-----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, FxrJp9cH3lOZldxHiKusIQPMOyXuypgljrSTQKOFUq5XI9gkQ85xPkHmb5KKhUdP YWoFMa7JFtjfYMtRzyReaA== 0001005477-02-001787.txt : 20020424 0001005477-02-001787.hdr.sgml : 20020424 ACCESSION NUMBER: 0001005477-02-001787 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20020424 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-65146 FILM NUMBER: 02620139 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 S-1/A 1 b317965_s1a.txt REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on April 24, 2002 SEC Registration No. 1022701 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT ON FORM S-1 UNDER THE SECURITIES ACT OF 1933 NEOMEDIA TECHNOLOGIES, INC. (Name of issuer in its charter) Delaware 7373 36-3680347 - ------------------------------- ------------------- ------------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
2201 Second Street, Suite 600 Fort Myers, Florida 33901 941-337-3434 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Charles W. Fritz 2201 Second Street, Suite 600 Fort Myers, Florida 33901-3083 941-337-3434 941-337-3668 Fax (Name, address, including zip code, and telephone number, including area code, of agent for service) With copies to: Robert Steven Brown, Esq. Charles W. Fritz Amos S. Edelman, Esq. Charles T. Jensen Reitler Brown LLC NeoMedia Technologies, Inc. 800 Third Avenue, 21st Floor 2201 Second Street, Suite 600 New York, New York 10022 Fort Myers, Florida 33901-3083 (212) 209-3050 (941) 337-3434 (212) 371-5500 Fax (941) 337-3668 Fax - ------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE See next page. Approximate date of commencement of proposed sale to the public: from time to time following the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. CALCULATION OF REGISTRATION FEE
Title of Shares Amount to be Proposed Maximum Proposed Maximum Amount of To be Registered Registered Price Per Unit Aggregate Offering Price Registration Fee ---------------- ---------- -------------- ------------------------ ---------------- Common Stock/(1)/ 27,541,350 $0.130 (3) $3,580,400.00 $ 895.00 Common Stock/(1)/ 1,232,510 $0.165 (4) $ 203,400.00 $ 51.00 ------------- ------------- --------- 28,773,860 $3,783,800.00 $ 946.00 ============= ============= =========
/(1)/ Shares of the common stock, par value $0.01 per share, of NeoMedia Technologies, Inc. /(2)/ Represents 26,956,437 shares of common stock, and 1,817,423 shares of common stock issuable upon exercise of warrants and options. The shares of common stock offered hereby are being registered for resale by the holders thereof. /(3)/ In accordance with Rule 457(c), the price represents the average of the high and low sale prices of the registrant's common stock on November 13, 2001 on the Nasdaq SmallCap Market /(4)/ In accordance with Rule 457(c), the price represents the average of the high and low sale prices of the registrant's common stock on April 4, 2002 on the NASDAQ SmallCap Market. Estimated solely for purposes of computing the registration fee pursuant to Rule 457. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there by any sale of these securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, dated April 22, 2002 PROSPECTUS 28,773,860 Shares NeoMedia Technologies, Inc. Common Stock The stockholders of NeoMedia Technologies, Inc. identified on page 45 of this prospectus may offer and sell the shares covered by this prospectus from time to time. The shares covered by this prospectus are comprised of 26,956,437 shares of our common stock outstanding on the date hereof, including 3,544,074 shares held by some of our affiliates, and 1,817,423 shares of our common stock issuable upon the exercise of outstanding warrants. Except as otherwise described in this prospectus, the selling stockholders will receive all of the proceeds from the sales of the shares and will pay all commissions and selling expenses, if any, on the resale of these shares. We have agreed to pay the expenses of registration of the sale of these shares. We will receive the proceeds from the exercise of the warrants for 1,817,423 of the shares registered in this offering if and when such warrants are exercised, the aggregate proceeds of which are expected to amount to at least $218,090. We also expect 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 us as primary consideration for 19,000,000 shares of our common stock, selling at $0.17 per share, offered by us in a private placement and registered for public sale in this offering, and for which $0.01 per share, or $190,000 in aggregate, was paid in cash. Our common stock trades on the Nasdaq Small Cap Market under the symbol "NEOM". On April 4, 2002, the last reported sale price of our common stock on the Nasdaq Small Cap Market was $0.17 per share. Beginning on page 12, we have listed several Risk Factors which you should consider. You should read the entire prospectus carefully before you make your investment decision. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - ------------------------------------------------------------------------------- The date of this prospectus is April 22, 2002. TABLE OF CONTENTS Page No. Prospectus Summary.......................................................4 Cautionary Note Regarding Forward Looking Statement.....................11 Risk Factors............................................................12 Use Of Proceeds.........................................................22 Capitalization..........................................................23 Market For Our Common Stock.............................................24 Dividend Policy.........................................................25 Selected Financial Data Sheet...........................................26 Management's Discussion And Analysis Of Financial Condition And Results Of Operations...................................28 Business................................................................33 Management..............................................................41 Principal And Selling Stockholders......................................51 Related Party Transactions..............................................55 Description Of Securities...............................................56 Shares Eligible For Future Sale.........................................59 Plan Of Distribution....................................................60 Legal Matters...........................................................61 Experts.................................................................61 Changes In And Disagreements With Accountants On Accounting And Financial Disclosures..................................61 Where You Can Find More Information.....................................62 PROSPECTUS SUMMARY This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission. You should read both this prospectus and any prospectus supplement related to this prospectus together with the information described on page 69 under the heading "Where You Can Find More Information." You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents. The following summary highlights selected information from this prospectus and may not contain all the information that is important to you. To understand our business and this offering fully, you should read this entire prospectus carefully, including the Risk Factors beginning on page 12, and our financial statements and the related notes beginning on page F-1. When we refer in this prospectus to "NeoMedia," "we," "our," and "us," we mean NeoMedia Technologies, Inc., a Delaware corporation, together with our subsidiaries and our respective predecessors. When we refer in this prospectus to "common stock", we mean shares of the common stock, par value $0.01 per share, of NeoMedia Technologies, Inc. This prospectus contains forward-looking statements and information relating to NeoMedia. See "Cautionary Note Regarding Forward-Looking Statements" on page 11. NeoMedia Our Business We develop proprietary technologies that link physical information and objects to the Internet marketed under our "PaperClick(TM)" brand name and automate print production operations. We are structured as two distinct business units: Internet Switching Service and Consulting and Integration Services. NeoMedia Internet Switching Service (NISS), our physical world-to-Internet offerings, is our core business and is based in the United States, with development and operating facilities in Fort Myers, Florida. Application services develops and supports all of our physical world to Internet technology as well as its suite of application service provider services, including our linking "switch" and our application platforms. NISS also provides the systems integration resources needed to design and build custom customer solutions predicated on our infrastructure technology. NeoMedia Consulting and Integration Services (NCIS) is the original business line upon which we were organized. This unit resells client-server equipment and related software. The unit also provides general and specialized consulting services targeted at software driven print applications, and especially at process automation of production print facilities through its integrated document factory solution. NCIS also identifies prospects for custom applications based on our products and services. The operations are based in Lisle, Illinois. Our Products and Services Internet Switching Service Our primary focus is to develop and commercialize technologies and products that link physical print media and physical objects to the Internet, creating a common media space. As an innovator and pioneer in this industry, we have developed our proprietary PaperClick switching platform while obtaining four U.S. patents covering the convergence of the physical world and the Internet. NISS currently sells the following products: PaperClick(TM) switching service. PaperClick(TM) is a state-of-the-art application-switching platform that links physical objects to digital media through the use of scanned UPC, EAN, or custom PaperClick(TM) codes. This dynamic open solution serves a wide variety of customers in industrial, commercial, and educational applications. Intellectual Property Licensing. We hold four U.S. patents relating to the physical world-to-Internet marketplace. We intend to license this intellectual property portfolio to companies endeavoring to unlock the potential of this emerging market. To date, we have entered into such agreements with Digital:Convergence, A.T. Cross Company, and Symbol Technologies. During January 2002, we announced that we 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 us in seeking out potential licensees of our patent portfolio. 4 Our customers for our physical world-to-Internet offerings have included Amway, Solar Communications, Inc., NYCO Products Company, and two universities in Latin America. Consulting and Integration Services We provide equipment and software reselling and integration and automation consulting services, which allow our customers, including Fortune 500 companies, and large companies such as Ameritech, to integrate and maximize the performance of their existing equipment and software. Additionally, we offer data storage management solutions and consultancy consisting of tools and services that insure data integrity, efficiency, and accessibility. We also provide consulting services targeted at software-driven print applications and process automation of production print facilities. We add value to these services by offering system integration and encoding and code migration products incorporating proprietary technology. Also, we offer integrated document factory solutions, which are designed to assist larger financial service concerns such as banks, insurance companies, and brokerage firms, and help companies to manage high-volume printing of statements on a frequent basis. Our Markets Internet Switching Service Although we have been developing our physical world-to-Internet technology and offerings since 1996, the physical world-to-Internet market in which we compete is relatively new. In the past year, new technologies and concepts have emerged in the physical world-to-Internet space. We view the increased development of other products in this space as a validation of the physical world-to-Internet concept and believe that the increased promotion of these products and services by us and other companies in this space, including Digital:Convergence and AirClic, Inc., ("AirClic") will raise consumer awareness of this technology, resulting in a larger market. We believe that the versatility of our physical world-to-Internet technologies will provide us with a significant competitive advantage in the emerging market. We also believe that the significant portfolio of physical world-to-Internet technologies that we have developed over the last five years will provide a barrier to entry for most potential competitors. Consulting and Integration Services The technology and equipment resale business is becoming a commodity industry for products undifferentiated by value-added proprietary elements and services. Resale operations are also being compressed as equipment manufacturers consolidate their distribution channels. The largest competition, in terms of number of competitors, is for customers desiring systems integration, including the re-marketing of another party's products, and document solutions. These competitors range from local, small privately held companies to large national and international organizations, including large consulting firms. A large number of companies act as re-marketers of another party's products, and therefore, the competition in this area is intense. In some instances, we, in acting as a re-marketer, may compete with the original manufacturer. Recent Sales and Marketing Developments In January 2001, we entered into an agreement with A.T. Cross Company, a major international manufacturer of fine writing instruments and pen computing products. Cross licensed the rights under our physical world-to Internet patents for personal portable scanning devices used to link bar codes on documents and other physical consumer goods to corresponding Internet content. Cross pays us a royalty per device sold for license rights granted under this agreement. In February 2001, we won best of show at the Internet World Wireless 2001 in the commerce category. According to the IWW announcement, this award exemplifies our outstanding achievements as a business leader in the Internet marketplace, and represents broad industry recognition and appreciation of our achievements. In May 2001, we entered into an agreement with Symbol Technologies, Inc., granting Symbol a worldwide, non-exclusive license of our patents surrounding the sale and use of scanning devices used in physical world-to-Internet technologies. 5 In March 2001, we purchased all of the net assets of Qode.com, Inc. (Qode), except for cash. In consideration for these assets, we issued 274,699 shares of our common stock, valued at $1,359,760. On August 31, 2001, we signed a non-binding letter of intent to sell the assets and liabilities of the Qode business unit to The Finx Group, Inc., a holding company based in Elmsford, NY. The final contract is contingent upon the completion of due diligence and definitive terms and conditions stated in the letter of intent. We intend to sell the assets and liabilities of Qode, which consist of all inventory, equipment and the ownership and operation of the comprehensive universal internet database along with the corresponding patents. The Finx Group will assume $620,000 in Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of the Finx Group. We also will be granted rights to use and sell Qode services, and Finx will pay us up to $5 million in affiliate revenues over the next five years. In January 2002, we entered into an agreement with the law firm of Baniak Pine and Gannon, under which the firm will seek potential licensees of our patent portfolio. Our Strategy Internet Switching Service Our objective is to position NeoMedia to take advantage of an anticipated surge in consumer interest in physical world-to-Internet technologies by licensing a high-margin switching solution (PaperClick(TM)) to emerging developers of this space, as well as traditional businesses with offerings related to commerce, publishing, e-learning, and others. We will also aggressively seek to license our intellectual property portfolio to companies endeavoring to tap the potential of this emerging market. Consulting and Integration Services Our objective in this industry is to obtain greater market share by differentiating our offerings with value-added proprietary elements and services. Proprietary products, such as our encoders, systems integration services, and integrated document factory solutions, offer a competitive value-add to our consulting and integration business. Additionally, we plan to continue to add customers to our storage area network (SAN) solution, which is a data storage management tool that insures data integrity, efficiency and accessibility. This division has unique offerings, which, to the extent that they meet market needs, offer the potential for growth in this industry. For the years ended December 31, 2001, 2000, and 1999, one customer, Ameritech Services, Inc., accounted for 36.6%, 29.9%, and 23.9%, respectively, of our revenue. We have no written agreement with Ameritech Services to prevent termination of this commercial relationship. The loss of this customer would materially adversely affect the business prospects, financial condition, and results of operations of our consulting and integration segment. For these reasons, we are seeking, and continue to seek, to diversify our sources of revenue. Our History and Structure We were incorporated as Dev-Sys, Inc. under the laws of the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech Associates, Inc., NeoMedia's predecessor, which was organized in Illinois in December 1989. In March 1996, Dev-Tech's common stock was split, with an aggregate of 2,551,120 shares of common stock being issued in exchange for the 164 then issued and outstanding shares of common stock. On August 5, 1996, we acquired all of the shares of Dev-Tech in exchange for the issuance of shares of our common stock to Dev-Tech's stockholders. In November 1996, a reverse stock split was effected whereby each NeoMedia stockholder received 0.90386 shares of common stock for each one share of common stock then owned. On October 4, 1996, we changed our name to NeoMedia Technologies, Inc. We also have the following wholly-owned subsidiaries: NeoMedia Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A., organized under the laws of Guatemala; NeoMedia Technologies of Canada, Inc., organized under the laws of Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH, organized under the laws of Austria; NeoMedia Technologies Holding Company B.V., organized under the laws of the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V., organized under the laws of Mexico; NeoMedia Migration de Mexico S.A. de C.V., organized under the laws of Mexico; NeoMedia Technologies do Brazil Ltd., organized under the laws of Brazil, and NeoMedia Technologies UK Limited, organized under the laws of the United Kingdom. In November, 1996, we acquired the migration services company, Dev-Tech Migration, Inc., an Illinois corporation and an affiliate of Dev-Tech Associates, Inc., our predecessor, through a tax-free merger of Dev-Tech Migration into our subsidiary, NeoMedia Migration, Inc. In return, we issued 827,525 shares of our common stock to Charles W. Fritz, the sole stockholder of Dev-Tech Migration and one of our principal stockholders, officers and directors. 6 On September 25, 1997, we purchased all of the stock of Allegiant Legacy Solutions, Inc., a software development company specializing in Year 2000 bug identification and correction technology ("Allegiant"), from George G. Luntz and Gerald L. Willis. In return, Mr. Luntz and Mr. Willis received an aggregate of 1,070,000 shares of our common stock. The number of shares of NeoMedia's common stock received by Mr. Luntz and Mr. Willis was determined through arms-length negotiations between the parties. In connection with the acquisition of Allegiant, we entered into an employment agreement with Mr. Luntz and entered into a consulting agreement with Mr. Willis, both of which have been terminated. On December 2, 1997, Allegiant was merged into NeoMedia. On March 1, 2001, we purchased all of the net assets of Qode.com, Inc. (Qode), except for cash. In consideration for these assets, we issued 274,699 shares of common stock, valued at $1,359,760. Additionally, we placed in escrow 1,676,500 shares of our 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. On August 31, 2001, we signed a non-binding letter of intent to sell the assets and liabilities of our Ft. Lauderdale-based Qode business unit, which we acquired in March 2001, to The Finx Group, Inc., a holding company based in Elmsford, NY. The final contract is contingent upon the completion of due diligence and definitive terms and conditions stated in the letter of intent. We intend to sell the assets and liabilities of Qode, which consist of all inventory, equipment and the ownership and operation of the comprehensive universal internet database along with the corresponding patents. The Finx Group will assume $620,000 in Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of the Finx Group. We also will be granted rights to use and sell Qode services, and Finx will pay us up to $5 million in affiliate revenues over the next five years. As of April 4, 2002, the transaction had not been consummated due to the encumbrance of certain of our Qode-related assets under the Company's note payable to Airclic, Inc. The Finx group has taken possession of certain Qode system assets and has taken over ongoing expenses related to the business unit. Our principal executive offices are located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. Our general telephone number is (941) 337-3434. Our Web site is located at www.neom.com. Information contained on our Web site is not part of this prospectus. ----------- Unless otherwise stated, the information in this prospectus does not give effect to: - - The proposed sale of certain of the assets and liabilities purchased by NeoMedia from Qode.com, Inc. which is currently the subject of an executed non-binding letter of intent; - - Any issuances of shares of common stock or the issuance, exercise, exchange or conversion of options, warrants or other rights or debt or equity securities directly or indirectly exercisable, exchangeable or convertible into shares of common stock after the effective date of this registration statement. Unless otherwise stated, the information in this prospectus reflects any stock splits to date. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7 The Offering Common stock offered........................ 28,773,860 shares Common stock outstanding immediately prior to this offering............ 40,315,153 shares Common stock outstanding immediately following this offering.......... 43,774,002 shares Use of proceeds...................... The shares of common stock offered pursuant to this registration are held by certain of our stockholders identified in "Principal and Selling Stockholders", on page 45. We will not receive any proceeds from the sale of the shares offered hereby, except an amount not anticipated to exceed $3,040,000, plus interest at a rate of 6% per annum, in repayment of the principal and interest of promissory notes issued to us as primary consideration for the issuance of 19,000,000 shares of common stock, and the exercise price of warrants exercisable for shares of common stock offered pursuant to this registration, which proceeds are not expected to exceed $500,000. Nasdaq Small Cap Market Trading symbol.................. "NEOM" Risk factors......................... An investment in our common stock is highly speculative and involves a high degree of risk. You should read the "Risk Factors" section beginning on page 12. 8 Summary Consolidated Financial Information The following selected statements of operations data for the years ended December 31, 1997 and 1998 and the selected balance sheet data as of each of December 31, 1997 and 1998, are derived from our consolidated financial statements and related notes not included elsewhere in this prospectus audited by KPMG LLP, our former independent auditors. See "Changes in and Disagreements with Accountants on Accounting and Financial Disclosures", on page 54. The following selected statements of operations data for the years ended December 31, 1999 and 2000, and the selected balance sheet data as of each of December 31, 1999 and 2000, are derived from our consolidated financial statements and notes included elsewhere in this prospectus audited by Arthur Andersen LLP, our former independent auditors. The following selected statements of operations data for the year ended December 31, 2001, and the selected balance sheet data as of December 31, 2001, are derived from our financial statements and notes included elsewhere is this prospectus audited by Stonefield Josephson, Inc., our current independent auditors. The results of operation for any interim period are not necessarily indicative of the results for the remainder of the year or to be expected for the entire year. Some significant assumptions included in the data presented below are as follows: - December 31, 2001 numbers include a loss from operations of discontinued Qode business unit of $3.6 million and a loss on disposal of discontinued Qode business unit of $3.1 million; - December 31, 2001 numbers reflect a loss on impairment of assets of $2.9 million relating to the write-off of assets employed in our MLM/Affinity product line. - December 31, 2001 numbers reflect the second quarter write-off of approximately $7.4 million of assets and liabilities related to the Digital:Convergence license contract. The write-off is reflected as an operating expense in the consolidated statement of operations for the year ended December 31, 2001 contained herein; and - December 31, 2001 numbers do not reflect working capital or stated capital which we expect to receive upon the exercise of outstanding warrants and other options and the payment of promissory notes issued as consideration for the purchase of up to 19,000,000 shares of our common stock. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Statement of Operations Data:
