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain contingency related to this matter.
In April 2001, the former President and director of NeoMedia filed a
lawsuit against the Company and several of its directors. The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The
claim alleges the individual was fraudulently induced into accepting employment
and that the Company breached the employment agreement. The individual's
employment with the Company ended in January 2001. The Company believes the
claim is without merit and is vigorously defending itself. Final outcome of this
matter is uncertain and a range of loss cannot reasonably be estimated. The
Company has accrued approximately $347,000 in severance and incentive payments
relating to this matter.
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. The Company
has entered into a letter of intent with the Finx Group, Inc. to sell certain
assets and liabilities relating to Qode. As part of the letter of intent, the
Finx Group will assume all liabilities up to $138,000 relating to the Ripfire
contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages
in the Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida. Headway Associates, Ltd. is seeking payment of all amounts due under
the terms the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode
business unit. The lease commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment over
a two-month period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
The Company has entered into a letter of intent with the Finx Group, Inc. to
sell certain assets and liabilities relating to Qode. As part of the letter of
intent, the Finx Group will assume all liabilities up to $530,000 relating to
the Orsus contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment
of approximately $38,700 relating to past due and future payments under an
office equipment lease. The Company has returned the equipment and intends to
settle the past due amounts. As of December 31, 2001, the Company had recorded a
liability of approximately $10,000 relating to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 24, 2001, the Company filed a proxy statement with the SEC to
request a shareholder vote that would increase the number of the Company's
authorized shares of common stock from 50,000,000 shares to 100,000,000 and
19
increase the number of the Company's authorized shares of preferred stock from
10,000,000 shares to 25,000,000. The proxy also requested approval to sell
19,000,000 shares of common stock to accredited investors in exchange for
limited recourse promissory notes. On December 11, 2001, the Company's
shareholders approved the sale of 19,000,000 shares at $0.08 per share in
exchange for limited recourse promissory notes. The price has since been
increased to $0.17 per share. The proposition to increase the number of
authorized common and preferred shares did not pass as a result of the failure
to secure favorable votes from holders of a majority of the outstanding shares.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. NeoMedia's common stock began trading on The Nasdaq
Small Cap Stock Market under the symbol "NEOM" on November 25, 1996, the date of
its initial public offering. Prior to such time there was no established public
trading market for NeoMedia's common stock.
Set forth below is the range of high and low sales prices for the common
stock and warrants for the three-month periods indicated as reported by NASDAQ.
The quotations do not include retail markups, markdowns or commissions and may
not represent actual transactions.
TYPE OF SECURITY PERIOD ENDED HIGH LOW
---------------- ------------ ---- ---
Common Stock March 31, 2000 $ 14.50 $5.69
June 30, 2000 $ 11.13 $5.00
September 30, 2000 $ 6.75 $4.13
December 31, 2000 $ 6.50 $1.94
March 31, 2001 $ 6.00 $2.50
June 30, 2001 $ 4.50 $1.76
September 30, 2001 $ 1.85 $0.16
December 31, 2001 $ 0.24 $0.11
NeoMedia's stock price has been and will continue to be subject to
significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on NeoMedia's
stock price. In addition, NeoMedia's stock price may be affected by broader
market trends that may be unrelated to NeoMedia's performance.
(b) HOLDERS. As of March 13, 2002, there were 158 registered shareholders
and approximately 3,000 beneficial shareholders of record of NeoMedia's common
stock. NeoMedia believes that it has a greater number of shareholders because a
substantial number of NeoMedia's common stock is held of record in street name
by broker-dealers for their customers.
(c) DIVIDENDS. As of March 15, 2002, NeoMedia has not paid any dividends on
its common stock and does not expect to pay a cash dividend in the foreseeable
future, but intends to devote all funds to the operation of its businesses. As
of March 15, 2002, NeoMedia has a letter of credit with Bank One, Chicago,
Illinois, the terms of which require Bank One's written permission prior to the
declaration of cash dividends.
(d) RECENT ISSUANCES OF UNREGISTERED SECURITIES.
In November 1998, NeoMedia borrowed $500,000, in two separate notes from
unrelated third parties. These notes were due in November, 1999 with an interest
rate of 20%. One $250,000 note was extended until January 6, 2000, and the other
was extended until February 25, 2000. These notes were secured by 375,000 shares
of NeoMedia's common stock by placing them in an escrow account. These shares
were considered issued but not outstanding for 1999. As part of obtaining the
financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to
the lender. These warrants were exercised in February 2000. During 2000, both
notes were repaid and the 375,000 shares securing the notes have been released
from escrow and retired by the Company.
20
In January 1999, NeoMedia issued 82,372 shares of NeoMedia's common
stock to an individual related party at a price of $3.04 per share. In
connection with the sale, NeoMedia also issued 8,237 warrants with an exercise
price of $3.04. The gross proceeds of such transaction were approximately
$250,000.
In January 1999, NeoMedia issued warrants to purchase 230,000 shares of
common stock at a price of $2.13 per share to an outside consultant for services
performed.
In January and February 1999, NeoMedia issued an aggregate of 145,000
shares of NeoMedia's common stock at a price of $3.50 per share to five
individual and one institutional unrelated parties. In connection with the sale,
NeoMedia also issued an aggregate of 3,000 warrants with an exercise price of
$3.50. The gross proceeds of such transaction were approximately $507,500. In
connection with the sale, NeoMedia also issued as a commission 280,000 warrants
to purchase shares of NeoMedia common stock at an exercise price of $2.13 per
share
In January 1999, NeoMedia issued 42,857 shares of NeoMedia's common
stock at a price of $3.50 per share to an individual related party. In
connection with the sale, NeoMedia also issued 4,286 warrants with an exercise
price of $3.50. The gross proceeds of such transaction were approximately
$150,000.
In February 1999, NeoMedia issued 250,000 shares of NeoMedia's common
stock at a price of $4.00 per share to AT Cross Company, an unrelated party. In
connection with the sale, NeoMedia also issued 100,000 warrants with an exercise
price of $5.00. The gross proceeds of such transaction were $1,000,000.
In April 1999, NeoMedia issued an aggregate of 1,000,000 shares of
NeoMedia's common stock at a price of $3.45 per share to two individual and
three institutional unrelated parties. The gross proceeds of such transaction
were approximately $3,450,000. In connection with the sale, NeoMedia issued as a
commission 175,000 warrants to purchase shares of NeoMedia common stock at an
exercise price of $3.45 per share.
In April 1999, NeoMedia issued warrants to purchase 50,000 shares of
common stock at a price of $0.01 per share to an outside institution for
services performed.
In May 1999, NeoMedia issued an aggregate of 65,000 shares of NeoMedia's
common stock at a price of $4.75 per share to two individual unrelated parties.
In connection with the sale, NeoMedia also issued an aggregate of 6,500 warrants
with an exercise price of $5.00. The gross proceeds of such transaction were
approximately $309,000. In connection with the sale, NeoMedia paid commissions
of $3,375 cash plus 3,250 warrants to purchase shares of NeoMedia common stock
at an exercise price of $5.00 per share.
In June 1999, NeoMedia issued 250,000 shares of NeoMedia's common stock
at a price of $4.00 per share to AT Cross Company, an unrelated party. In
connection with the sale, NeoMedia also issued 100,000 warrants with an exercise
price of $7.00. The gross proceeds of such transaction were approximately
$1,000,000.
In September 1999, NeoMedia issued an aggregate of 210,000 shares of
NeoMedia's common stock at a price of $7.00 per share to one individual and two
institutional unrelated parties. The gross proceeds of such transaction were
approximately $1,470,000. In connection with the sale, NeoMedia issued as a
commission 105,000 warrants to purchase shares of NeoMedia common stock at an
exercise price of $6.00 per share.
In September 1999, NeoMedia issued an aggregate of 275,231 shares of
NeoMedia's common stock at a price of $5.75 per share to two individual and
three institutional unrelated parties. In connection with the sale, NeoMedia
also issued an aggregate of 27,523 warrants with an exercise price of $6.75. The
gross proceeds of such transaction were approximately $1,583,000. In connection
with the sale, NeoMedia paid commissions of $30,000 cash, and also issued 11,172
shares of its common stock valued at $6.19 per share and 10,000 warrants to
purchase shares of NeoMedia common stock at an exercise price of $6.19 per
share.
In October 1999, NeoMedia issued 15,000 shares of NeoMedia's common
stock at a price of $4.38 per share to an individual unrelated party. In
connection with the sale, NeoMedia also issued 1,500 warrants with an exercise
price of $4.38. The gross proceeds of such transaction were approximately
$66,000.
21
In November 1999, NeoMedia issued an aggregate of 143,334 shares of
NeoMedia's common stock at a price of $3.75 per share to two individual and two
institutional unrelated parties. In connection with the sale, NeoMedia also
issued an aggregate of 5,067 warrants with an exercise price of $5.50, 1,267
warrants with an exercise price of $4.75, 5,333 warrants with an exercise price
of $4.67, and 2,667 warrants with an exercise price of $5.84. The gross proceeds
of such transaction were approximately $538,000. In connection with the sale,
NeoMedia paid commissions of approximately $35,000.
In January 2000, NeoMedia issued an aggregate of 301,368 shares of
NeoMedia's common stock at a price of $3.75 per share to ten individual and four
institutional unrelated parties. In connection with the sale, NeoMedia also
issued an aggregate of 12,570 warrants with an exercise price of $7.19, 5,400
warrants with an exercise price of $6.44, and 12,167 warrants with an exercise
price of $7.37. The gross proceeds of such transaction were approximately
$1,130,000. In connection with the sale, NeoMedia issued as commissions 9,502
shares of its common stock valued at $7.09 per share.
In February 2000, NeoMedia issued 39,535 shares of NeoMedia's common
stock at a price of $6.88 per share to one individual and one institutional
unrelated party. In connection with the sale, NeoMedia also issued 2,500
warrants with an exercise price of $12.74 and 1,454 warrants with an exercise
price of $9.56. The gross proceeds of such transaction were approximately
$272,000.
In February 2000, NeoMedia issued 50,000 shares of NeoMedia's common
stock at a price of $6.00 per share to an institutional unrelated party. In
connection with the sale, NeoMedia also issued 2,982 warrants with an exercise
price of $10.06. The gross proceeds of such transaction were approximately
$300,000.
In February 2000, NeoMedia issued 37,500 shares of NeoMedia common stock
upon the exercise of outstanding warrants at a price of $2.00 per share. The
gross proceeds of such transaction were approximately $75,000.
In March 2000, NeoMedia issued an aggregate of 1,000,000 shares of
NeoMedia's common stock at a price of $7.50 per share to 20 individual and one
institutional unrelated party. The gross proceeds of such transaction were
approximately $7,500,000. In connection with the sale, NeoMedia issued as a
commission 125,000 warrants to purchase shares of NeoMedia common stock at an
exercise price of $7.50 per share, 125,000 warrants to purchase shares of
NeoMedia common stock at an exercise price of $15.00 per share, and 100,000
warrants to purchase shares of NeoMedia common stock at an exercise price of
$7.20 per share.
In May 2000, NeoMedia issued 187,500 shares of NeoMedia common stock
upon the exercise of outstanding warrants at a price of $7.38 per share. The
gross proceeds of such transaction were approximately $1,383,000.
In October 2000, NeoMedia issued warrants to purchase 1,400,000 shares
of common stock at a price of $6.00 per share to Digital:Convergence Corporation
as consideration for a 10-year intellectual property license agreement.
In March and April 2001, NeoMedia issued 316,500 shares of NeoMedia's
common stock at a price of $3.40 per share to four unrelated institutional
parties. The gross proceeds of such transaction were approximately $1,076,000.
In connection with the sale, NeoMedia issued as a commission 50,000 warrants to
purchase shares of NeoMedia common stock at an exercise price of $3.56 per
share.
In March 2001, NeoMedia issued 18,000 shares of NeoMedia's common stock
at a price of $3.41 per share to an institutional unrelated party. The gross
proceeds of such transaction were $61,000.
In March 2001, NeoMedia issued 156,250 shares of NeoMedia's common stock
at a price of $3.20 per share to an institutional unrelated party. The gross
proceeds of such transaction were $500,000.
In March 2001, NeoMedia issued an aggregate of 170,000 shares of
NeoMedia common stock upon the exercise of outstanding warrants at a price of
$2.13 per share. The gross proceeds of such transaction were approximately
$362,000.
In March 2001, NeoMedia placed 1,676,500 shares of NeoMedia common stock
in escrow in exchange for certain assets and liabilities of Qode.com, Inc.. The
22
shares are subject to earn-out under a sale and purchase agreement with
Qode.com, Inc. In connection with the sale and purchase agreement, the Company
also issued 274,699 shares of NeoMedia common stock to certain of Qode.com,
Inc.'s debtholders.
In April 2001, NeoMedia issued warrants to purchase 50,000 shares of
common stock at a price of $0.01 per share to an outside institution for
services performed
In May 2001, NeoMedia issued an aggregate of 320,050 shares of NeoMedia
common stock upon the exercise of outstanding warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $641,000.
In June 2001, NeoMedia issued an aggregate of 4,100 shares of NeoMedia
common stock upon the exercise of outstanding warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $8,000.
In July 2001, NeoMedia issued an aggregate of 11,300 shares of NeoMedia
common stock upon the exercise of outstanding warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $23,000.
In September 2001, the Company released from escrow 35,074 shares of its
common stock under the terms of the Company's sale and purchase agreement with
Qode.com, Inc. The shares were payment for first and second contract quarter
performance under the earn-out plan included in the sale and purchase agreement.
In November 2001, NeoMedia issued an aggregate of 3,000,000 shares of
our common stock to two unrelated parties at a price of $0.08 per share. These
shares were subsequently cancelled and re-issued as part of a 19 million share
offering during the first quarter of 2002.
In January 2002, the Company issued 452,489 shares of common stock to
About.com, Inc. The shares were issued upon conversion of 452,489 shares of
Series B Preferred Stock issued to About.com, Inc. as payment for advertising
expense incurred during 2001.
In January 2002, NeoMedia issued 1,646,987 shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under equipment lease agreements. There were no cash proceeds to NeoMedia in
these transactions.
In February 2002, NeoMedia issued 19,000,000 shares of NeoMedia's common
stock at a price of $0.17 per share to five individuals and two institutional
unrelated parties. The shares were issued in exchange for limited recourse
promissory notes maturing at the earlier of i.) 90 days from the date of
issuance, or ii.) 30 days from the date of registration of the shares. The gross
proceeds of such transaction will be approximately $3,230,000 upon maturity of
the notes.
The above issuances of securities were made by the Company in reliance on
exemptions from registration contained in Section 4(2) of the Securities Act of
1933, as amended, and the rules and regulations thereunder, as offerings not
involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the related notes appearing in Item 8.
