-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S6FtdwWxaVj/BztNr3SOkcMEijmUbKtj78ua6eaznEqCZQuHt5goHZd9XTfr0+dp HDbBsDm1Xb6ThJXZzeidmQ== 0000898432-02-000552.txt : 20020814 0000898432-02-000552.hdr.sgml : 20020814 20020814122043 ACCESSION NUMBER: 0000898432-02-000552 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOMEDIA TECHNOLOGIES INC CENTRAL INDEX KEY: 0001022701 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 363680347 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21743 FILM NUMBER: 02733095 BUSINESS ADDRESS: STREET 1: 2201 SECOND ST STE 600 STREET 2: STE 600 CITY: FORT MYERS STATE: FL ZIP: 33901 BUSINESS PHONE: 6303554404 MAIL ADDRESS: STREET 1: 2201 SECOND STREET STREET 2: SUITE 600 CITY: FORT MYERS STATE: FL ZIP: 33901 FORMER COMPANY: FORMER CONFORMED NAME: DEVSYS INC DATE OF NAME CHANGE: 19960911 10-Q 1 neomediatech10q.txt U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------- FORM 10 - Q (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21743 NEOMEDIA TECHNOLOGIES, INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3680347 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2201 SECOND STREET, SUITE 600, FORT MYERS, FLORIDA 33901 (Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (Including Area Code) 239-337-3434 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- As of August 12, 2002, there were 21,929,896 outstanding shares of the issuer's Common Stock. PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED SONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------- ASSETS (Unaudited) (Audited) Current assets: Cash and cash equivalents............................................ $ 10 $ 134 Trade accounts receivable, net of allowance for doubtful account of $32 in 2002 and $65 in 2001............................. 3,613 2,583 Costs and estimated earnings in excess of billings on uncompleted contracts.............................................. 46 43 Inventories.......................................................... 141 197 Assets held for sale................................................. --- 210 Prepaid expenses and other current assets............................ 711 582 -------- -------- Total current assets............................................. 4,521 3,749 Property and equipment, net............................................ 148 205 Capitalized patents, net............................................... 2,378 2,500 Capitalized and purchased software costs, net.......................... 219 1,828 Other long-term assets................................................. 710 757 -------- -------- Total assets..................................................... $ 7,976 $ 9,039 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................................... $ 3,842 $ 2,886 Amounts due under financing agreements.......... 2,746 2,283 Liabilities in excess of assets of discontinued business unit 1,496 --- Accrued expenses..................................................... 2,020 1,922 Current portion of long-term debt.................................... 156 149 Notes payable........................................................ 785 750 Sales taxes payable.................................................. 209 135 Billings in excess of costs and estimated earnings on uncompleted contracts.............................................. 75 13 Deferred revenues.................................................... 901 767 Other................................................................ 14 7 -------- -------- Total current liabilities........................................ 12,244 8,912 Long-term debt, net of current portion................................. 310 390 -------- -------- Total liabilities................................................ 12,554 9,302 -------- -------- Shareholders' equity: Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued and outstanding in 2002, 452,489 issued and outstanding in 2001 --- 5 Additional paid-in capital, preferred stock................... --- 878 Common stock, $.01 par value, 200,000,000 shares authorized, 41,882,724 shares issued and 40,241,298 outstanding in 2002 and 20,446,343 shares issued and 18,804,917 outstanding in 2001 402 188 Additional paid-in capital.......................................... 68,259 63,029 Stock subscription receivable....................................... (3,040) (240) Deferred stock-based compensation................................... (347) --- Accumulated deficit................................................. (69,073) (63,344) Treasury stock, at cost, 201,230 shares of common stock............. (779) (779) -------- ----------- Total shareholders' equity....................................... (4,578) (263) -------- -------- Total liabilities and shareholders' equity $ 7,976 $ 9,039 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
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NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) SIX MONTHS ENDED JUNE 30, ---------------------------------- 2002 2001 --------------- ----------- NET SALES: License fees...................................... $ 153 $ 430 Resale of software and technology equipment and service fees 4,895 2,452 -------------- ----------- Total net sales............................... 5,048 2,882 -------------- ----------- COST OF SALES: License fees...................................... 684 1,328 Resale of software and technology equipment and service fees 3,865 1,994 -------------- ----------- Total cost of sales........................... 4,549 3,322 -------------- ----------- GROSS PROFIT (LOSS)................................. 499 (440) Sales and marketing expenses........................ 512 1,379 General and administrative expenses................. 2,560 2,591 Research and development costs...................... 533 143 Loss on impairment of assets........................ 1,003 --- Loss on Digital:Convergence license contract........ --- 7,354 ------------- ------------ Loss from operations.................. (4,109) (11,907) Interest expense (income), net...................... 97 (52) -------------- ------------ Loss from continuing operations....... (4,206) (11,855) Discontinued operations (Note 1): Loss from operations of discontinued business unit --- (2,612) Loss on disposal of discontinued business unit (1,523) --- -------------- ------------ NET LOSS............................................ $ (5,729) $ (14,467) ============== ============ NET LOSS PER SHARE FROM CONTINUING OPERATIONS- BASIC AND DILUTED................................ $ (0.12) $ (0.79) ============== =========== NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS- BASIC AND DILUTED................................ $ (0.05) $ (0.18) ============== =========== NET LOSS PER SHARE--BASIC AND DILUTED................ $ (0.17) $ (0.97) ============== =========== Weighted average number of common shares--basic and diluted 34,291,781 14,924,646 ============== =========== The accompanying notes are an integral part of these consolidated financial statements.
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NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) SIX MONTHS ENDED JUNE 30, ---------------------------------- 2002 2001 --------------- ------------ NET SALES: License fees...................................... $ 41 $ 203 Resale of software and technology equipment and service fees 3,611 1,029 -------------- ------------ Total net sales............................... 3,652 1,232 -------------- ------------ COST OF SALES: License fees...................................... 336 659 Resale of software and technology equipment and service fees 2,899 775 -------------- ------------ Total cost of sales........................... 3,235 1,434 -------------- ------------ GROSS PROFIT (LOSS)................................. 417 (202) Sales and marketing expenses........................ 280 479 General and administrative expenses................. 1,575 1,092 Research and development costs...................... 317 (5) Loss on impairment of assets........................ 1,003 --- Loss on Digital:Convergence license contract........ --- 7,354 -------------- ------------ Loss from operations.................. (2,758) (9,122) Interest expense (income), net...................... 66 (21) -------------- ------------ Loss from continuing operations....... (2,824) (9,101) Discontinued operations (Note 1): Loss from operations of discontinued business unit --- (1,941) Loss on disposal of discontinued business unit (1,523) --- -------------- ------------ NET LOSS............................................ $ (4,347) $ (11,042) ============== ============ NET LOSS PER SHARE FROM CONTINUING OPERATIONS- BASIC AND DILUTED................................ $ (0.07) $ (0.59) ============== ============ NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS- BASIC AND DILUTED................................ $ (0.04) $ (0.13) ============== ============ NET LOSS PER SHARE--BASIC AND DILUTED................ $ (0.11) $ (0.72) ============== ============ Weighted average number of common shares--basic and diluted 39,412,368 15,413,832 ============== ============= The accompanying notes are an integral part of these consolidated financial statements.
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NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ---------------------------------- 2002 2001 --------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................................... $(5,729) $(14,467) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................... 805 1,935 Write-off of Digital Convergence license contract................................ --- 7,354 Preferred stock issued to pay advertising expense................................ --- 882 Loss on disposal of discontinued business unit................................... 1,523 --- Loss on impairment of assets..................................................... 1,003 --- Expense associated with warrant repricing........................................ 38 845 Stock options and warrants granted for services.................................. 383 75 Changes in operating assets and liabilities: Trade accounts receivable...................................................... (1,030) 1,173 Prepaid - Digital:Convergence.................................................. --- 118 Other current assets........................................................... 563 (4) Accounts payable, amounts due under financing agreements, liabilities in excess of assets of discontinued business unit, and accrued expenses 1,933 (2,127) Deferred revenue............................................................... 134 189 Other current liabilities...................................................... 69 (53) -------- -------- Net cash used in operating activities........................................ (308) (4,080) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of patent costs, software development and purchased intangible assets (20) (2,652) (Increase)/decrease in value of life insurance policies 47 --- Acquisition of property and equipment.............................................. --- (81) -------- -------- Net cash used in investing activities........................................ 27 (2,733) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock net of $0 issuance costs in 2002 and $10 in 2001................................ 198 1,637 Net proceeds from exercise of stock warrants....................................... 43 1,010 Net proceeds from exercise of stock options.......... 242 139 Net proceeds from release of restricted cash held for line of credit --- 750 Net proceeds from issuance of notes payable........................................ 21 --- Issuance of stock-based deferred compensation...................................... (347) --- Repayments on notes payable and long-term debt..................................... --- (210) ------- -------- Net cash provided by financing activities.................................... 157 3,326 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................................. (124) (3,487) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 134 4,453 -------- -------- CASH AND CASH EQUIVALENTS, SEPTEMBER 30, 2001...................................... $ 10 $ 966 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the six months ended June 30 (net) $ 1 $ 2 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 Issuance costs for shares issued through private placements --- 10 Stock issued in exchange for limited recourse promissory notes 3,040 --- Common stock issued to settle debt.............................................. 309 --- Cancellation of common stock issued in 2001 to offset stock subscription receivable.............................. (240) --- The accompanying notes are an integral part of these consolidated financial statements.
5 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS BASIS OF PRESENTATION The condensed consolidated financial statements include the financial statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. These condensed consolidated financial statements and related notes should be read in conjunction with the Company's Form 10-K for the fiscal year ended December 31, 2001. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the consolidated financial position of NeoMedia as of June 30, 2002, and the results of operations for the three- and six-month periods ended June 30, 2002 and 2001, and cash flows for the six-month period ended June 30, 2002 and 2001. The results of operations for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of the results which may be expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated in preparation of the condensed consolidated financial statements. 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 Service (NISS) and NeoMedia Consulting and Integration Service (NCIS). NEOMEDIA INTERNET SWITCHING SERVICE (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 its 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, 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 the Company's 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. RECLASSIFICATIONS Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 presentation. 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. 6 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 has implemented the provisions of SFAS No. 141 and No. 142 and has concluded that the adoption does not have a material impact on the Company's financial statements. In October 2001, the FASB 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. 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 are being held in escrow pending the results of negotiations between the Company and Qode with respect to the performance of the Qode business unit for the period March 1, 2001 through February 28, 2002. As a result, all such shares may be released to Qode. 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 June 30, 2002. 7 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 ------------- $ 1,373,000 Total purchase price ------------- 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) ------------- $ 1,373,000 Total purchase price allocated ============= 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 was July 1, 2001. At the end of the 12-month measurement period (February 28, 2002), the number of shares issued to Qode under the earn-out was 309,773, allocated as outlined in the table above. The remaining 1,641,426 shares are being held in escrow pending the results of negotiations between the Company and Qode with 8 respect to a disagreement over the performance of, and investment in, the Qode business unit for the period March 1, 2001 through February 28, 2002. As a result, all such shares may be released to Qode. 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. OTHER 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. DISPOSAL OF QODE BUSINESS UNIT On August 31, 2001, the Company signed a non-binding letter of intent to sell the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which it acquired in March 2001, to The Finx Group, Inc., a holding company based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of the Finx Group, right to use and sell Qode services, and up to $5 million in affiliate revenues over the next five years. During the third and fourth quarters of 2001 and the first quarter of 2002, the company recorded a $2.6 million expense from the write-down of the Qode assets/liabilities to net realizable value. The loss for discontinued operations during the phase-out period from August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No further loss is anticipated. During June 2002, the Finx Group notified the Company that it did not intend to carry out the letter of intent due to capital constraints. As a result, during the three-month period ended June 30, 2002, the company recorded an additional expense of $1.5 million for the write-off of remaining Qode assets. As of June 30, 2002, the Company had $1.3 million of liabilities relating to the Qode system on its books. IMPAIRMENT OF PAPERCLICK ASSET During the three-month period ending June 30, 2002, the Company recognized an impairment charge of $1.0 million relating to its PaperClick physical-world-to-internet software solution. Due to capital constraints, the Company is not currently able to devote full-time resources and infrastructure to commercializing the technology. The Company intends to re-focus sales and marketing efforts surrounding the product upon the receipt of sufficient capital. OTHER EVENTS 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 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. 