Year Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 1998 1997 (Actual) (Actual) (Actual) (Actual) (Actual) (in thousands, except shares data) Net sales ................................. $ 8,142 $ 27,565 $ 25,256 $ 23,478 $ 24,434 Operating income/(loss) ................... (18,789) (5,583) (10,246) (11,616) (5,904) Total operating expenses .................. 16,706 33,148 35,502 35,094 30,338 Digital Convergence write-off ............. 7,354 -- -- -- -- Loss on impairment of assets .............. 2,871 -- -- -- -- Interest expense/(income) ................. (21) (174) 226 (121) 147 Loss from operations and disposal of discontinued operations ................... (6,701) -- -- -- -- Net income/(loss) ......................... (25,469) (5,409) (10,472) (11,495) (5,973) Net income/(loss) per weighted average common share outstanding (basic and diluted) .................................. ($1.55) ($0.39) ($1.01) ($1.34) ($0.90) Weighted average common shares outstanding (basic and diluted) ....................... 16,410,246 13,931,104 10,377,478 8,560,849 6,615,107
9 Balance Sheet Data
At December 31, ----------------------------------------------------------- 2001 2000 1999 1998 1997 (Actual) (Actual) (Actual) (Actual) (Actual) Cash .......................... $ 134 $ 4,453 $ 2,460 $ 1,350 $ 10,283 Working capital ............... (5,163) 8,426 (1,667) (453) 12,112 Current assets ................ 3,749 15,868 7,294 8,115 17,870 Total assets .................. 9,039 40,594 13,657 12,630 19,799 Short-term debt ............... 899 137 625 577 201 Long-term debt, less current portion ....................... 390 539 676 801 915 Total stockholders' equity .... (263) 19,110 4,020 3,261 13,126
10 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements and information relating to NeoMedia. We intend to identify forward-looking statements in this prospectus by using words such as "believes," "intends," "expects," "may," "will," "should," "plan," "projected," "contemplates," "anticipates," "estimates," "predicts," "potential," "continue," or similar terminology. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. Some, but not all, of the factors that may cause such a difference include those which we discuss in the Risk Factors section of this prospectus beginning on page 12, including our ability to secure additional funding, increase our customer base, develop and maintain strategic partnerships and licensing arrangements, develop our technology, respond to competitive developments, or comply with government regulations. 11 RISK FACTORS Investing in our shares of common stock involves a high degree of risk. Before purchasing our shares of common stock, you should carefully consider the risks described below in addition to the other information in this prospectus. Our business, prospects, financial condition, and results of operations may be materially and adversely affected due to any of the following risks. The trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. Risks Specific To NeoMedia Currently Pending Legal Actions Threaten To Divest Us Of Critical Intellectual Property On September 6, 2001, AirClic filed suit against us in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, the accelerated repayment of a $500,000 loan it advanced to us under the terms of a letter of intent entered into between AirClic and us. The letter of intent was subsequently abandoned on the basis of our alleged breach of certain representations made by us in the promissory note issued by us to AirClic in respect of such advance. See, "Business - Legal Proceedings". The note issued by us in respect of AirClic's $500,000 advance is secured by substantially all of our property, including our core physical world-to-Internet technologies. If we are deemed to have defaulted under such note, and we do not pay the judgment, AirClic, which is one of our key competitors, could acquire our core intellectual property and other assets, which would have a material adverse effect on our business, prospects, financial condition, and results of operations. We are vigorously defending this claim and have interposed counterclaims against AirClic. The lawsuit is in its preliminary stages and, as such, at this time it is difficult to assess the outcome. Whether or not AirClic is successful in asserting its claims that we breached certain representations made by us 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 us, payment of the note and related interest would have a material adverse effect on our financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". If we fail to pay such note, AirClic could proceed against our intellectual property and other assets securing the note which would have a material adverse effect on our business, prospects, financial condition, and results of operations. We are aggressively seeking bridge financing to enable us to pay such principal and interest as remains under the note following the resolution of our counterclaims against AirClic. See "Risk Factors - Risks Specific to NeoMedia - We Cannot Predict Our Capital Needs And We May Not Be Able To Secure Additional Financing". AirClic has also filed suit against us in the United States District Court for the Eastern District of Pennsylvania. In this second action, AirClic seeks a declaration that certain core intellectual property securing the note issued by us to AirClic, some of which is patented and others for which a patent application is pending, is invalid and in the public domain. Any declaration that our core patented or patentable technology is non-protectable and in the public domain would have a material adverse effect on our business, prospects, financial condition, and results of operations. We are vigorously defending this second action as well. See, "Risk Factors - Risks Specific to NeoMedia - We May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable For Infringing The Intellectual Property Rights Of Others". Our Shares May Be De-Listed From Trading On The Nasdaq SmallCap Market, Which May Have A Material Adverse Effect On Your Ability To Resell Your Shares Or Obtain Accurate Price Quotations On March 11, 2002, we received a Nasdaq Staff Determination stating that, as of December 31, 2001, we 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, our shares were subject to de-listing from such market. We have requested a hearing before the Nasdaq Listing Qualifications Panel to review the Staff Determination. There can be no assurance that such panel will grant our request for continued listing of our common stock on the Nasdaq SmallCap Market. If our shares are de-listed, trading, if any, of our common stock would then be conducted in the over-the-counter market on the OTC Bulletin Board established for securities that do not meet the Nasdaq SmallCap Market listing requirements, or in what are commonly referred to as the "pink sheets". In such circumstance, your ability to resell shares of our stock, obtain accurate or timely price quotations on our shares, and, potentially, our ability to sell shares for our own account in order to raise equity financing would be materially adversely affected. 12 We Have Had A Retained Deficit; We Anticipate Future Losses We have incurred substantial losses since our inception, and we anticipate continuing to incur substantial losses for the foreseeable future. We incurred a loss of $25,469,000 in the year ended December 31, 2001, $5,409,000 in the year ended December 31, 2000, $10,472,000 in the year ended December 31, 1999, $11,495,000 in the year ended December 31, 1998, $5,973,000 in the year ended December 31, 1997, and $3,075,000 in the year ended December 31, 1996. Our accumulated losses were approximately $63,344,000 on December 31, 2001. As of December 31, 2001 and December 31, 2000, we had a working capital (deficit) of approximately $(5,163,000) and $8,426,000, respectively. We had stockholders' equity of $(263,000) and $19,110,000 at December 31, 2001 and December 31, 2000, respectively. See our financial statements and the related notes. We generated revenues of $8,142,000 for the year ended December 31, 2001 and $27,565,000 for the year ended December 31, 2000. In addition, during the year ended December 31, 2001 and the year ended December 31, 2000, we recorded negative cash flows from operations of $5,202,000 and $6,775,000, respectively. To succeed, we must develop new client and customer relationships and substantially increase our revenue derived from improved products and additional value-added services. We have expended and will continue to expend resources to develop and improve our products, increase our value-added services and to market our products and services. These development and marketing expenses must be incurred well in advance of the recognition of revenue. As a result, we may not be able to achieve or sustain profitability. Our Auditors Have Qualified Their Report On Our Financial Statements With Respect To Our Ability To Continue As A Going Concern The report of Stonefield Josephson, Inc., our current independent auditors, with respect to our financial statements and the related notes for the year ended December 31, 2001, indicates that, at the date of their report, we had suffered recurring losses from operations and our current cash position raised substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes. The report of Arthur Andersen LLP, our former independent auditors, with respect to our financial statements and the related notes for the years ended December 21, 2000 and 1999, indicates that, at the date of their report, we had suffered recurring losses from operations and our current cash position raised substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes. Because The Physical World - to - Internet Market In Which We Operate Has Existed For A Short Period Of Time, There Is Limited Information Upon Which Investors Can Evaluate Our Business The physical world-to-Internet market in which we operate is a recently developed market. Further, we have conducted operations in this market only since March 1996. Consequently, we may be deemed to have a relatively limited operating history upon which you may base an evaluation of our primary business and determine our prospects for achieving our intended business objectives. To date, we have sold our physical world-to-Internet products to only 12 companies. Further, Digital:Convergence, our primary customer for our physical world-to-Internet products, is facing pressing financial difficulties and is presently being sued by us for default on a promissory note issued to us in lieu of payment. See "Business - Other Recent Developments - Digital:Convergence Corporation Relationship". We are prone to all of the risks inherent to the establishment of any new business venture, including unforeseen changes in our business plan. You should consider the likelihood of our future success to be highly speculative in light of our limited operating history in our 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, we must, among other things, - maintain and increase our client base; - implement and successfully execute our business and marketing strategy; - continue to develop and upgrade our products; - continually update and improve our service offerings and features; - respond to industry and competitive developments; and - attract, retain, and motivate qualified personnel. We may not be successful in addressing these risks. If we are unable to do so, our business, prospects, financial condition, and results of operations would be materially and adversely affected. 13 Fluctuations In Our Operating Results May Affect Our Stock Price As a result of the emerging and evolving nature of the markets in which we compete, as well as the current nature of the public markets and our current financial condition, we believe that our operating results may fluctuate materially, as a result of which quarter-to-quarter comparisons of our results of operations may not be meaningful. If in some future quarter, whether as a result of such a fluctuation or otherwise, our results of operations fall below the expectations of securities analysts and investors, the trading price of our common stock would likely be materially and adversely affected. You should not rely on our results of any interim period as an indication of our future performance. Additionally, our quarterly results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may cause our quarterly results to fluctuate include, among others: - our ability to retain existing clients and customers; - our ability to attract new clients and customers at a steady rate; - our ability to maintain client satisfaction; - our ability to motivate potential clients and customers to acquire and implement new technologies; - the extent to which our products gain market acceptance; - the timing and size of client and customer purchases; - introductions of products and services by competitors; - price competition in the markets in which we compete; - the pricing of hardware and software which we resell or integrate into our products; - the level of use of the Internet and online services and the rate of market acceptance of physical world-to-Internet marketing; - our ability to upgrade and develop our systems and infrastructure in a timely and effective manner; - our ability to attract, train, and retain skilled management, strategic, technical, and creative professionals; - the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations, and infrastructure; - unanticipated technical, legal, and regulatory difficulties with respect to use of the Internet; and - general economic conditions and economic conditions specific to Internet technology usage and electronic commerce. We Are Uncertain Of The Success Of Our Internet Switching Services Business Unit And The Failure Of This Unit Would Negatively Affect The Price Of Our Stock. We provide products and services that provide a seamless link from physical objects, including printed material, to the Internet. We can provide no assurance that: - this Internet Switching Services business unit will ever achieve profitability; - our current product offerings will not be adversely affected by the focusing of our resources on the physical world-to-Internet space; or - the products we develop will obtain market acceptance. In the event that the Internet Switching Services business unit should never achieve profitability, that our current product offerings should so suffer, or that our products fail to obtain market acceptance, our business, prospects, financial condition, and results of operations would be materially adversely affected. We Depend On The Resale Of Software And Equipment For Revenue And A Reduction In These Sales Would Materially Adversely Affect Our Operations And The Value Of Our Stock. During the years ended December 31, 2001, 2000, 1999, 1998, 1997 and 1996, we derived 73%, 66%, 78%, 72%, 78%, and 83%, respectively, of our 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 our business, prospects, financial condition, and results of operations, as well as our stock price. We can provide no assurance that: - the market for our products and services will continue; - we will be successful in marketing these products due to competition and other factors; - we will continue to be able to obtain short-term financing for the purchase of the products that we resell; or - our relationship with companies whose products and services we sell will continue, including our relationship with Sun Microsystems Computer Company. Further, the technology and equipment resale business is becoming a commodity industry for products undifferentiated by value-added proprietary elements and services. A large number of companies act as re-marketers of another party's products, and therefore, the competition in this area is intense. Resale operations are also being compressed as equipment manufacturers consolidate their distribution channels. In some instances, we, 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 our business, prospects, financial condition, and results of operations. 14 A Large Percentage Of Our Assets Are Intangible Assets, Which Will Have Little Or No Value If Our Operations Are Unsuccessful. At December 31, 2001, approximately 48% of our total assets were intangible assets, consisting primarily of rights related to our patents and other intellectual property. If our operations are unsuccessful, these assets will have little or no value, which will materially adversely affect the value of our stock and the ability of our stockholders to recoup their investments in our capital stock. Our Marketing Strategy Has Not Been Tested And May Not Result In Success To date, we have conducted limited marketing efforts directly. All of our marketing efforts have been largely untested in the marketplace, and may not result in sales of our products and services. To penetrate the markets in which we compete, we will have to exert significant efforts to create awareness of, and demand for, our products and services. With respect to our marketing efforts conducted directly, we intend to expand our sales staff after this offering, upon receipt of the remaining payment for shares subject to the promissory notes and warrants issued by selling stockholders in respect of 19,000,000 shares of common stock registered in this offering. Our failure to further develop our marketing capabilities and successfully market our products and services would have a material adverse effect on our business, prospects, financial condition, and results of operations. We Rely On Internally Developed Systems Which Are Inefficient, Which May Put Us At A Competitive Disadvantage We use internally developed technologies for a portion of our systems integration services, as well as the technologies required to interconnect our clients' and customers' physical world-to-Internet systems and hardware with our own. As we 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 us at a competitive disadvantage when compared to competitors with more efficient systems. We intend to upgrade and expand our systems and technologies and to integrate newly-developed and purchased technologies with our own in order to improve the efficiency of our systems and technologies, although we are unable to predict whether these upgrades will improve our competitive position when compared to our competitors. We Have Limited Human Resources; We Need To Attract And Retain Highly Skilled Personnel; And We May Be Unable To Effectively Manage Our Growth With Our Limited Resources Our future success will depend in large part on our 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 we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. Due to our current working capital deficiency, we are currently unable to afford a directors' and officers' liability insurance policy with a term of greater than six months. Our existing policy expires on July 25, 2002. To the extent that sufficient resources are available, we intend to maintain a directors' and officers' liability insurance policy at all times. See "Management - Director and Officer Liability." However, any inability to maintain such liability insurance in the future would materially adversely affect our ability to attract and retain qualified director and officer candidates. If we are not successful in attracting and retaining qualified personnel, our business, prospects, financial condition, and results of operations will be materially adversely affected. 