SELECTED FINANCIAL DATA
RESULTS FOR THE YEAR ENDED DECEMBER 31,
1996 1997 1998 1999 2000 2001
(ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL) (ACTUAL)
-------- -------- -------- -------- -------- --------
(in thousands, except share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $17,518 $24,434 $23,478 $25,256 $27,565 $8,142
Cost of sales 14,948 20,070 19,149 22,470 18,533 8,866
Gross margin 2,570 4,364 4,329 2,786 9,032 (724)
Operating expenses 4,949 10,268 15,945 13,032 14,615 7,840
Digital Convergence write-off -- -- -- -- -- 7,354
Loss on impairment of assets -- -- -- -- -- 2,871
Loss from operations (2,379) (5,904) (11,616) (10,246) (5,583) (18,789)
Interest expense/(income) 540 147 (121) 226 (174) (21)
Income tax provision/(benefit) 156 (78) -- -- -- --
Loss from continuing operations (3,075) (5,973) (11,495) (10,472) (5,409) (18,768)
Loss from operations and disposal of
discontinued business unit -- -- -- -- -- (6,701)
Net loss ($3,075) ($5,973) ($11,495( $10,472) ($5,409) ($25,469)
LOSS PER SHARE DATA:
Loss per share from
continuing operations ($0.72) ($0.90) ($1.34) ($1.01) ($0.39) ($1.14)
Net loss per share ($0.72) ($0.90) ($1.34) ($1.01) ($0.39) ($1.55)
Weighted average common
shares outstanding (basic
and diluted) 4,266,753 6,615,107 8,560,841 0,377,4713 ,931,104 16,410,246
CONSOLIDATED BALANCE SHEET DATA:
Total assets $11,266 $19,799 $12,630 $13,657 $40,594(a) $9,039
Long-term debt 1,589 915 801 676 14,042(b) 390
(a) - Includes $22,518,000 of assets related to Digital Convergence license
contract that were written off during 2001
(b) - Includes $13,503,000 of long-term deferred revenue related to Digital
Convergence license contract that was written off during 2001
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During 2001, the company's continued focus was aimed toward its Internet
Switching Systems (NISS, formerly NAS) business. NISS consists of the patented
PaperClickTM technology that enables users to link directly from the physical to
the digital world. 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 the Company's
end-users, competitive advantage for their business partners and
24
return-on-investment for their investors. Additionally, the Company has retained
the services of the intellectual property law firm of Baniak Pine & Gannon to
pursue license agreements surrounding NeoMedia's valuable patent portfolio.
In March 2001, the Company purchased substantially all the assets of
Qode.com, Inc. In August 2001, the Company entered into a letter of intent with
a third party to purchase the assets and assume certain of the liabilities
related to the business unit. The discontinuation of the Qode business unit
resulted in a loss from disposal of discontinued business unit of $3.1 million
in 2001. Additionally, the loss from operations of the business unit during
2001was $3.6 million. (see also Footnote 2 in the accompanying financial
statements)
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000
NET SALES. Total net sales for the year ended December 31, 2001 were $8.1
million, which represented a $19.5 million, or 70.1%, decrease from $27.6
million for the year ended December 31, 2000. This decrease primarily resulted
from reduced resales of Sun Microsystems equipment due to increased competition
and general economic conditions. Additionally, we recognized $7.8 million of
revenue in 2000 related to the DC license contract. No revenue was recognized
related to this contract in 2001. The Company expects net sales in 2002 will
increase significantly from 2001, due to a resurgence in demand for software and
technology equipment and services, combined with anticipated revenue streams
from intellectual property licenses.
Total net sales during the fourth quarter of 2001 were $4.5 million,
compared with $0.9 million in the third quarter of 2001, $1.2 million in the
second quarter of 2001, and $1.5 million in the first quarter of 2001. The
fourth-quarter increase is primarily due to a large Storage Area Network (SAN)
sale of $1.1 million in that quarter. Additionally, sales from the Company's
Consulting and Integration Services business unit have been historically higher
in the fourth quarter of the calendar year.
LICENSE FEES. License fees were $0.6 million for the year ended December 31,
2001, compared with $8.4 million for the year ended December 31, 2000, a
decrease of $7.8 million, or 92.9%. The decrease resulted primarily from the
recognition of $7.8 million revenue during 2000 related to the
Digital:Convergence license contract. No revenue was recognized related to this
contract in 2001. The Company is anticipating license revenue growth in 2002
compared with 2001 as it aggressively pursues license contracts relating to its
intellectual property.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees decreased by $11.5 million,
or 63.4%, to $7.6 million for the year ended December 31, 2001, as compared to
$19.1 million for the year ended December 31, 2000. This decrease primarily
resulted from fewer sales of Sun Microsystems hardware due to increased
competition and general economic conditions. The Company believes that resurgent
demand for such products, combined with the Company's movement into higher
margin and Value-Add products and services such as Storage Area Networks, will
result in increased revenue from resales of software and technology equipment
and service fees during 2002.
COST OF SALES. Cost of resales as a percentage of related resales was 86.0%
in 2001, compared to 90% in 2000. This decrease is substantially due to a sales
mix of higher-margin products such as service fees and maintenance contracts.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses were $2.5 million for the year ended
December 31, 2001, compared to $6.5 million for the year ended December 31,
2000, a decrease of $4.0 million or 61.5%. This decrease primarily resulted from
fewer marketing personnel in 2001, coupled with a decrease in sales commissions
from reduced sales. Sales and marketing expense will continue to decrease in
2002 as the Company moves away from its applications service provider model.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$2.2 million, or 30.1%, to $4.8 million for the year ended December 31, 2001,
compared to $7.2 million for the year ended December 31, 2000. The decrease is
25
primarily related to a reduction in personnel as a result of the Company's cost
reduction initiative. General and administrative expenses will continue to
decline in 2002 as the Company realizes the full-year benefit of cost-reduction
measures begun in the fourth quarter of 2001.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 2001, NeoMedia
charged to expense $0.5 million of research and development costs, a decrease of
$0.6 million or 54.5% compared to $1.1 million charged to expense for the year
ended December 31, 2000. This decrease is predominately associated with
decreased personnel devoted to NeoMedia's development during the second half of
2001, combined with increased capitalization of software development costs
associated with NeoMedia's "switching" platform and the Qode Universal Commerce
Solution during the first half of 2001. Research and development expense will
continue to decrease in 2002 as the Company moves away from its applications
service provider model
LOSS ON IMPAIRMENT OF ASSETS. During the third quarter of 2001, the Company
wrote off all assets associated with its discontinued MLM/Affinity product line,
resulting in an impairment charge of $2.9 million.
LOSS ON DIGITAL:CONVERGENCE. During the second quarter of 2001, the Company
wrote off all assets and liabilities relating to its intellectual property
license with Digital:Convergence, resulting in a net charge of $7.4 million.
INTEREST EXPENSE (INCOME), NET. Interest expense/(income) consists primarily
of interest paid to creditors as part of financed purchases, notes payable and
NeoMedia's asset-based collateralized line of credit net of interest earned on
cash equivalent investments. Interest (income) decreased by $153,000, or 87.9%,
to $(21,000) for the year ended December 31, 2001 from $(174,000) for the year
ended December 31, 2000, due to reduced cash balances throughout 2001 as
compared to 2000.
LOSS FROM CONTINUING OPERATIONS. During the year ended December 31, 2001,
the Company's loss from continuing operations increased by $13.4 million or
248.1% from $5.4 million in 2000 to $18.8 million in 2001. This increase is
primarily due to the loss on the Digital:Convergence license contract of $7.4 in
the second quarter of 2001 and an impairment loss of $2.8 million in the third
quarter of 2001 related to the discontinuation of the Company's MLM/Affinity
product line.
LOSS FROM OPERATIONS AND DISPOSAL OF DISCONTINUED OPERATIONS. The Company
discontinued operations of its Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $3.6 million. There was no
loss from this business unit during 2000. The business unit's assets were
purchased in March 2001 and the implementation was cancelled during the second
quarter of 2001.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. The Company sustained a loss of
$3.1 million in 2001 from the disposal of the Qode business unit in 2001.
NET LOSS. The net loss for the year ended December 31, 2001 was $25.5
million, which represented a $20.1 million, or 372.2% increase from a $5.4
million loss for the year ended December 31, 2000. The increase in net loss is
due primarily to the loss on the Digital:Convergence contract, an impairment
loss of in the third quarter of 2001 related to the discontinuation of the
Company's MLM/Affinity product line and the discontinuation of the Company's
Qode business unit, and reduced resales of software and technology equipment and
service fees resulting from increased competition and general economic
conditions, offset by lower expenses as a result of the Company's cost reduction
effort.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999
NET SALES. Total net sales for the year ended December 31, 2000 were $27.6
million, which represented a $2.3 million, or 9.1%, increase from $25.3 million
for the year ended December 31, 1999. This increase primarily resulted from
intellectual property (IP) license contract signed with Digital Convergence
offset by decreased sales of Y2K licenses and services from $3.3 million in 1999
to $0.1 million in 2000.
LICENSE FEES. Total license fees increased from $2.4 million to $8.4
million, or 250.0%, for the years ended December 31, 1999 and December 31, 2000.
The increase was due to a license agreement, entered into during the fourth of
quarter of 2000, between NeoMedia and Digital Convergence Corporation ("DC"),
granting DC a worldwide, non-exclusive license of the Company's patent portfolio
for directly linking documents, objects, and transactions directly to the
Internet. Revenue from this agreement totaled $7.8 million in 2000. This was
offset by a decrease of $1.8 million due to the discontinuation of the Company's
26
Y2K product line. Cost of sales as a percentage of related sales was 15.4%
during 2000 compared to 73.7% during 1999. This decrease in the cost of sales as
a percentage of related sales was primarily due to DC license sale in 2000 and
the discontinuation of Y2K licenses on which the Company paid royalties.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees decreased by $3.7 million, or
16.1%, to $19.1 million for the year ended December 31, 2000, as compared to
$22.8 million for the year ended December 31, 1999. This decrease primarily
resulted from decreased resales of IBM equipment due to discontinuation of sales
in our Canadian market. Also contributing to the decrease was reduced service
revenue from Y2K products of $1.6 million. Cost of sales as a percentage of
related sales decreased to 90.0% during 2000 from 90.5% during 1999.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses decreased $0.3 million, or 4.4%, to $6.5
million for the year ended December 31, 2000 from $6.8 million for the year
ended December 31, 1999, due to a decrease in NeoMedia's NAS direct sales force,
offset by personnel additions in marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.7 million, or 32.1%, to $7.0 million for the year ended December 31, 2000,
from $5.3 million for the year ended December 31, 1999. This increase was due to
the accrual of executive performance incentive in 2000. No performance incentive
expense was incurred in 1999. Also, increased legal costs of $0.5 million were
expensed in 2000.
RESEARCH AND DEVELOPMENT. During the year ended December 31, 2000, NeoMedia
charged to expense $1,101,000 of research and development expenses, an increase
of $114,000 or 11.6% compared to $986,000 charged to expense for the year ended
December 31, 1999. This increase was due to increased resources directed toward
the development of the ASP business. To the extent the Company can obtain
additional capital, it will continue to make significant investments in research
and development.
INTEREST (INCOME) EXPENSE, NET. Interest expense consists primarily of
interest paid to creditors as part of financed purchases, capitalized leases and
NeoMedia's asset-based collateralized line of credit net of interest earned on
cash equivalent investments. Interest expense decreased by $400,000, or 177%, to
income of $(174,000) for the year ended December 31, 2000 from $226,000 of
expense for the year ended December 31, 1999. This was due to reduced interest
expense resulting from the repayment of notes in the first quarter of 2000, as
well as interest income from higher cash balances during 2000.
NET LOSS. The net loss for the year ended December 31, 2000 was $5.4
million, which represented a $5.1 million, or 48.6% decrease from a $10.5
million loss for the year ended December 31, 1999. The decrease was primarily
due to revenue from the licensing of NeoMedia's intellectual property in 2000.
This was offset by a 97% decrease of Y2K revenue in 2000 along with increased
general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
NeoMedia anticipates that its existing cash balances and funds available
from borrowings under its existing financing agreement will have to be
supplemented with additional funds, through loans and/or capital contributions,
to finance NeoMedia's operations in 2002. During the first quarter of 2002, the
Company has successfully sold 19 million shares of its common stock at a price
of $0.17 per share in exchange for limited recourse promissory notes maturing no
later than May 2002, resulting in proceeds of $3,230,000 to the Company. The
Company expects to obtain an additional $1.0 million of debt and/or equity
financing during the first quarter and second quarters of 2002. Management
believes that this additional financing will be sufficient to sustain operations
through the first half of 2002, however, there can be no assurances that these
additional financings will be obtained. 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.
Net cash used in operating activities for the year ended December 31, 2001,
2000, and 1999 was $5.2 million, $6.8 million and $7.0 million, respectively.
27
During 2001, trade accounts receivable inclusive of costs in excess of billings
increased $0.9 million, while accounts payable, accrued expenses and deferred
revenue increased $3.0 million. During 2000, trade accounts receivable inclusive
of costs in excess billings increased $1.0 million, while accounts payable,
accrued expenses and deferred revenue increased $1.1 million. During 1999, trade
accounts receivable inclusive of costs in excess of billings decreased $2.5
million, while accounts payable, accrued expenses and deferred revenue decreased
$1.7 million. NeoMedia's net cash flow used in investing activities for the
years ended December 31, 2001, 2000 and 1999, was $3.0, $2.6 million and $2.1
million, respectively. This increase resulted from higher capitalized software
development costs coupled with an increase in acquisition costs related to
long-term and intangible assets.
During the years ended December 31, 2001, 2000 and 1999 the Company's net
loss totaled approximately $25,469,000, $5,409,000 and $10,472,000,
respectively. As of December 31, 2001 the Company had accumulated losses from
operations of approximately $63,344,000, had a working capital deficit of
approximately $5,163,000, and approximately $134,000 in unrestricted cash
balances.
Management believes it will need to raise additional capital to sustain the
Company's operations in 2002. The failure of management to accomplish these
initiatives will adversely effect the Company's business, financial conditions,
and results of operations and its ability to continue as a going concern.
Subsequent to December 31, 2001, the Company has undertaken the following
initiatives:
o During February 2002, the Company sold 19 million shares of its
common stock at $0.17 per share in exchange for promissory notes
maturing at the earlier of i) 90 days from the date of issuance, or
ii) 30 days from registration of the shares. Proceeds from this
transaction will be $3,230,000.
o During March 2002, the Company repriced 1.2 million of its common
stock warrants for a period of six months. During the term of the
warrant repricing program, participating holders are 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 NASDAQ Small Cap Market on the trading date
immediately preceding the date of exercise.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, our most critical
accounting policies include: inventory valuation, which affects our cost of
sales and gross margin; the valuation of purchased intangibles and goodwill,
which affects our amortization and write-offs of goodwill and other intangibles;
the valuation of strategic equity investments, which affects our other income
and expense; and valuation of deferred income taxes, which affects our income
tax expense and benefit. The Company also has other key accounting policies,
such as our policies for revenue recognition, including the deferral of a
portion of revenues on sales to distributors, and allowance for bad debt. The
methods, estimates and judgments the Company uses in applying these most
critical accounting policies have a significant impact on the results the
Company reports in our financial statements.
INVENTORY VALUATION
Our policy is to value inventories at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventories, including an assessment of excess or obsolete
inventories. The Company determines excess and obsolete inventories based on an
estimate of the future demand for our products within a specified time horizon,
generally 12 months. The estimates the Company uses for demand are also used for
near-term capacity planning and inventory purchasing and are consistent with
revenue forecasts. If our demand forecast is greater than its actual demand the
28
Company may be required to take additional excess inventory charges, which will
decrease gross margin and net operating results in the future.
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, the Company primarily uses the discounted cash
flow method. 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 the Company has used are consistent with the plans and
estimates that the Company 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 our net operating results.
ALLOWANCE FOR BAD DEBT
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Our allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts, the aging of accounts receivable,
our history of bad debts, and the general condition of the industry. If a major
customer's credit worthiness deteriorates, or our customers' actual defaults
exceed our historical experience, our estimates could change and impact our
reported results.
INTANGIBLE ASSETS
At the end of each quarter the Company performs impairment tests on each of
its intangible assets, which include capitalized patent costs, capitalized
software development costs, and purchased software. In doing so, the Company
evaluates the carrying value of each intangible asset with respect to several
factors, including historical revenue generated from each intangible asset,
application of the assets in our current business plan, and projected revenue to
be derived from the asset. Revenue is projected using the expected present value
of revenues over the lives of each intangible asset group. If the book value of
any assets group exceeds the expected revenue, then an impairment charge is
taken and the asset balance is adjusted to match the expected revenue. As of
December 31, 2001, the expected present value of revenues over the lives of each
intangible asset group exceeded their respective carrying values, and no
impairment charge was taken in the fourth quarter of 2001.