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. 9 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) August 12, 2002, or ii) 30 days from registration of the shares. Assuming full payment of the notes, proceeds from this transaction will be $3,230,000, of which $190,000 par value was paid during the first quarter of 2002. During August 2002, the notes matured without payment, and the Company subsequently cancelled the 19 million shares issued in connection with such notes. The Company has accrued a liability in the third quarter of $190,000 relating to the par value paid in connection with the issuance of the shares. 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. 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 OTCBB, on the trading date immediately preceding the date of exercise. Approximately 370,000 warrants were exercised in connection with the program, and the Company recognized approximately $38,000 in expense relating to the repricing during the six months ended June 30, 2002. 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 returned the equipment and settled the liability for cash payments totaling $30,000. During April 2002, the Company repriced 7.4 million of its common stock options held by employees, consultants and advisors for a period of six months. During the term of the option repricing program, participating holders are entitled to exercise subject options at an exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the OTCBB, on the trading date immediately preceding the date of exercise. Shortly after the announcement of the repricing program, the market price for the Company's common stock fell below $0.12, and has not closed above $0.12 since. As a result, no options were exercised under the terms of the program and the Company did not recognize any expense relating to the repricing program during the second quarter. On May 16, 2002, the Company received notification from the Nasdaq Listing Qualifications Panel that its shares were delisted effective May 17, 2002, due to failure to meet either the minimum net tangible assets ($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for continued listing. The Company's shares are now trading on the Over-the-Counter Bulletin Board ("OTCBB"). During May 2002, the Company settled its lawsuit with its former President and Chief Operating Officer (see "Legal Proceedings"). The Company will make cash payments of $90,000 directly to the plaintiff from the period May 2002 through December 2002, and cash payments to the plaintiff's attorney for legal fees in the amount of $45,000 due in July and August 2002. In addition, the plaintiff was granted 360,000 options to purchase shares of NeoMedia common stock at an exercise price of $0.08. During May 2002, the Company entered into a Standby Equity Purchase Agreement with Cornell Capital Partners LP ("Cornell"). Under the terms of the agreement, Cornell has agreed to purchase up to $5.0 million of NeoMedia common stock over the next two years, with the timing of the purchase at the Company's discretion. Each purchase will be for a maximum of $75,000, with a minimum seven days between purchases. The shares will be valued at 98% of the lowest closing bid price during the five-day period following the notice of purchase by NeoMedia. The Company will pay 5% of the gross proceeds of each purchase to Cornell as a commission. According to the terms of the agreement, the Company cannot draw on the line of credit until the shares underlying the agreement are registered for trading with Securities and Exchange Commission. During May 2002, the Company granted a personal, worldwide, non-exclusive, limited intellectual property licensing agreement to Brandkey Systems Corporation. Brandkey will pay the Company $50,000 upfront licensing fee plus 2.5 % of all royalty-based revenues earned by Brandkey, with minimum royalties of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and after. Royalty revenue earned by the Company may not exceed $1.0 million in any given year. The Company recognized approximately $4,000 relating to this contract in the accompanying consolidated statements of operations. On June 6, 2002, the Company held its annual meeting of shareholders, at which shareholders approved proposals to: i.) amend NeoMedia's Certificate of Incorporation to increase the number of shares of authorized common stock, par value $.01, from 50,000,000 to 200,000,000 shares and to increase the number of shares of authorized preferred stock, par value $0.01, from 10,000,000 to 25,000,000; and ii.) implement the 2002 Stock Option Plan, under which the 10 Company is authorized to grant to employees, directors, and consultants up to 10,000,000 options to purchase shares of its common stock. On June 26, 2002, the Company announced that its chairman, Charles W. Fritz, had been granted a 90-day leave of absence from his responsibilities as Chief Executive Officer by the company's Board, which, concurrently, elected Charles T. Jensen president and Chief Operating Officer, and also named him acting CEO. The Company also announced that it had promoted David Dodge, its Controller, to Vice President and Chief Financial Officer. 2. LIQUIDITY AND CAPITAL RESOURCES The accompanying unaudited financial statements have been prepared assuming the Company will continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from the Company's inability to continue as a going concern. Based on current cash balances and operating budgets, the Company believes it will need to raise operating capital in the next 30 days. If the Company's financial resources are insufficient, the Company may be forced to seek protection from its creditors under the United States Bankruptcy Code or analogous state statutes unless it is able to engage in a merger or other corporate finance transaction with a better capitalized entity. The Company cannot predict whether additional financing will be available, its form, whether equity or debt, or be in another form, or if the Company will be successful in identifying entities with which it may consummate a merger or other corporate finance transactions. 3. GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Through June 30, 2002, the Company has not been able to generate significant revenues from its operations to cover its costs and operating expenses. Although the Company has been able to issue its common stock or other financing for a significant portion of its expenses, it is not known whether the Company will be able to continue this practice, or if its revenue will increase significantly to be able to meet its cash operating expenses. This, in turn, raises substantial doubt about the Company's ability to continue as a going concern. Management believes that the Company will be able to raise additional funds through an offering of its common stock or alternative sources of financing. However, no assurances can be given as to the success of these plans. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 4. SUBSEQUENT EVENTS On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the Company's Lisle, IL, office, filed a summons seeking payment of approximately $72,000 for all past due rents on the facility. The summons asked for a judgment for the above amount plus possession of the premises. A court date is scheduled for August 22, 2002. The Company is attempting to negotiate settlement of this issue out of court prior to the court date. On July 27, 2002, the Company's former General Counsel filed suit in U.S. District Court, Ft. Myers division, seeking payment of the 2000 executive incentive, severance and unpaid vacation days in the amount of approximately $154,000. In June 2001, the Company's compensation committee approved an adjustment to the 2000 executive incentive plan that reduced the executive incentive payout as a result of the write-off of the Digital:Convergence intellectual property license contract in the second quarter of 2001. As a result, the Company reduced the accrual for such payout by an aggregate of approximately $1.1 million in the second quarter of 2002. The plaintiff is seeking payment of the entire original incentive payout. The Company has accrued the reduced payout. The total accrual relating to this matter as of June 30, 2002, is approximately $100,000. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During the second quarter of 2002, the Company's continued focus was aimed toward the intellectual property commercialization unit of its Internet Switching Systems (NISS, formerly NAS) business. NISS consists of the patented PaperClickTM technology that enables users to link directly from the physical to the digital world, as well as the patents surrounding certain physical-world-to-web linking processes. NeoMedia's mission is to invent, develop, and commercialize technologies and products that effectively leverage the integration of the physical and electronic to provide clear functional value for the Company's end-users, competitive advantage for their business partners and return-on-investment for their investors. To this end, the Company signed an intellectual property license with Brandkey Systems Corporation, the fourth intellectual property license into which the Company has entered. The Company also continued its movement into the Storage Area Network (SAN) market through its NeoMedia Consulting and Integration Services (NCIS) business unit. NeoMedia's quarterly operating results have been subject to variation and will continue to be subject to variation, depending upon factors, such as the mix of business among NeoMedia's services and products, the cost of material, labor and technology, particularly in connection with the delivery of business services, the costs associated with initiating new contracts, the economic condition of NeoMedia's target markets, and the cost of acquiring and integrating new businesses. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001 NET SALES. Total net sales for the six months ended June 30, 2002 were $5.0 million, which represented a $2.1 million, or 72%, increase from $2.9 million for the six months ended June 30, 2001. This increase primarily resulted from revenues relating to the Company's newly created SAN practice in 2002. The Company will continue to pursue additional sales of SAN products and services, and to the extent that such sales can be made, the Company expects total net sales to more closely resemble the results for the first six months of 2002, rather than the first six months of 2001. License fees. License fees were $0.2 million for the six months ended June 30, 2002, a decrease of $0.2 million or 50%, compared with $0.4 million for the six months ended June 30, 2001. The decrease was due to lower sales of internally developed software licenses in 2002. Demand for such licenses has historically fluctuated from year to year. The Company will continue to increase sales efforts of its internally developed software licenses in the future. RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of software and technology equipment and service fees increased by $2.4 million, or 96%, to $4.9 million for the six months ended June 30, 2002, as compared to $2.5 million for the six months ended June 30, 2001. This increase primarily resulted from revenues relating to the Company's newly created SAN practice in 2002. The Company will continue to pursue additional sales of SAN products and services, and to the extent that such sales can be made, the Company expects resales to more closely resemble the results for the first six months of 2002, rather than the first six months of 2001. COST OF SALES. Cost of resales as a percentage of related resales was 79% in 2002 and 81% in 2001. The Company expects the cost of resales as a percentage of related resales to remain relatively stable in the next 12 months. GROSS PROFIT. Gross profit was $0.5 million for the six months ended June 30, 2002, an increase of $0.9 million compared with a negative gross profit of ($0.4) million in 2001. The increase was due to higher SAN-related ales in 2002, as well as lower software amortization costs in 2002 due to the write-off of Qode-related assets at the end of 2001. 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 12 volume. Sales and marketing expenses were $0.5 million for the six months ended June 30, 2002, compared to $1.4 million for the six months ended June 30, 2001, a decrease of $0.9 million or 64%. This decrease resulted from a reduction in sales and marketing personnel resulting from the Company's cost-reduction initiative started in the second half of 2001. The Company does not expect sales and marketing expenses fluctuate dramatically from 2002 levels over the next 12 months. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.6 million for the six months ended June 30, 2002 and 2001. The Company expects general and administrative expense to decrease slightly in the next 12 months due to continued cost reduction efforts and reduced expenses relating to professional services paid with shares of common stock, stock options, and stock warrants. RESEARCH AND DEVELOPMENT. During the six months ended June 30, 2002, NeoMedia charged to expense $0.5 million of research and development costs, compared to $0.1 million for the six months ended June 30, 2001, an increase of $0.4 million or 400%. The increase is primarily due to the fact that the Company was capitalizing the majority of its product development costs in 2001 as the Qode Commerce Solution was being rolled out. The roll-out was canceled and the product discontinued in the third quarter of 2001. During the second quarter of 2002, development resources were devoted primarily to system maintenance. The company expects research and development costs will decline over the next 12 months. LOSS ON IMPAIRMENT OF ASSETS. During the six months ended June 30, 2002, the Company recognized a loss on impairment of assets of $1.0 million for the write-off capitalized development costs relating to its PaperClick physical-world-to-internet software. Due to capital constraints, the Company is not currently able to devote full-time resources and infrastructure to commercializing the technology. The Company intends to re-focus sales and marketing efforts surrounding the product upon the receipt of sufficient capital. The Company does not expect any additional losses from asset impairment in the next 12 months. WRITE-OFF OF DIGITAL CONVERGENCE LICENSE CONTRACT. During the second quarter of 2001, the Company took a $7.4 million cash charge to income to write off the net assets associated with the Digital Convergence intellectual property license contract. There were no charges related to the contract in 2002. No charges are expected in the next 12 months. 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 expense increased by $149,000 to $97,000 for the six months ended June 30, 2002 from income of $(52,000) for the six months ended June 30, 2001, due to lower cash balances in 2002, as well as interest charges in 2002 relating to notes payable not held during 2001. The Company expects net interest expense similar to 2002 levels over the next 12 months, due to capital constraints and borrowing costs. LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for the six months ended June 30, 2002 was $4.2 million, which represented a $7.7 million, or 65% decrease from a $11.9 million loss for the six months ended June 30, 2001. The decrease resulted primarily from the $7.4 million write-off of the Digital Convergence license contract during the second quarter of 2001. LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. The Company discontinued operations of its Qode business unit in 2001, resulting in a loss from operations of discontinued business units of $2.6 million for the six months ended June 30, 2001. The business unit's assets were purchased in March 2001 and the implementation was cancelled during the second quarter of 2001. The Company does not expect any charges relating to the Qode business unit in the next 12 months. LOSS ON DISPOSAL OF DISCONTINUED BUSINESS UNITS. During the third quarter of 2001, the Company discontinued operations of its Qode business unit, resulting in a loss on disposal of discontinued business unit of $3.2 million. The remaining Qode system assets were held for sale subject to a letter of intent with the Finax Group, Inc. As of September 30, 2001, December 31, 2001, and March 31, 2002, the Company recorded on its consolidated balance sheet net assets held for sale in the amount of $210,000, which was the estimated value to be received by the Company from the Finx Group in exchange for the Qode assets. During the second quarter of 2002, the Finx group withdrew its letter of intent. As a result, during the three months ended June 30, 2002, the Company recognized an additional loss on disposal of discontinued business unit of $1.5 million to write off the remaining Qode-related assets. The Company does not expect any charges relating to the Qode business unit in the next 12 months. 