15 We Depend Upon Our Senior Management And Their Loss Or Unavailability Could Put Us At A Competitive Disadvantage Our 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 our business, prospects, financial condition, and results of operations. None of our key management or technical personnel is presently subject to employment agreements. We have recently awarded stock options to key members of management. See "Management - Management Compensation." All key management personnel are required to sign non-solicitation and confidentiality agreements. I have not seen these or been otherwise informed of existence of policy. However, there is no guarantee that these option incentives or contractual restrictions will discourage our key management and technical personnel from leaving. If we are not successful in retaining our key personnel, our business, prospects, financial condition, and results of operations would be materially adversely affected. We May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable For Infringing The Intellectual Property Rights Of Others Our success in the physical world-to-Internet and the value-added systems integration markets is dependent upon our proprietary technology, including our patents and other intellectual property, and on our ability to protect our proprietary technology and other intellectual property rights. In addition, we must conduct our operations without infringing on the proprietary rights of third parties. We also intend to rely upon unpatented trade secrets and the know-how and expertise of our employees, as well as our patents. To protect our proprietary technology and other intellectual property, we rely 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. We have four patents for our physical world-to-Internet technology. We also have several trademarks relating to our proprietary products. Although we believe that we have taken appropriate steps to protect our unpatented proprietary rights, including requiring that our employees and third parties who are granted access to our proprietary technology enter into confidentiality agreements with us, we can provide no assurance that these measures will be sufficient to protect our rights against third parties. Others may independently develop or otherwise acquire patented or unpatented technologies or products similar or superior to ours. We license from third parties certain software tools that we include in our services and products. If any of these licenses were terminated, we could be required to seek licenses for similar software from other third parties or develop these tools internally. We 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. We may in the future be required to defend our 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, us. An adverse determination could subject us to significant liabilities to third parties, require us to seek licenses from, or pay royalties to, third parties, or require us to develop appropriate alternative technology. Some or all of these licenses may not be available to us on acceptable terms or at all, and we 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 our business, prospects, financial condition, and results of operations. See "Risk Factors - Risks Specific To NeoMedia - Currently Pending Legal Actions Threaten To Divest Us Of Critical Intellectual Property." We Are 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 Our Business, Prospects, Financial Condition, And Results Of Operations, As Well As The Value Of Our Stock Many of our projects are critical to the operations of our clients' businesses. Any failure in a client's information system could result in a claim for substantial damages against us, regardless of our responsibility for such failure. We could, therefore, be subject to claims in connection with the products and services that we sell. We currently maintain product liability and errors and omissions insurance. There can be no assurance that: - we have contractually limited our liability for such claims adequately or at all; - we would have sufficient resources to satisfy any liability resulting from any such claim; - our coverage, if available, will be adequate in term and scope to protect us against material adverse effects in the event of a successful claim; or - our insurer will not disclaim coverage as to any future claim. 16 The successful assertion of one or more large claims against us that exceed available insurance coverage could materially adversely affect our business, prospects, financial condition, and results of operations. We Cannot Predict Our Future Capital Needs And We May Not Be Able To Secure Additional Financing We expect to receive up to $218,090 attributable to the payment of the exercise prices of warrants for shares of common stock that we are registering in this offering. We also expect 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 us as primary consideration for 19,000,000 shares of our common stock, sold at $0.17 per share, offered by us in a private placement and registered for public sale in this offering, assuming all 19,000,000 of such shares offered in the private placement are resold in connection with this offering 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 are for the balance of the purchase price of $0.16 per share. The promissory notes become due and payable on the earlier of (1) the date which is on or about May 11, 2002, or (2) 30 days following the effectiveness of this registration statement. The promissory notes are limited recourse in nature. If any portion of the notes are unpaid, our sole recourse will be to cancel the shares of common stock issued in respect of such unpaid promissory notes or the proceeds of sales of the shares of common stock purchased in consideration of such promissory notes. Therefore, if the issuers of the promissory notes default on their payment obligations under the notes, substantially less or none of the $3,040,000 subscription price anticipated to be received in connection with the sale of the promissory notes would be received by us, which would have a material adverse effect on our business, prospects, financial condition, and results of operations. Despite the anticipated infusion of such capital, and because we cannot reliably predict when or if such warrant exercises and note repayments will occur, if at all, we are unable to determine whether and for how long we will be able to meet our capital requirements. We anticipate offering up to 10,000,000 additional shares of common stock within six months of this offering and the offering for sale convertible debt and preferred stock in order to obtain short-term financing. As is typical with short-term, bridge financing, this capital may be obtained upon terms highly unfavorable to us. Further, we cannot be certain that anticipated revenues from operations will be sufficient to satisfy our capital requirements. We believe that we will have sufficient capital to sustain operations through June 30, 2002. Our belief is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. If capital raised from financing efforts and our financial resources are insufficient we may require additional financing in order to execute on our operating plan and continue as a going concern. We cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans for expansion, repay our debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations. In the event that any future financing should take the form of a sale of equity securities, the holders of the common stock may experience additional dilution. Because We Will Not Pay Cash Dividends, Investors May Have To Sell Their Shares In Order To Realize Their Investment We have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and marketing of our products and services. We are currently party to a credit agreement with Bank One which restricts our ability to pay dividends and any future credit agreements into which we may enter with institutional lenders may similarly restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our 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. See "Dividend Policy" and "Description of Securities - Common Stock." Some Provisions Of Our Certificate of Incorporation And By-Laws May Deter Takeover Attempts, Which May Limit The Opportunity Of Our Stockholders To Sell Their Shares At A Premium To The Then Market Price 17 Some of the provisions of our certificate of incorporation and by-laws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares at a premium to the then market price. On December 10, 1999, our 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 our 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. See "Description of Securities - Stockholders Rights Plan." Certain of our directors, officers and principal stockholders, Charles W. Fritz, William E. Fritz and The Fritz Family Limited Partnership and their holdings were exempted from the triggering provisions of our "poison pill" plan, as a result of the fact that, as of the plan's adoption, their holdings might have otherwise triggered the "poison pill". In addition, our 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. We are authorized to issue a total of 10,000,000 shares of Preferred Stock, par value $0.01 per share. Our designated Preferred Stock is currently comprised of 200,000 shares of Series A Preferred Stock, par value $0.01 per share, which shares are issuable in connection with our stockholders rights plan, following the conversion and cancellation of 452,489 shares of Series A Convertible Preferred Stock, par value $0.01 per share, 47,511 shares of Series A Convertible Preferred Stock; and 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock, par value $0.01 per share. No shares of our preferred stock are currently issued or outstanding. See "Description of Securities". We have no present plans for the issuance of any additional preferred stock. However, the issuance of any preferred stock could materially adversely affect the rights of holders of our common stock, and, therefore, could reduce the value of shares of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict the Company's ability to merge with, or sell its assets to, a third party. The ability of the Board of Directors to issue preferred stock could have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of us or a change in our control thereby preserving our control by the current stockholders. See "Description of Securities." Risks Relating To Our Industry Internet Security Poses Risks To Our Entire Business Concerns over the security of the Internet and other electronic transactions and the privacy of consumers and merchants may inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions, which may have a material adverse effect on our physical world-to-Internet business. We Will Only Be Able To Execute Our Physical World-To-Internet Business Plan If Internet Usage and Electronic Commerce Continue To Grow Our 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 we expect, 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, our physical world-to-Internet business, and therefore our 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 us 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 our physical world-to-Internet product and networks in particular. 18 We 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 We 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. Our failure to respond in a timely manner to changing market conditions or client requirements would have a material adverse effect on our business, prospects, financial condition, and results of operations. The Internet, physical world-to-Internet, equipment resales, and systems integration markets are characterized by: - rapid technological change; - changes in user and customer requirements and preferences; - frequent new product and service introductions embodying new technologies; and - the emergence of new industry standards and practices that could render proprietary technology and hardware and software infrastructure obsolete. Our success will depend, in part, on our ability to: - enhance and improve the responsiveness and functionality of our products and services; - license or develop technologies useful in our business on a timely basis; - enhance our existing services, and develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective or current customers; and - respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. See "Business--Business Strategy." We May Not Be Able To Compete Effectively In The Markets In Which We Compete 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 us. We believe that competition will intensify and increase in the future. Our target market is rapidly evolving and is subject to continuous technological change. As a result, our 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 our business, prospects, financial condition, and results of operations. In addition, the equipment resales and systems integration markets are increasingly competitive. We compete 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 our 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 us. Many of our competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than we do. Based on total assets and annual revenues, we are significantly smaller than our two largest competitors in the physical world-to-Internet industry, the primary focus of our business. Similarly, we compete against significantly larger and better-financed companies in our systems integration and resales businesses, including the manufacturers of the equipment and technologies that we integrate and resell. If we compete with our primary competitors for the same geographical or institutional markets, their financial strength could prevent us from capturing those markets. We may not successfully compete in any market in which we conduct 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, we believe that we will no longer be able to compete effectively in these markets in the future. It is for this reason, that we have increasingly focussed our business plan on competing in the emerging market for physical world-to-Internet products. 19 Regulatory And Legal Uncertainties Could Harm Our Business We are 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 our business, or the application of existing laws and regulations to the Internet and other online services, could have a material adverse effect on our 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 our services and increase our cost of doing business, or otherwise have a material adverse effect on our 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 our proprietary technology allow for the storage of demographic data from our 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 our ability to collect and use information collected by our technology in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. We could incur significant additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Risks Specific To This Offering Our Common Stock Trades Sporadically, The Offering Price Of Our Common Stock Is Arbitrary, The Market Price Of Our Securities May Be Volatile, And We Must Satisfy The Applicable Requirements For Our Common Stock To Trade On The Nasdaq SmallCap Market. Our common stock currently trades sporadically on the Nasdaq SmallCap Market. The market for our common stock may continue to be an inactive market. Accordingly, unless and until an active public market develops, you may have difficulty selling your shares of common stock at a price that is attractive to you. Our common stock has traded as low as $0.11 and as high as $6.75 between June 30, 2000 and April 4, 2002. From time to time after this offering, the market price of our common stock may experience significant volatility. Our quarterly results, failure to meet analysts expectations, announcements by us or our 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 our business, prospects, financial condition, and results of operations. Our shares may also be de-listed from trading on the Nasdaq SmallCap Market due to our failure to meet the minimum net tangible assets and minimum stockholders' equity criteria for continued listing. In such event, an investor may have more difficulty disposing of, or obtaining accurate quotations as to the price of our shares. See "Risk Factors - Risks Specific To NeoMedia - Our Shares May be De-Listed From Trading On The Nasdaq SmallCap Market, Which May Have A Material Adverse Effect On Your Ability to Resell Your Shares Or Obtain Accurate Price Quotations." Our Shares May Be De-Listed From Trading On The Nasdaq SmallCap Market, Which May Have A Material Adverse Effect On Your Ability To Resell Your Shares Or Obtain Accurate Price Quotations On March 11, 2002, we received a Nasdaq Staff Determination stating that, as of December 31, 2001, we 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, our shares were subject to de-listing from such market. We have requested a hearing before the Nasdaq Listing Qualifications Panel to review the Staff Determination. There can be no assurance that such panel will grant our request for continued listing of our common stock on Nasdaq SmallCap Market. (see Exhibit 10.25) 20 If our shares are de-listed, trading, if any, of our common stock would then be conducted in the over-the-counter market on the OTC Bulletin Board established for securities that do not meet the Nasdaq SmallCap Market listing requirements, or in what are commonly referred to as the "pink sheets". In such circumstance, your ability to resell shares of our stock, obtain accurate or timely price quotations on our shares, and, potentially, our ability to sell shares for our own account in order to raise equity financing would be materially adversely affected.. You May Suffer Significant Additional Dilution If Outstanding Options And Warrants Are Exercised We also have outstanding stock options to purchase approximately 5.0 million shares of common stock and warrants to purchase approximately 3.2 million shares of common stock, some of which may in the future, but do not currently, have exercise prices significantly below the public offering price of our common stock in this offering. 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. During March 2002, we repriced 1.2 million of our common stock warrants for a period of six months. During the term of the warrant repricing program, participating holders are entitled to exercise qualified warrants at an exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the Nasdaq SmallCap Market on the trading date immediately preceding the date of exercise. During April 2002, we repriced 7.4 million of our 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 Nasdaq SmallCap Market on the trading date immediately preceding the date of exercise. Future Sales Of Common Stock By Our Existing Stockholders Could Adversely Affect Our Stock Price The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market as a result of this offering, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After this offering, we will have outstanding 40,315,153 shares of common stock. Of these shares, an aggregate of 38,673,727 shares, including the 28,773,860 shares being offered in this offering, will be freely tradeable. Our officers and directors are not currently subject to lock-up agreements preventing them from selling their shares. Two of our 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 this registration. Additionally, shares issued upon the exercise of stock options granted under our stock option plans will be eligible for resale in the public market from time to time subject to vesting. Giving effect to applicable legal restrictions and the vesting of outstanding options and warrants for our common stock, the number of shares of common stock and the dates when these will become freely tradable on the market is as follows: Number of Shares Date ---------------- ---- 38,673,727 As of the date of this prospectus (including the number of shares of common stock included in this offering); 1,641,426 Within six months from the date of this prospectus; and 0 Between six to twelve months from the date of this prospectus. As a result of our option repricing and warrant repricing programs up to $8.6 million shares of our common stock. may be acquired upon exercise of outstanding options and warrants and resold within a period ending September 2002. The programs likely will result in a large volume of shares which will be sold into the market or which will overhang the market and will likely have a material impact on the market price of our common stock. In addition, we intend to offer for sale up to 10,000,000 additional shares of common stock within six months from the date of this prospectus, as necessary to raise capital to sustain our operations. While applicable law provides that unregistered securities may not generally be resold within one year of their purchase, market conditions may require us 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 our shares in this offering. 21 USE OF PROCEEDS We will receive the exercise price of warrants exercisable for shares of our common stock registered hereby held by selling stockholders if and when such warrants are exercised, anticipated to be up to $500,000. We expect 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 us as primary consideration for 19,000,000 shares of our common stock, sold at $0.17 per share, of which aggregate subscription price $0.01 per share, or $190,000 in aggregate, was paid in cash, offered in a private placement and registered for sale in this offering. The terms of such promissory notes provide that the principal amount of such promissory note will be prepaid with the proceeds of any sale of shares of common stock purchased by the issuance of such notes (and any securities of NeoMedia issued in respect of such shares of common stock). The notes mature on the earlier of (1) a date which is on or about May 11, 2002, or (2) 30 days after the effective date of this registration statement. The proceeds from such warrant exercises and note repayments will be used for general corporate and working capital purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Except for the foregoing, we will not receive the proceeds of the shares sold in this offering. 22 CAPITALIZATION The following table sets forth, as of December 31, 2001, 2000, and 1999: - our actual short-term debt and capitalization, - our short-term debt and capitalization, which gives effect to our acquisition of the assets and liabilities which we acquired from Qode.com, Inc. in March 2001. The table also gives effect to the non-binding letter of intent to sell the assets and liabilities of the Qode business unit to The Finx Group, Inc., a holding company based in Elmsford, NY. During the year ended December 31, 2001, we wrote down those assets and liabilities to their net realizable value of $210,000. We recognized a loss from operations of the Qode business unit of $3.6 million and a loss from disposal of the Qode business unit of $2.1 million during the third quarter of 2001. There is no guarantee that the proposed sale of assets outlined by such letter of intent will be consummated by year end 2002, or at all. The data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes and other financial information included elsewhere in this prospectus.