FINANCING AGREEMENTS
As of December 31, 2001, 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. There are no debt covenants specified in the credit
agreement. Termination of this agreement would materially adversely affect the
Company's financial condition. Management expects the agreement to remain in
place in the near future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The FASB later issued in
June 1999 SFAS No. 137, which deferred the effective date for SFAS No. 133 to
all fiscal years beginning after June 15, 2000, with earlier application
encouraged. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of
29
SFAS No. 133 did not have a material impact on our financial position or results
of operations.
On December 3, 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition. This SAB
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. We implemented SAB No. 101 for the quarter ended June 30,
2000. It did not have a material impact on our results of operations.
On July 21, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142 addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized, but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives will continue to
be amortized over their useful lives, but those lives will no longer be limited
to forty years. SFAS No. 141 is effective for all business combinations after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. The Company is considering the provisions of SFAS No. 141 and No. 142 and
at present has not determined the impact of adopting SFAS No. 141 and SFAS No.
142.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption to have a material impact to its financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock market. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates and
foreign currency exchange rates. The Company does not currently invest in equity
instruments of public or private companies for business or strategic purposes.
The Company generally conducts business, including sales to foreign
customers, in U.S. dollars, and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS
The Financial Statements to this Form 10-K are attached commencing on page
F-1.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
On July 7, 1999, the Company filed a Report on Form 8-K reporting that KPMG
LLP had resigned as the Company's independent auditors. In connection with the
audit of the Company's financial statements for the fiscal year ended December
31, 1998 and in the subsequent interim periods, there were no disagreements with
KPMG LLP on any matters of accounting principles or practice, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of KPMG LLP would have caused KPMG LLP to make reference to the
matter in their report. Effective July 14, 1999, the Company engaged Arthur
Andersen LLP to audit the Company's consolidated financial statements for the
fiscal year ending December 31, 1999.
On October 29, 2001, the Company filed a Report on Form 8-K reporting that
it had dismissed Arthur Andersen LLP as its independent auditors. In connection
with the audit of the Company's financial statements for the fiscal year ended
December 31, 2000 and 1999 and in the subsequent interim periods, there were no
disagreements with Arthur Andersen LLP on any matters of accounting principles
or practice, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Arthur Andersen LLP would have
caused Arthur Andersen LLP to make reference to the matter in their report.
Effective October 25, 2001 the Company engaged Stonefield Josephson, Inc. as its
new independent accountants.
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To NeoMedia Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of NeoMedia
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' 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. 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 referred to above present fairly, in
all material respects, the financial position of NeoMedia Technologies, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and the current cash position of the Company raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
March 30, 2001
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Neomedia Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Neomedia
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows 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.
We conducted our audit 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Neomedia
Technologies, Inc. and subsidiaries as of December 31, 2001, 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 3 to the
consolidated financial statements, the Company's significant operating losses
and current cash flow position raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
Irvine, California
March 28, 2002
F-2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................... $ 134 $4,453
Restricted cash........................................... -- 750
Short-term investments.................................... -- --
Trade accounts receivable, net of allowance for doubtful
accounts of $65 and $484 in 2001 and 2000............... 2,583 4,370
Digital Convergence receivable............................ 5,144
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 43 89
Inventories............................................... 197 116
Assets held for sale...................................... 210 --
Prepaid expenses and other current assets................. 582 946
--------- ----------
Total current assets................................. 3,749 15,868
Property and equipment, net.................................. 205 365
Digital Convergence receivable, net of current portion....... -- 10,288
Prepaid - Digital Convergence................................ -- 4,116
Capitalized patents, net..................................... 2,500 2,661
Capitalized and purchased software costs and other intangible assets, net 1,828 6,382
Other long-term assets............................. 757 914
--------- ----------
Total assets........................................ $ 9,039 $ 40,594
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $2,886 $1,187
Amounts due under financing agreements.................... 2,283 1,114
Accrued expenses.......................................... 1,922 2,691
Stock liability........................................... -- --
Current portion of long-term debt......................... 149 137
Note Payable.............................................. 750 --
Sales taxes payable....................................... 135 261
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 13 49
Deferred revenues - Digital Convergence................... -- 1,543
Deferred revenues......................................... 767 449
Other..................................................... 7 11
--------- ----------
Total current liabilities............................ 8,912 7,442
Long-term debt, net of current portion....................... 390 539
Long-term deferred revenue - Digital Convergence............. -- 13,503
--------- ----------
Total liabilities.................................... 9,302 21,484
--------- ----------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
452,289 issued and outstanding in 2001, none issued and outstanding
in 2000................................................... 5 --
Additional paid-in capital, preferred stock.............. 878 --
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,446,343 shares issued and 18,804,917 outstanding
in 2001, 14,460,384 shares issued and outstanding in 2000 188 145
Additional paid-in capital................................ 63,029 57,619
Stock subscriptions receivable............................ (240) --
Accumulated deficit....................................... (63,344) (37,875)
Treasury stock, at cost, 201,230 shares of common stock... (779) (779)
--------- ----------
Total shareholders' equity...................... .... (263) 19,110
--------- ----------
Total liabilities and shareholders' equity......... $ 9,039 $ 40,594
============ ==========
The accompanying notes are an integral part of these consolidated balance sheets.
F-3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
NET SALES:
License fees.............................................. $ 576 $8,417 $2,430
Resales of software and technology equipment and service fees 7,566 19,148 22,826
----------- ---------- ----------
Total net sales...................................... 8,142 27,565 25,256
------------ ---------- ----------
COST OF SALES:
License fees............................................... 2,355 1,296 1,790
Resales of software and technology equipment and service fees 6,511 17,237 20,680
------------ ---------- ----------
Total cost of sales.................................. 8,866 18,533 22,470
------------ ---------- ----------
GROSS PROFIT................................................. (724) 9,032 2,786-
Sales and marketing expenses................................. 2,519 6,504 6,765
General and administrative expenses.......................... 4,772 7,010 5,281
Research and development costs............................... 549 1,101 986
Loss on impairment of assets................................. 2,871 -- --
Loss on Digital:Convergence license contract................. 7,354 -- --
------------ ---------- ----------
Loss from operations......................................... (18,789) (5,583) (10,246)
Interest (income) expense, net.............................. (21) (174) 226
------------ ---------- ----------
Loss from continuing operations.............................. (18,768) (5,409) (10,472)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit...... (3,613) -- --
Loss on disposal of discontinued business unit, including provision
of $439 in 2001 for operating losses during phase-out period (3,088) -- --
------------ ---------- ----------
NET LOSS..................................................... $(25,469) $ (5,409) (10,472)
------------ ---------- ----------
NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED....................................... $(1.14) $ (0.39) $(1.01)
----------- ---------- ----------
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED....................................... $(0.41) $ -- $ --
------------ ---------- ----------
NET LOSS PER SHARE--BASIC AND DILUTED........................ $(1.55) $(0.39) $(1.01)
------------ ---------- ----------
Weighted average number of common shares--basic and diluted 16,410,246 13,931,104 10,377,478
=========== =========== ==========
The accompanying notes are 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,
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $(25,469) $(5,409) $(10,472)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................. 3,369 2,336 2,029
Loss on disposal of discontinued business units........... 2,649 -- --
Loss on disposal of and impairment of assets.............. 2,871 58 --
Effect of loss on Digital:Convergence contract............ 7,354 -- --
Preferred stock issued to pay advertising expense......... 882 -- --
Expense associated with warrant repricing................. 947 -- --
Fair value of stock based compensation granted for
professional services................................... 69 437 28
Changes in operating assets and liabilities
Trade accounts receivable, net.......................... (709) 1,548 2,271
Digital Convergence receivable.......................... (2,767) --
Prepaid - Digital Convergence........................... 118 -- --
Costs and estimates earnings in excess of billings on
uncompleted contracts................................. 46 (89) 222
Other current assets.................................... (109) (121) 382
Other long-term assets................................. -- (194) --
Accounts payable, accrued expenses and stock liability.. 2,502 (2,676) (1,286)
Billings in excess of costs and estimates earnings on
uncompleted contracts................................. (36) (82) 131
Deferred revenue........................................ 318 184 (391)
Other current liabilities............................... (4) -- 76
--------- ------- -------
Net cash used in operating activities........................ (5,202) (6,775) (7,010)
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets (2,883) (2,317) (1,470)
(Increase)/decrease in value of life insurance policies...... 158 (199) (522)
Acquisition of property and equipment........................ (81) (123) (127)
--------- ------- -------
Net cash used in investing activities........................ (2,806) (2,639) (2,119)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance
costs of $149 in 2001, $74 in 2000, and $148 in 1999..... 1,638 9,203 8,172
Net proceeds from exercise of stock warrants................. 1,045 2,877 75
Net proceeds from exercise of stock options.................. 138 537 1,061
Common stock repurchased..................................... -- (779) --
Borrowings under notes payable and long-term debt............ 504 -- 2,000
Change in restricted cash.................................... 750 194 (194)
Repayments on notes payable and long-term debt............... (386) (625) (125)
--------- ------- -------
Net cash provided by financing activities.................... 3,689 11,407 10,989
--------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................... (4,319) 1,993 1,860
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................. 4,453 2,460 600
--------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR....................... $ 134 $4,453 $2,460
========= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year .................... $ (61) $170 $146
Non-cash investing and financing activities:
Net assets acquired as part of Qode purchase agreement in exchange
for common stock and forgiveness of note.............. 1,800 -- --
Shares earned by Qode.com under purchase agreement........ 13
F-5
Accounts payable converted to note payable................ 246 -- --
Common stock issued in exchange for note receivable....... 240 -- --
Net assets classified as "Liabilities held for sale"...... 210 -- --
Daystar assets purchased with shares of common stock...... -- 3,520 --
Conversion of short-term debt to equity................... -- -- 2,000
Issuance costs for shares issued through private placement 149 96 112
Stock liability due upon issuance of patent............... -- -- 1,863
Warrants issued for license contract...................... -- 4,704 --
Deferred revenue relating to license contract............. -- 15,432 --
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Preferred Stock Treasury Stock
Stock
-------------------- ---------------------- -----------
Additional Stock Additional
Paid-in Subscription Paid-in Accumulated
Shares Amount Capital Receivable Shares Amount Capital Deficit Shares Amount
--------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998..... 8,699,08 $87 $25,168 - - - - ($21,994) - -
Exercise of employee options... 611,854 6 1,055 - - - - - - -
Issuance of common stock through
Private placement, net of 1,978,794 20 8,039 - - - - - - -
placement, net of $260 of
Issuance costs............ 1,978,794 20 8,039 - - - - - - -
Fair value of warrants issued
for professional services - - 28 - - - - - - -
rendered.......................
Exercise of warrants........... 231,764 1 74 - - - - - - -
warrants......................
Fair value of stock granted in
Conjunction with financing 501,897 5 2,003 - - - - - - -
Net Loss....................... - - - - - - - (10,472) - -
--------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999..... 12,023,389 $119 $36,367 - - - - ($32,466) - -
Exercise of employee options... 182,787 2 535 - - - - - - -
Issuance of common stock through
Private placement, net of
$170 of
Issuance costs............ 1,415,259 15 9,188 - - - - - - -
Fair value of warrants issued for
Professional services rendered - - 253 - - - - - - -
Fair value of stock issued for
professional Services rendered.. 21,500 1 183 - - - - - - -
Fair value of warrants issued
Related to license agreement
With Digital Convergence... - - 4,704 - - - - - - -
Exercise of warrants........... 495,600 5 2,872 - - - - - - -
Stock issued to purchase assets 321,829 3 3,517 - - - - - - -
purchase assets.........
Treasury stock at cost......... - - - - - - - - 201,230 (779)
Net Loss........................ - - - - - - - (5,409) - -
---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 14,460,384 $145 $57,619 - - - - ($37,875) 201,230 ($779)
2000.........
---------------------------------------------------------------------------------------------------
Exercise of employee options... 38,560 - 138 - - - - - - -
Issuance of Common Stock through
private Placement, Net
of $149 of issuance costs...... 3,490,750 35 1,843 - - - - - - -
Expense associated with warrant - - 947 - - - - - - -
repricing..
Fair value of options issued for - - 69 - - - - - - -
Professional services
rendered
Exercise of Warrants........... 505,450 5 1,040 - - - - - - -
Stock issued to purchase assets 309,773 3 1,373 - - - - - - -
purchase assets..........
Issuance of Preferred Stock for - - - - 452,489 5 878 - - -
services.......................
Stock Subscription Receivable.. (240)
Net Loss........................ - - - - - - - (25,469) - -
---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 18,804,917 $188 $63,029 (240) 452,489 $5 $878 ($63,344) 201,230 ($779)
Total
Stockholders'
Equity
----------------
BALANCE, DECEMBER 31, 1998..... $3,261
Exercise of employee options... 1,061
Issuance of common stock through
Private placement, net of 8,059
placement, net of $260 of
Issuance costs............
Fair value of warrants issued
for professional services 28
rendered.......................
Exercise of warrants........... 75
warrants......................
Fair value of stock granted in
Conjunction with financing 2,008
Net Loss....................... (10,472)
----------------
BALANCE, DECEMBER 31, 1999..... $4,020
Exercise of employee options... 537
Issuance of common stock through
Private placement, net of
$170 of
Issuance costs............ 9,203
Fair value of warrants issued for
Professional services rendered 253
Fair value of stock issued for
professional Services rendered.. 184
Fair value of warrants issued
Related to license agreement
With Digital Convergence... 4,704
Exercise of warrants........... 2,877
Stock issued to purchase assets 3,520
purchase assets.........
Treasury stock at cost......... (779)
Net Loss........................ (5,409)
----------------
BALANCE, DECEMBER 31, $19,110
2000.........
----------------
Exercise of employee options... 138
Issuance of Common Stock through
private Placement, Net
of $149 of issuance costs...... 1,878
Expense associated with warrant 947
repricing..
Fair value of options issued for 69
Professional services
rendered
Exercise of Warrants........... 1,045
Stock issued to purchase assets 1,376
purchase assets..........
Issuance of Preferred Stock for 883
services.......................
Stock Subscription Receivable.. (240)
Net Loss........................ (25,469)
--------
BALANCE, DECEMBER 31, 2001 ($263)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia
Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A.
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc. incorporated in
Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH
incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated
in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in
Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico;
NeoMedia Technologies do Brasil Ltd. incorporated in Brazil and NeoMedia
Technologies UK Limited incorporated in the United Kingdom, and are collectively
referred to as "NeoMedia" or the "Company". The consolidated financial
statements of NeoMedia are presented on a consolidated basis for all periods
presented. All significant intercompany accounts and transactions have been
eliminated in preparation of the consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS), and
NeoMedia Consulting and Integration Services (NCIS)
NEOMEDIA INTERNET SWITCHING SERVICES (NISS)
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports the Company's physical world to
Internet core technology, including our 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)
NCIS (systems integration service offerings) is the original business line
upon which the Company was organized. This unit resells client-server equipment
and related software. The unit also provides general and specialized consulting
services targeted at software driven print applications, and especially at
process automation of production print facilities through its integrated
document factory solution. Systems integration services also identifies
prospects for custom applications based on NeoMedia's products and services. The
operations are based in Lisle, Illinois.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated balance sheets and consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
F-8
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
License 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.
Under American Institute of Certified Public Accountants ("AICPA")
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as
amended, license revenue is recognized if persuasive evidence of an agreement
exists, delivery has occurred, pricing is fixed and determinable, and
collectibility is probable.
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.