13 NET LOSS. The net loss for the six months ended June 30, 2002 was $5.7 million, which represented an $8.8 million, or 61% decrease from a $14.5 million loss for the six months ended June 30, 2001. The decrease primarily resulted from the $7.4 million write-off of the Digital Convergence license contract during the second quarter of 2001, combined with a reduction in overhead expenses resulting from a reduction in force initiated in the third quarter of 2001. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001 NET SALES. Total net sales for the three months ended June 30, 2002 were $3.7 million, which represented a $2.5 million, or 208%, increase from $1.2 million for the three months ended June 30, 2001. This increase primarily resulted from revenues relating to the Company's newly created SAN practice in 2002. The Company will continue to pursue additional sales of SAN products and services, and to the extent that such sales can be made, the Company expects total net sales to more closely resemble the results for the first six months of 2002, rather than the first six months of 2001. LICENSE FEES. License fees were $41,000 for the three months ended June 30, 2002, a decrease of $162,000 or 80%, compared with $203,000 for the three months ended June 30, 2001. The decrease was due to lower sales of internally developed software licenses in 2002. Demand for such licenses has historically fluctuated from year to year. The Company will continue to increase sales efforts of its internally developed software licenses in the future. . RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of software and technology equipment and service fees increased by $2.6 million, or 260%, to $3.6 million for the three months ended June 30, 2002, as compared to $1.0 million for the three months ended June 30, 2001. This increase primarily resulted from revenues relating to the Company's newly created SAN practice in 2002. The Company will continue to pursue additional sales of SAN products and services, and to the extent that such sales can be made, the Company expects total net sales to more closely resemble the results for the first six months of 2002, rather than the first six months of 2001. COST OF SALES. Cost of resales as a percentage of related resales for the three months ended June 30 was 80% in 2002 and 75% in 2001. This increase is primarily due to a higher sales mix of lower-margin equipment in 2002. GROSS PROFIT. Gross profit was $0.4 million for the three months ended June 30, 2002, an increase of $0.6 million compared with a negative gross profit of ($0.2) million in 2001. The increase was due to higher SAN-related ales in 2002, as well as lower software amortization costs in 2002 due to the write-off of Qode-related assets at the end of 2001. 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 $0.3 million for the three months ended June 30, 2002, compared to $0.5 million for the three months ended June 30, 2001, a decrease of $0.2 million or 40%. This decrease resulted from a reduction in sales and marketing personnel resulting from the Company's cost-reduction initiative started in the second half of 2001. The Company does not expect sales and marketing expenses fluctuate dramatically from 2002 levels over the next 12 months. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $0.5 million, or 45%, to $1.6 million for the three months ended June 30, 2002, compared to $1.1 million for the three months ended June 30, 2001. The increase is primarily related to increased legal and professional services relating to fund-raising in 2002. During the three-month period ended June 30, 2002, the Company recognized expense of $0.4 million relating to professional services paid with shares of common stock, stock options, and stock warrants. The Company expects general and administrative expense to decrease slightly in the next 12 months due to continued cost reduction efforts and reduced expenses relating to professional services paid with shares of common stock, stock options, and stock warrants. 14 RESEARCH AND DEVELOPMENT. During the three months ended June 30, 2002, NeoMedia charged to expense $0.3 million of research and development costs. During the three months ended June 30, 2001, the Company did not charge to expense any costs associated with research and development, but did incur $0.2 million of development expense relating to its Qode business. This expense is included under "Loss from operations of discontinued business unit" in the accompanying statement of operations. The company expects research and development costs will decline over the next 12 months. LOSS ON IMPAIRMENT OF ASSETS. During the three months ended June 30, 2002, the Company recognized a loss on impairment of assets of $1.0 million for the write-off capitalized development costs relating to its PaperClick physical-world-to-internet software. Due to capital constraints, the Company is not currently able to devote full-time resources and infrastructure to commercializing the technology. The Company intends to re-focus sales and marketing efforts surrounding the product upon the receipt of sufficient capital. The Company does not expect any additional losses from asset impairment in the next 12 months. WRITE-OFF OF DIGITAL CONVERGENCE LICENSE CONTRACT. During the second quarter of 2001, the Company took a $7.4 million cash charge to income to write off the net assets associated with the Digital Convergence intellectual property license contract. There were no charges related to the contract in 2002. No charges are expected in the next 12 months. 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 expense increased by $87,000 to $66,000 for the three months ended June 30, 2002 from income of $(21,000) for the three months ended June 30, 2001, due to lower cash balances in 2002, as well as interest charges in 2002 relating to notes payable not held during 2001. The Company expects net interest expense similar to 2002 levels over the next 12 months, due to capital constraints and borrowing costs. LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for the three months ended June 30, 2002 was $2.8 million, which represented a $6.3 million, or 69% decrease from a $9.1 million loss for the three months ended June 30, 2001. The decrease resulted primarily from the $7.4 million write-off of the Digital Convergence license contract during the second quarter of 2001, offset by the $1.0 million loss on impairment of assets in 2002. LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. The Company discontinued operations of its Qode business unit in 2001, resulting in a loss from operations of discontinued business units of $1.9 million for the three months ended June 30, 2001. The business unit's assets were purchased in March 2001 and the implementation was cancelled during the second quarter of 2001. The Company does not expect any charges relating to the Qode business unit in the next 12 months. NET LOSS. The net loss for the three months ended June 30, 2002 was $4.3 million, which represented a $6.7 million, or 61% decrease from a $11.0 million loss for the three months ended June 30, 2001. The decrease resulted from the $7.4 million write-off of the Digital Convergence license contract during the second quarter of 2001, offset by the $1.0 million loss on impairment of assets in 2002. FINANCIAL CONDITION As of June 30, 2002, the Company's cash balance was $10,000 compared to $17,000 at March 31, 2002 and $134,000 at December 31, 2001. Net cash used in operating activities for the six months ended June 30, 2002 and 2001, was $0.3 million and $4.1 million, respectively. During the six months ended June 30, 2002, trade accounts receivable increased $1.0 million, while accounts payable inclusive of amounts due under financing agreements, accrued expenses and deferred revenue increased $2.1 million. During the six months ended June 30, 2001, trade accounts receivable decreased $1.2 million, while accounts payable inclusive of amounts due under financing agreements, accrued expenses and deferred revenue decreased $1.9 million. NeoMedia's net cash flow used in investing activities for the six months ended June 30, 2002 and 2001 was $0 and $2.7 million, respectively. 15 Net cash provided by financing activities for the six months ended June 30, 2002 and 2001, was $0.2 million and $3.3 million, respectively. The decrease was due to $1.6 million proceeds for the sale of common stock and $1.1 million from the exercise of stock options and warrants in 2001. During the six months ended June 30, 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), August 12, 2002, or ii) 30 days from registration of the shares. During August 2002, the notes matured without payment, and the Company subsequently cancelled the 19 million shares issued in connection with such notes. The Company has accrued a liability in the third quarter of $190,000 relating to the par value paid in connection with the issuance of the shares. The accompanying unaudited financial statements have been prepared assuming the Company will continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from the Company's inability to continue as a going concern. Based on current cash balances and operating budgets, the Company believes it will need to raise operating capital in the next 30 days. If the Company's financial resources are insufficient, the Company may be forced to seek protection from its creditors under the United States Bankruptcy Code or analogous state statutes unless it is able to engage in a merger or other corporate finance transaction with a better capitalized entity. The Company cannot predict whether additional financing will be available, its form, whether equity or debt, or be in another form, or if the Company will be successful in identifying entities with which it may consummate a merger or other corporate finance transactions. ITEM 3. 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. 16 FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for software products is generally characterized by rapidly changing technology, frequent new product introductions and changes in customer requirements which can render existing products obsolete or unmarketable. The statements contained in this document that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission. The forward-looking statements are based on the beliefs of the management of the Company, as well as assumptions made by, and information currently available to, the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2002 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, the Company's ability to sell its products 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 does not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. 17 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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. 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 against AirClic. The Company has not accrued any additional liability over and above the note payable and related accrued interest. As of the date of this filing, pleadings were closed and the parties have engaged in written discovery. 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. On November 21,2001, the Company filed a motion to dismiss the complaint. On December 19, 2001, AirClic filed a response opposing that position. The motion has not yet been decided upon by the court. 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. On March 22, 2002, Digital:Convergence filed under Chapter 7 of the United States Bankruptcy Code. 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. During May 2002, the Company settled the suit. The Company will make cash payments of $90,000 directly to the plaintiff during the period May 2002 through December 2002, and cash payments to the plaintiff's attorney for legal fees in the amount of $45,000 due in July and August 2002. In addition, the plaintiff was granted 360,000 options to purchase shares of NeoMedia common stock at an exercise price of $0.08. As of March 31, 2002, the Company had accrued a $347,000 liability relating to the suit. As a result, the Company recognized an increase to net income of approximately $176,000 during the three-month period ended June 30, 2002 to adjust the liability to the settlement amount. As of June 30, the Company had an accrued liability of $115,000 relating to this matter. As of August 5, 2002, the Company's legal counsel in this matter withdrew representation and no longer represents the Company. As of the date of this filing, the Company had not engaged new counsel. 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 18 license agreement entered into between the Company and Ripfire in May 2001 relating to implementation of the Qode Universal Commerce Solution. The Company is currently negotiating settlement of this matter. The Company has accrued a $133,000 liability relating to this matter. As of August 5, 2002, the Company's legal counsel in this matter withdrew representation and no longer represents the Company. As of the date of this filing, the Company had not engaged new counsel. 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. As of June 30, 2002, the Company had made payments all payments relating to the settlement. 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 is currently negotiating settlement of this matter. The Company has accrued a liability of $525,000 in the accompanying financial statements. As of August 5, 2002, the Company's legal counsel in this matter withdrew representation and no longer represents the Company. As of the date of this filing, the Company had not engaged new counsel. 