Year Ended December 31, 2001 2000 1999 (Actual) (Actual) (Actual) (In thousands, except share data) Short-term debt ............................................. $ 899 $ 137 $ 625 Long-term debt .............................................. 390 539 676 Stockholders' equity(1) Preferred stock-$0.01 par value, authorized-10,000,000 shares; 452,489 issued and outstanding shares(2) ............ 5 -- -- Common stock-$0.01 par value, authorized-50,000,000 shares; 20,446,343 issued and 18,804,917 outstanding (3) ............ 188 145 119 Treasury stock, at cost common stock - 201,230 shares of common stock ............................................. (779) (779) -- Additional paid-in capital- Preferred stock ........................................ 878 -- -- Common stock ........................................... 63,029 57,619 36,367 Deferred compensation ....................................... -- -- -- Stock subscription receivable ............................... (240) -- -- Accumulated other comprehensive loss ........................ -- -- -- Accumulated deficit ......................................... (63,344) (37,875) (32,466) Total stockholders' equity .................................. (263) 19,110 4,020 Total debt and capitalization ............................... $ 1,026 $ 19,786 $ 5,321
- ------------- (1) An amendment was adopted by our Board of Directors which if approved by stockholders will increase the authorized capital stock to 200,000,000 shares of common stock and 20,000,000 shares of preferred stock. (2) 452,489 shares of Series B Convertible Preferred Stock outstanding as of December 311, 2001 were converted to shares of common stock on January 2, 2002. As of April 4, 2002, the authorized Preferred Stock consisted of the following series of preferred stock: 200,000 shares of Series A Preferred Stock, par value $0.01 per share; and 47,511 shares of Series A Convertible Preferred Stock, par value $0.01 per share. (3) An additional 19,000,000 shares were issued in February 2002 in exchange for $190,000 cash and promissory notes for $3,230,000 maturing at the earlier of May 10, 2002 or 30 days from the date of registration of the shares. Exercise of all outstanding options and warrants would result in total issued shares of 48,447,890 and total outstanding shares of 46,806,464. Qualified options and warrants have been placed into repricing program deigned to encourage exercise by restating exercise prices below current market prices 23 MARKET FOR OUR COMMON STOCK Market Information Our common stock began trading on The Nasdaq SmallCap Market under the symbol NEOM on November 25, 1996, the date of our initial public offering. Prior to such time there was no established public trading market for our common stock. Set forth below is the range of high and low sales prices for the common stock for the periods indicated as reported by The Nasdaq SmallCap Market. The quotations do not include retail markups, markdowns, or commissions and may not represent actual transactions. Quarter ended High Low ------------- ---- --- March 31, 1999 $5.25 $2.75 June 30, 1999 $7.25 $4.03 September 30, 1999 $9.88 $5.50 December 31, 1999 $7.00 $4.25 March 31, 2000 $14.50 $5.69 June 30, 2000 $11.13 $5.00 September 30, 2000 $6.75 $4.13 December 31, 2000 $6.50 $1.94 March 31, 2001 $6.00 $2.50 June 30, 2001 $4.50 $1.76 September 30, 2001 $1.85 $0.16 December 31, 2001 $0.24 $0.11 March 31, 2002 $0.41 $0.14 As of April 4, 2002, our common stock was trading at $0.17 per share. Our stock price has been and will continue to be subject to significant volatility. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. If revenues or earnings in any quarter fail to meet expectations of the investment community, there could be an immediate and significant impact on our stock price. In addition, our stock price may be affected by broader market trends that may be unrelated to our performance. See "Risk Factors - Risks Specific To NeoMedia - Fluctuations In Our Operating Results May Affect Our Stock Price"; "Risk Factors - Risks Specific To This Offering - Our Common Stock Trades Sporadically, The Offering Price Of Our Common Stock Is Arbitrary, The Market Price Of Our Securities May Be Volatile, And We Must Satisfy The Applicable Requirements For Our Common Stock To Trade On The Nasdaq SmallCap Market"; "Risk Factors - Risks Specific To This Offering - Our Shares May Be De-Listed From Trading On The Nasdaq SmallCap Market, Which May Have A Material Adverse Effect On Your Ability To Resell Your Shares Or Obtain Accurate Price Quotations". Holders As of December 31, 2001, there were 158 holders of record of our common stock. We estimate that, as many of our shares of common stock are held in street name, we have approximately 3,000 beneficial holders of our common stock. 24 DIVIDEND POLICY We have never paid or declared any cash dividends. We currently expect to retain future earnings, if any, to finance the growth and development of our business. In addition, we have a letter of credit with Bank One, Chicago, Illinois, the terms of which require Bank One's written consent prior to the declaration of cash dividends. As a result of the foregoing, we do not anticipate paying any cash dividends on our shares in the foreseeable future. 25 SELECTED FINANCIAL DATA The following selected statements of operations data for the years ended December 31, 1997 and 1998 and the selected balance sheet data as of each December 31, 1997 and 1998, are derived from our consolidated financial statements and related notes not included elsewhere in this prospectus audited by KPMG LLP, our former independent auditors. The following selected statements of operations data for the years ended December 31, 1999 and 2000, and the selected balance sheet data as of each of December 31, 1999 and 2000, are derived from our consolidated financial statements and notes included elsewhere in this prospectus audited by Arthur Andersen LLP, our former independent auditors. The following selected statements of operations data for the year ended December 31, 2001, and the selected balance sheet data as of December 31, 2001, are derived from our consolidated financial statements and notes included elsewhere in this prospectus audited by Stonefield Josephson, Inc., our current independent auditors. See "Changes in and Disagreements with Accountants on Accounting and Financial Disclosures", on page 54. Some significant assumptions included in the data presented below are as follows: - December 31, 2001 numbers include a loss from operations of discontinued Qode business unit of $3.6 million and a loss on disposal of discontinued Qode business unit of $3.1 million; - December 31, 2001 numbers reflect a loss on impairment of assets of $2.9 million relating to the write-off of assets employed in our MLM/Affinity product line. - December 31, 2001 numbers reflect the second quarter write-off of approximately $7.4 million of assets and liabilities related to the Digital:Convergence license contract. The write-off is reflected as an operating expense in the consolidated statement of operations for the year ended December 31, 2001 contained herein; and - December 31, 2001 numbers do not reflect working capital or stated capital which we expect to receive upon the exercise of outstanding warrants and other options and the payment of promissory notes issued as consideration for the purchase of up to 19,000,000 shares of our common stock. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Selected Financial Data
Results for the Year Ended December 31, ------------------------------------------------------------------------ 2001 2000 1999 1998 1997 (Actual) (Actual) (Actual) (Actual) (Actual) -------- -------- -------- -------- -------- (in thousands, except share data) Consolidated Statement of Operations Data: Revenues ................................. $ 8,142 $ 27,565 $ 25,256 $ 23,478 $ 24,434 Cost of sales ............................ 8,866 18,533 22,470 19,149 20,070 Gross margin ............................. (724) 9,032 2,786 4,329 4,364 Operating expenses ....................... 7,840 14,615 13,032 15,945 10,268 Digital Convergence write-off ............ 7,354 -- -- -- -- Loss on impairment of assets ............. 2,871 -- -- -- -- Loss from operations ..................... (18,789) (5,583) (10,246) (11,616) (5,904) Interest expense/(income) ................ (21) (174) 226 (121) 147 Income tax provision/(benefit) ........... -- -- -- -- (78) Loss from continuing operations .......... (18,768) (5,409) (10,472) (11,495) (5,973) Loss from operations and disposal of discontinued business unit ............. (6,701) -- -- -- -- Net loss ................................. ($25,469) ($5,409) ($10,472) ($11,495) ($5,973) Loss per Share Data: Loss per share from continuing operations ................. ($1.14) ($0.39) ($1.01) ($1.34) ($0.90) Net loss per share ....................... ($1.55) ($0.39) ($1.01) ($1.34) ($0.90) Weighted average common shares outstanding (basic and diluted) .......................... 16,410,246 13,931,104 10,377,478 8,560,849 6,615,107
26
At December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: (Actual) (Actual) (Actual) (Actual) (Actual) -------- -------- -------- -------- -------- Total assets $9,039 $40,594(a) $13,657 $12,630 $19,799 Long-term debt 390 14,042(b) 676 801 915
(a) - Includes $22,518,000 of assets related to Digital Convergence license contract that were written off during 2001 (b) - Includes $13,503,000 of long-term deferred revenue related to Digital Convergence license contract that was written off during 2001 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The financial statements made part of this prospectus have been prepared assuming that we will be able to continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from our inability to continue as a going concern. Based on current operating budgets, we do not anticipate having sufficient cash on hand or available through current lending arrangements to continue to fund operations beyond June 30, 2002. To address this funding need, we are seeking to raise funds through private placements, warrant and stock option repricing programs as well as decreasing cash outflow through expense reductions. We believe that the funds generated by these transactions will be sufficient to continue to fund our operations through December 31, 2002. We expect to receive up to $3,040,000, plus interest at 6% per annum, by the middle of the second quarter 2002 upon repayment of promissory notes received in connection with our private placement of 19,000,000 shares of our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." It is important to note however, that our sole remedy upon a default under any such promissory note will be cancellation of the shares purchased thereby, and the proceeds of the sales of any such shares, and we will not be able to recover principal and interest due and payable under any such note. During the third quarter of 2001, we terminated 55 employees, including our chief technology officer and our chief operating officer, representing a 60% decrease in our total workforce. In connection with the layoffs, we recognized severance expense of approximately $494,000 during the third quarter of 2001. The layoffs were part of a company-wide cost reduction initiative. As a result of these initiatives, we incurred a material impairment of intangible assets during the third quarter of 2001. During 2001 and 2002, our continued focus has been aimed toward our Applications Services business, consisting of the patented PaperClick(TM) technology that enables users to link directly from the physical to the digital world, as well as the Qode Universal Commerce Solution. We are also seeking additional licensees of our intellectual property patent portfolio. To date, we have signed three such licenses. See "Business - Our Strategic Relationships." Results of Operations Year Ended December 31, 2001 and 2000 Net sales Total net sales for the year ended December 31, 2001 were $8.1 million, which represented a $19.5 million, or 70.1%, decrease from $27.6 million for the year ended December 31, 2000. This decrease primarily resulted from reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions. Additionally, we recognized $7.8 million of revenue in 2000 related to the DC license contract. No revenue was recognized related to this contract in 2001. We expect net sales in 2002 will increase significantly from 2001, due to a resurgence in demand for software and technology equipment and services, combined with anticipated revenue streams from intellectual property licenses. License fees License fees were $0.6 million for the year ended December 31, 2001, compared with $8.4 million for the year ended December 31, 2000, a decrease of $7.8 million, or 92.9%. The decrease resulted primarily from the recognition of $7.8 million revenue during 2000 related to the Digital:Convergence license contract. No revenue was recognized related to this contract in 2001. We are anticipating license revenue growth in 2002 compared with 2001 as we aggressively pursues license contracts relating to its intellectual property. Resales of software and technology equipment and service fees Resales of software and technology equipment and service fees decreased by $11.5 million, or 63.4%, to $7.6 million for the year ended December 31, 2001, as compared to $19.1 million for the year ended December 31, 2000. This decrease primarily resulted from fewer sales of Sun Microsystems hardware due to increased competition and general economic conditions. We believe that resurgent demand for such products, combined with our movement into higher margin and Value-Add products and services such as Storage Area Networks, will result in increased revenue from resales of software and technology equipment and service fees during 2002. 28 Cost of sales Cost of resales as a percentage of related resales was 86.0% in 2001, compared to 90% in 2000. This decrease is substantially due to a sales mix of higher-margin products such as service fees and maintenance contracts. Sales and marketing A portion of the compensation to the sales and marketing staff constitutes salary and is fixed in nature and the remainder of this compensation, which is paid as a commission, is directly related to sales volume. Sales and marketing expenses were $2.5 million for the year ended December 31, 2001, compared to $6.5 million for the year ended December 31, 2000, a decrease of $4.0 million or 61.5%. This decrease primarily resulted from fewer marketing personnel in 2001, coupled with a decrease in sales commissions from reduced sales. Sales and marketing expense will continue to decrease in 2002 as we move away from its applications service provider model. General and administrative. General and administrative expenses decreased by $2.2 million, or 30.1%, to $4.8 million for the year ended December 31, 2001, compared to $7.2 million for the year ended December 31, 2000. The decrease is primarily related to a reduction in personnel as a result of our cost reduction initiative. General and administrative expenses will continue to decline in 2002 as we realize the full-year benefit of cost-reduction measures begun in the fourth quarter of 2001. Research and development During the year ended December 31, 2001, we charged to expense $0.5 million of research and development costs, a decrease of $0.6 million or 54.5% compared to $1.1 million charged to expense for the year ended December 31, 2000. This decrease is predominately associated with decreased personnel devoted to our development during the second half of 2001, combined with increased capitalization of software development costs associated with our "switching" platform and the Qode Universal Commerce Solution during the first half of 2001. Research and development expense will continue to decrease in 2002 as we move away from its applications service provider model Loss on Impairment of Assets During the third quarter of 2001, we wrote off all assets associated with its discontinued MLM/Affinity product line, resulting in an impairment charge of $2.9 million. Loss on Digital:Convergence During the second quarter of 2001, we wrote off all assets and liabilities relating to its intellectual property license with Digital:Convergence, resulting in a net charge of $7.4 million. Interest expense (income), net Interest expense/(income) consists primarily of interest paid to creditors as part of financed purchases, notes payable and our asset-based collateralized line of credit net of interest earned on cash equivalent investments. Interest (income) decreased by $153,000, or 87.9%, to $(21,000) for the year ended December 31, 2001 from $(174,000) for the year ended December 31, 2000, due to reduced cash balances throughout 2001 as compared to 2000. Loss from continuing operations During the year ended December 31, 2001, our loss from continuing operations increased by $13.4 million or 248.1% from $5.4 million in 2000 to $18.8 million in 2001. This increase is primarily due to the loss on the Digital:Convergence license contract of $7.4 in the second quarter of 2001 and an impairment loss of $2.8 million in the third quarter of 2001 related to the discontinuation of our MLM/Affinity product line. 29 Loss from operations and disposal of discontinued operations We discontinued operations of its Qode business unit in 2001, resulting in a loss from operations of discontinued business units of $3.6 million. There was no loss from this business unit during 2000. The business unit's assets were purchased in March 2001 and the implementation was cancelled during the second quarter of 2001. Loss on disposal of discontinued operations We sustained a loss of $3.1 million in 2001 from the disposal of the Qode business unit in 2001. Net Loss The net loss for the year ended December 31, 2001 was $25.5 million, which represented a $20.1 million, or 372.2% increase from a $5.4 million loss for the year ended December 31, 2000. The increase in net loss is due primarily to the loss on the Digital:Convergence contract, an impairment loss of in the third quarter of 2001 related to the discontinuation of our MLM/Affinity product line and the discontinuation of our Qode business unit, and reduced resales of software and technology equipment and service fees resulting from increased competition and general economic conditions, offset by lower expenses as a result of our cost reduction effort. Years ended December 31, 2000 and 1999 Net sales Total net sales for the year ended December 31, 2000 were $27.6 million, which represented a $2.3 million, or 9.1%, increase from $25.3 million for the year ended December 31, 1999. This increase primarily resulted from the intellectual property license contract signed with Digital:Convergence, offset by decreased sales of Y2K licenses and services from $3.3 million in 1999 to $0.1 million in 2000. License fees Total license fees increased from $2.4 million to $8.4 million, or 250.0%, for the years ended December 31, 1999 and December 31, 2000. The increase was due to a license agreement, entered into during the fourth of quarter of 2000, between us and Digital:Convergence, granting Digital:Convergence a worldwide, non-exclusive license of our patent portfolio. Revenue from this agreement totaled $7.8 million in 2000. This was offset by a decrease of $1.8 million due to the discontinuation of our Y2K product line. Cost of sales as a percentage of related sales was 15.4% during 2000 compared to 73.7% during 1999. This decrease in the cost of sales as a percentage of related sales was primarily due to the Digital:Convergence license sale in 2000 and the discontinuation of Y2K licenses on which NeoMedia paid royalties. Resales of software and technology equipment and service fees Resales of software and technology equipment and service fees decreased by $3.7 million, or 16.1%, to $19.1 million for the year ended December 31, 2000, as compared to $22.8 million for the year ended December 31, 1999. This decrease primarily resulted from decreased resales of IBM equipment due to discontinuation of sales in the Canadian market. Also contributing to the decrease was reduced service revenue from Y2K products of $1.6 million. Cost of sales as a percentage of related sales decreased to 90.0% during 2000 from 90.5% during 1999. Sales and marketing A portion of the compensation to the sales and marketing staff constitutes salary and is fixed in nature and the remainder of this compensation, which is paid as a commission, is directly related to sales volume. Sales and marketing expenses decreased $0.3 million, or 4.4%, to $6.5 million for the year ended December 31, 2000 from $6.8 million for the year ended December 31, 1999, due to a decrease in NeoMedia's application services direct sales force, offset by personnel additions in marketing. General and administrative General and administrative expenses increased by $1.7 million, or 32.1%, to $7.0 million for the year ended December 31, 2000, from $5.3 million for the year ended December 31, 1999. This increase was due to the accrual of executive performance incentives in 2000. No performance incentive expense was incurred in 1999. Also, increased legal costs of $0.5 million were expensed in 2000. 