PURCHASE AND DISPOSAL OF QODE.COM, INC.
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the
average closing price for the few days before and after the measurement date of
March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of
common stock from escrow for performance for the period March 1, 2001 to August
31, 2001. The remaining 1,641,426 shares held in escrow as contingent
compensation will not be issued due to the business unit not attaining certain
performance targets.
The Company accounted for this purchase using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
over the purchase price was allocated to reduce proportionately the values
assigned to noncurrent assets. The accompanying consolidated statements of
operations include the operations of Qode from March 1, 2001, through September
30, 2001.
F-9
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price at the original purchase date was calculated and allocated as
follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at $0.39 $ 13,000
----------------
Total purchase price $ 1,373,000
----------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
----------------
Total purchase price allocated $ 1,373,000
================
During the third quarter of 2001, the Company issued an additional 35,074 shares
under the terms of the earn-out with Qode.com, Inc. (see explanation below). The
value of these shares in the amount of $13,000 was allocated $9,000 to
capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has
placed 1,676,500 shares of its common stock in escrow for a period of one year,
subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March 1, 2002, these performance targets were not met and therefore, the
remaining 1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue, page views, and fully allocated earnings before taxes relating to the
Qode Universal Commerce Solution.
At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date is July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
final number of shares issued to Qode under the earn-out was 309,773, allocated
as outlined in the table above.
F-10
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
i). Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over three
years.
ii). Capitalized software development costs relating to the development of
the Qode Universal Commerce Solution.
PROFORMA INFORMATION
Proforma results of operations as though the companies had combined at the
beginning of the period is as follows:
YEAR ENDED
----------
December 31, 2001 December 31, 2000
----------------- -----------------
Revenue $ 8,228 $ 27,776
Net Loss $ (20,959) $ (14,297)
EPS - basic and diluted $ (1.28) $ (1.01)
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to sell
the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which
it acquired in March 2001, to The Finx Group, Inc., a holding company based in
Elmsford, NY. The final contract is contingent upon the completion of due
diligence and definitive terms and conditions stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all inventory, equipment and the ownership and operation of the comprehensive
universal internet database along with the corresponding patents. The Finx Group
will assume $620,000 in Qode payables and $800,000 in long-term leases in
exchange for 500,000 shares of the Finx Group, right to use and sell Qode
services, and up to $5 million in affiliate revenues over the next five years.
As of December 31, 2001, the transaction had not been consummated due to the
encumbrance of certain of NeoMedia's Qode-related assets under the Company's
note payable to Airclic, Inc. The Finx group has taken possession of certain
Qode system assets and has taken over ongoing expenses related to the business
unit. Management believes that the sale will be completed immediately upon
resolution of Airclic litigation. During the third and fourth quarters of 2001,
the company recorded a $2.6 million expense from the write-down of the Qode
assets/liabilities to the following net realizable value:
December 31, 2001
(Balances in Thousands)
Inventory $ 144
Equipment 265
Intangible Assets 1,027
-----
Assets 1,436
-----
Accounts Payable $1,108
Note Payable 15
Capital Lease 103
-----
Liabilities 1,226
-----
Net Realizable Value $ 210
------
F-11
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $439,000. No further loss is
anticipated.
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.
DIGITAL:.CONVERGENCE CORPORATION INTELLECTUAL PROPERTY LICENSE AGREEMENT
The Company entered into an agreement with a competitor,
Digital:Convergence Corporation ("DC"), a private company located in the US, in
October 2000, granting them a worldwide, non-exclusive license of the Company's
extensive patent portfolio for directly linking documents, objects, transaction
and voice commands to the internet. The agreement provided for annual license
fees over a period of ten years in excess of $100 million through a combination
of cash and equity. The Company recognized $7.8 million of revenue in 2000
related to this contract, including a $5.0 million cash payment received in
October 2000 for royalties earned before contract execution, $2.5 million
related to the $10 million of payments in DC common stock and cash expected to
be received in the first year of the contract, and $0.3 million related to DC
stock received by NeoMedia to be recognized over the life of the contract.
As part of the contract, the Company issued to DC a warrant to purchase 1.4
million shares of NeoMedia common stock.
In the first quarter of 2001, DC issued the Company an interest bearing $3
million note payable in lieu of a $3 million cash payment due in January 2001.
The Company also received shares of DC stock in January with a contractual value
of $2 million as part of the first contract-year royalties due. The note was
originally due on April 24, 2001, however, on that date the Company agreed to
extend it until June 24, 2001. The Company also partially wrote down, in the
first quarter of 2001, the value of the remaining DC stock receivable, and DC
stock that had been received in January, to a value that management believed was
reasonable at the time (50% of the valuation stipulated in the contract). The
write-down consisted of a reduction in assets of $7.7 million and a
corresponding reduction in liabilities of $7.7 million. The DC stock received in
January 2001 was valued at $1 million and the DC receivable was valued at $9.2
million. In April 2001, the Company received additional shares of DC stock with
a $5 million value based on the valuation method stipulated in the contract. No
revenue was recognized related to these shares and the shares were not recorded
as an asset due to DC's worsening financial condition. All assets and
liabilities relating to the contract were subsequently written off in the second
quarter (see below).
Also in April, an agreement was entered into with DC whereby for a period
from the date of registration of the shares underlying the warrant to purchase
1.4 million shares of the Company's common stock until October 24, 2001, if the
Company would identify a purchaser for the Company's shares, DC would exercise
the warrant and purchase 1.4 million shares of common stock and sell the shares
to the identified purchaser. One third of the net proceeds received by DC on the
sale of the Company's common stock shall be paid to the Company toward repayment
of DC's obligations under the note to the Company in the amount of $3 million.
In consideration for this, the warrant exercise price was reduced during this
period to 38 percent of the closing sale price of the Company's common stock on
the day prior to the date of exercise, subject to a minimum price. Because the
exercise of the warrants at this reduced price is contingent upon the Company
finding a purchaser of the underlying 1.4 million shares, the value of this
re-pricing will be measured and recorded at the time the shares are sold. As of
October 24, the Company was not able to locate a purchaser and therefore, the
warrant was not exercised.
On June 24, 2001, DC did not pay the note that was due, and on June 26,
2001, the Company filed a $3 million lawsuit against DC for breach of contract
regarding the $3 million promissory note. It was also learned in the second
quarter of 2001 that DC's capital raising efforts and business operations were
having difficulty, and the Company decided to write off all remaining amounts
related to the DC contract. The following table represents balance sheet
balances at December 31, 2000 and March 31, 2001, as well as all amounts written
off during the second quarter of 2001:
F-12
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, March 31, Write-off
2000 Balances 2000 Balances June 30, 2001
(Unaudited)
----------------------------------------------
(Dollars in thousands)
----------------------------------------------
ASSETS
Available for sale securities - Digital Convergence $ - $ 1,000 $ 1,000
Trade Accounts Receivable 2,500 1,500 1,500
Digital Convergence receivable
5,144 5,144 5,144
Prepaid expenses (current portion)
470 470 470
Digital Convergence receivable, net of current portion 10,288 2,572 2,572
Prepaid DC (long-term portion) 4,116 3,998 3,998
-------------- -------------- --------------
Total assets $22,518 $14,684 $ 14,684
============== ============== ==============
LIABILITIES
Deferred revenues DC $ 1,543 772 772
Long-term deferred revenues - DC 13,503 6,558 6,558
-------------- -------------- --------------
Total liabilities $15,046 7,330 7,330
============== ============== ==============
The net effect of the write-off is a $7,354,000 non-cash charge to income
during the second quarter, which is included in Loss on Digital:Convergence
License Contract in the consolidated statements of operations for the year
ending December 31, 2001. Any future revenues related to this contract will be
recorded as payments are received.
AIRCLIC, INC. RELATIONSHIP
On July 3, 2001, NeoMedia signed a non-binding letter of intent with
AirClic, Inc. to cross-license the companies' intellectual property. The terms
of the proposed agreement called for NeoMedia to: (i) acquire an equity interest
in AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic,
which interest would likely have exceeded 50% of NeoMedia's outstanding equity
securities. Further terms of the agreement called for NeoMedia to acquire
AirClic's Connect2 comparison shopping business unit, which was to be combined
with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a
secured note due on the earlier of (i) the date on which NeoMedia raises $5
million in equity financing from a source other than AirClic, (ii) a change in
control of NeoMedia, or (iii) January 11, 2002.
During the negotiation of a definitive set of agreements between the
companies, it was determined that the consummation of the transaction as
provided in the non-binding letter of intent would not be completed. As a
result, additional notes aggregating $1,500,000 will not be executed between the
companies.
On September 6, 2001, AirClic filed suit against the Company in the Court
of Common Pleas, Montgomery County, PA, for breach of contract relating to the
July 3, 2001 non-binding letter of intent signed by the Company and AirClic.
AirClic claims that the Company violated express representations and warranties
relating to the Company's assets and state of business affairs. AirClic seeks a
judgment to accelerate repayment of the $500,000 note due January 11, 2002, and
to relieve AirClic from any obligation to make further loans to the Company as
outlined in the letter of intent. AirClic has also filed suit against the
Company in the United States District Court for the Eastern District of
Pennsylvania. In this second action, AirClic seeks a declaration that certain
core intellectual property securing the note issued by us to AirClic, some of
which is patented and others for which a patent application is pending, is
invalid and in the public domain. (see "Legal Proceedings" in Footnote 11)
ADVERTISING EXPENSE
F-13
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2001, the Company entered into a one-year
license agreement with About.com, Inc. to provide the Qode Universal Commerce
SolutionTM to About.com's users. In June 2001, About.com ran banner ads on its
site promoting the Qode Universal Commerce SolutionTM. As part of this
transaction, About.com received 452,489 shares of our Series B Convertible
Preferred Stock, par value $0.01 per share, of the 500,000 total Series B
Convertible Preferred shares the Company is authorized to issue, in
consideration for these promotions. The Company recorded an advertising expense
of $882,000 associated with this transaction in sales and marketing expense in
the accompanying consolidated statements of operations. The agreement with
About.com was terminated on August 31, 2001, in anticipation of the sale of the
Qode assets to the Finx Group.
SEVERANCE EXPENSE
During the third quarter of 2001, the Company laid off 55 employees,
including the chief technology officer and the chief operating officer,
representing a 60% decrease in its total workforce. In connection with the
layoffs, the Company recognized a severance expense of approximately $494,000
during the third quarter of 2001. The layoffs were part of a company-wide cost
reduction initiative.
EXECUTIVE INCENTIVE EXPENSE
In June 2001, the Company's compensation committee approved an adjustment,
relating to the Digital:Convergence patent license fees, to the 2000 executive
incentive plan that reduced the bonus payout by approximately $1.1 million. This
was recorded as a negative expense in the accompanying consolidated statement of
operations.
WARRANT REPRICING PROGRAM
In May 2001, the Company re-priced approximately 1.5 million
additional warrants subject to a limited exercise period and other conditions,
including certain warrants issued in connection with NeoMedia's initial public
offering in 1996, which will expire at the end of 2001. The repricing program
allowed the warrant exercise price to be reduced to 33 percent of the closing
sale price of the Company's common stock (subject to a minimum) on the day prior
to the date of exercise for a period of six months from the date the repricing
program began. The exercise of the warrants and sale of the underlying common
stock was at the discretion of a broker selected by the Company, within the
parameters of the repricing arrangement. In accordance with FASB Interpretation,
FIN 44, Accounting for Certain Transactions Involving Stock Transactions, the
award was accounted for as variable from the date of modifications on May 1,
2001. Accordingly, $181,000 was recorded as compensation in the accompanying
consolidated statement of operations.
WARRANT ISSUANCE
In June 2001, the Board of Directors' approved the issuance of 414,000
warrants for Charles W. Fritz, NeoMedia's Chairman, CEO, and president at a
exercise price of $2.09. However, the warrants were not issued during 2001. The
Company does not intend to issue these warrants in 2002.
VALUATION AND RESERVES
Allowance for doubtful accounts activity for the years ended December 31,
2001 and 2000 was as follows:
(dollars in thousands)
-----------------------
2001 2000
---- ----
Beginning balance................................. $484 $888
Bad debt expense.................................. (169) 303
Write-off of uncollectible accounts............... (68) (17)
Collection of accounts previously written off.....
(182) (75)
F-14
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjustment to general allowance................... - (615)
-----------------------
Ending balance.................................. $65 $484
=========== ===========
INVENTORIES
Inventory is stated at the lower of cost or market, and at December 31,
2001, 2000 and 1999 was comprised of purchased computer technology resale
products. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less 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. The estimated useful lives range
from three to five years for equipment and seven years for furniture and
fixtures. Leasehold improvements are amortized over the shorter of the life of
the lease or the useful lives of the related assets. Upon retirement or sale,
cost and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in the consolidated statements of operations.
Depreciation expense was $249,000, $263,000 and $367,000 for the years
ended December 31, 2001, 2000 and 1999 respectively.
CAPITALIZED AND PURCHASED SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS
Intangible assets consist of capitalized software development costs and
patents.
Software development costs are accounted for in accordance with Statement
of Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Costs associated with the
planning and designing phase of software development, including coding and
testing activities necessary to establish technological feasibility, are
classified as research and development and expensed as incurred. Once
technological feasibility has been determined, additional costs incurred in
development, including coding, testing, quality assurance and documentation are
capitalized. Once a product is made available for sale, capitalization is
stopped unless the related costs are associated with a technologically feasible
enhancement to the product. Amortization of purchased and developed software is
provided on a product-by-product basis over the estimated economic life of the
software, generally three years, using the straight-line method.
In accordance with SFAS No. 86, at the end of each quarterly reporting
period, the Company evaluates each of its software products for impairment by
adjusting the unamortized capitalized costs of each computer software product to
its net realizable value. Net realizable value is equal to the estimated future
gross revenues from each product reduced by the estimated future costs of
completing and disposing of that product, including the costs of performing
maintenance and customer support required to satisfy the Company's
responsibility set forth at the time of sale. It is reasonably possible that the
estimates underlying the impairment analysis could change in the near term, and
the effect of the change could be material to the financial statements.
Patents (including patents pending and intellectual property) and acquired
customer lists are stated at cost, less accumulated amortization. Patents are
generally amortized over periods ranging from five to seventeen years.
Intangible assets activity for the years ended December 31, 2001 and 2000
was as follows:
DECEMBER 31,
------------
2001 2000
---- ----
Beginning Balance $9,043 $ 5,296
F-15
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additions 2,493 5,837
Intangible Assets Moved
To "Assets Held for Sale" (1,027) ---
Amortization/Write-offs (6,181) (2,090)
------- --------
Ending Balance $4,328 $ 9,043
======= ========
Amortization expense of intangible assets was $3,120,000 $2,073,000 and
$1,662,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
LOSS ON IMPAIRMENT OF ASSETS
In connection with the Company's reduction in work force during the third
quarter 2001, the Company sold the rights to its Pacer Advantage end-user
software product for $40,000 cash. Accordingly, the Company wrote off all its
assets aggregating $2.9 million related to the MLM/Affinity program including
assets pertaining to the purchase of Daystar services, LLC and a customer list
purchased in 1998. Revenue related to the MLM/Affinity program was $92,000,
$259,000, and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively. Net loss allocated to the MLM/Affinity program was $832,000,
$1,075,000, and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively.
EVALUATION OF LONG-LIVED ASSETS
The Company periodically performs an evaluation of the carrying value of
its long-lived assets, including intangible assets, in accordance with SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This evaluation consists primarily of a comparison to
the future undiscounted net cash flows from the associated assets in comparison
to the carrying value of the assets. As of December 31, 2001, the Company is of
the opinion that no impairment of its long-lived assets has occurred.
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, 2001, 2000
and 1999.