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. During April 2002, the Company settled this matter for cash payments totaling $29,000. As of June 30, 2002, the Company had made all payments under the settlement agreement. On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the Company's Lisle, IL, office, filed a summons seeking payment of approximately $72,000 for all past due rents on the facility. The summons asked for a judgment for the above amount plus possession of the premises. A court date is scheduled for August 22, 2002. The Company is attempting to negotiate settlement of this issue out of court prior to the court date. On July 27, 2002, the Company's former General Counsel filed suit in U.S. District Court, Ft. Myers division, seeking payment of the 2000 executive incentive, severance and unpaid vacation days in the amount of approximately $154,000. In June 2001, the Company's compensation committee approved an adjustment to the 2000 executive incentive plan that reduced the executive incentive payout as a result of the write-off of the Digital:Convergence intellectual property license contract in the second quarter of 2001. As a result, the Company reduced the accrual for such payout by an aggregate of approximately $1.1 million in the second quarter of 2002. The plaintiff is seeking payment of the entire original incentive payout. The Company has accrued the reduced payout. The total accrual relating to this matter as of June 30, 2002, is approximately $100,000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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, the Company issued 55,000 shares of its common stock at a price of $0.13 per share to an individual unrelated party. Cash proceeds to NeoMedia were $7,150. In January 2002, the Company 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, the Company issued 19,000,000 shares of 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.) August 12, 2002, or ii.) 30 days from the 19 date of registration of the shares. The gross proceeds of such transaction were expected to be approximately $3,040,000 upon maturity of the notes, as a purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash. During August 2002, the notes matured without payment, and the Company subsequently cancelled the 19 million shares issued in connection with such notes. The Company has accrued a liability in the third quarter of $190,000 relating to the par value paid in connection with the issuance of the shares. In March 2002, NeoMedia issued an aggregate of 228,675 shares of NeoMedia common stock upon the exercise of outstanding warrants by an unrelated party at a price of $0.12 per share. The gross proceeds of such transaction were approximately $27,000. In April 2002, NeoMedia issued an aggregate of 140,775 shares of NeoMedia common stock upon the exercise of outstanding warrants by Charles W. Fritz, its Chairman and Chief Executive Officer, at a price of $0.12 per share. Mr. Fritz subsequently sold the shares into the market. The gross proceeds of such transaction were approximately $17,000. In accordance with Section 16(b), all proceeds from the sales were retained by the Company. In April 2002, NeoMedia issued an aggregate of 1,962,255 shares of NeoMedia common stock upon the exercise of outstanding options by two unrelated parties at a price of $0.12 per share. The gross proceeds of such transaction were approximately $235,000. In April 2002, NeoMedia issued an aggregate of 40,000 shares of NeoMedia common stock upon the exercise of outstanding options by James J. Keil, an outside director. Mr. Keil purchased 25,000 shares at an exercise price of $0.135 and 15,000 shares at $0.20. The gross proceeds of such transaction were approximately $6,000. In May 2002, NeoMedia issued an aggregate of 200 shares of NeoMedia common stock upon the exercise of outstanding options by an employee at a price of $0.12 per share. The gross proceeds of such transaction were $24. In June 2002, the Company issued 900,000 shares of common stock to an unrelated consultant as payment for consulting services to be performed from June 2002 through June 2003. There were no cash proceeds to NeoMedia in these transactions. In June 2002, the Company issued 10,000 shares of common stock to an unrelated vendor as an interest payment on past-due accounts payable. There were no cash proceeds to NeoMedia in these transactions. The Company relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. The Company made a determination in each case that the person to whom the securities were issued did not need the protection that registration would afford. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and our transfer agent was instructed not to permit transfers unless directed to do so by the Company, after approval by our legal counsel. The Company believes that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. The Company also believes that the investors had access to the same type of information as would be contained in a registration statement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's annual meeting of our shareholders was held on June 6, 2002 ("the Annual Meeting"). Holders of our common stock were entitled to elect five directors. On all matters that came before the Annual Meeting, holders of our common stock were entitled to one vote for each share held. Proxies for 32,633,935 of the 41,956,579 shares of common stock entitled to vote were received in connection with the Annual Meeting. The following table sets forth the names of the five persons elected at the Annual Meeting to serve as directors until our next annual meeting of shareholders and the number of votes cast for, against or withheld with respect to each person. 20 DIRECTOR FOR AGAINST WITHHELD TOTAL - -------- --- ------- -------- ----- Charles W. Fritz 31,784,070 849,865 9,322,644 41,956,579 William E. Fritz 31,784,070 849,865 9,322,644 41,956,579 Charles T. Jensen 31,784,070 849,865 9,322,644 41,956,579 A. Hayes Barclay 31,784,048 849,887 9,322,644 41,956,579 James J. Keil 31,784,070 849,865 9,322,644 41,956,579 Shareholders were also asked to vote on the following proposals: PROPOSAL #2 - To approve an amendment to NeoMedia's Certificate of Incorporation to increase the number of shares of authorized common stock, par value $.01, from 50,000,000 to 200,000,000 shares and to increase the number of shares of authorized preferred stock, par value $0.01, from 10,000,000 to 25,000,000 PROPOSAL #3 - To approve the 2002 Stock Option Plan The following table sets forth the number of votes cast for, against or withheld with respect to each of the two proposals listed above. MATTER FOR AGAINST ABSTAIN WITHHELD TOTAL - ------ --- ------- ------- -------- ----- Proposal #2 25,482,127 1,731,300 13,550 14,729,602 41,956,579 Proposal #3 29,451,084 1,551,800 1,631,051 9,322,644 41,956,579 21 RISK FACTORS RISKS SPECIFIC TO NEOMEDIA CURRENTLY PENDING LEGAL ACTIONS THREATEN TO DIVEST THE COMPANY OF CRITICAL INTELLECTUAL PROPERTY On September 6, 2001, 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 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 property, including its core physical world-to-Internet technologies. If the Company is deemed to have defaulted under such note, and does not pay the judgment, AirClic, which is one of the Company's key competitors, could acquire the Company's core intellectual property and other assets, 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 claim and has interposed counterclaims against AirClic. As of the date of this filing, pleadings were closed and the parties have engaged in written discovery. Whether or not AirClic is successful in asserting its claims that the Company breached certain representations made by it 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". If the Company fails to pay such note, AirClic could proceed against the Company's intellectual property and other assets 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 such principal and interest that remains under the note following the resolution of the Company's counterclaims against AirClic. See "Risk Factors - Risks Specific to NeoMedia - The Company Cannot Predict Its Capital Needs And May Not Be Able To Secure Additional Financing". 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 in the public domain. Any declaration that the Company's core patented or patentable technology is non-protectable and in the public domain would have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. The Company is vigorously defending this second action as well. On November 21,2001, the Company filed a motion to dismiss the complaint. On December 19, 2001, AirClic filed a response opposing that position. The motion has not yet been decided upon by the court. See "Risk Factors - Risks Specific to NeoMedia - The Company May Be Unable To Protect Its Intellectual Property Rights And May Be Liable For Infringing The Intellectual Property Rights Of Others". THE COMPANY'S SHARES HAVE BEEN DE-LISTED FROM TRADING ON THE NASDAQ SMALLCAP MARKET, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON AN INVESTOR'S ABILITY TO RESELL SHARES OR OBTAIN ACCURATE PRICE QUOTATIONS On March 11, 2002, the Company received a Nasdaq Staff Determination stating that, as of December 31, 2001, it did not meet either the minimum net tangible assets ($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for continued listing on the Nasdaq SmallCap Market and advising that, accordingly, the Company's shares were subject to de-listing from such market. On May 16, 2002, The Company received notification from the Nasdaq Listing Qualifications Panel that the Company's shares were delisted effective May 17, 2002. The Company's shares are now trading on the OTC Bulletin Board. THE COMPANY HAD A RETAINED DEFICIT; THE COMPANY ANTICIPATES FUTURE LOSSES. The Company has incurred substantial losses since its inception, and anticipates continuing to incur substantial losses for the foreseeable future. The Company incurred a loss of $5,729,000 in the six months ended June 30, 2002, $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 22 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 $69,073,000 as of June 30, 2002, and $63,344,000 as of December 31, 2001. As of June 30, 2002 and December 31, 2001 and 2000, the Company had a working capital (deficit) of approximately $(7,723,000), $(5,163,000) and $8,426,000, respectively. The Company had stockholders' equity of $(4,578,000), $(263,000) and $19,110,000 at June 30, 2002, December 31, 2001 and 2000, respectively. The Company generated revenues of $5,048,000 for the six months ended June 30, 2002 and $8,142,000 and $27,565,000 for the years ended December 31, 2001 and 2000. In addition, during the six months ended June 30, 2002, and years ended December 31, 2001 and 2000, the Company recorded negative cash flows from operations of $308,000, $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. 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 its physical world-to-Internet products to only 13 companies. Further, on March 22, 2002, Digital:Convergence Corporation, the Company's primary customer for the Company's physical world-to-Internet products, filed for bankruptcy under Chapter 7 of the United States Bankruptcy Code. 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. 23 During the three-month period ending June 30, 2002, the Company recognized an impairment charge of $1.0 million relating to its PaperClick physical-world-to-internet software solution. Due to capital constraints, the Company is not currently able to devote full-time resources and infrastructure to commercializing the technology. The Company intends to re-focus sales and marketing efforts surrounding the product upon the receipt of sufficient capital. 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's results of operations fall below the expectations of securities analysts and investors, the trading price of the Company's common stock would likely be materially and adversely affected. 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 its 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 its systems and infrastructure in a timely and effective manner; 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. 24 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 six months ended June 30, 2002 and the years ended December 31, 2001, 2000, 1999, 1998, and 1997, the Company derived 97%, 73%, 66%, 78%, 72%, and 78%, respectively, of its revenues from the resale of computer software and technology equipment. A loss or a reduction of this revenue would have a material adverse effect on the Company's business, prospects, financial condition, and results of operations, as well as 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, such as Sun Microsystems Computer Company, will continue. 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 June 30, 2002, approximately 33% 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. 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 its marketing capabilities and successfully market its 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 its systems integration services, as well as the technologies required to interconnect its 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 its systems and technologies and to integrate newly-developed and purchased technologies with its 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 its competitors. 25 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. The Company's current directors' and officers' insurance policy was renewed on July 25, 2002 for a period of 12 months. 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, its business, prospects, financial condition, and results of operations would be materially adversely affected. THE COMPANY DEPENDS UPON ITS SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE. The Company's success depends largely on the skills of certain key management and technical personnel. 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 its key personnel, the Company's business, prospects, financial condition, and results of operations would be materially adversely affected. On June 26, 2002, the Company announced that its chairman, Charles W. Fritz, had been granted a 90-day leave of absence from his responsibilities as Chief Executive Officer by the Company's Board, which, concurrently, elected Charles T. Jensen president and Chief Operating Officer, and also named him acting CEO. The Company also announced that it had promoted David Dodge, its Controller, to vice president and Chief Financial Officer. 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. 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 issued patents for its physical world-to-Internet technology. On July 25, 2002, the Company received an Issue Notification from the U.S. Patent and Trademark Office that a fifth patent surrounding the Company's technology would be issued on August 13, 2002. 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. 26 The Company licenses from third parties certain software tools that it includes in its services and products. If any of these licenses were terminated, the Company could be required to seek licenses for similar software from other third parties or develop these tools internally. The Company may not be able to obtain such licenses or develop such tools in a timely fashion, on acceptable terms, or at all. Companies participating in the software and Internet technology industries are frequently involved in disputes relating to intellectual property. The Company may in the future be required to defend its intellectual property rights against infringement, duplication, discovery, and misappropriation by third parties or to defend against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies. Any such litigation or disputes could result in substantial costs to, and a diversion of effort by, the Company. An adverse determination could subject the Company to significant liabilities to third parties, require the Company to seek licenses from, or pay royalties to, third parties, or require the Company to develop appropriate alternative technology. Some or all of these licenses may not be available to the Company on acceptable terms or at all, and the Company may be unable to develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. See "Risks Specific To NeoMedia - Currently Pending Legal Actions Threaten To Divest The Company Of Critical Intellectual Property." 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 insurance: o The Company has contractually limited its liability for such claims adequately or at all; o The Company would have sufficient resources to satisfy any liability resulting from any such claim; 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 expected to receive up to $3,040,000, plus interest at a rate of 6% per annum, upon repayment of limited recourse promissory notes issued to the Company as primary consideration for 19,000,000 shares of NeoMedia common stock, sold at $0.17 per share, offered by the Company in a private placement and currently in the process of being registered for public resale, assuming all 19,000,000 of such shares offered in the private placement are resold and the notes are repaid in full. A price of $0.01 per share was paid in cash for such shares and the limited recourse promissory notes were for the balance of the purchase price of $0.16 per share. The promissory notes became due and payable on the earlier of (1) August 12, 2002, or (2) 30 days following the effectiveness of the S-1/A registration statement in which the shares are included. During August 2002, the notes matured without payment, and the Company subsequently cancelled the 19 million shares issued in connection with such notes. The Company has accrued a liability in the third quarter of $190,000 relating to the par value paid in connection with the issuance of the shares. The Company's cash balance as of June 30, 2002, was approximately $10,000. Based on current cash balances and operating budgets, the Company believes it will need to raise operating capital in the next 30 days. If the Company's financial resources are insufficient, the Company may be forced to seek protection from its creditors under the United States Bankruptcy Code or 27 analogous state statutes unless it is able to engage in a merger or other corporate finance transaction with a better capitalized entity. The Company cannot predict whether additional financing will be available, its form, whether equity or debt, or be in another form, or if the Company will be successful in identifying entities with which it may consummate a merger or other corporate finance transactions. 