30 Research and development During the year ended December 31, 2000, we charged to expense $1,101,000 of research and development expenses, an increase of $114,000 or 11.6% compared to $986,000 charged to expense for the year ended December 31, 1999. This increase was due to increased resources directed toward the development of the application services business. To the extent we can obtain additional capital, we will continue to make significant investments in research and development. Net interest (income) expense Interest expense consists primarily of interest paid to creditors as part of financed purchases, capitalized leases and our asset-based collateralized line of credit net of interest earned on cash equivalent investments. Interest expense decreased by $400,000, or 177%, to income of $174,000 for the year ended December 31, 2000 from $226,000 of expense for the year ended December 31, 1999. This was due to reduced interest expense resulting from the repayment of notes in the first quarter of 2000, as well as interest income from higher cash balances during 2000. Net loss The net loss for the year ended December 31, 2000 was $5.4 million, which represented a $5.1 million, or 48.6% decrease from a $10.5 million loss for the year ended December 31, 1999. The decrease was primarily due to revenue from the licensing of our intellectual property in 2000. This was offset by a 97% decrease of Y2K revenue in 2000 along with increased general and administrative expenses. Liquidity and Capital Resources NeoMedia anticipates that our existing cash balances and funds available from borrowings under our existing financing agreement will have to be supplemented with additional funds, through loans and/or capital contributions, to finance our operations in 2002. During the first quarter of 2002, we have successfully sold 19 million shares of our common stock at a price of $0.17 per share in exchange for cash of $0.01 per share and limited recourse promissory notes for $0.16 per share maturing no later than May 2002, resulting in proceeds of $3,230,000 to us assuming full payment of the notes. We expect to obtain an additional $1.0 million of debt and/or equity financing during the first quarter and second quarters of 2002. Management believes that this additional financing will be sufficient to sustain operations through the first half of 2002, however, there can be no assurances that these additional financings will be obtained. If necessary funds are not available, our business and operations would be materially adversely affected and in such event, we would attempt to reduce costs and adjust our business plan. Net cash used in operating activities for the year ended December 31, 2001, 2000, and 1999 was $5.2 million, $6.8 million and $7.0 million, respectively. During 2001, trade accounts receivable inclusive of costs in excess of billings increased $0.9 million, while accounts payable, accrued expenses and deferred revenue increased $3.0 million. During 2000, trade accounts receivable inclusive of costs in excess billings increased $1.0 million, while accounts payable, accrued expenses and deferred revenue increased $1.1 million. During 1999, trade accounts receivable inclusive of costs in excess of billings decreased $2.5 million, while accounts payable, accrued expenses and deferred revenue decreased $1.7 million. Our net cash flow used in investing activities for the years ended December 31, 2001, 2000 and 1999, was $3.0, $2.6 million and $2.1 million, respectively. This increase resulted from higher capitalized software development costs coupled with an increase in acquisition costs related to long-term and intangible assets. During the years ended December 31, 2001, 2000 and 1999 our net loss totaled approximately $25,469,000, $5,409,000 and $10,472,000, respectively. As of December 31, 2001 we had accumulated losses from operations of approximately $63,344,000, had a working capital deficit of approximately $5,163,000, and approximately $134,000 in unrestricted cash balances. Management believes it will need to raise additional capital to sustain our operations in 2002. The failure of management to accomplish these initiatives will adversely effect the Company's business, financial conditions, and results of operations and its ability to continue as a going concern. Subsequent to December 31, 2001, the Company has undertaken the following initiatives: o During February 2002, we sold 19 million shares of our common stock at $0.17 per share in exchange for promissory notes maturing at the earlier of i) 90 days from the date of issuance, or ii) 30 days from registration of the shares. Proceeds from this transaction will be $3,230,000, assuming full payment of the notes. 31 o During March 2002, we repriced 1.2 million of our common stock warrants for a period of six months. During the term of the warrant repricing program, participating holders are entitled to exercise qualified warrants at an exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the Nasdaq SmallCap Market on the trading date immediately preceding the date of exercise. o During April 2002, we repriced 7.4 million of our 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 qualified 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 Nasdaq SmallCap Market on the trading date immediately preceding the date of exercise. o During April 2002, we 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 $2.0 million of NeoMedia common stock over the next two years, with the timing of the purchase at our discretion. Each purchase will be for a maximum of $25,000, 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. We will pay 5% of the gross proceeds of each purchase to Cornell as a commission. Recently Issued Accounting Pronouncements On July 21, 2001, the FASB issued Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill; SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized, but rather will be tested at least annually for impairment. It also provides that intangible assets that have finite useful lives will continue to be amortized over their useful lives, but those lives will no longer be limited to forty years. SFAS No. 141 is effective for all business combinations after June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1, 2002. We are considering the provisions of SFAS No. 141 and No. 142, and at present, have not determined the impact of adopting SFAS No. 141 and SFAS No. 142. In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the subject 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. We do not expect the adoption of SFAs No. 143 to have a material impact on our 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. We do not expect the adoption of SFAs No. 144 to have a material impact on our financial position or results of operations. 32 BUSINESS Our Business We develop proprietary technologies that link physical information and objects to the Internet marketed under our "PaperClick(TM)" brand name and automate print production operations. We are structured as two distinct business units: Internet Switching Service and Consulting and Integration Service. NeoMedia Internet Switching Service (NISS) is our core business and is based in the United States, with development and operating facilities in Fort Myers, Florida. Application services develops and supports all of our physical world to Internet technology as well as its suite of application service provider services, including our linking "switch" and our application platforms. NISS also provides the systems integration resources needed to design and build custom customer solutions predicated on our infrastructure technology. NeoMedia Consulting and Integration Service (NCIS) is the original business line upon which we were organized. This unit resells client-server equipment and related software. The unit also provides general and specialized consulting services targeted at software driven print applications, and especially at process automation of production print facilities through its integrated document factory solution. NCIS also identifies prospects for custom applications based on our products and services. The operations are based in Lisle, Illinois. Our Products and Services Internet Switching Service PaperClick(TM) switching service. PaperClick(TM) is a state-of-the-art application-switching platform that links physical objects to digital media through the use of scanned UPC, EAN, or custom PaperClick(TM) codes. This dynamic open solution serves a wide variety of customers in industrial, commercial, and educational applications. Intellectual Property Licensing. We currently hold four U.S. patents relating to the physical world-to-Internet marketplace. We intend to license this intellectual property portfolio to companies endeavoring to tap the potential of this emerging market. To date, we have entered into such agreements with Digital:Convergence, A.T. Cross Company, and Symbol Technologies. During January 2002, we announced that we 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 our patent portfolio. Consulting and Integration Service NCIS is a group of highly skilled application developers thoroughly familiar with MSS and other associated NeoMedia technologies who contract to develop custom applications for clients. Product Sales and Equipment Re-sales. NCIS markets and sells proprietary software products, including high-density symbology encoders (e.g. PDF417 and UPS Maxicode) and resells client-server hardware and related systems such as Sun Microsystems, IBM and others , as well as related applications software and services. Integrated Document Factory (IDF). The IDF solution provides design and implementation of a collection of tested hardware and software solutions utilizing Xerox's printers and Sun servers to turn document creation, production, and printing into an assembly line manufacturing process. The system particularly assists financial service concerns such as banks, insurance companies, and brokerage firms as well as helps to manage high-volume printing of statements on a frequent basis. Storage Area Networks (SAN). SAN is a Storage Management solutions and consultancy offering consisting of tools and services that insure data integrity, efficiency and accessibility, achieved through moving data backup, access and archival functions off of traditional LANs/WANs that are added on to a highly reliable independent managed network. System Integration Services Systems. Integration Services is responsible for customer identification, pre and post sales relationship support, proposals, and account management surrounding custom application development for solutions involving the metered switch services (MSS). These customized solutions are built and integrated via the NAS business unit of the Company. 33 Our Markets Internet Switching Service Our switching platform is a state-of-the-art open and extensible cross-media publishing tool serving customers in a variety of industrial, commercial, and educational applications. This business segment is also responsible for licensing our intellectual property to others as a means of promoting this new market as well as providing a revenue and cash resource. We have been developing our physical world-to-Internet technology and offerings since 1996 and consider ourselves an innovator and pioneer in this industry. In the past two years, we have seen similar technologies and concepts emerge in the marketplace, and see these events as a positive validation of the physical world-to-internet concept. Press from competitors is expected to continue to raise consumer awareness of physical-to-Web convergence. We believe the key to the adoption of physical world-to-Internet technologies in the marketplace will be in the development of real world applications that provide the end user a valuable experience. Our service offering, however, differs from those of AirClic and other competitors in that, unlike their products and services, our products do not require the use of a proprietary or specified device, and we offer our service on a private label basis. We are positioned to provide solutions that preserve the customer's brand and also provide tailored solutions to fit the customer needs. Consulting and Integration Service The technology and equipment resale business is becoming a commodity industry for products undifferentiated by value added proprietary elements and services. Resale operations are also being compressed as equipment manufacturers consolidate their distribution channels. Proprietary products, such as our encoders, systems integration services, and integrated document factory solutions, offer a competitive value-add to our consulting and integration business. This division has unique offerings, which, to the extent that they meet market needs, offer the potential for growth in this industry. This division also sells migration products, tools designed to migrate software code from one platform to another platform, primarily to mid-sized to large corporations and government agencies. The products include proprietary products and software tools to migrate Wang, HP3000, Data General, DEC and IBM DOS/VSE platforms, legacy systems, to a Unix or NT open system platform. Our Strategy We have spent the past five years developing and patenting the now confirmed space of linking the physical and Internet environments, and developing and implementing five generations of continuously refined switch technology that seamlessly bridges these environments. We are now entering a new phase of operations. With the market being validated with the emergence of other competitors, we are turning our attention to the next stage of market development by facilitating the growth of the industry through licensing of our PaperClick(TM) switching platform to companies in this space, as well as traditional businesses with offerings related to commerce, publishing, extended media publishing, e-learning, and others. Additionally, we are strategically pursuing intellectual property licensing opportunities with organizations attempting to commercialize physical world-to-Internet technology, such as A.T. Cross Company. While pursing these goals we remain aware of strategic issues, opportunities, and constraints that will govern the interplay of competition and alliances in this rapidly emerging market. Our Strategic Relationships Internet Switching Services In this segment, we have a number of customers using our products and services, including Amway, Solar, A.T. Cross Company, NYCO and two universities in Latin America. During the year ended December 31, 2000, we entered into a license agreement with Digital:Convergence. This customer accounted for 28.2% of the Company's total revenue and 96.1% of our Application Services revenue during such year. During the year ended December 31, 2001, we did not recognize any revenue related to the Digital:Convergance contract, and we wrote off approximately $7.4 million in net assets and liabilities related to the contract. We are aggressively pursuing numerous additional opportunities for our products and services. 34 In January 2001, we entered into a patent license with A.T. Cross Company, a major international manufacturer of fine writing instruments and pen computing products. A.T. Cross Company obtained the rights under our physical world-to-Internet patents for personal portable scanning devices used to link bar codes on documents and other physical consumer goods to corresponding Internet content. A.T. Cross Company will pay a royalty per device to us for license rights granted under this agreement. In May, 2001, we entered into an agreement with Symbol Technologies, Inc., granting Symbol a worldwide, non-exclusive license of our patents surrounding the sale and use of scanning devices used in physical world-to-Internet technologies. Symbol will pay us a royalty per qualified device shipped. During January 2002, we engaged Baniak Pine and Gannon, a Chicago law firm specializing in intellectual property licensing and litigation. The firm will assist us in seeking out potential licensees of our intellectual property portfolio, including any resulting litigation. Consulting and Integration Services Through this segment, we provide services and products to a spectrum of customers, ranging from closely held companies to Fortune 500 companies. For the years ended December 31, 2001, 2000, and 1999, one customer, Ameritech Services, Inc., accounted for 36.6%, 29.9%, and 23.9%, respectively, of our revenue. We expect sales to Ameritech as a percentage of total sales to decline in the future. Furthermore, we do not have a written agreement with Ameritech and, therefore, there are no contractual provisions to prevent Ameritech from terminating its relationship with us at any time. Accordingly, the loss of this customer, or a significant reduction by it in buying the products and services offered by us, absent diversification, would materially and adversely affect of our business, prospects, financial condition, and results of operations. In addition, a single supplier supplies the equipment and software, which is re-marketed to this customer. Accordingly, the loss of this supplier would materially adversely affect our business, prospects, financial condition, and results of operations. For these reasons, we are seeking, and continue to seek, to diversify our sources of revenue and vendors from whom we purchase. Sales and marketing Internet Switching Service PaperClick(TM). While we eliminated the majority of our sales and marketing staff during the third quarter of 2001, we continue to promote our PaperClick(TM) line of products to potential customers in a wide array of industries. Upon receipt of sufficient financing, we plan to re-focus our efforts on the sale of PaperClick(TM) licenses through the hiring of additional sales and marketing staff. We have refocused our sales efforts by focusing on signing up channel partners who have industry market presence. We are currently negotiating with a number of industry-focused companies who will be our "go-to-market" partners. No assurances can be given that any successful association will result. Intellectual Property Licensing. During January 2002, we engaged Baniak Pine and Gannon, a law firm specializing in intellectual property licensing and litigation. The firm will assist us in seeking out potential licensees of our intellectual property portfolio, including any resulting litigation. Consulting and Integration Service We, through or systems integration services division, market our products and services, as well as those for which we act as a re-marketer, primarily through a direct sales force, which was composed of five individuals as of December 31, 2001. In addition, the business unit also relies upon strategic alliances with industry leaders to help market products and services, provide lead referrals, and establish informal co-marketing arrangements. Our representatives attend seminars and trade shows, both as speakers and participants, to help market products and services. In addition, this business segment has two agents in the United States that sell our products and services. Research and development Internet Switching Service We believes that our success in the Internet environment depends upon its ability to quickly develop new products and services, as well as make enhancements to its existing products. NISS employed 3, 24 and 19 persons in the area of product development as of December 31, 2001, 2000, and 1999, respectively. During the years ended December 31, 2001, 2000 and 1999, NeoMedia ISS incurred total software development costs of $2,064,000, $2,888,000 and $1,722,000, respectively, of which $1,515,000, $1,787,639 and $807,000, respectively, were capitalized as software development costs and $549,000, $1,101,000 and $915,000, respectively, were expensed as research and development costs. 