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, 2001 DECEMBER 31, 2000 DECEMBER 31, 2000
----------------- ----------------- -----------------
Outstanding Stock Options.............. 4,214,000 4,294,000 3,418,000
Outstanding Warrants................... 3,240,000 3,968,000 2,676,000
..............................................
FINANCIAL INSTRUMENTS
The Company believes that the fair value of its financial instruments
approximate carrying value.
CONCENTRATIONS OF CREDIT RISK
F-16
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
Credit risk is generally minimized as a result of the large number and diverse
nature of NeoMedia's customers, which are located throughout the United States.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $65,000, $484,000 and
$888,000 in its December 31, 2001, 2000 and 1999 consolidated balance sheets,
respectively. NeoMedia had net sales to one major customer in the
telecommunications industry (Ameritech) of $2,983,000, $5,824,000 and $5,843,000
during the years ended December 31, 2001, 2000 and 1999, respectively, resulting
in trade accounts receivable of $1,499,000, $229,000 and $225,000 as of December
31, 2001, 2000 and 1999, respectively. In addition, a single company supplies
the equipment and software, which is re-marketed to this customer. Accordingly,
the loss of this supplier or customer would materially adversely affect NeoMedia
SI. 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 73%, 66% and 78% of NeoMedia's revenue for the
years ended December 31, 2001, 2000 and 1999, respectively. NeoMedia had license
fees to one major customer (DC) of $7,768,000 during the year ended December 31,
2000, resulting in an accounts receivable of $2,500,000 as of December 31, 2000.
Revenue generated from this licensing agreement accounted for approximately 28%
of NeoMedia revenue for the year ended December 31, 2000. No revenue was
recognized under this agreement during the year ended December 31, 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform to the 2001 presentation.
COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2000 and 1999, the Company did not
have other comprehensive income and therefore has not included the statement of
comprehensive income in the accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 21, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142 addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives will continue to
be amortized over their useful lives, but those lives will no longer be limited
to forty years. SFAS No. 141 is effective for all business combinations after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. The Company is considering the provisions of SFAS No. 141 and No. 142 and
at present has not determined the impact of adopting SFAS No. 141 and SFAS No.
142. The Company does not expect the adoption to have a material impact to the
Company's financial position or results of operations.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
F-17
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
3. LIQUIDITY
During the years ended December 31, 2001, 2000 and 1999 the Company's net
loss totaled approximately $25,469,000, $5,409,000 and $10,472,000 respectively.
As of December 31, 2001 the Company had an accumulated deficit of approximately
$63,344,000 and approximately $134,000 in unrestricted cash balances. As of
December 31, 2001, the working capital was negative $5,163,000 and cash flow
from operations was negative $5,202,000. The Company's unrestricted cash balance
as of March 12, 2002 was approximately $134,000 (unaudited).
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 or debt,
or be in 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.
Subsequent to December 31, 2001, the Company has undertaken the following
initiatives:
o During February 2002, the Company sold 19 million shares of its
common stock at $0.17 per share in exchange for promissory notes
maturing at the earlier of i) 90 days from the date of issuance, or
ii) 30 days from registration of the shares. Proceeds from this
transaction will be $3,230,000.
o During March 2002, the Company repriced 1.2 million of its common
stock warrants for a period of six months. During the term of the
warrant repricing program, participating holders are 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 NASDAQ Small Cap Market on the trading date
immediately preceding the date of exercise.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge to revenue generation
from the Company's valuable intellectual property portfolio and PaperClickTM
internet "switching" software. To this end, the Company has retained the law
firm of Baniak Pine & Gannon to pursue potential license agreements, and plans
to implement a sales strategy for PaperClickTM upon receipt of adequate funding.
4. CONTRACT ACCOUNTING
NeoMedia periodically enters into long-term software development and
consultation agreements with certain customers. As of December 31, 2001, 2000
and 1999, certain contracts were not completed and information regarding these
uncompleted contracts was as follows:
F-18
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
---- ----
Costs Incurred on Contracts........................ $ 50 $ 321
Profit to Date..................................... 15 1,087
-------- ---------
Total Costs and Estimated Earnings............. 65 1,408
Less - Billings to Date............................ (35) (1,368)
-------- ---------
Costs and Estimated Earnings in Excess of $ 30 $ 40
Billings........................................... 30 40
======== =========
The above are included in the accompanying consolidated balance sheets under the
following captions:
2001 2000
---- -----
Costs and Estimated Earnings in Excess of $ 43 $ 89
Billings.......
Billing in Excess of Costs and Estimated
Earnings......... (13) (49)
-------- ---------
Costs and Estimated Earnings in Excess of $ 30 $ 40
Billings, Net ======== =======
5. PROPERTY AND EQUIPMENT
As of December 31, 2001, 2000 and 1999, property and equipment consisted of
the following:
2001 2000
------------ --------
(IN THOUSANDS)
Furniture and fixtures...................................... $ 643 $ 314
Leasehold improvements...................................... 109 124
Equipment................................................... 326 504
--------- --------
Total.................................................. 1,078 942
Less accumulated depreciation............................... (608) (577)
Less property and equipment held for sale................... (265) ---
--------- --------
Total property and equipment, net...................... $ 205 $ 365
========= ========
6. CAPITALIZED PATENTS, CAPITALIZED AND PURCHASED SOFTWARE COSTS, AND OTHER
INTANGIBLE ASSETS
As of December 31, 2001 and 2000 , intangible assets consisted of the
following:
2001 2000
---- ----
(IN THOUSANDS)
Capitalized and purchased software costs............... $ 8,520 $ 6,418
Customer list.......................................... --- 1,143
Repurchased license rights and other................... --- 3,520
Patents and related costs.............................. 3,125 3,026
------- --------
Total.................................................. 11,645 14,107
Less accumulated amortization:
Capitalized and purchased software costs (5,665) (3,590)
Customer list - (609)
Repurchased license rights and other - (500)
Patents and related costs (625) (365)
Less capitalized software held for (1,027) --
sale................................................... ------- --------
F-19
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total intangible assets, net........................... $ 4,328 $ 9,043
======== ========
At December 31, 1999, the Company had a liability of $1,862,500 to the
seller of a patent purchased by the Company in 1998. The liability was settled
by the Company in cash during 2000. The patent is being amortized over seventeen
years.
7. FINANCING AGREEMENTS
The Company has entered into two separate financing agreements during the
years ended December 31, 2001 and 2000.
IBM COMMERCIAL CREDIT. During the years ended December 31, 2001 and 2000,
the Company had an agreement with IBM Commercial Credit that provided short-term
financing for certain computer hardware and software purchases. Under the
agreement, there were generally no financing charges for amounts paid within 30
or 45 days, depending on the vendor used to source the product. Under this
agreement there were two separate lines of credit. The first line had credit
availability of $750,000. The second line had credit availability of up to
$2,000,000, based upon the Company's customer credit rating. Borrowings were
collateralized by all inventory, property and equipment, and accounts
receivable. In addition, as of December 31, 2000, a $750,000 letter of credit
was issued to the benefit of the commercial finance company. At December 31,
2000, NeoMedia collateralized this letter with a restricted cash balance of
$750,000. This line of credit during 2001. As of December 31, 2001 and 2000,
amounts due under this financing agreement included in "Amounts due under
financing agreements" were $0 and $1,101,000, respectively.
GE ACCESS. The Company has an agreement with GE Access that provides
short-term financing for certain computer hardware and software purchases. Under
the agreement, there are generally no financing charges for amounts paid within
30 days. Under this agreement there are two separate lines of credit. The first
line has credit availability of up to $1,500,000 as of December 31, 2001. The
second line has unlimited credit availability, based upon the Company's customer
credit rating. Under this second agreement, the financing company finances the
purchase pending credit approval of NeoMedia's customer. Payments are then
remitted directly to the finance company, at which time the finance company
forwards to NeoMedia the Company's margin on the sale. Borrowings are
collateralized by all inventory, property and equipment, and accounts
receivable. As of December 31, 2001 and 2000, amounts due under this financing
agreement included in "Amounts due under financing agreements" were $2,283,000
and $13,000, respectively.
8. LONG-TERM DEBT
As of December 31, 2001 and 2000, long-term debt consisted of the
following:
2001 2000
---- ----
(IN THOUSANDS)
Note payable to International Digital Scientific, Inc. (IDSI),
non-interest bearing with interest imputed at 9%,
due with minimum monthly installments of $16,000 through
March 2005................................................... $624 $ 816
Less: unamortized discount....................................... (84) (140)
--- ----
Total long-term debt......................................... 540 676
Less: current portion............................................ (150) (137)
---- ----
Long-term debt, net of current portion............................ $390 $ 539
---- =====
The long-term debt repayments for each of the next five fiscal years ending
December 31 are as follows:
(IN THOUSANDS)
2002........................................................... $ 192
F-20
2003........................................................... 192
2004........................................................... 192
2005........................................................... 48
2006........................................................... ----
Total.......................................................... $ 624
In October 1994, the Company purchased, via seller financing, certain
computer software from IDSI. The aggregate purchase price was $2,000,000 and was
funded by the seller with an uncollateralized note payable, without interest, in
an amount equal to the greater of: (i) 5% of the collected gross revenues of
NeoMedia Migration for the preceding month; or (ii) the minimum installment
payment as defined, until paid in full. The minimum installment payment is the
amount necessary to provide an average monthly payment for the most recent
twelve month period of $16,000 per month. The present value of $2,000,000
discounted at 9% (the Company's then incremental borrowing rate) for 125 months
was approximately $1,295,000, the capitalized cost of the assets acquired. The
discount is being accreted to interest expense over the term of the note. The
software acquired was amortized over its estimated useful life of three years.
As of December 31, 2001 and 2000, the balance of the note payable, net of
unamortized discount, was $540,000 and $676,000, respectively.
9. INCOME TAXES
For the years ended December 31, 2001, 2000 and 1999, the components of
income tax expense were as follows:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Current $ - $ - $ -
Deferred $ - $ - $ -
---- ---- ----
Income tax expense/(benefit) $ - $ - $ -
==== ==== ====
As of December 31, 2001, 2000 and 1999, 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:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Accrued employee benefits ................................ $ 62 $ 30 $ 31
Provisions for doubtful accounts ......................... 26 182 337
Deferred revenue ......................................... -- 13 -
Capitalized software development costs and fixed assets... 676 284 98
Net operating loss carryforwards (NOL) ................... 22,916 15,021 12,724
Research and Development Credit -- -- 91
Accruals ................................................. 470 864 51
Loss on disposal of Qode business unit ................... 1,060 -- --
Other .................................................... 8 -- 17
Alternative minimum tax credit carryforward .............. 45 45 45
------- ------- --------
Total deferred tax assets ................................ 25,255 16,456 13,385
Valuation Allowance $25,255) (16,456) (13,385)
------- ------- --------
Net deferred income tax asset ............................ $-- $ -- $ --
======= ======= ========
F-21
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Because it is more likely than not that NeoMedia will not realize the
benefit of its deferred tax assets, a valuation reserve has been established
against them.
For the years ended December 31, 2001, 2000 and 1999, the income tax
benefit differed from the amount computed by applying the statutory federal rate
of 34% as follows:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Benefit at federal statutory rate ........................... $8,659) $(1,839) $(3,561)
State income taxes, net of federal .......................... (1,009) (196) (380)
Foreign income taxes, net of federal ........................ -- -- 61
Exercise of non-qualified stock options ..................... (17) (176) (1,874)
Permanent difference - write-off of Digtal Convergence stock. 1,190 -- --
Permanent and other, net .................................... (304) (860) (12)
Change in valuation allowance ............................... 8,799 3,071 5,766
------- -------- --------
Income tax expense/(benefit) ................................ $ -- $ -- $ --
======= ======== ========
As of December 31, 2001, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $57.3 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 occurring during the year
ended December 31, 1997, NeoMedia anticipates that the annual usage of its
pre-1998 net operating loss carryforwards may be further restricted pursuant to
the provisions of Section 382 of the Internal Revenue Code.
10. TRANSACTIONS WITH RELATED PARTIES
In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372
shares of the Company's common stock at a price of $3.03 per share. In January
1999, William Fritz purchased 42,857 shares of the Company's common stock at a
price of $3.50 per share. As part of these purchases, Edna Fritz received a
total of 8,237 warrants to purchase stock at $3.04 per share and William Fritz
received 4,286 warrants to purchase stock at $3.50 per share.
In June 1999, the Company sold a license for the right to utilize its
Neolink Information Server to Daystar Services L.L.C. ("Daystar") a Tennessee
limited liability company, owned in part by an officer and one of the Company's
board members, for $500,000. The original business purpose of the sale was to
generate revenue through the sale of an exclusive license to Daystar. In April
2000, in anticipation of either a potential acquisition of the Company by
Digital:Convergence ("DC") (which subsequently did not occur), or a long-term
intellectual property license with DC, the Company purchased substantially all
the assets of Daystar, including the rights to the license it sold to Daystar in
1999, for approximately $3.5 million of our common stock. In order to enter into
a 10-year intellectual property license agreement with DC, the Company was
required to re-purchase the exclusive license agreement. Additional Daystar
assets purchased were to be employed in our MLM/Affinity licensing program. The
assets purchased were recorded as intangible assets at approximately $3.5
million on the accompanying consolidated balance sheets. The Company believes
this transaction was conducted on terms as good as favorable as those would have
been derived from an arm's length negotiation.
In July 1999, the Company paid professional fees in the amount of $73,000
to James J. Keil, a director of the Company, for services related to the
recruitment of the Company's President and Chief Operating Officer and one sales
representative.
During the years ended December 31, 1999 and 1998, the Company leased from
William E. Fritz a trade show booth for rental payments totaling $31,000 and
$34,000, respectively. The lease expired during 1999.
During each of the years ended December 31, 2000 and 1999, the Company
leased office and residential facilities from related parties for rental
payments totaling $5,000 and $13,000, respectively. The lease expired during
2000.
F-22
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its
Chairman and Chief Executive Officer, under a note payable bearing interest at
10% per annum with a term of six months.
The Company believes this transaction was conducted on terms as good as
favorable as those would have been derived from an arm's length negotiation.
11. 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, 2001, 2000 and 1999, NeoMedia's rent expense was $1,246,000,
$1,067,000 and $1,268,000, respectively.
The following is a schedule of the future minimum lease payments under
non-cancelable operating leases as of December 31, 2001:
PAYMENTS
--------
(IN THOUSANDS)
2002............................................ $ 844
2003............................................ 473
2004............................................ 56
2005............................................ 2
2006............................................ --
-----
Total........................................... $ 1,375
=======
Of the $844,000 minimum lease payment due in 2002, approximately $205,000
relates to leases for Qode Universal Commerce Solution equipment that will be
assumed by the Finx Group, Inc. upon consummation of The Finx Group's letter of
intent with the Company.
As of December 31, 2001, none of the Company's employees were under
contract. Additionally, the Company was not party to any long-term consulting
agreements as of December 31, 2001.
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.
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the
Company in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking,
among other things, the accelerated repayment of a $500,000 loan it advanced to
the Company under the terms of a letter of intent entered into between AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain representations made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note issued by the Company in respect of AirClic's $500,000 advance is
secured by substantially all of the Company's intellectual property, including
its core physical world-to-Internet technologies. If the Company is deemed to
have defaulted under the note, and does not pay the judgment, AirClic, which is
one of the NeoMedia's key competitors, could acquire the Company's core
intellectual property, which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is vigorously defending this lawsuit and has interposed
counterclaims against AirClic. The lawsuit is in its preliminary stages and, as
such, at this time it is difficult to assess the outcome. Whether or not AirClic
is successful in asserting its claims that the Company breached certain
representations made by the Company in the note, the note became due and payable
in accordance with its terms on January 11, 2002. Based on the cash currently
available to the Company, payment of the note and related interest would have a
material adverse effect on the Company's financial condition. If the Company
faisl to pay such note, AirClic could proceed against the Company's intellectual
F-23
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property securing the note, which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is aggressively seeking bridge financing to enable it to pay the
principal and interest remaining under the note following the resolution of the
counterclaims against AirClic. The Company has not accrued any additional
liability over and above the note payable and related accrued interest.