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 its 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 the Company, even if doing so might be beneficial to the Company's stockholders by providing them with the opportunity to sell their shares at a premium to the then market price. On December 10, 1999, the Company's Board of Directors adopted a stockholders rights plan and declared a non-taxable dividend of one right to acquire Series A Preferred Stock of 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 the Company's 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 25,000,000 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 in 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, AND THE MARKET PRICE OF THE SECURITIES MAY BE VOLATILE The Company's common stock currently trades sporadically on the OTCBB. The market for the Company's common stock may continue to be 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. 28 The Company's common stock has traded as low as $0.02 and as high as $6.75 between June 30, 2000 and August 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. INVESTORS MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS AND WARRANTS ARE EXERCISED. As of June 30, 2002, the Company had outstanding stock options to purchase approximately 11.7 million shares of common stock and warrants to purchase approximately 7.9 million shares of common stock, some of which may in the future, but do not currently, have exercise prices at or below 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 3,544,074 shares of common stock in connection with a registration that the Company is 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. As of June 30, 2002, the Company had outstanding options to purchase up to 11.7 million shares of its common stock, with exercise prices ranging from $0.01 to $10.88. Of the 11.7 million options outstanding, 10.3 million were vested as of June 30, 2002. As of June 30, 2002 the Company also had outstanding 7.9 million warrants to purchase shares of common stock, with exercise prices ranging from $0.00 to $15.00. In addition, the Company may offer for sale 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. 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 29 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. 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. 30 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 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 31 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.17 Standby Equity Purchase Agreement between NeoMedia Technologies, Inc. and Cornell Capital Partners LP (filed as an amendment to this form 10-Q) 10.18 Nasdaq Staff delisting notification letter dated May 16, 2002. (filed as an amendment to this form 10-Q) 10.19 Settlement agreement relating to wrongful termination lawsuit brought by former president and Chief Operating Officer (filed as an amendment to this form 10-Q) (b) Reports on Form 8-K On April 2, 2002, the Company filed a form 8-K disclosing that it had instituted a stock warrant repricing program under which certain of its stock warrants would be repriced to the greater of (1) $0.12 per share, 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. On April 15, 2002, the Company filed a form 8-K disclosing that it had instituted a stock option repricing program under which certain of its stock options would be repriced to the greater of (1) $0.12 per share, 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. On May 17, 2002, the Company filed a from 8-K disclosing that it received notification from the Nasdaq Listing Qualifications Panel that its shares were delisted effective May 17, 2002, due to failure to meet either the minimum net tangible assets ($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for continued listing. The Company's shares are now trading on the OTC Bulletin Board. On June 26, 2002, the Company filed a from 8-K disclosing that its chairman, Charles W. Fritz, had been granted a 90-day leave of absence from his responsibilities as Chief Executive Officer by the company's Board, which, concurrently, elected Charles T. Jensen president and Chief Operating Officer, and also named him acting CEO. The Company also announced that it had promoted David Dodge, its Controller, to Vice President and Chief Financial Officer. 32 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEOMEDIA TECHNOLOGIES, INC. --------------------------- Registrant Date AUGUST 14, 2002 By: /s/ Charles T. Jensen --------------- ----------------------------------------- Charles T. Jensen, President and Chief Operating Officer Date AUGUST 14, 2002 By: /s/ David A. Dodge --------------- ----------------------------------------- David A. Dodge, Vice President, Chief Financial Officer, and Controller CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NeoMedia Technologies, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By:/s/ Charles T. Jensen Date August 14, 2002 ------------------------------------------------------- --------------- Charles T. Jensen, President and Chief Operating Officer By:/s/ David A. Dodge Date August 14, 2002 ------------------------------------------------------- --------------- David A. Dodge, Vice President, Chief Financial Officer, and Controller 33 EX-10 3 exhibit10-17.txt EXHIBIT 10.17 EXHIBIT 10.17 EQUITY LINE OF CREDIT AGREEMENT AGREEMENT dated as of the 6th day of May, 2002 (the "AGREEMENT") between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "INVESTOR"), and NEOMEDIA TECHNOLOGIES INC., a corporation organized and existing under the laws of the State of Delaware (the "COMPANY"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Five Million ($5,000,000) Dollars of the Company's common stock, par value $0.01 per share (the "COMMON STOCK"), for a total purchase price of Five Million ($5,000,000) Dollars; and WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("REGULATION D") of the Securities Act of 1933, as amended, and the regulations promulgated there under (the "SECURITIES ACT"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder. WHEREAS, the Company has engaged Westrock Advisors, Inc. to act as the Company's exclusive placement agent in connection with the sale of the Company's Common Stock to the Investor hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.1. "ADVANCE" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice. Section 1.2. "ADVANCE DATE" shall mean the date Butler Gonzalez LLP/First Union Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. No Advance Date shall be less than six (6) Trading Days after an Advance Notice Date. Section 1.3. "ADVANCE NOTICE" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "ADVANCE NOTICE DATE" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven(7) Trading Days after the prior Advance Notice Date. Section 1.5. "BID PRICE" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "CLOSING" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3. Section 1.7. "COMMITMENT AMOUNT" shall mean the aggregate amount of up to Five Million Dollars ($5,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement, provided that the Company shall not request an Advance if the issuance of the full number of shares of Common Stock issuable in connection with such Advance would result in a violation of the Listing Qualifications of the National Association of Securities Dealers, Inc Market 10.17-1 Place Rules (or any similar applicable section) unless the necessary shareholder approval or consent has been received prior to such request. Section 1.8. "COMMITMENT PERIOD" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Five Million Dollars ($5,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring twenty four (24) months after the Effective Date. Section 1.9. "COMMON STOCK" shall mean the Company's common stock, par value $0.01 per share. Section 1.10. "CONDITION SATISFACTION DATE" shall have the meaning set forth in Section 7.2. Section 1.11. "DAMAGES" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "EFFECTIVE DATE" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "ESCROW AGREEMENT" shall mean the escrow agreement among the Company, the Investor, the Investor's Counsel and First Union National Bank dated the date hereof. Section 1.14. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under. Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. Section 1.16. "MARKET PRICE" shall mean the lowest closing Bid Price of the Common Stock during the Pricing Period. Section 1.17. "MAXIMUM ADVANCE AMOUNT" shall be equal up to Twenty Five Thousand Dollars ($25,000) per Advance Notice. Section 1.18 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19 "PERSON" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20 "PLACEMENT AGENT" shall mean Westrock Advisors, Inc. a registered broker-dealer. Section 1.21 "PRICING PERIOD" shall mean the five (5) consecutive Trading Days after the Advance Notice Date. Section 1.22 "PRINCIPAL MARKET" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23 "PURCHASE PRICE" shall be set at ninety eight percent (98%) of the Market Price during the Pricing Period. Section 1.24 "REGISTRABLE SECURITIES" shall mean the shares of Common Stock (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("RULE 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction 10.17-2 under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.25 "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.26 "REGISTRATION STATEMENT" shall mean a registration statement on Form S-1 or SB-2 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.27 "REGULATION D" shall have the meaning set forth in the recitals of this Agreement. Section 1.28 "SEC" shall mean the Securities and Exchange Commission. Section 1.29 "SECURITIES ACT" shall have the meaning set forth in the recitals of this Agreement. Section 1.30 "SEC DOCUMENTS" shall mean Annual Reports on Form 10K, Quarterly Reports on Form 10Q, Current Reports on Form 8K and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.31 "TRADING DAY" shall mean any day during which the New York Stock Exchange shall be open for business. ARTICLE II. ADVANCES Section 2.1. INVESTMENTS. (a) ADVANCES. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. Notwithstanding the foregoing the Company shall only be entitled to an Advance if the Company's Common Stock has an active bid at all times during the Pricing Period. (b) The Company acknowledges that the Investor may sell the Company's Common Stock purchased pursuant to an Advance Notice during the corresponding Pricing Period. (c) The Company acknowledges that the Investor may sell the Company's Common Stock purchased pursuant to an Advance Notice during the corresponding Pricing Period. Section 2.2. MECHANICS. (a) ADVANCE NOTICE. At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, unless waived by the Investor, the amount for each Advance as designated by the Company in the applicable Advance Notice, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, 10.17-3 unless otherwise agreed by the Investor in the Investor's sole and absolute discretion. The Company acknowledges that the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There will be a minimum of seven (7) Trading Days between each Advance Notice Date. (b) DATE OF DELIVERY OF ADVANCE NOTICE. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered, on a day that is not a Trading Day. (c) PRE-CLOSING SHARE CREDIT. Within two (2) business days after the Advance Notice Date, the Company shall credit shares of the Company's Common Stock to the Investor's balance account with The Depository Trust Company through its Deposit Withdrawal At Custodian system, in an amount equal to the amount of the requested Advance divided by the closing Bid Price of the Company's Common Stock as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments to the number of shares to be delivered to the Investor at the Closing as a result of fluctuations in the closing Bid Price of the Company's Common Stock shall be made as of the date of the Closing. Any excess shares shall be credited to the next Advance. In no event shall the number of shares issuable to the Investor pursuant to an Advance exceed nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (d) In the event the Investor sells the Company's Common Stock pursuant to subsection (c) above and the Company fails to perform it's obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor. 10.17-4 Section 2.3. CLOSINGS. On each Advance Date, which shall be six (6) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to First Union National Bank (the "ESCROW AGENT") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; PROVIDED, HOWEVER, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor or its Investor's counsel in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. Section 2.4. TERMINATION OF INVESTMENT. The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, PROVIDED, HOWEVER, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC.. Section 2.5. AGREEMENT TO ADVANCE FUNDS. (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof; (iii) the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions there from. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii) the conditions set forth in Section 7.2 shall have been satisfied. 10.17-5 (viii) The Company shall have provided to the Investor an acknowledgement, to the satisfaction of the Investor, from the Company's accountants as to the accountant's ability to provide all consents required in order to file a registration statement in connection with this transaction; (ix) The Company's transfer agent shall be DWAC eligible. Section 2.6. LOCK UP PERIOD. (a) The Company shall not, without the prior consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance. (b) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF INVESTOR Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: 10.17-6 Section 3.1. ORGANIZATION AND AUTHORIZATION. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. Section 3.2. EVALUATION OF RISKS. The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. NO LEGAL ADVICE FROM THE COMPANY. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. Section 3.4. INVESTMENT PURPOSE. The securities are being purchased by the Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. ACCREDITED INVESTOR. Investor is an "ACCREDITED INVESTOR" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. INFORMATION. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. RECEIPT OF DOCUMENTS. The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10K for the year ended year ended December 31, 2001 and Form 10 Q for the periods ended June 30, 2001 and September 30, 2001; and (v) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Section 3.8. REGISTRATION RIGHTS AGREEMENT AND ESCROW AGREEMENT. The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. 10.17-7 Section 3.9. NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. Section 3.10. NOT AN AFFILIATE. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "AFFILIATE" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. ORGANIZATION AND QUALIFICATION. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and within ten (10) days of the date hereof will be in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. AUTHORIZATION, ENFORCEMENT, COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Section 4.3. CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $0.01 per share of which 49,150,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in Section 4.5 hereof), no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or 10.17-8 any related agreement or the consummation of the transactions described herein or therein. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. Section 4.4. NO CONFLICT. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. Section 4.5. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since November 1996, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "FINANCIAL STATEMENTS") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 4.6. 10b-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. NO DEFAULT. Except as disclosed in Section 4.4 or the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or 10.17-9 instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. ABSENCE OF EVENTS OF DEFAULT. Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. EMPLOYEE RELATIONS. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Section 4.11. ENVIRONMENTAL LAWS. The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Section 4.12. TITLE. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. REGULATORY PERMITS. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. 10.17-10 Section 4.15. INTERNAL ACCOUNTING CONTROLS. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.16. NO MATERIAL ADVERSE BREACHES, ETC. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. ABSENCE OF LITIGATION. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. SUBSIDIARIES. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. TAX STATUS. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. CERTAIN TRANSACTIONS. Except as set forth in the SEC Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 4.21. FEES AND RIGHTS OF FIRST REFUSAL. Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. USE OF PROCEEDS. The Company represents that the net proceeds from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, 10.17-11 or if any judgment or other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability. Section 4.23. FURTHER REPRESENTATION AND WARRANTIES OF THE COMPANY. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market Section 4.24. OPINION OF COUNSEL. Investor shall receive an opinion letter from counsel to the Company (updated where applicable) on the date hereof. Section 4.25. OPINION OF COUNSEL. The Company will obtain for the Investor, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. Section 4.26. DILUTION. The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. INDEMNIFICATION The Investor and the Company represent to the other the following with respect to itself: Section 5.1. INDEMNIFICATION. (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INVESTOR INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "COMPANY INDEMNITEES") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution 10.17-12 to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. ARTICLE VI. Covenants of the Company Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. LISTING OF COMMON STOCK. The Company shall maintain the Common Stock's authorization for quotation on theNational Association of Securities Dealers SmallCap Market. Section 6.3. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules there under to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act. Section 6.4. TRANSFER AGENT INSTRUCTIONS. Not later than two days after each Advance Notice Date and prior to each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends. Section 6.5. CORPORATE EXISTENCE. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.6. NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE AN Advance. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. EXPECTATIONS REGARDING ADVANCE NOTICES. Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8. CONSENT OF INVESTOR TO SELL COMMON STOCK. During the Commitment Period, the Company shall not issue or sell (i) any Common Stock without consideration or for a consideration per share less than its Bid Price determined immediately prior to its issuance, (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a 10.17-13 consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, or (iii) file any registration statement on Form S-8. Section 6.9. CONSOLIDATION; MERGER. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "CONSOLIDATION EVENT") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.10. ISSUANCE OF THE COMPANY'S COMMON STOCK. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. ARTICLE VII. CONDITIONS FOR ADVANCE AND CONDITIONS TO CLOSING Section 7.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) ACCURACY OF THE INVESTOR'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor shall be true and correct in all material respects. (b) PERFORMANCE BY THE INVESTOR. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER AN ADVANCE NOTICE AND THE OBLIGATION OF THE INVESTOR TO PURCHASE SHARES OF COMMON STOCK. The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the satisfaction or waiver by the Investor, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "CONDITION SATISFACTION DATE"), of each of the following conditions: (a) REGISTRATION OF THE COMMON STOCK WITH THE SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) AUTHORITY. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions there from. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) FUNDAMENTAL CHANGES. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. (d) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the 10.17-14 conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK. The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (h) ADVANCES. The amount of the individual Advance, requested by the Company does not exceed the Maximum Advance Amount unless waived by the Investor. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (h) NO KNOWLEDGE. The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. (i) PRIOR APPROVAL. The Company shall have obtained all approvals necessary under the rules and regulations under the Listing Qualifications of the Market Place Rules established and maintained by the National Association of Securities Dealers, Inc., for the issuance of the shares of Common Stock to the Investor pursuant to Advances under this Agreement, the Investor's shares pursuant to Section 12.4 and the Placement Agent's shares pursuant to the Placement Agent Agreement. (j) OTHER. On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate substantially in the form annexed hereto on EXHIBIT A. ARTICLE VIII. DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION Section 8.1. DUE DILIGENCE REVIEW. Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION. (a) The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such 10.17-15 non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX. CHOICE OF LAW/JURISDICTION Section 9.1. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County, New Jersey and the United States District Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action asserted pursuant to this paragraph. ARTICLE X. ASSIGNMENT; TERMINATION Section 10.1. ASSIGNMENT. Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person. Section 10.2. TERMINATION. The obligations of the Investor to make Advances under Article II hereof shall terminate twenty-four (24) months after the Effective Date. ARTICLE XI. NOTICES Section 11.1. NOTICES. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: NeoMedia Technologies Inc. 2201 Second Street - Suite 300 Fort Myers, FL 33901 Attention: Telephone: Facsimile: 10.17-16 With a copy to: If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street -Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a Copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. MISCELLANEOUS Section 12.1. COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. Section 12.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Section 12.3. REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. FEES AND EXPENSES. The Company hereby agrees to pay the following fees: (a) LEGAL FEES. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company will pay the fees and expenses of Butler Gonzalez LLP for legal, administrative, and escrow fees in the amount of Fifteen Thousand Dollars ($15,000) of which Five Thousand Dollars ($5,000) is due and payable upon the execution of this Agreement and Ten Thousand Dollars ($10,000) is due and payable upon directly from the gross proceeds of the first (1) Advance pursuant this Agreement. . Subsequently on each Advance Date, the Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for legal, administrative and escrow fees. 10.17-17 (b) COMMITMENT FEES. (i) On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to five percent (5%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement. (ii) In addition upon the Company obtaining shareholder approval for an increase of the Company's authorized shares from fifty million (50,000,000) to two hundred million (200,000,000) the Company shall issue to the Investor eight hundred thirty seven thousand five hundred (837,500) shares of the Company's Common Stock. (the "INVESTOR'S SHARES") In the event the Company does not obtain the required shareholder approval within ninety (90) days from the date hereof the Company shall immediately issue the Investor's Shares. (iii) FULLY EARNED. The Investor's Shares shall be deemed fully earned upon the execution of this Agreement. (iv) Registration Rights. The Investor's Shares will have demand and "piggy-back" registration rights. Section 12.5. BROKERAGE. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. CONFIDENTIALITY. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10.17-18 IN WITNESS WHEREOF, the parties hereto have caused this Line of Credit Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: NEOMEDIA TECHNOLOGIES INC. By:/s/ Charles T. Jensen ---------------------------------- Name: Charles T. Jensen Title: Chief Financial Officer INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ MARK ANGELO ---------------------------------- Name: Mark Angelo Title: Portfolio Manager 10.17-19 EXHIBIT A ADVANCE NOTICE/COMPLIANCE CERTIFICATE NEOMEDIA TECHNOLOGIES INC. The undersigned, ________________________________ hereby certifies, with respect to the sale of shares of Common Stock of NeoMedia Technologies Inc. (the "COMPANY"), issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "NOTICE"), delivered pursuant to the Equity Line of Credit Agreement (the "AGREEMENT"), as follows: 1. The undersigned is the duly elected Chief Executive Officer of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of _________________. NEOMEDIA TECHNOLOGIES INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 10.17-20 SCHEDULED 2.6(b) NEOMEDIA TECHNOLOGIES INC. The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Equity Line of Credit Agreement dated ________________ between NeoMedia Technologies Inc. (the "COMPANY"), and Cornell Capital Partners, LP, (the "INVESTOR") (the "LOCK-UP PERIOD"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "SECURITIES"). In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company. Dated: _______________, 2002 Signature -------------------------------------------- Address: ------------------------------------ City, State, Zip Code: ---------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- Print Social Security Number or Taxpayer I.D. Number 10.17-21 EX-10 4 exhibit10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 NASDAQ JASON S. FRANKEL COUNSEL SENT VIA FACSIMILE AND OVERNIGHT COMMERCIAL COURIER May 16,2002 Mr. Charles T. Jensen Chief Financial Officer, Vice President and Treasurer NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, FL 33901 Re: NeoMedia Technologies, Inc. (Symbol: NEOM) Nasdaq Listing Qualifications Panel Decision NQ 4010C-02 Dear Mr. Jensen: This is to inform you that, pursuant to the April 18, 2002 oral hearing before a Nasdaq Listing Qualifications Panel (the "Panel"), a determination has been made in the matter of NeoMedia Technologies, Inc. (the "Company") and its request for continued inclusion on The Nasdaq SmallCap Market pursuant to an exception to the net tangible assets/shareholders' equity/market capitalization/net income and bid price requirements, as set forth in Nasdaq Marketplace Rules 4310(c)(2) and 4310(c)(4), respectively. After a careful review of the entire record, the Panel relied upon the following information in reaching its determination. The Company develops technologies that link physical information and objects to the Internet. The Form 10-Q for the quarter ended March 31, 2002 reported total assets of $7,547,000 and net tangible assets/shareholders' equity of $(629,000). Revenue and net income (loss) for the three-month period ended March 31, 2002 was $1,396,000 and $(1,382,000).(1) The Company reported 40,275,153 total shares outstanding and 33,389,341 publicly held shares. The closing bid price for the Company's common stock on May 15, 2002 was $0.10 per share, consequently, the market capitalization and market values of publicly held shares were $4,027,515 and $3,338,934, respectively. On November 20, 2001, staff notified the Company that it failed to satisfy the net tangible assets/shareholders' equity requirement based upon a reported total of $1,331,000 as of September 30, 2001. On February 14, 2002, the Company was notified that it failed to demonstrate compliance with the $1.00 bid price requirement for The 30 consecutive trading - -------------------------- (1) The Forms 10-K for the fiscal years ended December 31, 2001, 2000 and 1999 reported net income (loss) of $(23,777,000), $(25,469,000) and $(5,409,000), respectively 2 Staff also noted that the Company did not satisfy the market capitalization or net income alternative requirements. 10.18-1 days(3). Pursuant to Marketplace Rule 4310(c)(8)(D), the Company was provided with a 180-day grace period, through August 13, 2002, to regain compliance with that requirement. The Company was later informed on March 11, 2002 that its securities were subject to delisting based upon the net tangible assets/shareholders' equity deficiency, Also within the March 11th letter, staff notified the Company that it was delinquent in the payment of certain annual and listing of additional shares fees totaling $13,253.80.4 However, staff later confirmed that full payment had been received on March 14, 2002, thereby resolving the fee issue. By correspondence dated March 15, 2002, the Company requested a hearing, which stayed the delisting. The Company believes that its failure to satisfy the net tangible assets/shareholders' equity requirement is based upon several adverse business developments that occurred during fiscal 2001. The Company explained that, as a result, it was forced to incur several unrelated one-time charges totaling approximately $17,000,000 during that fiscal year. Notwithstanding, the Company represented that it has since undertaken steps designed to improve operating results. To that end, the Company estimated that it would report a net loss of only $(1,320,300) for the quarter ended March 31, 2002, thereby reducing net tangible assets/shareholders' equity to approximately $(263,000). However. The Company projected net income of $286,900 for the quarter ending June 30, 2002, a net loss of $(246,800) for the quarter ending September 30, 2002 and net income of $1,584,300 for the quarter ending December 31, 2002. The Company also represented that, in February 2002, it sold 19,000,000 common shares at $0.17 per share for aggregate proceeds of $3,230,000.5 Specifically, the Company received promissory notes in consideration for the shares that mature at the earlier of 90 days from the date of issuance or 30 days from the filing of the Form S- 1 registration statement. The Securities and Exchange Commission's (the "SEC") EDGAR database indicates that the Company filed the registration statement on April 24, 2002. In addition, the Company stated within the Form 10-K for the fiscal year ended December 31, 2001 that the "promissory notes mature no later than May 2002, resulting in proceeds of $3,230,000 to the Company."6 Upon review of The March 31, 2002 Form 10-Q, it appears that the notes were recorded in the equity section of the balance sheet as a "Stock subscription receivable" of $(3,040,000). The Company anticipates that, including the proceeds from the notes and the achievement of its operating projections discussed above, it will report net tangible assets/shareholders' equity of $2,708,400 as of June 30, 2002. The Company believes that it will further increase equity through an agreement that was announced on April 17, 2002 with Cornell Capital Partners, LP ("Cornell") for a $2,000,000 equity line of credit. Under the terms of the agreement, The Company may exercise "put" options, at its sole discretion, to sell up to $25,000 worth of Company common stock to Cornell at seven-day intervals. The pricing of the shares would be 98% of the lowest closing bid price during the five-day period immediately subsequent to the exercise of the put option. The shares - ------------------- (3) The 30-day period relating to the bid price requirement began on January 2, 2002, upon the expiration of the moratorium implemented by Nasdaq the bid price requirement on September 27,2001 (4) See Marketplace Rules 4310(c)(13) and 4520 (5) Staff noted in its Hearing Memorandum dated April 9, 2002 that, at a Special Meeting of Shareholders held on December 11, 2001, the Company's shareholders approved the issuance of up to 29,000,000 common shares to certain unaffiliated investors (6) Company Form 10-K for the fiscal year ended December 31, 2001, page 26 10.18-2 would then be issued on the sixth day after the exercise of the put option(7) The Company stated that it exercised its first put option on April 15, 2002, and that it plans to continue to utilize the equity line in the future for liquidity purposes. In addition, the Company hopes to increase equity through a program it instituted in March and April 2002 to reprice all of its then outstanding stock option and warrants. Specifically, under the program, holders of any of the Company's outstanding stock options and warrants may exercise their interests at "the greater of $0.12 per share...or 50% of the previous day [sic] closing price."