35 Consulting and Integration Services All significant research and development relating to our consulting and integration products was discontinued at December 31, 1999 when we discontinued our Y2K business. All employees that were in this area were reassigned or released at or prior to such time. If any future research or development of products is needed, it will be performed by the application services division or outside contractors. Intellectual Property Our success in the physical world-to-Internet and the value-added systems integration markets is dependent upon our proprietary technology, including patents, and other intellectual property, and on our ability to protect our proprietary technology and other intellectual property rights. In addition, we must conduct our operations without infringing on the proprietary rights of third parties. We also intend to rely upon unpatented trade secrets and the know-how and expertise of our employees. To protect our proprietary technology and other intellectual property, we rely 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. We have four patents for our physical world-to-Internet technology. We also have several trademarks relating to our proprietary software products. Although we believe that we have taken appropriate steps to protect our unpatented proprietary rights, including requiring that our employees and third parties who are granted access to our proprietary technology enter into confidentiality agreements with us, we can provide no assurance that these measures will be sufficient to protect our rights against third parties. Others may independently develop or otherwise acquire patented or unpatented technologies or products similar or superior to ours. We are currently engaged in two lawsuits initiated against us by one of our primary competitors, AirClic. AirClic seeks, among other things, to succeed to our core assets, by suing for alleged default under a promissory note in the principal amount of $500,000 issued to AirClic by us, secured by our core assets. AirClic is also suing to invalidate our patents on our key physical world-to-Internet technologies. See "Risk Factors - Risks Specific to NeoMedia - Currently Pending Legal Actions Threaten to Divest Us of Critical Intellectual Property". We license from third parties certain software tools that we include in our services and products. If any of these licenses were terminated, we could be required to seek licenses for similar software from other third parties or develop these tools internally. We 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. We may in the future be required to defend our 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, us. An adverse determination could subject us to significant liabilities to third parties, require us to seek licenses from, or pay royalties to, third parties, or require us to develop appropriate alternative technology. Some or all of these licenses may not be available to us on acceptable terms or at all, and we may be unable to develop alternate technology at an acceptable price or at all. Further, any of these events could have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Risk Factors - Risks Specific To NeoMedia - We May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable For Infringing The Intellectual Property Rights Of Others. Other Recent Developments Qode.com Assets In March 2001, we acquired the assets of Qode.com, a Web-based commerce facilitation service. On September 7, 2001, we announced that we had signed a non-binding letter of intent to sell the assets of our Fort Lauderdale-based Qode business unit, which we acquired in March 2001, to The Finx Group, Inc., a holding company in Elmsford, New York. The agreement calls for The Finx Group to assume approximately $620,000 of Qode's payables and approximately $800,000 in long-term assets. We are expecting to receive 500,000 shares of The Finx Group common stock, a five-year license to use and sell Qode Services, and up to $5 million in affiliate revenues from The Finx Group from Qode sales over the next five years. In connection with the sale of the Qode assets, we recognized a loss of approximately $3.1 million in 2001. 36 About.com, Inc. Relationship In June 2001, we announced that we entered into a one-year license agreement with About.com, Inc. to provide our Qode Universal Commerce Solution(TM) to About.com's estimated 36 million worldwide users. We and About.com intended to promote the co-branded shopping service throughout the About.com network. In June 2001, About.com ran banner ads on its site promoting the Qode Universal Commerce Solution(TM). As part of the emerging About.com and NeoMedia relationship, About.com received 452,489 shares of our Series A Convertible Preferred Stock, par value $0.01 per share, of the 500,000 total Series A Convertible Preferred shares which we are authorized to issue, in consideration for these promotions. On January 2, 2002, these 452,489 shares were converted into 452,489 shares of common stock, registered for resale in this prospectus. Those shares are currently subject to a right of first refusal in favor of us prior to resale. See "Principal and Selling Stockholders." We recorded an expense of $882,000 associated with this transaction in the second quarter in sales and marketing expense in the accompanying consolidated statements of operations. The agreement with About.com was terminated on August 31, 2001, in anticipation of the sale of the Qode assets to the Finx Group. AirClic, Inc. Relationship On July 3, 2001, we entered into a non-binding letter of intent with AirClic, Inc. ("AirClic") which contemplated an intellectual property cross-licensing transaction between us and AirClic. Under the terms of the letter of intent, AirClic was to provide us with bridge financing of $2,000,000, which was to be paid to us in installments. On July 11, 2001, AirClic advanced $500,000 in bridge financing to us in return for a promissory note secured by all of our assets. During the negotiation of a definitive set of agreements, the parties decided not to proceed with the cross-licensing transaction. AirClic has since initiated two currently pending lawsuits against us. See "Business - Legal Proceedings." Digital:Convergence Corporation Relationship We entered into an agreement with a competitor, Digital:Convergence Corporation ("DC"), a private company located in the US, in October 2000, granting them a worldwide, non-exclusive license of our extensive patent portfolio for directly linking documents, objects, transaction and voice commands to the internet. The agreement provided for annual license fees over a period of ten years in excess of $100 million through a combination of cash and equity. We recognized $7.8 million of revenue in 2000 related to this contract, including a $5.0 million cash payment received in October 2000 for royalties earned before contract execution, $2.5 million related to the $10 million of payments in DC common stock and cash expected to be received in the first year of the contract, and $0.3 million related to DC stock received by us to be recognized over the life of the contract. As part of the contract, we issued to DC a warrant to purchase 1.4 million shares of our common stock. In the first quarter of 2001, DC issued us an interest bearing $3 million note payable in lieu of a $3 million cash payment due in January 2001. We also received shares of DC stock in January with a contractual value of $2 million as part of the first contract-year royalties due. The note was originally due on April 24, 2001, however, on that date we agreed to extend it until June 24, 2001. We also partially wrote down, in the first quarter of 2001, the value of the remaining DC stock receivable, and DC stock that had been received in January, to a value that management believed was reasonable at the time (50% of the valuation stipulated in the contract). The write-down consisted of a reduction in assets of $7.7 million and a corresponding reduction in liabilities of $7.7 million. The DC stock received in January 2001 was valued at $1 million and the DC receivable was valued at $9.2 million. In April 2001, we received additional shares of DC stock with a $5 million value based on the valuation method stipulated in the contract. No revenue was recognized related to these shares and the shares were not recorded as an asset due to DC's worsening financial condition. All assets and liabilities relating to the contract were subsequently written off in the second quarter. Also in April 2001, an agreement was entered into with DC whereby for a period from the date of registration of the shares underlying the warrant to purchase 1.4 million shares of our common stock until October 24, 2001, if we would identify a purchaser for our shares, DC would exercise the warrant and purchase 1.4 million shares of common stock and sell the shares to the identified purchaser. One third of the net proceeds received by DC on the sale of our common stock shall be paid to us toward repayment of DC's obligations under the note to us in the amount of $3 million. In consideration for this, the warrant exercise price was reduced during this period to 38 percent of the closing sale price of our common stock on the day prior to the date of exercise, subject to a minimum price. Because the exercise of the warrants at this reduced price is contingent upon our finding a purchaser of the underlying 1.4 million shares, the value of this re-pricing will be measured and recorded at the time the shares are sold. As of October 24, 2001, we were not able to locate a purchaser and therefore, the warrant was not exercised. On June 24, 2001, DC did not pay the note that was due, and on June 26, 2001, we filed a $3 million lawsuit against DC for breach of contract regarding the $3 million promissory note. It was also learned in the second quarter of 2001 that DC's capital raising efforts and business operations were having difficulty, and we decided to write off all remaining amounts related to the DC contract. The net effect of the write-off is a $7,354,000 non-cash charge to income during the second quarter, which is included in Loss on Digital:Convergence License Contract in our consolidated statements of operations for the year ending December 31, 2001. Any future revenues related to this contract will be recorded as payments are received 37 Product Liability Insurance We have never had any product liability claim asserted against us. However, we could be subject to product liability claims in connection with the use of the products and services that we sell. There can be no assurance that we would have sufficient resources to satisfy any liability resulting from these claims or would be able to have our customers indemnify or insure us against such claims. Although we maintain our insurance against such claims, there can be no assurance that such coverage will be adequate in terms and scope to protect us against material adverse effects in the event of a successful claim. We are currently covered up to $1 million for product and completed operations liability. See "Risk Factors - Risks Specific to NeoMedia - We are 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 Our Business, Prospects, Financial Condition And Results Of Operations, As Well As The Value Of Our Stock." Government Regulation Existing or future legislation could limit the growth of use of the Internet, which would curtail our revenue growth. Statutes and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Congress recently passed laws regarding children's online privacy, copyrights and taxation. The law remains largely unsettled, even in areas where there has been legislative action. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet, e-commerce and online advertising. In addition, the growth and development of e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. See "Risk Factors - Risks Related To Our Industry - Regulatory and Legal Uncertainties Could Harm Our Business." Certain of our proprietary technology allows for the storage of demographic data from our users. In 2000, the European Union recently adopted a directive addressing data privacy that may limit the collection and use of certain information regarding Internet users. This directive may limit our ability to collect and use information collected by our technology in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. We could incur significant additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Employees As of December 31, 2001, we employed 21 persons. Of the 21 employees, ten are located at our headquarters in Fort Myers, Florida, and 11 at other domestic locations. Of the 21 employees, four are dedicated to the Application Services business unit, 11 are dedicated to the Systems Integration Services business unit, and six provide shared services used by both business units. None of our employees are represented by a labor union or bound by a collective bargaining agreement. We believe that our employee relations are good. Properties Our principal executive, development and administrative office is located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. We occupy approximately 15,000 square feet under terms of a written lease from an unaffiliated party which expires on January 31, 2004, with monthly rent totaling approximately $24,000. We maintain a sales facility at 2150 Western Court, Suite 230, Lisle, Illinois 60532, where we occupy approximately 6,000 square feet under the terms of a written lease from an unaffiliated party expiring on October 31, 2003, with monthly rent totaling approximately $7,500. In March 2001, with the acquisition of the assets of Qode.com, Inc., we added an additional 8,388 square feet office lease at 4850 N. State Road 7, Suite 104, Ft. Lauderdale, Florida, with monthly rent totaling approximately $9,200. The lease expires in March 2005. This space is in the process of being subleased pending the anticipated sale of the Qode assets, as subject to an executed non-binding letter of intent with the Finx Group. During 2001, we closed our office in Monterrey, Mexico, which was primarily used for sales and consulting efforts. We believe that existing office space is adequate to meet current and short-term requirements. 38 Legal Proceedings AirClic, Inc. Litigation On July 3, 2001, we entered into a non-binding letter of intent with AirClic which contemplated an intellectual property cross-licensing transaction between us and AirClic. Under the terms of the letter of intent, AirClic was to provide us with bridge financing of $2,000,000, which was to be paid to us in installments. On July 11, 2001, AirClic advanced $500,000 in bridge financing to us in return for a promissory note from us secured by all of our assets, including our physical world-to-Internet patents. During the negotiation of definitive agreements, the letter of intent was abandoned on the basis of our alleged breach of certain representations made by us in the promissory note. On September 6, 2001, AirClic filed suit against us in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, to accelerate repayment of the $500,000 promissory note, scheduled to mature on January 11, 2002, alleging that we breached certain representations and warranties contained in the promissory note that we issued to AirClic regarding, among other things, our rights, title and interests in and to certain intellectual property. AirClic seeks a judgment awarding it $500,000 (plus interest, attorney's fees and expenses) and a declaratory judgment that it has no obligation to fund us the remaining $1.5 million of bridge financing contemplated by the letter of intent. We have filed an answer denying the claims set forth in the complaint and have interposed counterclaims against AirClic. The lawsuit is in its preliminary stages and, as such, at this time it is difficult to assess the outcome or potential liability to us. We intend to continue to vigorously defend this action and pursue our counterclaim for fraud against AirClic. Though by its terms, the promissory note issued by us to AirClic, matured on January 11, 2002, we have not repaid the promissory note. If successful, our counterclaims may result in a reduction of the amounts repayable to AirClic under the promissory note. Regardless of the outcome of the action, based on our currently-available funds, the repayment of the promissory note would have a material adverse effect on our financial condition. Failure to repay the note might result in AirClic's execution on its security interest in our assets, including our key physical world-to-Internet patents, which would have material adverse effect on our business, prospects, financial condition, and results of operations. See "Risk Factors - Risks Specific To NeoMedia - Currently Pending Legal Actions Threaten to Divest Us Of Critical Intellectual Property." We are currently seeking bridge financing to enable us to repay the promissory note to AirClic. AirClic has also filed suit against us 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 promissory note issued by us to AirClic, some of which is patented and others for which a patent application is pending, is invalid and in the public domain. Any declaration that our core patented or patentable technology is non-protectable and in the public domain would have a material adverse effect on our business, prospects, financial condition, and results of operations. See, "Risk Factors - Risks Specific To NeoMedia - We May Be Unable To Protect Our Intellectual Property Rights And We May Be Liable For Infringing The Intellectual Property Rights Of Others". We are vigorously defending this second action as well. Digital: Convergence Litigation On June 26, 2001, we 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. We are seeking payment of the $3 million note plus interest and attorneys fees. See "Business - Other Recent Developments". We have not accrued any gain contingency related to this matter. Other Litigation In April 2001, the former President and director of NeoMedia filed a lawsuit against us and several of our directors. The suit was filed in the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim alleged the individual was fraudulently induced into accepting employment and that we breached the employment agreement. The individual's employment with us ended in January 2001. We are currently negotiating settlement of this case. On August 20, 2001, Ripfire, Inc. filed suit against us in the San Francisco County Superior Court seeking payment of $138,000 under a software license agreement entered into between us and Ripfire in May 2001 relating to implementation of the Qode Universal Commerce Solution. We have entered into a letter of intent with the Finx Group, Inc. to sell certain assets and liabilities relating to Qode. As part of the letter of intent, the Finx Group will assume all liabilities up to $138,000 relating to the Ripfire contract. Accordingly, we have not accrued a liability in the accompanying financial statements. We, along with the Finx Group, are currently negotiating settlement of this matter. On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages in the Circuit Court of the Seventeenth Judicial Circuit for Broward County, Florida. Headway Associates, Ltd. is seeking payment of all amounts due under the terms of the lease agreement of the Ft. Lauderdale office of our Qode business unit. The lease commenced on March 3, 2000 and terminates on March 31, 2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment over a two-month period for settlement of all past-due and future amounts owed under the lease. This amount is accrued in the accompanying financial statements. 