AirClic has also filed suit against the Company in the United States
District Court for the Eastern District of Pennsylvania. In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic, some of which is patented and others for
which a patent application is pending is invalid and unenforceable. Any
declaration that the Company's core patented or patentable technology is invalid
and unenforceable would have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. The Company
is vigorously defending against this lawsuit as well. The Company has not
accrued any liability in connection with this matter.
On June 26, 2001, the Company filed a $3 million lawsuit in the U.S.
District Court, Northern District of Texas, Dallas Division, against
Digital:Convergence Corporation for breach of contract regarding a $3 million
promissory note due on June 24, 2001 that was not paid. The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain contingency related to this matter.
In April 2001, the former President and director of NeoMedia filed a
lawsuit against the Company and several of its directors. The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The
claim alleges the individual was fraudulently induced into accepting employment
and that the Company breached the employment agreement. The individual's
employment with the Company ended in January 2001. The Company believes the
claim is without merit and is vigorously defending itself. Final outcome of this
matter is uncertain and a range of loss cannot reasonably be estimated. The
Company has accrued approximately $347,000 in severance and incentive payments
payable to Mr. Goins. The Company has not accrued any additional liability
related to the suit.
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. The Company
has entered into a letter of intent with the Finx Group, Inc. to sell certain
assets and liabilities relating to Qode. As part of the letter of intent, the
Finx Group will assume all liabilities up to $138,000 relating to the Ripfire
contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages
in the Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida. Headway Associates, Ltd. is seeking payment of all amounts due under
the terms the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode
business unit. The lease commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment over
a two-month period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
The Company has entered into a letter of intent with the Finx Group, Inc. to
sell certain assets and liabilities relating to Qode. As part of the letter of
intent, the Finx Group will assume all liabilities up to $530,000 relating to
the Orsus contract. Accordingly, the Company has not accrued a liability in the
accompanying financial statements. The Company, along with the Finx Group, is
currently negotiating settlement of this matter.
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment
of approximately $38,700 relating to past due and future payments under an
office equipment lease. The Company has returned the equipment and intends to
settle the past due amounts. As of December 31, 2001, the Company had recorded a
liability of approximately $10,000 relating to this matter.
F-24
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
13. EMPLOYEE STOCK OPTION PLAN
Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
1,500,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price shall be equal to or in excess of the fair market value per share
of NeoMedia's common stock on the date of grant. 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 granted during 2000 and 1999 were
granted at an exercise price equal to fair market value on the date of grant.
Options generally vest 20% upon grant and 20% per year thereafter. The options
expire ten years from the date of grant.
Effective January 1, 1996, NeoMedia adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" defines a fair-value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, SFAS 123 also allows an entity to continue to measure
compensation cost for stock-based compensation plans using the intrinsic-value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
continue using the accounting method in APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair-value method of accounting
had been adopted. Because NeoMedia elected to continue using the accounting
method in APB 25, no compensation expense was recognized in the consolidated
statements of operations for the years ended December 31, 2000 and 1999 for
stock-based employee compensation.
For grants in 2001, 2000 and 1999, the following assumptions were used: (i)
no expected dividends; (ii) a risk-free interest rate of 4.5% for 2001, 6% for
2000 and 5% for 1999; (iii) expected volatility of 135% for 2001, 80% for 2000
and 70% for 1999 and (iv) an expected life of 5 years for options granted in
2001 and 4 years for options granted in 2000 and 1999. 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 the 1998 Stock Option Plan.
Utilizing the assumptions detailed above, our net loss and loss per share,
as reported, would have been the following pro forma amounts ($ in thousands
except per share data).
2001 2000 1999
---- ---- ----
NET LOSS
As reported.............................. $25,469 $5,409 $10,472
Pro forma................................ $27,888 $7,498 $11,731
NET LOSS PER SHARE
As reported.............................. $1.55 $0.39 $ 1.01
Pro forma................................ $1.70 $0.54 $ 1.13
F-25
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of NeoMedia's 1996 and 1998 stock option plans as
of and for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
----------- ------------ ------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
(IN (IN (IN
THOUSANDS) THOUSANDS) THOUSANDS)
Outstanding at beginning of year 4,294 $ 4.71 3,418 $ 4.43 3,164 $ 4.40
Granted ......................... 3,499 2.00 1,192 4.87 1,721 4.71
Exercised ....................... (38) 3.60 (170) 2.83 (599) 1.77
Forfeited ....................... (3,541) 4.13 (146) 5.78 (868) 5.79
------ ------ ----- ------ ----- ------
Outstanding at end of year ...... 4,214 $ 2.96 4,294 $ 4.71 3,418 $ 4.43
====== ====== ===== ====== ===== ======
Options exercisable at 2,452 2,140 1,398
year-end.......................
Weighted-average fair value of
options granted
during the year................ $ 1.81 $ 3.05 $ 2.68
granted during the year
Available for grant at the end
of the year.................... 4,158 4,116 5,162
The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 2001:
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 $ 0.84 1,441 9.4 years $ 0.24 667 $ 0.28
1.88 to 2.91 767 8.0 years 2.52 429 2.52
3.25 to 4.98 1,055 7.9 years 3.81 619 3.76
5.06 to 7.88 836 7.2 years 6.15 632 6.25
8.44 to 10.88 115 7.7 years 8.89 105 8.92
---------------- ----- --------- ------- ----- -------
$0.84 to $10.88 4,214 8.3 years $ 2.96 2,452 $ 3.46
================ ===== ========= ======= ===== =======
In December 1999, the Company issued 20,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $7.00 per share
for consulting services rendered, and recognized $28,200 in expense in its 1999
consolidated financial statements. These options vest in the same manner as the
employee options granted under the 1998 Stock Option Plan. All these options
were outstanding at December 31, 2000 and 1999. Of these options, 8,000 and
4,000 were vested at December 31, 2000 and 1999, respectively.
F-26
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2000, the Company issued 80,000 warrants to buy shares of the
Company's common stock to an outside consultant at a price of $4.13 per share
for consulting services rendered, and recognized approximately $253,000 in
expense in its 2000 consolidated financial statements. These warrants vest in
the same manner as the employee options granted under the 1998 Stock Option
Plan. All these warrants were outstanding at December 31, 2001. Of these
warrants, 16,000 were vested at December 31, 2001.
In September 2001, the Company issued 150,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.20 per share
for consulting services rendered, and recognized $18,800 in expense in the 2001
consolidated financial statements. The warrants vest 40% upon grant and the
remaining 60% one year from the grant date. As of December 31, 2001, all 150,000
warrants were outstanding and 60,000 were vested.
WARRANTS
Warrant activity as of December 31, 2001, 2000 and 1999, is as follows:
Balance December 31, 1998 1,639,832
Warrants issued 1,118,630
Warrants exercised 82,100
---------
Balance December 31, 1999 2,676,362
Warrants issued 1,787,073
Warrants exercised 495,600
---------
Balance December 31, 2000 3,967,835
Warrants issued 887,512
Warrants exercised 505,450
Warrants expired 1,110,000
---------
Balance December 31, 2001 3,239,897
---------
During 2000, the Company issued 1,400,000 warrants as part of a ten year
license of the Company's intellectual property. These warrants were immediately
vested and exercisable. The associated expense is being recognized over the life
of the contract. During 2000, $118,000 was recorded as a reduction of the
license revenue related to the contract.
During 2001, the Company re-priced approximately 1.5 million additional
warrants subject to a limited exercise period and other conditions, including
certain warrants issued in connection with NeoMedia's initial public offering in
1996, which expired at the end of 2001. The repricing program allowed the
warrant exercise price to be reduced to 33 percent of the closing sale price of
the Company's common stock (subject to a minimum) on the day prior to the date
of exercise for a period of six months from the date the repricing program
began. The exercise of the warrants and sale of the underlying common stock was
at the discretion of a broker selected by the Company, within the parameters of
the repricing arrangement. In accordance with FASB Interpretation, FIN 44,
Accounting for Certain Transactions Involving Stock Transactions, the award was
accounted for as variable from the date of modifications on May 1, 2001.
Accordingly, $181,000 was recorded in during 2001 as compensation expense.
In June 2001, the Board of Directors approved the issuance of 404,900
warrants to an outside consultant at an exercise price of $2.09. The Company
recognized an expense of approximately $742,000 related to this transaction,
which is included in general and administrative expense in the accompanying
F-27
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated statements of operations. The Company used the Black-Scholes
option-pricing model to value the shares, with the following assumptions: (i) no
expected dividends (ii) a risk-free interest rate of 4.5% (iii) expected
volatility of 135% and (iv) an expected life of 3 years.
The following table summarizes information about warrants outstanding at
December 31, 2001, all of which are exercisable:
Weighted
Average
Remaining Average
Range of Warrants Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
--------------- ----------- ------------ --------
$0.10 to $5.50 927 2.6 $2.51
$5.51 to $6.99 1,558 3.5 $6.02
$7.00 to $9.99 524 1.0 $8.04
$10.00 to $15.00 231 1.1 $12.74
--- --- ------
$0.10 to $15.00 3,240 2.7 $5.82
----- --- -----
14. SEGMENT INFORMATION
Beginning with the year ended December 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company is organized into two business segments: (a) NeoMedia ASP, and
(b) NeoMedia SI. Performance is evaluated and resources allocated based on
specific segment requirements and measurable factors. Management uses the
Company's internal income statements to evaluate each business unit's
performance. Assets of the business units are not available for management of
the business segments or for disclosure.
Operational results for the two segments for the years ended December 31,
2001, 2000 and 1999 are presented below (in thousands):
NEOMEDIA ISS NEOMEDIA CIS
(FORMERLY (FORMERLY
NEOMEDIA ASP) NEOMEDIA SI) CONSOLIDATED
------------- ------------ ------------
YEAR ENDED DECEMBER 31, 2001
Net Sales
Qode Business Unit................... $13 $- $13
Paperclick/Amway/MLM................. 140 140
Software and equipment resales
and related services............... - 8,002 8,002
----- -------- -------
Total gross sales.................... 153 8,002 8,155
Less: Qode Business Unit............. (13) - (13)
----- -------- -------
Total net sales..................... 140 8,002 8,142
----- -------- -------
Loss from Continuing Operations.......... (17,639) (1,129) (18,768)
Loss from operations of and disposal of
discontinued business unit........... (6,701) - (6,701)
Net Loss................................. (24,340) (1,129) (25,469)
F-28
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
Net Sales................................ $8,083 $19,482 $27,565
Net Loss................................. (4,225) (1,184) (5,409)
YEAR ENDED DECEMBER 31, 1999
Net Sales................................ $795 $24,461 $25,256
Net Loss................................. (5,916) (4,556) (10,472)
15. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflects all
adjustments which, in the opinion of management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
(dollars in thousands except per share data)
---------------------------------------------------------------
TOTAL FOURTH THIRD SECOND FIRST
----- ------ ----- ------ -----
2001
----
Total net sales.............................. $8,142 $4,459 $908 $1,237 $1,538
Gross profit................................. ($724) $597 ($503) ($404) ($414)
(Loss) before income taxes
and discontinued
operations......... ($18,768) $771 ($5,072) ($11,042) ($3,425)
Net (loss)................................... ($25,469) ($1,692) ($9,310) ($11,042) ($3,425)
Net (loss) per share:
basic and diluted....................... ($1.55) ($0.11) ($0.60) ($0.72) ($0.24)
2000
----
Total net sales.............................. $27,565 $9,875 $4,049 $9,547 $4,094
Gross profit................................. $9,032 $7,571 $42 $879 $540
(Loss) before income taxes
and discontinued operations............. ($5,409) $2,667 ($3,555) ($2,085) ($2,436)
Net (loss)................................... ($5,409) $2,667 ($3,555) ($2,085) ($2,436)
Net (loss) per share:
basic and diluted....................... ($0.39) $0.21 ($0.25) ($0.15) ($0.19)
1999
----
Total net sales.............................. $25,256 $5,091 $5,019 $7,342 $7,804
Gross profit................................. $2,786 ($156) ($11) $1,269 $1,684
(Loss) before income taxes
and discontinued operations............. ($10,472) ($3,881) ($2,937) ($1,888) ($1,766)
Net (loss)................................... ($10,472) ($3,881) ($2,937) ($1,888) ($1,766)
Net (loss) per share:
basic and diluted....................... ($1.01) ($0.34) ($0.27) ($0.19) ($0.20)
16. COMMON STOCK
On October 24, 2001, the Company filed a proxy statement with the SEC to
request a shareholder vote to increase the number of the Company's authorized
F-29
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of common stock from 50,000,000 shares to 100,000,000 and increase the
number of the Company's authorized shares of preferred stock from 10,000,000
shares to 25,000,000. The shareholder meeting was held on December 11, 2001.
This resolution did not pass as a result of the failure to secure favorable
votes from holders of a majority of the outstanding shares.
The proxy also requested approval to sell 19,000,000 shares of common stock
to accredited investors in exchange for limited recourse promissory notes
accruing interest at a rate of 6% per annum, with a term of three months,
providing for mandatory repayment of principal in the amount of the proceeds of
any sale of the shares of common stock (or other securities or assets issued in
respect of such shares of common stock) purchased by means of such promissory
notes, with sole recourse under the event of default under the promissory note
limited to recovery of the shares of common stock purchased (or other assets or
securities issued in respect thereof) by means of such promissory note. This
resolution passed. During the fourth quarter of 2001, the Company issued
3,000,000 of the 19,000,000 shares at $0.08 per share in exchange for limited
recourse promissory notes as described above. The Company has recorded a stock
subscription receivable of $240,000 as of December 31, 2001 with respect to
these shares. Subsequent to December 31, 2001, the Company has cancelled the
3,000,000 shares issued in 2001 and re-issued them, along with 16,000,000
additional shares, at a price of $0.17 per share, subject to the same terms
described above.
During the year ended December 31, 2001, the Company issued through private
placements 3,490,750 shares of the Company's Common Stock for proceeds of
$1,637,000.
During the year ended December 31, 2000, the Company issued through private
placements 1,415,279 shares of the Company's Common Stock for proceeds of
$9,203,000. In connection with these private placements, the Company also issued
387,073 warrants with strike prices ranging from $6.00 to $12.74. These warrants
were immediately vested and have a life of three to five years.
In 1999, an unrelated third party converted their $2.0 million note
receivable from the Company into shares of the Company's common stock at a price
of $4.00 per share. The unrelated third party also received 200,000 warrants.
These warrants were 100% vested upon issuance. Of these warrants, 100,000 were
issued at $5.00 and 100,000 were issued at $7.00. All 200,000 warrants had a
three-year expiration and were subsequently exercised in 2000.
17. PREFERRED STOCK
In June 2001, the Company entered into a one-year license agreement with
About.com, Inc. to provide the Qode Universal Commerce SolutionTM to About.com's
estimated 36 million worldwide users. The Company and About.com intended to
promote the co-branded shopping service throughout the About.com network. In
June 2001, About.com ran banner ads on its site promoting the Qode Universal
Commerce SolutionTM. As part of the emerging About.com and NeoMedia
relationship, About.com received 452,489 shares of our Series B Convertible
Preferred Stock, par value $0.01 per share, of the 500,000 total Series B
Convertible Preferred shares which we are authorized to issue, in consideration
for these promotions. Each share was convertible into one share of NeoMedia
common stock. We recorded an expense of $882,000 associated with this
transaction in the second quarter in sales and marketing expense in the
accompanying consolidated statements of operations. The agreement with About.com
was terminated on August 31, 2001, in anticipation of the sale of the Qode
assets to the Finx Group, Inc. Subsequent to December 31, 2001, the Series B
Convertible Preferred Stock issued to About.com automatically converted to
452,289 shares of NeoMedia common stock on January 2, 2002.
18. SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the following events have occurred:
o During January 2002, certain of the Company's shareholders filed a
complaint with the Securities and Exchange Commission, alleging that
the shareholders were not included in the special shareholders
meeting of November 25, 2001, to vote on the issuance of 19 million
F-30
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of NeoMedia common stock. On March 11, the Company filed its
response claiming that the Company had fully complied with all of its
obligations under the laws and regulations administered by the
Securities and Exchange Commission, as well as with its obligation
under Delaware General Corporation Law.
o During February 2002, the Company sold 19 million shares of its
common stock at $0.17 per share in exchange for promissory notes
maturing at the earlier of i) 90 days from the date of issuance, or
ii) 30 days from registration of the shares. During 2001, the Company
had issued 3 million shares to unrelated investors at $0.08 per share
payable in the same manner. Those shares were cancelled and re-issued
as part of the 19 million share offering in 2002.
o During February 2002, the Company issued 1,646,987 shares of its
common stock to two separate vendors as settlement of past due
liabilities and future payments relating to equipment leases.
o During March 2002, the Company requested a hearing before a Nasdaq
listing qualifications panel to review a staff determination issued
by Nasdaq. The determination indicated that as of December 31, 2001
the Company did not comply with either the minimum $2 million net
tangible assets or the minimum $2.5 million stockholders' equity
requirement for continued listing, and that the company's shares were
therefore subject to delisting. NeoMedia responded by requesting a
hearing before a Nasdaq listing panel to review the staff
determination. The hearing is scheduled for April 18, 2002.
o During March 2002, the Company repriced 1.2 million of its common
stock warrants for a period of six months. During the term of the
warrant repricing program, participating holders are 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 NASDAQ Small Cap Market on the trading date
immediately preceding the date of exercise. The Company is accounting
for the repricing using variable accounting at each reporting date,
in accordance with FIN 44. Under this treatment, expense is
recognized for unexercised stock warrants repriced below market based
on the closing price of NeoMedia stock on the last day of each
reporting period. Additionally, if any warrants are exercised
pursuant to the repricing program, expense is recognized for the
difference between the market price of NeoMedia stock at the time of
exercise and the restated exercise price.
F-31
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
As of March 14, 2002, NeoMedia's directors and executive officers were:
NAME AGE POSITION HELD
Charles W. Fritz.............. 45 President, Chief Executive Officer,
Director and Chairman of the Board
William E. Fritz.............. 71 Secretary and Director
Charles T. Jensen............. 58 Chief Financial Officer, Vice-President,
Treasurer, and Director
A. Hayes Barclay............ 71 Director
James J. Keil.................. 72 Director
The following is certain summary information with respect to the directors
and executive officers of NeoMedia:
CHARLES W. FRITZ, age 45, is a founder of NeoMedia and has served as an
officer and as a Director since its 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. Mr. Fritz is currently a
member of the Compensation Committee. Prior to founding NeoMedia, Mr. Fritz was
an Account Executive with IBM Corporation from 1986 to 1988, Director of
Marketing and Strategic Alliances for the Information Consulting Group from
1988-1989, and a Consultant for McKinsey & Company. Mr. Fritz holds an M.B.A.
from Rollins College and a B.A. in finance from the University of Florida. Mr.
Fritz is the son of William E. Fritz, a Director of NeoMedia, and its Secretary.
WILLIAM E. FRITZ, age 71, is a founder of NeoMedia and has served as
Secretary and Director since its inception. Mr. Fritz also served as Treasurer
of NeoMedia from its inception until May 1, 1996. Mr. Fritz, who has over
thirty-two years in establishing and operating privately owned companies,
currently is, and for at least the past eleven years has been, an officer and
either the sole stockholder or a majority stockholder, of G.T. Enterprises, Inc.
(formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark, Inc.) and EDSCO, three
railroad freight car equipment manufacturing companies. Mr. Fritz 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 Chief
Executive Officer and Chairman of the Board.
CHARLES T. JENSEN, age 58, has been Chief Financial Officer, Treasurer and
Vice President of NeoMedia since May 1, 1996. Mr. Jensen has been a Director
since August 6, 1996, and currently is a member of the Compensation Committee.
Prior to joining NeoMedia in November 1995, Mr. Jensen was Chief Financial
Officer of Jack M. Berry, Inc., a Florida corporation which grows and processes
citrus products, from December, 1994, to October, 1995, and at Viking Range
Corporation, a Mississippi corporation which manufactures gas ranges, from
November 1993, to December 1994. From December, 1992, to February, 1994, Mr.
Jensen was Treasurer of Lin Jensen, Inc., a Virginia corporation specializing in
ladies clothing and accessories. Prior to that, from January, 1982, to March,
1993, Mr. Jensen was Controller and Vice-President of Finance of The Pinkerton
Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a B.B.A. in accounting
from Western Michigan University and is a Certified Public Accountant.
III-1
A. HAYES BARCLAY, age 71, has been a Director of NeoMedia since August 6,
1996, and currently is a member of the Stock Option Committee and the Audit
Committee. Mr. Barclay has practiced law for approximately 37 years and since
1967, has been an officer, owner and employee of the law firm of Barclay &
Damisch, Ltd. and its predecessor, with offices in Chicago, Wheaton and
Arlington Heights, Illinois. Mr. Barclay holds a B.A. degree from Wheaton
College, a B.S. from the University of Illinois and a J.D. from the Illinois
Institute of Technology - Chicago Kent College of Law.
JAMES J. KEIL, age 74, has been a Director of NeoMedia since August 6,
1996. Mr. Keil currently is a member of the Compensation Committee, the Stock
Option Committee and the Audit Committee. He is founder and president of Keil &
Keil Associates, a business and marketing consulting firm located in Washington,
D.C., specializing in marketing, sales, document application strategies,
recruiting and Electronic Commerce projects. Prior to forming Keil & Keil
Associates in 1990, Mr. Keil worked for approximately 38 years at IBM
Corporation and Xerox Corporation in various marketing, sales and senior
executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of
Elixir Technologies Corporation (a non-public corporation), and from 1990-1992
was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on
the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S.
degree from the University of Dayton and did Masters level studies at the
Harvard Business School and the University of Chicago in 1961/62.
During July, 2001, the Company laid off 55 employees, including Rudolph
Mosny, Chief Operating Officer and Executive Vice President - International, and
Robert Durst, Chief Technical Officer and Executive Vice President, each of whom
were also directors.
During September 2001, Michael Tanner, an outside director, resigned from
the Board of Directors.
During January 2002, Paul Reece, an outside director, resigned from the
Board of Directors.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
All directors shall be elected on an annual basis, each to hold office
until the next annual meeting of shareholders or until that director's successor
has been elected and qualified or until the earlier of death or resignation. At
present, NeoMedia's by-laws provide for not less than one director nor more than
nine. Currently, there are five directors. NeoMedia's by-laws permit the Board
of Directors to fill any vacancy and such director may serve until the next
annual meeting of shareholders or until his successor is elected and qualified.
From January 1, 2001, through December 31, 2001, NeoMedia held 13 directors'
meetings. During the fiscal year ended December 31, 2001, all incumbent
directors attended more than 75 percent of the combined total of meetings of the
Board and the Committees on which they served during 2001.
Our board of directors currently has audit, stock option, and compensation
committees. At least a majority of the members of each committee are independent
directors. The audit committee reviews the scope of our audit, recommends to our
board of directors the engagement of our independent auditors, reviews the
financial statements, and reviews any transactions between us and any of our
officers, directors or other related parties. Our stock option committee
administers the 1996 and 1998 stock option plans and the 1996 management
incentive plan. Our compensation committee evaluates our compensation policies
and approves executive compensation and executive employment contracts. Messrs.
Keil (chairman) and Barclay are members of the audit committee. Messrs. Keil
(chairman) and Barclay are members of the stock option committee. Messrs. Keil
(chairman), Charles W. Fritz, Jensen, Reece, and Tanner are members of the
compensation committee.
DIRECTOR COMPENSATION
III-2
Directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. Non-employee directors receive
fees of $2,000 per meeting attended. Upon election or re-election as a director,
non-employee directors receive options to purchase 15,000 shares of NeoMedia's
common stock under the 1998 Stock Option Plan. Non-employee directors may elect
to receive options to purchase an additional 3,000 shares of NeoMedia's common
stock under the 1998 Stock Option Plan in lieu of the director fee of $2,000.
These options are immediately vested. NeoMedia anticipates that the Board of
Directors will meet at least five times a year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's
officers and directors, and persons who own more than ten percent of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and with
the NASDAQ SmallCap Market. Officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish NeoMedia with copies of
all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to NeoMedia,
NeoMedia believes that during 2001 all Section 16(a) filing requirements
applicable to NeoMedia's officers, directors and ten percent beneficial owners
were complied with.
III-3
ITEM 11. 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, 2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1) LONG-TERM COMPENSATION
------------------------------------- ---------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL WARRANTS ALL OTHER
POSITION YEAR SALARY COMPENSATION BONUS AND OPTIONS COMPENSATION
-------------------------------------------- ------------ ---------- -------------- ------------
Charles W. Fritz............ 2001 $221,758 $ - $ - 400,000 (2) $21,532 (5),(6)
Chief Executive Officer 2000 250,000 - 148,800(8) 49,000 (2) 22,502 (5),(6)
1999 250,000 - - 400,000 (2) 84,914 (5),(6)
Charles T. Jensen........... 2001 144,239 - - 240,000 (2) 17,794 (5),(6)
Chief Financial Officer, 2000 150,000 - 87,860(8) 37,000 (2) 29,767 (5),(6)
Vice President & Treasurer 1999 150,000 - - 180,000 (2) 42,712 (5),(6)
Robert T. Durst, Jr......... 2001 95,755 - - 120,000 (2) 9,455 (5),(6)
Executive Vice President, 2000 170,000 - 99,708(8) 37,000 (2) 13,127 (5),(6)
Chief Technical Officer 1999 170,000 - - 210,000 (2) 13,876 (5),(6)
William F. Goins (3)........ 2001 13,963 - - 120,000 (2) -
President & Chief 2000 180,000 - 131,790(8) 40,000 (2) 11,699 (6)
Operating Officer 1999 75,000 25,000(7) - 200,000 (2) 625 (6)
Rudolf Y. Mosny (4)......... 2001 91,383 - - 500,000 (2) -
President & Chief 2000 - - - 100,000 (2) -
Operating Officer 1999 - - - - -
1. In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total of annual salary and bonuses for the Named
Executive Officer for such year.
2. Represents options granted under NeoMedia's 1998 Stock Option Plan and
warrants granted at the discretion of NeoMedia's Board of Directors.
3. Mr. Goins' employment with NeoMedia ended during January 2001.
4. Mr. Mosny's employment with NeoMedia ended during July 2001.
III-4
5. Includes life insurance premiums where policy benefits are payable to
beneficiary of the Named Executive Officer.
6. Automobile expenses attributable to personal use and the corresponding
income tax effects.
7. Represents sign-on bonus.
8. In June 2001, the Company's compensation committee approved an adjustment,
relating to the Digital:Convergence patent license fees, to the 2000
executive incentive plan that reduced the bonus payout by approximately
$1.1 million. The original amount recorded in 2000 and reported in the 2000
form 10-KSB was $430,800 for Charles W. Fritz, $193,860 for Charles T.
Jensen, $219,708 for Robert T. Durst, and $290,790 for William F. Goins.
The adjusted amounts are presented in the table above.
EMPLOYMENT AGREEMENTS
The Company entered into five year employment agreements ending April 30,
2001 with each of Charles W. Fritz, its chief executive officer and chairman of
the board of directors, and Charles T. Jensen, its vice president, chief
financial officer and treasurer, and with Robert T. Durst, Jr., its executive
vice-president and chief technical officer, ending March 31, 2001. The
employment agreements provided for an annual salary of $170,000 for Mr. Fritz,
$140,000 for Mr. Durst and $110,000 for Mr. Jensen, subject to annual review by
the board of directors which may increase but not decrease such salary, and
participation in all benefits and plans available to executive employees of
NeoMedia. Effective as of January 1, 1998, the board of directors increased the
annual salary of Mr. Fritz to $250,000, Mr. Durst to $170,000, and Mr. Jensen to
$150,000. During the period May 15, 2001 through July 15, 2001, these
individuals, along with other officers of NeoMedia, temporarily had their
salaries reduced by 20% in the effort to reduce expenses. In addition, during
the year ended December 31, 2001, the board granted Messrs. Fritz, Durst and
Jensen options to purchase 400,000, 120,000 and 240,000 shares of common stock,
respectively, under the 1998 stock option plan. During the year ended December
31, 2000, the board granted Messrs. Fritz, Durst and Jensen options to purchase
49,000, 37,000, and 37,000 shares of common stock, respectively, under the 1998
stock option plan. During the year ended December 31, 1999, the board of
directors granted to Messrs. Fritz, Durst and Jensen options to purchase
400,000, 210,000 and 180,000 shares of common stock, respectively, under the
1998 stock option plan. The Company plans to renegotiate new employment
agreements with Messrs. Fritz and Jensen. In the interim, the Company has put
into place agreements that provide for six months severance in the event of
termination related to a change of control. Mr. Durst was laid off during July
2001 as part of a company-wide cost reduction effort.
During the year ended December 31, 1999, the Company entered into a
one-year employment agreement ending July 31, 2000, with William F. Goins, its
president and chief operating officer. The agreement was renewed through July
31, 2001. The agreement provides for an annual salary of $180,000, subject to
periodic review by the board of directors which may increase but not decrease
such salary, and participation in all benefits and plans available to our
executive employees. In addition, during the year ended December 31, 2001, 2000,
and 1999, the board of directors granted to Mr. Goins options to purchase up to
120,000, 40,000, and 200,000 shares of our common stock, respectively, under the
1998 stock option plan. As of January 31, 2001, Mr. Goins was no longer employed
by the Company. The Company is involved in litigation with Mr. Goins regarding
his departure with company.
During July, 2001, the Company laid off 55 employees, including Rudolph
Mosny, Chief Operating Officer, Executive Vice President - International, and
director.
INCENTIVE PLAN FOR MANAGEMENT
III-5
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan
for Management ("Incentive Plan"), which provides for annual bonuses to eligible
employees based upon the attainment of certain corporate and/or individual
performance goals during the year. The Incentive Plan is designed to provide
additional incentive to NeoMedia's management to achieve these growth and
profitability goals. Participation in the Incentive Plan is limited to those
employees holding positions assigned to incentive eligible salary grades and
whose participation is authorized by NeoMedia's Compensation Committee which
administers the Incentive Plan, including determination of employees eligible
for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.
To be eligible for consideration for inclusion in the Incentive Plan, an
employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and/or the employee's
performance during the year, and if performance goals are attained, eligible
employees are entitled to an award based upon a specified percentage of their
base salary.
STOCK OPTION PLANS
Effective as of February 1, 1996 (and amended and restated effective July
18, 1996 and further amended through November 18, 1996), NeoMedia adopted its
1996 Stock Option Plan ("1996 Stock Option Plan"). The 1996 Stock Option Plan
provides for the granting of non-qualified stock options and "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and provides for the issuance of a maximum of 1,500,000 shares of
common stock. All 1,500,000 options were granted under NeoMedia's 1996 Stock
Option Plan.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan
("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting
of non-qualified stock options and provides for the issuance of a maximum of
8,000,000 shares of common stock.