(8) In all, the Company stated that 7,400,000 options and 1,200,000 warrants are eligible for the program. The Company anticipates that as many as 6,200,000 options and warrants will be exercised in the six-month period following the hearing, which would result in an increase to net tangible assets and shareholders' equity of approximately $800,000.(9) The Company also indicated that it had instituted a debt restructuring program with its creditors. The Company stated that it has had success in retiring an undisclosed portion of debt thus far, and that it hopes to retire additional debt through the issuance of Company common shares that could result in an increase to net income (and presumably net tangible assets and shareholders' equity) of $600,000 during fiscal 2002, Finally, The Company stated that it is negotiating a merger transaction with Unicomp, Inc. ("Unicomp").(1)0 It believes the transaction would increase its net tangible assets/shareholders' equity by approximately $2,000,000. With respect to the bid price deficiency, the Company believes that the price of its common shares will significantly increase once the announcement of the foregoing initiatives is received by the market. In addition, the Company stated that it would consider including a proposal in its proxy materials for a reverse stock split at an upcoming annual meeting of shareholders.(11) - -------------------- (7) At the hearing, the Panel inquired as to whether the agreement prohibited Cornell from entering into any short sales of the Company's stock. The Company was unable to provide a definitive answer. See Hearing Transcript, pages 33, 34. (8) See Exhibit 1 to the Hearing transcript, page 16. (9) By letter dated May 7, 2002, the Panel requested that the Company provide additional information regarding its option and warrant repricing program to ensure that the repricing did not violate Nasdaq's shareholder approval rules, as set forth in Marketplace Rule 4350(i). By response dated May 13, 2002, the Company stated that it received shareholder approval for the employee stock option plans adopted in 1996 and 1998. The Company also provided certain other information requested regarding its outstanding stock options and warrants. According to the documentation provided, it appears that the Company's 1996 and 1998 stock option plans provided the "Nonemployee Directors" with the general authority to re-price employee stock options. (10) The common stock of Unicomp is quoted on the "Pink Sheets" under the trading symbol "UCMP". The common stock of Unicomp was delisted from the Nasdaq national market effective with the open of business on May 2, 2001 based upon a failure to satisfy the net tangible assets, bid price, and market value of public float requirements. According to the SEC's EDGAR database, Unicom is not current in its periodic public filings. S such, there is no current public financial information available about that entity. (11) The Company filed a Definitive Proxy Statement with the SEC on May 7, 2002 for the 2002 Annual Meeting of Shareholders scheduled for June 6, 2002. Upon review of that proxy, it does not appear that the company plans to propose the implementation of reverse stock split at the upcoming meeting. In addition, according to the information disclosed in the Proxy, it appears that the Company only has two independent directors, both of whom serve on the Audit Committee. See Marketplace Rules 4350(c) and 4350(d)(2). 10.18-3 PANEL DECISION The Panel was of the opinion that the Company failed to present a definitive plan that will enable it to evidence compliance with all requirements for continued listing on The Nasdaq SmallCap Market within a reasonable period of time and to sustain compliance with those requirements over the long tem. In that regard, according to its most recent public filing, the March 31, 2002 Form 10-Q filed with the SEC on March 15, 2002, the Company does not satisfy the $2,000,000 net tangible assets or $2,500,000 shareholders' equity requirement. Further, while the Panel noted that the Company's reported shareholders' equity as of March 31, 2002 included an item entitled "Stock subscription receivable" of $(3,040,000), which reduced shareholders' equity by that amount, the Panel observed that there are no assurances that the notes will be paid when and if they mature. Further, even in the event the notes do mature in the near term, which could increase the Company's net tangible assets/shareholders' equity to $2,411,000 on a pro forma basis as of March 31, 2002, the Panel lacked confidence in the Company's ability to sustain compliance with the net tangible assets/shareholders' equity requirement over the long term, given its history of significant losses and the lack of documentation to support its projections for fiscal 2002. Moreover, the Panel was of the view that the Company's supplementary plans to increase net tangible assets/shareholders' equity were not sufficiently definitive in nature to merit an exception. As a separate matter, while the Panel originally expressed concern that the repricing of the stock options and warrants may trigger the application of Nasdaq's shareholder approval rules, the Panel determined that it was not necessary to render a decision on that issue given its determination on the net Tangible assets/shareholders' equity deficiency.(12) Finally, The Panel noted that the Company is entitled to the balance of the 180-day grace period for the bid price deficiency, through August 13, 2002, as provided for by Marketplace Rule 4310(c)(8)(D) and, therefore, determined that the issue is not yet ripe. BASED UPON THE FOREGOING, THE PANEL DETERMINED TO DELIST THE COMPANY'S SECURITIES from THE NASDAQ STOCK MARKET EFFECTIVE WITH THE OPEN OF BUSINESS TOMORROW, MAY 17, 2002.(13) The Company's securities may be immediately eligible to trade on the OTC Bulletin Board. Pursuant to SEC File No. TP 97-235, an exemption from Rule I5c2-11 has been granted to permit a broker-dealer, without having the information specified by the Rule, To publish in, or submit for publication in, a quotation medium, quotations for a security immediately after such security is no longer authorized for quotation on The Nasdaq Stock Market, subject to the following conditions: 1. The security's removal from authorization for quotation on The Nasdaq Stock Market is attributable solely to the issuer's failure to satisfy the initial listing or - -------------------------- (12) In addition, while the Panel observed that the Company does not presently appear to satisfy Nasdaq's independent directors and audit committee composition requirements, the panel determined not to cite those issues as bases for delisting given that the Company was not provided with notice and an opportunity to respond to those deficiencies (13) The Panel's determination is limited to those findings expressly set forth in this decision, which is based solely upon the facts and circumstances of this matter and should not be interpreted as precedent. 10.18-4 maintenance standards, as contained in SEC Release No. 34-38961 (August 22, 1997). 2. The security must have been quoted continuously on The Nasdaq Stock Market during the 30 calendar days preceding its delisting from that market, exclusive of any trading halt not exceeding one day to permit the dissemination of material news concerning the security's issuer; 3. The security's removal from authorization for quotation on The Nasdaq Stock Market is not attributable to public interest concerns under Marketplace Rules 4300 and 4330(a)(3) and the issuer of the security must not be the subject of bankruptcy proceedings; 4. The issuer of the security must be current in all of its periodic reporting requirements, pursuant to Section 13(a) or 15(d) of the Exchange Act; 5. A broker-dealer relying upon this exemption must have been a market maker registered with the NASD in the security no longer eligible for quotation during the 30 day period preceding the security's removal from The Nasdaq Stock Market, and 6. The exemption is available only for securities that were authorized for quotation on The Nasdaq Stock Market and then delisted, and not for any other securities of the issuer. The Company should be aware that the Nasdaq Listing and Hearing Review Council (the "Listing Council") may, on its own motion, determine to review any Panel decision within 45 calendar days after issuance of the written decision. If the Listing Council determines to review this decision, it may affirm, modify, reverse, dismiss, or remand the decision to the Panel, The Company will be immediately notified in the event the Listing Council determines that this matter will be called for review. The Company may also request that the Listing Council review this decision. The request for review MUST BE MADE IN WRITING, AND RECEIVED WITHIN 15 DAYS FROM THE DATE OF THIS DECISION. Requests for review and a copy of the check must be in writing and faxed to (301) 978-4028, with the original sent to, MICHAEL GREENE, ESQ. Office of Appeals and Review The Nasdaq Stock Market, Inc. 9600 Blackwell Road, 3rd Floor Rockville, MD 20850 10.18-5 Pursuant to Nasdaq Marketplace Rule 4840(b), the Company must submit a fee of $4,000.00 to The Nasdaq Stock Market, Inc. to cover the cost of the review. The Company should send only its payment with the enclosed Appeal Fee Payment Form to: Regular Mail(14) Courier/Overnight - ------------ ----------------- The Nasdaq Stock Market, Inc. The Nasdaq Stock Market, Inc P.O. Box 7777-W0435 or W0435 Philadelphia, PA 19175-0435 C/O Mellon Bank, Rm. 490 701 Market Street Philadelphia, PA 19106 Please be advised that the institution of a review, whether by way of the Company's request or an initiative of the Listing Council, will not operate as a stay of this decision. Should you have any questions, please do not hesitate to contact me at (301) 978-8076. Sincerely, /s/ Jason S. Frankl Counsel Nasdaq Listing Qualifications Hearings - ----------------------------------- (14) Please note that the P.O. Box address will not accept courier or overnight deliveries. 10.18-6 Appeal Fee Payment Form Please complete this form legibly and submit it with our payment to the appropriate address below: Issuer Name: ----------------------------------------------------- Issuer Symbol: ----------------------------------------------------- Issuer Address: ----------------------------------------------------- Remitter Name. ----------------------------------------------------- (if not the same as the Issuer) Check enclosed in the amount of $ Check No. --------------------- ------------ Please attach your payment to this form and send to: Regular Mail Courier/Overnight - ------------ ----------------- The Nasdaq Stock Market, Inc. The Nasdaq Stock Market, Inc P.O. Box 7777-W0435 Or W0435 Philadelphia, PA 19175-0435 C/O Mellon Bank, Rm. 490 701 Market Street Philadelphia, PA 19106 Please note that the P.O. Box address WILL NOT ACCEPT courier or overnight deliveries 10.18-7 EX-10 5 exhibit10-19.txt EXHIBIT 10.19 EXHIBIT 10.19 SEPARATION AGREEMENT This Separation Agreement is made this 15th day of May, 2002, between NEOMEDIA TECHNOLOGIES, INC., having its principal place of business at 2201 2nd Street, Suite 600, Ft. Myers, Florida 33901 (hereinafter "NeoMedia"), CHARLES W. FRITZ, individually (hereinafter "Fritz"), JAMES J. KEIL, individually, (hereinafter "Keil"), JOHN A. LOPIANO, individually (hereinafter "Lopiano") and WILLIAM F. GOINS (hereinafter "Goins"). For purposes of this Agreement, the term "NEOMEDIA" refers jointly and severally to NeoMedia Technologies, Inc. and, without limitation, any parent, affiliate, predecessor, successor, subsidiary, or other related entity and their existing and former officers, directors, shareholders, employees, or agents (in their individual and representative capacities). 1. SEPARATION AND SEVERANCE. Goins' employment with NeoMedia is hereby terminated effective the 31st day of January, 2001. NeoMedia and Goins desire to terminate the employment relationship in an amicable manner and to resolve any differences between the parties. NeoMedia has decided to pay Goins an amount that NeoMedia does not owe Goins in order to resolve any disputes between the parties. Goins agrees to accept those benefits from NeoMedia and, in exchange, Goins agrees to give up, waive, abandon, and release any and all claims Goins may have against NeoMedia and its officers, directors, employees, agents, and representatives, and their successors in interest. Goins acknowledges that NeoMedia has advised Goins to consult an attorney prior to executing this Agreement. As Severance, NeoMedia agrees to pay, and Goins agrees to accept, the following benefits and other consideration to which Goins is not otherwise entitled: a. NeoMedia shall grant to Goins, no later than May 15, 2002, 360,000 registered and vested options in NeoMedia Technologies, Inc., at $.08, with Goins to have five (5) years from the date of issuance to exercise the options, and provide evidence of such issuance and registration to Goins no later than May 31, 2002. Such options shall survive any future business combinations and successor businesses. b. NeoMedia shall pay Goins the gross amount of $10,000.00 per month, for nine (9) months, with the first payment being due May 20, 2002. Each subsequent payment will be due on the 201h of the month. NeoMedia will withhold from these payments all necessary federal, state, or local taxes or other standard withholdings. c. NeoMedia shall pay Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered, the gross amount of $18,000.00 no later than July 10, 2002. No amounts shall be withheld from this payment. Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered is solely responsible for any taxes payable for receipt of such amount and shall receive a Form 1099 in the manner and at the time required by law. d. NeoMedia shall pay Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered, the gross amount of $19,000.00 no later than July 25, 2002.No amounts shall be withheld from this payment. Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered is solely responsible for any taxes payable for receipt of such amount and shall receive a Form 1099 in the manner and at the time required by law. e. NeoMedia shall pay Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered, the gross amount of $8,000.00 no later than August 25, 2002. No amounts shall be withheld from this payment. Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered is solely responsible for any taxes payable for receipt of such amount and shall receive a Form 1099 in the manner and at the time required by law. f. As a condition precedent to this Agreement, Fritz and Keil agree to execute the Continuing Guarantee, attached as Exhibit "A", in the amount of $40,000 on or before September 15, 2002 if all obligations in paragraphs 1 (a) through 1 (e) have been satisfied. The guarantee amount shall be automatically reduced by any amounts subsequently paid to Goins pursuant to this Agreement. Payment under the continuing guarantee shall be immediately due to Goins upon any failure by NeoMedia to pay the amounts due under this Agreement. g. Other than the payments described in paragraphs 1 (c), 1 (d), and 1 (e) above, NeoMedia, Fritz, Keil, and Lopiano shall not be liable for the payment or reimbursement of any attorneys' fees incurred by Goins whatsoever, including but not limited to, any fees or costs incurred by Goins as a result of his association with, or retention of, the firm of Abel, Band, Russell, Collier, Pitchford & Gordon, Chartered. 10.19-1 h. Goins understands that the Payment will be given to him if and only if he executes this Agreement and agrees to release and waive any and all claims that he may have against NeoMedia, Fritz, Keil, or Lopiano with respect to Goins's employment or termination of employment with NeoMedia. i. Goins understands that the payments described above shall constitute the sole financial obligation of NeoMedia, Fritz, Keil, or Lopiano to Goins under this Agreement. j. The parties acknowledge and agree: (a) that the transactions entered into by NeoMedia do not constitute any admission of liability by NeoMedia, Fritz, Keil, or Lopiano; and (b) that the settlement of Goins' claims does not constitute an admission by NeoMedia, Fritz, Keil, or Lopiano of the validity of any legal or factual contentions by Goins. 