39 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. We have entered into a letter of intent with the Finx Group, Inc. to sell certain assets and liabilities relating to Qode. As part of the letter of intent, the Finx Group will assume all liabilities up to $530,000 relating to the Orsus contract. Accordingly, we have not accrued a liability in the accompanying financial statements. We, along with the Finx Group, are currently negotiating settlement of this matter. On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment of approximately $38,700 relating to past due and future payments under an office equipment lease. We have returned the equipment and intend to settle the past due amounts. As of December 31, 2001, we had recorded a liability of approximately $10,000 relating to this matter. During April 2002, we settled this matter for cash payments totaling $29,000. On March 20, 2002, Ecentives, Inc. filed a summons seeking full payment of approximately $44,000 relating to past due and future payments under a service agreement from 2001. During April 2002, we settled this suit for cash payments totaling $24,000. During April 2002, we settled this matter for cash payments totaling $24,000. 40 MANAGEMENT Directors and Officers Our directors and executive officers, their respective ages, and their positions held with us are as follows: Name Age Position - ---- --- -------- Charles W. Fritz......... 45 Chief Executive Officer, President and Chairman of the Board of Directors Charles T. Jensen........ 58 Chief Financial Officer, Treasurer, Vice President and Director William E. Fritz......... 71 Secretary and Director James J. Keil............ 72 Director A. Hayes Barclay......... 71 Director The following is certain summary information with respect to the directors and executive officers of NeoMedia: Charles W. Fritz is a founder of NeoMedia and has served as an officer and as a director of NeoMedia since our inception. On August 6, 1996, Mr. Fritz was appointed chief executive officer and chairman of the Board of Directors. On April 2, 2001, Mr. Fritz was appointed as president. Mr. Fritz is currently a member of the compensation committee. Prior to founding NeoMedia, Mr. Fritz was an account executive with IBM Corporation from January 1986 to January 1988, and director of marketing and strategic alliances for the information consulting group from February 1988 to January 1989. Mr. Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the University of Florida. Mr. Fritz is the son of William E. Fritz, a director of NeoMedia, and its secretary. Charles T. Jensen has been chief financial officer, treasurer and vice president of NeoMedia since May 1, 1996. Mr. Jensen has been a director since August 6, 1996, and currently is a member of the compensation committee. Prior to joining NeoMedia in November 1995, Mr. Jensen was chief financial officer of Jack M. Berry, Inc., a Florida corporation which grows and processes citrus products, from December 1994 to October 1995, and at Viking Range Corporation, a Mississippi corporation which manufactures gas ranges, from November 1993 to December 1994. From December 1992 to February 1994, Mr. Jensen was treasurer of Lin Jensen, Inc., a Virginia corporation specializing in ladies clothing and accessories. Prior to that, from January 1982 to March 1993, Mr. Jensen was Controller and vice-president of finance of The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a B.B.A. in accounting from Western Michigan University and is a Certified Public Accountant. William E. Fritz is a founder of NeoMedia and has served as secretary and director of NeoMedia since our inception. Mr. Fritz also served as treasurer of NeoMedia from its inception until May 1, 1996. Since February 1981 Mr. Fritz has been, an officer and either the sole stockholder or a majority stockholder, of G.T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark, Inc.) and EDSCO, three railroad freight car equipment manufacturing companies. Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's chief executive officer and chairman of the board. James J. Keil, has been a Director of NeoMedia since August 6, 1996. Mr. Keil currently is a member of the Compensation Committee, the Stock Option Committee and the Audit Committee. He is founder and president of Keil & Keil Associates, a business and marketing consulting firm located in Washington, D.C., specializing in marketing, sales, document application strategies, recruiting and Electronic Commerce projects. Prior to forming Keil & Keil Associates in 1990, Mr. Keil worked for approximately 38 years at IBM Corporation and Xerox Corporation in various marketing, sales and senior executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of Elixir Technologies Corporation (a non-public corporation), and from 1990-1992 was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S. degree from the University of Dayton and did Masters level studies at the Harvard Business School and the University of Chicago in 1961/62. A. Hayes Barclay has been a director of NeoMedia since August 6, 1996, and currently is a member of the stock option committee and the audit committee. Mr. Barclay has practiced law for approximately 37 years and, since 1967, has been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd. and its predecessor, with offices in Chicago, Wheaton and Arlington Heights, Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the University of Illinois and a J.D. from the Illinois Institute of Technology - Chicago Kent College of Law. 41 Election of Directors and Officers Directors are elected at each annual meeting of stockholders and hold office until the next succeeding annual meeting and the election and qualification of their respective successors. Officers are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. NeoMedia's by-laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of shareholders and the due election and qualification of his successor. Director and Officer Liability As permitted by Delaware law, we have included in our certificate of incorporation a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, except for liability (i) for any breach of the director's duty of loyalty to us or our stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases, as provided in Delaware law, or (iv) for any transaction from which the director derived an improper personal benefit. The effect of this provision is to eliminate our rights and those of our stockholders (through stockholders' derivative suits on our behalf) to recover monetary damages against a director for breach of the fiduciary duty of care as a director except in the situations described in (i) through (iv) above. This provision does not limit or eliminate our rights or those of our stockholders to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. These provisions will not alter the liability of directors under federal securities laws. Our certificate of incorporation and by-laws also provide that we are required and permitted to indemnify our officers and directors, employees and agents under certain circumstances. In addition, if permitted by law, we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them in their capacity as a director or officer for which they may be indemnified upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to indemnification. At present, we have one pending proceeding involving a director, officer, employee or agent of NeoMedia in which indemnification would be required or permitted. See "Business - Legal Proceedings." Our certificate of incorporation and by-laws also allow us to maintain a directors' and officers' liability insurance policy to cover the costs of indemnifying our directors and officers. Due to current capital shortages, we are currently unable to afford a directors' and officers' liability insurance policy with a term of greater than six months. Our existing policy, recently obtained, expires on July 25, 2002. It provides for coverage of $5,000,000 per occurrence, and a general policy limitation of $10,000,000. We intend 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 our ability to attract and retain qualified director and officer candidates. See "Risk Factors - Risk Specific To NeoMedia - We Have Limited Human Resources; We Need To Attract And Retain Highly Skilled Personnel; And We May Be Unable To Effectively Manage Our Growth With Our Limited Resources." Insofar as indemnification of liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. Meetings of the Board of Directors During our fiscal year ended December 31, 2001, our Board of Directors held 13 meetings. Committees of the Board of Directors NeoMedia's Board of Directors has an Audit Committee, Compensation Committee and a Stock Option Committee. The Board of Directors does not have a standing Nominating Committee. Audit Committee. The Audit Committee is responsible for nominating NeoMedia's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit with NeoMedia's independent accountants, and reviewing the financial statements, audit practices and internal controls of NeoMedia. During 2001, members of the Audit Committee were nonemployee directors - James J. Keil, A. Hayes Barclay and, until September 2001 when he resigned as a Director, John Lopiano. During 2001, the Audit Committee held two meetings. 42 Compensation Committee. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of NeoMedia to the Board of Directors and for administering NeoMedia's Incentive Plan for Management. Charles W. Fritz, Charles T. Jensen, James J. Keil, Paul Reece, and, until September 2001, John Lopiano, were members of NeoMedia's Compensation Committee during 2001. During January 2002, Mr. Reece resigned from the Board of Directors and Compensation Committee. This Committee held seven meetings throughout 2001. Stock Option Committee. The Stock Option Committee, which is comprised of non-employee directors, is responsible for administering NeoMedia's Stock Option Plans. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's Stock Option Committee. During 2001, this Committee held four meetings. Compensation of Directors Directors are reimbursed for expenses incurred in connection with attending meetings of the Board of Directors. Upon election or re-election as a director, non-employee directors receive options to purchase 15,000 shares of NeoMedia's common stock under the 1998 Stock Option Plan. Each employee director receives either fees of $2,000 per meeting attended or, at his election, options to purchase an additional 3,000 shares of NeoMedia's common stock under the 1998 Stock Option Plan. The options are vested immediately upon grant. 43 EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation paid during the years ended December 31, 2001, 2000 and 1999 to: (i) NeoMedia's Chief Executive Officer and (ii) each of NeoMedia's other executive officers as of December 31, 2001 who received aggregate cash compensation during the year ended December 31, 2001 in excess of $100,000 for services rendered to NeoMedia (collectively, "the Named Executive Officers"): Summary Compensation Table
Annual Compensation (1) Long-term Compensation ---------------------------------------------- --------------------------------- Securities Underlying Warrants Other Annual and All other Name and Principal Position Year Salary Compensation Bonus Options(2) Compensation - ---------------------------- ------- --------- ------------- --------- --------------- ---------------- Charles W. Fritz ............... 2001 $ 221,758 $- $ - 400,000 $ 21,352 (4) Chief Executive Officer ..... 2000 250,000 - 148,800(3) 49,000 22,502 (4) 1999 250,000 - - 400,000 84,914 (4) Charles T. Jensen .............. 2001 144,239 - - 240,000 17,794 (4) Chief Financial Officer, 2000 150,000 - 87,860(3) 37,000 29,767 (4) Vice President & Treasurer .. 1999 150,000 - - 180,000 42,712 (4)
- --------------- 1. In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits has been omitted in those instances where the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for the Named Executive Officer for such year. 2. Represents options granted under NeoMedia's 1998 Stock Option Plan and warrants granted at the discretion of NeoMedia's Board of Directors. 3. In June 2001, the Company's Compensation Committee approved an adjustment, relating to the Digital:Convergence patent license fees, to the Annual Incentive Plan for Management that reduced the 2000 bonus payout by approximately $1.1 million. The original amount recorded in 2000 and reported on the Company's Form 10-KSB for 2000 was $430,800 for Charles W. Fritz and $193,860 for Charles T. Jensen. The adjusted amounts are presented in the table above. 4. Includes life insurance premiums where policy benefits are payable to his beneficiary and automobile expenses attributable to personal use and the corresponding income tax effects. 44 Employment Agreements The five year employment agreements between the Company and each of Charles W. Fritz, as Chief Executive Officer and Chairman of the Board, and Charles T. Jensen, as Executive Vice-President and Chief Technical Officer expired on April 30, 2001. Their annual compensation, which at the time of expiration was $250,000 and $150,000, respectively, was continued except that each agreed, along with other officers of NeoMedia, to a 20% reduction in the annual rate for the two month period ended July 15, 2001 in the effort to reduce expenses. The Company plans to renegotiate new employment agreements with Messrs. Fritz and Jensen. In the interim, the Company has put into place agreements providing for six months severance in the event of termination related to a change of control. During the year ended December 31, 2001, the Board of Directors granted Mr. Fritz options to purchase 400,000 shares of Common Stock under the 1998 Stock Option Plan, 200,000 of which were exercisable at the price of $0.20 per share, and 200,000 of which were exercisable at a price of $2.50 per share. During the year ended December 31, 2001, the Board of Directors granted Mr. Jensen options to purchase 240,000 shares of Common Stock under the 1998 Stock Option Plan, 150,000 of which were exercisable at the price of $0.20 per share, and 90,000 of which were exercisable at a price of $2.50 per share. Mr. Fritz had received under the 1998 Stock Option Plan during the year ended December 31, 2000, options to purchase 49,000 shares at a price of $4.44 per share and during the year ended December 31, 1999, options to purchase 200,000 shares at a price of $3.63 per share and options to purchase 200,000 shares at a price of $5.13. Mr. Jensen received options to purchase 37,000 shares at $4.44 per share during 2000, and 90,000 shares at $3.63 and 90,000 shares at $5.13 during 1999, in each case under the 1998 Stock Option Plan. Incentive Plan for Management Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan for Management ("Incentive Plan"), which provides for annual bonuses to eligible employees based upon the attainment of certain corporate and/or individual performance goals during the year. The Incentive Plan is designed to provide additional incentive to NeoMedia's management to achieve these growth and profitability goals. Participation in the Incentive Plan is limited to those employees holding positions assigned to incentive eligible salary grades and whose participation is authorized by NeoMedia's Compensation Committee which administers the Incentive Plan, including determination of employees eligible for participation or exclusion. The Board of Directors can amend, modify or terminate the Incentive Plan for the next plan year at any time prior to the commencement of such next plan year. To be eligible for consideration for inclusion in the Incentive Plan, an employee must be on NeoMedia's payroll for the last three months of the year involved. Death, total and permanent disability or retirement are exceptions to such minimum employment, and awards in such cases are granted on a pro-rata basis. In addition, where employment is terminated due to job elimination, a pro rata award may be considered. Employees who voluntarily terminate their employment, or who are terminated by NeoMedia for unacceptable performance, prior to the end of the year are not eligible to participate in the Incentive Plan. All awards are subject to any governmental regulations in effect at the time of payment. Performance goals are determined for both NeoMedia's and/or the employee's performance during the year, and if performance goals are attained, eligible employees are entitled to an award based upon a specified percentage of their base salary. Stock Option Plans Effective as of February 1, 1996, NeoMedia adopted its 1996 Stock Option Plan, which was amended and restated effective July 18, 1996 and further amended through November 18, 1996, ("1996 Stock Option Plan"). The 1996 Stock Option Plan provides for the granting of non-qualified stock options and "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and provides for the issuance of a maximum of 1,500,000 shares of common stock. Nonqualifed options granted under the Plan with respect to 1,500,000 shares were outstanding as of March 29, 2002. Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan ("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 8,000,000 shares of common stock, of which 7,640,000 have been granted and were outstanding as of April 4, 2002. 45 401(k) Plan NeoMedia maintains a 401(k) Profit Sharing Plan and Trust (the "401(k) Plan"). All employees of NeoMedia who are 21 years of age and who have completed three months of service are eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each participant may make elective contributions of up to 20% of such participant's pre-tax salary (up to a statutorily prescribed annual limit, which is $10,500 for 2001 and $11,000 for 2002) to the 401(k) Plan, although the percentage elected by certain highly compensated participants may be required to be lower. All amounts contributed to the 401(k) Plan by employee participants and earnings on these contributions are fully vested at all times. The 401(k) Plan also provides for matching and discretionary contributions by NeoMedia. To date, NeoMedia has not made any such contributions. Options and Warrants Granted in the Last Fiscal Year The following table contains information concerning the grant of options, all of which are nonqualified, and warrants to the Named Executive Officers during the year ended December 31, 2001:
Number of Securities % of Total Potential Realized Value at Underlying Options/ Assumed Annual Rates of Stock Options/ Warrants Price Appreciation for Term Warrants Granted to Exercise Expiration ------------------------------------- Name Granted Employees Price Date 0% 5% 10% - ---------------------- --------------- ---------------- ------------- -------------- -- -- --- Charles W. Fritz 200,000 5.7% $2.50 1/2/11 $-- $814,447 $1,296,871 200,000 5.7% $0.20 9/13/11 $-- $65,156 $103,750 Charles T. Jensen 90,000 2.6% $2.50 1/2/11 $-- $366,501 $583,592 150,000 4.3% $0.20 9/13/11 $-- $48,867 $77,812
Option and Warrant Exercises in Last Fiscal Year and Fiscal Year-End Values None of the Named Executive Officers exercised during the year ended December 31, 2001 any options or warrants. The following table sets forth the number and value of all unexercised options and warrants as of December 31, 2002 by the Named Executive Officers during the year.