401(K) PLAN
NeoMedia maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan"). All employees of NeoMedia who are 21 years of age and who have completed
three months of service are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may make elective contributions of up
to 20% of such participant's pre-tax salary (up to a statutorily prescribed
annual limit, which is $10,500 for 2000) to the 401(k) Plan, although the
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The 401(k)
Plan also provides for matching and discretionary contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.
OPTIONS GRANTED IN THE LAST FISCAL YEAR
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 2001:
III-6
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE EXPIRATION
NAME GRANTED (1) EMPLOYEES PRICE DATE
-------------------------------- -------------- ------------ ---------- -----------
Charles W. Fritz................ 200,000 5.7% $2.50 1/2/11
200,000 5.7% $0.20 9/13/11
Robert T. Durst................. 120,000 3.4% $2.50 1/2/11
Charles T. Jensen............... 90,000 2.6% $2.50 1/2/11
150,000 4.3% $0.20 9/13/11
William F. Goins(2)............. 120,000 3.4% $2.50 1/2/11
Rudolf Y. Mosny (3)............. 500,000 14.3% $3.25 4/5/11
(1) Options granted under the 1998 Stock Option Plan.
(2) Mr. Goins' employment with NeoMedia ended in January 2001
(3) Options have special vesting depending on price of NeoMedia common stock.
Options were forfeited upon Mr. Mosny's termination in July 2001.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES
The following table sets forth options exercised by NeoMedia Named
Executive Officers during fiscal 2001, and the number and value of all
unexercised options at fiscal year end.
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT THE-MONEY OPTIONS/SARS AT
SHARES DECEMBER 31, 2001 DECEMBER 31, 2001 (1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ----------- ---------- -------------------------- --------------------------
Charles W. Fritz (2) - - 699,600 549,400 - -
Robert T. Durst - - - - - -
Charles T. Jensen - - 413,186 292,200 - -
William F. Goins(3) - - - - - -
Rudolf Y. Mosny(4) - - - - - -
(1) The value of the in the money options is calculated by the difference
between the market price of the stock at December 31, 2001 ($0.14) and
the exercise price of the options.
(2) Includes stock options and warrants.
III-7
(3) Mr Goins' employment with NeoMedia ended in January 2001.
(4) Mr. Mosny's employment with NeoMedia ended in July 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of March 15, 2002, (i) by each person or
entity known by NeoMedia to own beneficially more than five percent of
NeoMedia's Common Stock, (ii) by each of NeoMedia's directors and nominees,
(iii) by each executive officer of NeoMedia named in the Summary Compensation
Table, and (iv) by all executive officers and directors of NeoMedia as a group.
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNERSHIP (1) CLASS (1)
------------------------ ----------
Charles W. Fritz (2)(3).................... 2,555,930 7.0%
Fritz Family Limited Partnership (2)(4).... 1,511,742 4.1%
Chandler T. Fritz 1994 Trust (2)(5)(6)..... 58,489 *
Charles W. Fritz 1994 Trust (2)(5)(7)...... 58,489 *
Debra F. Schiafone 1994 Trust (2)(5)(8).... 48,489 *
William & Edna Fritz (2)(4)(5)............. 430,310 1.2%
Charles Jensen (2)(9)...................... 500,686 1.4%
A. Hayes Barclay (10)(11).................. 169,000 *
James J. Keil (12)(13).................... 123,000 *
-------
ALL EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (6 PERSONS) (14).............. 5,456,135 15.0%
____________________________________________________
/*/ denotes ownership of less than one percent of issued and outstanding
shares of our common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Options to purchase
shares of common stock currently exercisable or exercisable within sixty
days of March 15, 2002 are deemed outstanding for computing the beneficial
ownership percentage of the person holding such options but are not deemed
outstanding for computing the beneficial ownership percentage of any other
person. Except as indicated by footnote, to our knowledge, the persons
named in the table above have the sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
(2) The address of the referenced holder(s) is c/o NeoMedia Technologies, Inc.,
2201 Second Street, Suite 600, Fort Myers, FL 33901
(3) Shares beneficially owned include 400 shares of common stock, 100 shares
owned by each of Mr. Fritz's four minor children for an aggregate of 400
shares, 140,775 shares of common stock issuable upon exercise of warrants
to purchase common stock which are currently exercisable, 829,600 shares of
common stock issuable upon exercise of options granted under our 1998
employee stock option plan, 42,186 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.
III-8
(4) William E. Fritz, our corporate secretary, and his wife, Edna Fritz, are
the general partners of the Fritz Family Limited Partnership and therefore
each are deemed to be the beneficial owner of the 1,511,742 shares held in
the Fritz Family Partnership. As trustee of each of the Chandler R. Fritz
1994 Trust, Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust,
William E. Fritz is deemed to be the beneficial owner of the shares of
NeoMedia held in each trust. Accordingly, Mr. William E. Fritz is deemed to
be the beneficial owner of an aggregate of 2,070,519 shares, 165,467 of
which as a result of being trustee of the Chandler T. Fritz 1994 Trust,
Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust, 1,511,742
shares as a result of being co-general partner of the Fritz Family
Partnership, 268,787 shares owned by Mr. Fritz or his spouse, 12,523 shares
to be issued upon the exercise of warrants held by Mr. Fritz or his spouse
and 149,000 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) William E. Fritz is the trustee of this Trust and therefore is deemed to be
the beneficial owner of such shares.
(6) Chandler T. Fritz, son of William E. Fritz, is the primary beneficiary of
this trust.
(7) Charles W. Fritz, son of William E. Fritz and our president and chief
executive officer, is the primary beneficiary of this trust.
(8) Debra F. Schiafone, daughter of William E. Fritz, is the primary
beneficiary of this trust.
(9) Includes 499,186 shares of common stock issuable upon exercise of options
granted under our 1996 and 1998 stock option plans.
(10) Includes 164,000 shares of common stock issuable upon exercise of options
granted under our 1996 and 1998 stock option plans.
(11) c/o Barclay & Damisch Ltd. 115 West Wesley Street Wheaton, IL 60187
(12) Includes 123,000 shares of common stock issuable upon exercise of options
granted under NeoMedia's 1996 and 1998 stock option plans.
(13) The address of the referenced individual is c/o Keil & Keil Associates 733
15th Street, N.W. Washington 20005
(14) Includes an aggregate of 1,764,786 currently exercisable options to
purchase shares of common stock granted under our 1996 stock option plan
and 1998 stock option plan and 153,298 currently exercisable warrants to
purchase shares of common stock.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April, 2000, the Company purchased substantially all of the assets of
DayStar Services, L.L.C., a Tennessee limited liability company ("DayStar"). The
assets consisted of DayStar's rights under a license agreement between DayStar
and the Company dated June 30, 1999, for the Company's NeoLink Information
Server ("NeoLink") and DayStar's rights under an Agent Agreement between DayStar
and the Company dated June 30, 1999, for NeoLink. The assets purchased also
included all of DayStar's software and hardware and source codes used in the
operation of the DayStar website and existing customer/vendor relationships. The
purchase price for the assets was $4,000,000; $3,520,000 paid through the
transfer of shares of NeoMedia's Common Stock and $480,000 paid through the
forgiveness of a receivable due from DayStar. William Fritz and Charles Fritz,
III-9
officers, directors and principal shareholders of the Company are also principal
equity holders of DayStar.
During 2000, NeoMedia leased office and residential facilities from related
parties for rental payments totaling $5,000. This lease expired in 2000.
In April 2000, the NeoMedia paid professional fees in the amount of $8,000
to a director of the company for consulting services rendered.
During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its
Chairman and Chief Executive Officer, under a note payable bearing interest at
10% per annum with a term of six months.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) The following exhibits required by Item 601 of Regulation S-K to be
filed herewith are hereby incorporated by reference:
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Restated Certificate of Incorporation of DevSys, Inc. (Incorporated by
reference to Exhibit 3.3 to NeoMedia's Registration Statement, No.
333-5534 (the "Registration Statement")).
3.2 By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4 to
NeoMedia's Registration Statement).
3.3 Certificate of Amendment to Certificate of Incorporation of DevSys,
Inc. changing its name to NeoMedia Technologies, Inc. (Incorporated by
reference to Exhibit 3.13 to NeoMedia's Registration Statement).
3.4 Form of Certificate of Amendment to Certificate of Incorporation of
NeoMedia Technologies, Inc. authorizing a reverse stock split
(Incorporated by reference to Exhibit 3.14 to NeoMedia's Registration
Statement).
4.1 Form of Certificate for Common Stock of DevSys, Inc. (Incorporated by
reference to Exhibit 4.1 to NeoMedia's Registration Statement).
4.2 Form of Joseph Charles' Warrant Agreement (Incorporated by reference
to Exhibit 4.2 to NeoMedia's Registration Statement).
4.3 Form of Principal Stockholder's Warrant (Incorporated by reference to
Exhibit 4.6 to NeoMedia's Registration Statement).
4.4 Form of Placement Agent's Warrant for the Purchase of Shares of Common
Stock and Warrants (Incorporated by reference to Exhibit 4.8 to
NeoMedia's Registration Statement).
4.5 Form of Warrant to Charles W. Fritz (Incorporated by reference to
Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31,
1997)
4.6 Form of Warrant to Dominick & Dominick, Incorporated (Incorporated by
reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year ended
December 31, 1997)
4.7 Form of Warrant to Compass Capital, Inc. (Incorporated by reference to
Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December 31,
1997)
4.8 Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by
reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended
December 31, 1997)
4.9 Form of Warrant to Southeast Research Partners, Inc. (Incorporated by
reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year ended
December 31, 1997)
4.10 Form of Warrant to Joseph Charles & Associates, Inc. (Incorporated by
reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year ended
December 31, 1997)
10.1 Form of Nonsolicitation and Confidentiality Agreement (Incorporated by
reference to Exhibit 10.2 to NeoMedia's Registration Statement).
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10.2 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
Inc. and Charles W. Fritz (Incorporated by reference to Exhibit 10.3
to NeoMedia's Registration Statement).
10.3 Employment Agreement dated April 1, 1996 between Dev-Tech Associates,
Inc. and Robert T. Durst, Jr. (Incorporated by reference to Exhibit
10.4 to NeoMedia's Registration Statement).
10.4 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
Inc. and Charles T. Jensen (Incorporated by reference to Exhibit 10.5
to NeoMedia's Registration Statement).
10.5 Dev-Tech Associates, Inc. Annual Incentive Plan for Management
(Incorporated by reference to Exhibit 10.43 to NeoMedia's Registration
Statement).
10.6 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto
(Incorporated by reference to Exhibit 10.50 to NeoMedia's Registration
Statement).
10.7 First Amendment and Restatement of NeoMedia Technologies, Inc. 1996
Stock Option Plan (As Established Effective February 1, 1996, and as
amended through November 18, 1996) (Incorporated by reference to
Exhibit 10.60 to NeoMedia's Registration Statement).
10.8 Agreement of Lease Between First Union National Bank of Florida and
NeoMedia Technologies, Inc. Dated November 27, 1996 (Incorporated by
reference to Exhibit 10.43 to NeoMedia's Form 10-KSB for the year
ended December 31, 1996).
10.9 Agreement for Wholesale Financing (Security Agreement) Between IBM
Credit Corporation and NeoMedia Technologies, Inc. Dated February 20,
1997 (Incorporated by reference to Exhibit 10.47 to NeoMedia's Form
10-KSB for the year ended December 31, 1996).
10.10 Collateralized Guaranty Between IBM Credit Corporation and NeoMedia
Migration, Inc. Dated February 20, 1997 (Incorporated by reference to
Exhibit 10.48 to NeoMedia's Form 10-KSB for the year ended December
31, 1996).
10.11 NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated by
reference to Appendix A to NeoMedia's Form 14A Filed on February 18,
1998).
10.12 Amendment to NeoMedia Technologies 1998 Stock Option Plan
(Incorporated by reference to text of NeoMedia form 14A filed on July
2, 1999)
10.13 Employment Agreement dated August 2, 1999 between NeoMedia
Technologies, Inc. and William Goins (incorporated by reference to
exhibit 10.32 of NeoMedia's Form 10-KSB for the year ended December
31, 1999.)
10.14 Licensing Agreement between Digital:Convergence Corporation and
NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 10.1
of NeoMedia Form 10-QSB filed on October 30, 2000)
10.15 Sale and Purchase Agreement between Qode.com, Inc. and NeoMedia
Technologies, Inc. (Incorporated by reference to Exhibit 10.1 of
NeoMedia Form 8K filed on March 15, 2001)
10.16 Patent License Agreement - Devices between A.T. Cross Company and
NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 23.5
of NeoMedia Form S1/A filed November 16, 2001).
10.17 License Agreement between Symbol Technologies, Inc. and NeoMedia
Technologies, Inc. (Incorporated by reference to Exhibit 23.6 of
NeoMedia Form S1/A filed November 16, 2001).
10.18 Sponsorship and Advertising Agreement between About.com, Inc. and
NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 23.7
of NeoMedia Form S1/A filed November 16, 2001).
10.19 Proposed Transaction Agreement between AirClic, Inc. and NeoMedia
Technologies, Inc. (Incorporated by reference to Exhibit 23.8 of
NeoMedia Form S1/A filed November 16, 2001).
21 Subsidiaries (Incorporated by reference to description of Company's
subsidiaries contained in Part I, Item I of this form 10-K.
(2) The following exhibits required by Item 601 of Regulation S-K are
hereby filed herewith:
III-11
EXHIBIT
NO. DESCRIPTION
--- -----------
3.5 Form of Certificate of Amendment to Restated Certificate of
Incorporation of NeoMedia Technologies, Inc. increasing authorized
capital and creating preferred stock.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Stonefield Josephson, Inc.
(b) Reports on Form 8-K
Form 8-K filed October 29, 2001 to disclose that the Company had dismissed
Arthur Andersen LLP as its independent accountants and engaged Stonefield
Josephson, Inc. as its new independent accountants.
III-12
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report, included in this Form 10-K, into the Company's
previously filed Registration Statements File nos. 333-80591, 333-42477,
333-36098, 333-51811, 333-77659, and 333-33738.
/S/ ARTHUR ANDERSEN LLP
Tampa, Florida,
March 26, 2002
III-13
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
---------------------------------------------------
Board of Directors
Neomedia Technologies, Inc.
We consent to the incorporation by reference of our independent auditors' report
dated March 28, 2002 on the consolidated statement of balance sheet as of
December 31, 2001 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, included in this
Form 10-K/Amendment No. 1, into the Company's previously filed Registration
Statements (File Nos. 333-80591, 333-42477, 333-36098, 333-51811, 333-77659, and
333-33738, 333-101588, 333-99183, 333-91284, and 333-85422).
/s/ Stonefield Josephson, Inc.
Irvine, California
February 3, 2003
III-14
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 3rd day of February, 2003.
NEOMEDIA TECHNOLOGIES, INC.
REGISTRANT
By: /s/ CHARLES T. JENSEN
--------------------------------------
Charles T. Jensen
President, Acting Chief Executive
Officer, Chief Operating Officer and
Director
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 3, 2003.
SIGNATURES TITLE
/s/ CHARLES T. JENSEN President, Acting Chief Executive Officer,
----------------------------- Chief Operating Officer and Director
Charles T. Jensen
/s/ CHARLES W. FRITZ Chairman of the Board
-----------------------------
Charles W. Fritz
/s/ WILLIAM E. FRITZ Secretary and Director
-----------------------------
William E. Fritz
/s/ DAVID A. DODGE Vice President, Chief Financial Officer
----------------------------- and Controller
David A. Dodge
/s/ A. HAYES BARCLAY Director
-----------------------------
A. Hayes Barclay
/s/ JAMES J. KEIL Director
-----------------------------
James J. Keil
III-15