2. CONFIDENTIALITY AND NON-DISPARAGEMENT. The parties further understand and agree that the existence of this Separation Agreement and the terms and conditions thereof, other than the fact of Goins' termination of employment, shall be considered confidential, and shall not be disclosed by any party to this Agreement to any third party or entity except with the prior written approval of the other party or upon the order of a court of competent jurisdiction- All parties agree that, at all times, they will refrain from and will not directly or indirectly solicit, request or engage in any conversation that would tend to negatively impact any party. All parties agree to instruct their employees, agents, representatives, shareholders, officers, directors, independent contractors, and attorneys to refrain from making any disparaging remarks about the other party. Further, Goins agrees to maintain as confidential and not to disclose any confidential or proprietary information learned, obtained, or acquired while employed by NeoMedia. Goins represents that he has no originals or copies of Company documents, and no other property belonging to NeoMedia, and Goins represents that he has not provided any Company documents to others. In the event that he does have any such copies, originals or property, Goins agrees to return to NeoMedia all originals and copies of Company documents, and all other property belonging to NeoMedia, including but not limited to, proprietary or confidential information of NeoMedia in his possession or control, including any property or information that Goins has provided to others. 3. MUTUAL RELEASES. The parties hereby mutually release each other, their past, present, and future agents, representatives, shareholders, principals, attorneys, affiliates, parent corporations, subsidiaries, officers, directors, employees, predecessors and successors and heirs, executors and assigns, from any and all legal, equitable or other claims, counterclaims from the beginning of the world to the date hereof, which are now known and arise out of, or which may, can, or shall arise out of, or which have or ever had arisen out of, or which could have arisen out of, Goins' employment with or separation from NeoMedia, including, without limitation, any and all claims or counterclaims for breach of contract, violations of Title VII of Civil Rights Act of 1964, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act of 1974, and all amendments thereto, violations of any other federal, state, local, and/or municipality whistle-blowing statutes or laws or fair employment statutes or laws, and violations of any other law, rule, regulation, or ordinance pertaining to employment, discrimination, wages, hours, or any other terms and conditions of employment and separation of employment, and any other claims or counterclaims, which have been, or could have been, asserted by any party hereto in any court, arbitration, or other forum involving the subject matter of this Release. Notwithstanding the foregoing, this Release does not apply to: 1) the obligations imposed by this Separation Agreement; 2) third party claims against either party. 4. ABATEMENT OF PROCEEDINGS. At the time of execution of this Agreement, the parties will request that the Court place this case on its administrative docket, without prejudice to any party, until further notice of the parties but in any case no later than January 21, 2003. If, on January 21, 2003, Goins has received every payment due him under this Agreement, the case shall then be dismissed pursuant to this Agreement. If Goins fails to receive any payment due him, Goins has the specific right to have this case placed back on the Court's docket. At that time Goins may seek to enforce the settlement agreement or reinstate his prior case, whichever Goins elects. The abatement of this matter in no way stops any pre-judgment interest from accruing to which Goins would be entitled if he obtained a judgment against any of the Defendants. 5. COOPERATION. Goins agrees to cooperate with NeoMedia as a witness in all matters and provide truthful testimony about which Goins has knowledge, including any necessary factual support for motions, as a result of Goins's position with NeoMedia and in which Goins's testimony is required by NeoMedia. NeoMedia will reimburse Goins for any out-of-pocket expenses he incurs while acting as a witness on behalf of NeoMedia, Goins, however, shall not receive any 10.19-2 additional compensation for his testimony as a witness on behalf of NeoMedia. This obligation to cooperate and to provide truthful testimony shall include, without limitation, the duty to provide in person, deposition or affidavit testimony, and the preparation therefore; and to travel to provide in person testimony. It shall also apply to and include any litigation, arbitration, alternative dispute resolution, mediation, or other dispute resolution proceeding. Should applicable legal or ethical rules bar any portion of such reasonable compensation, Goins shall nonetheless fulfill these duties to cooperate and to provide truthful testimony. 6. OPPORTUNITY TO SEEK COUNSEL. The parties represent that they have had an opportunity to retain legal counsel to represent them in connection with this matter, that they have consulted with legal counsel and have been advised of the legal effect and consequences of this Separation Agreement, that they have entered into this Separation Agreement knowingly, freely and voluntarily, and that they have not been coerced, forced, harassed, threatened or otherwise unduly pressured to enter into this Separation Agreement. The parties further agree that, other than the payments described in paragraphs. 1 (c), 1 (d), and 1 (e) above, each Party will be liable for his or its attorneys fees incurred in connection with this matter. 7. NO ADMISSIONS. This Separation Agreement is not and shall not in any way be construed as an admission by either party of any wrongful act or omission, or any liability due and owing, or any violation of any federal, state or local law or regulation. 8. FUTURE EMPLOYMENT. Goins agrees not to apply for, seek, or accept employment with NeoMedia or any affiliated entity at any time in the future. Should Goins seek employment with NeoMedia in the future and NeoMedia denies his employment, Goins agrees that such would not constitute retaliation in violation of any laws. 9. ENTIRE AGREEMENT. This Separation Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior negotiations, agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof. 10. AMENDMENTS AND MODIFICATIONS. This Separation Agreement may not be amended or modified except in writing signed by all parties, specifically stating that it is an Amendment to this Agreement. 11. DRAFTING. The parties acknowledge that this Separation Agreement is a product of joint drafting efforts, and shall not be construed against any one party as the drafter. 12. GOVERNING LAW. This Separation Agreement, and all of the terms and conditions hereof, shall be construed and interpreted in accordance with the laws of the State of Florida. 13. SEVERABILITY. The invalidity or unenforceability of any particular provision of this agreement shall not affect the other provisions hereto and this Separation Agreement shall be construed in all respects as though such invalid or unenforceable provisions were omitted. 14. WAIVER. The waiver by any party hereto of a breach of any provision of this Separation Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. 15. BREACH. In the event that a party to this Agreement breaches any provision herein, the other party may seek redress from the Court. The Court shall retain jurisdiction to enforce this Agreement while the case remains on the Administrative docket pending final payment. 16. ATTORNEYS' FEES. In the event that any provision of this Separation Agreement must be enforced, the prevailing party shall be entitled to all reasonable attorneys' fees and costs. 17. DUPLICATES. This original Agreement or a duplicate copy of the original Agreement shall suffice in an action to enforce any of the terms and conditions herein. 18. COUNTERPARTS. If this Agreement is executed in counterparts, each counterpart shall be deemed an original and all counterparts so executed shall constitute one Agreement, binding on all of the parties hereto, not withstanding that all of the parties are not signatory to the same counterpart. 10.19-3 19. PRESS RELEASE. The parties agree that NeoMedia will draft a press release regarding Goins's termination of employment and the resolution of this lawsuit. Such press release shall be submitted to Goins for review prior to release, and any reasonable changes requested by Goins shall be made. Should the parties be unable to agree on the text of the press release, the draft press release shall be given to counsel for the parties in order to draft a mutually acceptable press release. In no event shall a press release concerning Goins and/or this lawsuit be released without the prior approval of Goins. 20. DISMISSALS. Within ten (10) days of final payment being made to Goins pursuant to this Agreement, Goins shall cause to be dismissed any and all actions he caused to be instituted against NeoMedia, Fritz, Keil and Lopiano. This shall include that case known as WILLIAM F. GOINS V. NEOMEDIA TECHNOLOGIES, INC., CHARLES W. FRITZ, JAMES J. KEIL AND JOHN A. LOPIANO, Case No. 2001 CA 5813 NC. Until such time as final payment is made to Goins pursuant to this Agreement, the parties shall request that the Court place this case on the administrative docket pending settlement. The parties agree to execute any documents necessary to make such a request of the Court. This provision shall also include the withdrawal of any charge of discrimination or retaliation filed by Goins. No action on the charges shall be taken by Goins. Goins represents and warrants to NeoMedia that, other than the pending actions or charges identified in this Agreement, he has no other pending charges, complaints, or claims or actions which he brought against NeoMedia, or any existing or former employee, agent, or representative of NeoMedia before signing this Agreement. In addition, Goins represents that he has not assigned to any person or entity any claim or action he has, or may have, against NeoMedia. Finally, within ten (10) days of final payment being made to Goins pursuant to this Agreement, Goins shall cause to be withdrawn any and all liens he may have caused to be filed against any and all patents held by NeoMedia. IN WITNESS THEREOF, the parties hereto acknowledge, understand and agree to this Separation Agreement. The parties understand and intend to be bound by all of the clauses contained in this document and further certify that they have received signed copies of this Separation Agreement. William F. Goins NeoMedia Technologies, Inc. /s/ William F. Goins - ------------------------------- By: /s/ Charles T. Jensen --------------------------------- Its: Chief Financial Officer -------------------------------- Charles W. Fritz, as an individual James J. Keil, as an individual /s/ Charles W. Fritz /s/ James J. Keil - -------------------------------- -------------------------------------- John A. Lopiano, as an individual /s/ John A. Lopiano - --------------------------------- 10.19-4 CONTINUING GUARANTY For the purpose of inducing WILLIAM F. GOINS, (the "Obligee") to enter into that certain Separation Agreement dated May 15th, 2002 (the "Separation Agreement") with NEOMEDIA TECHNOLOGIES, INC., a Florida corporation (the "Obligor"), CHARLES W. FRITZ AND JAMES J. KEIL (collectively, the "Guarantors") do hereby jointly and severally unconditionally guaranty to Obligee that the Obligor will duly and punctually pay and perform the Obligor's obligations and liabilities under paragraph 1(b) of the Separation Agreement which arise after September 15, 2002 for the payment of an amount not to exceed $40,000.00 due Obligee (collectively the "Obligations"). 1. The obligations of Guarantors hereunder are independent of the Obligations of Obligor and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Obligor or whether Obligor may be joined in any such action or actions. 2. Guarantors waive any right to require Obligee to: (a) proceed against Obligor, (b) proceed against or exhaust any security held from Obligor; or (c) pursue any other remedy in Obligee's power whatsoever. Guarantors waive any defense arising by reason of any disability or other defense of Obligor or by reason of the cessation from any cause whatsoever of the liability of Obligor, except the defense of payment, and until all Obligations of Obligor to Obligee under the Separation Agreement shall have been satisfied and paid in full, Guarantors shall have no right to subrogation, and waive any night to enforce any remedy which Obligee now has or may hereafter have against Obligor, and waives any benefit of, and any right to participate in any security now or hereafter held by Obligee. Guarantors waive all presentrnents, demands for performance, notices of nonperformance, protests, notices of dishonor, and notices of acceptance of this guaranty and of the existence, creation or incurring of new or additional Obligations. Guarantors covenant to cause Obligor to maintain and preserve the enforceability of any instruments -now or hereafter executed in favor of the Obligee, and to take no action of any kind which might be the basis for a claim that Guarantors have any defense hereunder other than satisfaction and payment in full of all Obligations of Obligor to Obligee. Guarantors waive any right or claim of night to cause a marshaling of Obligor's assets or to require Obligee to proceed against Guarantors in any particular order. No delay on the part of Obligee in the exercise of any right, power or privilege under the documentation with Obligor or under this guaranty shall operate as a waiver of any such privilege, power or right. 3. In addition to all liens upon, and rights of setoff against the monies, securities or other property of Guarantors given to Obligee by law, Obligee shall have a lien upon and a night of setoff against all monies, securities and other property of Guarantors now or hereafter in the possession of or on deposit with Obligee, whether held in a general or special account of deposit, or for safekeeping or otherwise; and every Such lien and right of setoff may be exercised without demand upon or notice to Guarantors. No act or conduct on the part of the Obligee, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, shall operate as a waiver of such right; and every right of setoff and lien shall continue in full force and effect until such night of setoff or lien is specifically waived or released by an instrument in writing executed by Obligee. 4. Upon the default of Obligor with respect to any of its Obligations or liabilities to Obligee, or in case Obligor or Guarantors shall become insolvent or make an assignment for the benefit of creditors, or if a petition in bankruptcy or for corporate reorganization or for an arrangement shall be filed by or against Obligor or Guarantors, or in the event of an appointment of a receiver for Obligor or Guarantors or their properties, or in the event that a judgment is obtained or warrant of attachment issued against Obligor or Guarantors, all or any part of the Obligations and liabilities of the Obligor and/or Guarantors to Obligee, whether direct or contingent, and of every kind and description, shall, at the option of the Obligee, become immediately due and payable and shall be satisfied by Guarantors. If Obligor falls to satisfy any of its obligations to Obligee, Obligee shall provide notice to Guarantors that Guarantors are required to satisfy Obligors' outstanding obligations to Obligee. After receipt of such notice, Guarantors shall have ten (10) days to satisfy Obligor's outstanding Obligations to Obligee. Such obligation by Guarantors, however, shall be limited to only those payments Obligor has actually failed to timely pay to Goins as required under the Separation Agreement, without acceleration. 5. Guarantors acknowledge that Obligee has been induced by this guaranty to make the make the Separation Agreement heretofore described, and this guaranty shall, without further reference or assignment, pass to and may be relied upon and enforced by, any successor, participant or assignee of Obligee in and to any liabilities or Obligations of Obligor. 6. This guaranty shall, for all purposes, be governed by and construed in accordance with, the laws of the State of Florida 7. All of Guarantors' obligations and responsibilities under this Guaranty are joint and several. 10.19-5 8. This guaranty shall immediately terminate upon the full, or pro rata partial, satisfaction of the Obligor's payment obligations under the Separation Agreement, as described in this Guaranty. 9. In the event that any provision of this Continuing Guaranty must be enforced, the prevailing party shall be entitled to all reasonable attorneys' fees and costs. 10. Dated effective as of May 15th, 2002. WITNESSES: GUARANTOR: Charles W. Fritz - ----------------------------------- As to Charles W. Fritz James J. Keil - ----------------------------------- As to James J. Keil 10.19-6 -----END PRIVACY-ENHANCED MESSAGE-----