Number of Unexercised Value of Unexercised In- Securities Underlying the-Money Options and Options and Warrants at Warrants at Shares December 31, 2001 December 31, 2001 (1) Acquired Value ----------------------------- ------------------------------ Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - --------------------------- -------------- ----------- ----------- --------------- ------------ --------------- Charles W. Fritz - - 699,600 549,400 - - Charles T. Jensen - - 413,186 292,200 - -
(1) The value of in-the-money options is calculated by the difference between the market price of the stock at December 31, 2001 ($0.14) and the exercise price of the options. Option Repricing Program To encourage the exercise of options, our Board of Directors in April 2002 adopted an option repricing program. Under the program, those persons holding options granted under the 1996 Stock Option Plan and the 1998 Stock Option Plan may to the extent their options are exercisable during the period ending October 9, 2002 exercise the option at a price which is the greater of $0.12 per share or 50% of the last sale price of a share of our common stock on the Nasdaq SmallCap Market on the trading date immediately preceding the date of exercise. To participate in such program the optionholder must agree to sell the shares following the exercise. As of April 4, 2002, there were outstanding under both plans nonqualified options exercisable during the program period for an aggregate of 7,384,760 shares of our common stock at prices ranging from $0.135 per share to $10.09 per share. Upon execution of the program, the exercise price reverts to the price provided in the option agreement. 46 Under applicable provisions of the Internal Revenue Code, to the extent the nonqualified options are exercised, the holders will be deemed to have the taxable income to the extent of the difference between the fair market value and the exercise price and we will suffer a comparable charge to our earnings. Alpine Securities Inc., a broker-dealer registered under the Securities Exchange Act has agreed to assist option holders in the option exercise and the sale of shares acquired and the payment to us of the exercise price from the sale proceeds. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's officers and directors, and persons who own more than ten percent of a registered class of NeoMedia's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the Nasdaq SmallCap Market. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish NeoMedia with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to NeoMedia, NeoMedia believes that during 2001 there was no delinquency in the Section 16(a) filing obligations of NeoMedia's officers, directors and ten percent beneficial owners. 47 STOCK PRICE PERFORMANCE GRAPH The following graph compares the yearly percentage change in the cumulative total stockholder return (change in stock price plus reinvested dividends) on NeoMedia's Common Stock with the cumulative total return for the Nasdaq Stock Market Index (U.S.) (the "Nasdaq Composite Index") and the Dow Jones Internet Composite Index (the "Dow Jones Internet Index"). The graph assumes that $100 was invested in the Common Stock of the Company and in each of the comparative indices on December 31, 1996, the trading day before the beginning of the Company's fifth preceding fiscal year. The graph further assumes that such amount was initially invested in the Common Stock of the Company at a per share price of $5.625, the price at which shares of the Company's common stock closed on the Nasdaq SmallCap exchange on December 31, 1996. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of NeoMedia's Common Stock. Date NeoMedia Nasdaq 100 Dow-Jones Internet - ----------------- ------------------------------------------------ 12/31/1996 -10.0% -10.9% 0.0% 1/31/1997 0.0% 0.0% 0.0% 2/28/1997 -8.0% -7.7% 0.0% 3/31/1997 -22.0% -13.5% 0.0% 4/30/1997 -22.0% -5.1% 0.0% 5/28/1997 -26.0% 6.6% 0.0% 6/30/1997 21.0% 3.9% 0.0% 7/30/1997 41.0% 19.5% 0.0% 8/31/1997 74.0% 16.5% 4.5% 9/30/1997 65.0% 19.1% 22.3% 10/29/1997 54.0% 11.7% 22.6% 11/30/1997 30.0% 14.0% 17.9% 12/31/1997 45.5% 7.5% 20.1% 1/31/1998 10.0% 16.2% 20.9% 2/28/1998 19.0% 29.6% 48.3% 3/31/1998 25.0% 32.5% 68.3% 4/30/1998 39.5% 35.4% 83.8% 5/28/1998 24.0% 31.8% 66.1% 6/30/1998 -22.0% 45.1% 114.5% 7/30/1998 -45.5% 54.3% 101.7% 8/31/1998 -58.0% 23.7% 32.5% 9/30/1998 -59.0% 46.0% 71.9% 10/29/1998 -60.0% 51.5% 80.7% 11/30/1998 -68.0% 69.1% 156.4% 12/31/1998 -54.0% 99.2% 223.0% 1/31/1999 -34.0% 130.8% 391.3% 2/28/1999 -43.0% 108.9% 297.4% 3/31/1999 -26.0% 128.6% 424.3% 4/30/1999 -21.5% 131.8% 501.4% 5/28/1999 -16.0% 126.7% 405.6% 6/30/1999 -2.0% 149.2% 430.4% 7/30/1999 26.0% 146.4% 350.5% 8/31/1999 42.0% 160.1% 357.6% 9/30/1999 8.0% 161.3% 403.9% 10/29/1999 -15.0% 186.2% 433.5% 11/30/1999 -12.0% 221.9% 556.0% 12/31/1999 -24.0% 302.3% 761.7% 1/31/2000 56.0% 287.4% 711.3% 2/29/2000 124.0% 363.0% 857.8% 3/31/2000 36.0% 377.2% 724.7% 4/30/2000 52.0% 309.4% 543.2% 5/31/2000 -17.5% 260.7% 415.4% 6/30/2000 -6.0% 308.4% 518.0% 7/31/2000 -6.0% 291.7% 470.5% 8/31/2000 -29.0% 342.5% 590.1% 9/30/2000 2.0% 287.5% 515.3% 10/31/2000 -20.0% 256.2% 392.0% 11/30/2000 -52.0% 172.0% 215.4% 12/31/2000 -52.0% 154.1% 192.7% 1/31/2001 -20.0% 181.4% 226.2% 2/28/2001 -22.0% 107.1% 104.4% 3/31/2001 -20.0% 70.7% 49.5% 4/30/2001 -53.1% 101.3% 87.9% 5/31/2001 -65.8% 95.3% 88.4% 6/30/2001 -68.8% 98.9% 81.0% 7/31/2001 -81.6% 82.7% 46.3% 8/31/2001 -96.2% 59.5% 13.5% 9/30/2001 -96.5% 26.8% -16.6% 10/31/2001 -97.4% 48.1% -0.6% 11/30/2001 -98.2% 73.2% 26.2% 12/31/2001 -97.8% 71.1% 33.6% 48 COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS The Compensation Committee, which meets on a periodic basis, is comprised of Messrs. Charles W. Fritz and Charles T. Jensen, officers of the Company and James J. Keil, a non-employee member of the Board of Directors (two non-employee Directors resigned as Directors and members during 2001). The Compensation Committee formulates and administers compensation policies for the President and Chief Executive Officer and all vice presidents of NeoMedia. (A Stock Option Committee consisting of two non-employee Directors is responsible for determining to whom and under what terms stock options should be granted, other than options which are automatically granted to members of the Board of Directors, under the Plan.) REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION (1) The following is a report of the Compensation Committee of the Board of Directors (the "Committee") describing the compensation policies applicable to the Company's executive officers during the fiscal year ended December 31, 2001. The Committee is responsible for establishing and monitoring the general compensation policies and compensation plans of the Company, as well as the specific compensation levels for executive officers. General Compensation Philosophy Under the supervision of the Committee, the Company's compensation policy is designed to attract, motivate and retain qualified key executives critical to the Company's success. It is the objective of the Company to have a portion of each executive's compensation dependent upon the Company's performance as well as upon the executive's individual performance. Accordingly, each executive officer's compensation package is comprised of three elements: (i) base salary which reflects individual performance and expertise, (ii) variable bonus payable in cash and tied to the achievement of certain annual performance goals and (iii) stock options which are designed to align the long-term interests of the executive officer with those of the Company's stockholders. The Committee considers the total compensation of each executive officer in establishing each element of compensation, other than stock options which are the responsibility of the Stock Option Committee. All incentive compensation plans are reviewed at least annually to assure they meet the current strategies and needs of the Company. The summary below describes in more detail the factors that the Committee considers in establishing each of the three primary components of the compensation package provided to the executive officers. Base Salary Base salary ranges are established based on benchmark data from nationally recognized surveys of similar high-technology companies that compete with the Company for executive officers and Company research of peer companies. Each executive officer's base salary is established on the basis of the individual's qualifications and relevant experience. Variable Bonus The Committee believes that a substantial portion of the annual compensation of each executive should be in the form of variable incentive pay to reinforce the attainment of Company goals. The Incentive Plan rewards achievement of specified levels of corporate profitability. A pre-determined formula, which takes into account profitability against the annual plan approved by the Board of Directors, is used to determine the bonus award. The individual executive officer's bonus award is based upon discretionary assessment of each officer's performance during the prior fiscal year. Compensation for the Chief Executive Officer Charles W. Fritz has served as the Company's Chairman of the Board and Chief Executive Officer since August 1996. Base Salary: The Committee reviews the Chief Executive Officer's major accomplishments and reported base salary information for the chief executive officers of other companies in the Company's peer group. Based on this information, the Committee recommends a salary adjustment to the Board of Directors. Beginning in 1996, the Company and Mr. Fritz entered into a five-year employment agreement under which Mr. Fritz was paid $170,000 per year. In January 1998, the Committee increased Mr. Fritz's salary to $250,000. In April 2001, the employment agreement expired. The Company and Mr. Fritz have not renewed the contract. Mr. Fritz's salary is currently $250,000. 49 Cash Incentive: The Chief Executive Officer's incentive target is at the discretion of the Committee. Achievement of the target is based on overall company income versus annual Plan income. Mr. Fritz did not earn a bonus relating to fiscal 2001. During June 2001, the Committee approved an adjustment, relating to the Digital:Convergence patent license fees, to the 2000 Incentive Plan that reduced the bonus payout by approximately $1.1 million. Mr. Fritz's incentive relating to fiscal 2000 was reduced from $430,800 to $148,800. The award had not been paid as of April 1, 2002. COMPENSATION COMMITTEE Charles W. Fritz Charles T. Jensen James J. Keil (1) This Section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any filing of the Company under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors currently consists of Messrs. Fritz, Jensen, and Keil. During the last fiscal year, no interlocking relationship existed between the Company's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company. REPORT OF THE AUDIT COMMITTEE The Audit Committee for the last fiscal year consisted of two nonemployee Directors (a third resigned in September 2001). The Board of Directors has determined that none of the members of the Audit Committee has a relationship to NeoMedia that may interfere with his independence from NeoMedia and its management. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial reports and other financial information provided by the Company to any governmental body or the public, the Company's systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board of Directors have established, and the Company's auditing, accounting and financial processes generally. The Audit Committee annually recommends to the Board of Directors the appointment of a firm of independent auditors to audit the financial statements of the Company and meets with such personnel of the Company to review the scope and the results of the annual audit, the amount of audit fees, the Company's internal accounting controls, the Company's financial statements contained in the Company's Annual Report to Stockholders and other related matters. The Audit Committee has reviewed and discussed with management the financial statements for fiscal year 2001 audited by Stonefield Josephson, Inc., the Company's independent auditors. The Audit Committee has discussed with Stonefield Josephson, Inc. various matters related to the financial statements, including those matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU ss. 380). The Audit Committee has also received the written disclosures and the letter from Stonefield Josephson, Inc. required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), and has discussed with the firm its independence. Based upon such review and discussions the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the fiscal year ending December, 2001 for filing with the Securities and Exchange Commission. AUDIT COMMITTEE James J. Keil A. Hayes Barclay The report of the Audit Committee shall not be deemed incorporated by reference by any general statement incorporating by reference this prospectus or registration statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that the filing specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. 50 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of April 4, 2002, (i) by each person or entity known by us to own beneficially more than five percent of our common stock, (ii) by each of our directors and nominees, (iii) by each of our executive officers named in the summary compensation table set forth below, (iv) by all of our executive officers and directors as a group, (v) by each of our selling stockholders. The shares of selling stockholders are being registered to permit public secondary trading of the shares, and the selling stockholders may offer their shares for resale from time to time pursuant to this registration. The selling stockholders will pay all commissions, transfer taxes, and other expenses associated with the sale of securities by them. The shares are being registered pursuant to contractual obligations of NeoMedia, and we have agreed to pay the expenses of the preparation of this prospectus.
Common stock beneficially Amount and Common owned after offering/1/A/ nature of stock covered ------------------------- beneficial Percent of by this Percent of ownership/1/ class/1/ prospectus /B/ Number class -------------- -------- ---------------- ------ ----- Charles W. Fritz/2/3/#/ ....................... 2,455,155 6.1% 1,585,555 869,600 2.2% Fritz Family Limited Partnership/2/4/#/ ....... 1,511,742 3.7% 1,511,742 0 /*/ Chandler T. Fritz 1994 Trust/2/5/6/#/ ......... 58,489 /*/ 58,489 0 /*/ Charles W. Fritz 1994 Trust/2/5/7/#/ .......... 58,489 /*/ 58,489 0 /*/ Debra F. Schiafone 1994 Trust/2/5/8/#/ ........ 48,489 /*/ 48,489 0 /*/ William Fritz/2/4/5/#/ ........................ 339,701 /*/ 190,701 149,000 /*/ Edna Fritz/2/4/#/ ............................. 90,609 /*/ 90,609 0 /*/ Charles T. Jensen/2/9/ ........................ 518,686 1.3% 0 518,686 1.3% A. Hayes Barclay/10/ .......................... 169,000 /*/ 0 169,000 /*/ James J. Keil/11/ ............................. 123,000 /*/ 0 123,000 /*/ All executive officers and directors as a group (9 persons)/12/ ............... 5,373,360 13.3% 3,544,074 1,829,286 4.5% Shelly Singhal/13/#/ .......................... 3,000,000 3,000,000 0 /*/ Matthew McGovern/13/#/ ........................ 3,000,000 3,000,000 0 /*/ John Buttles/13/#/ ............................ 3,000,000 3,000,000 0 /*/ Angela McCleer/13/#/ .......................... 3,000,000 3,000,000 0 /*/ Donald Danks/13/# ............................. 1,500,000 1,500,000 0 /*/ SBI E-2 CAPITAL (USA)/14/#/ ................... 3,000,000 3,000,000 0 /*/ BMS Capital/15/#/ ............................. 2,500,000 2,500,000 0 /*/ Digital:Convergence Corp./16/#/ ............... 1,400,000 1,400,000 0 /*/ Data Sales Corporation, Inc./17/#/ ............ 1,614,501 1,614,501 0 /*/ Thornhill Capital LLC/18/#/ ................... 480,900 404,900 76,000 /*/ About.com, Inc./19/#/ ......................... 452,489 452,489 0 /*/ Qode.com, Inc./20/#/ .......................... 1,676,500 1,676,500 0 /*/ Bank of Austria/21/#/ ......................... 250,000 250,000 0 /*/ Durban Administration S.A./22/#/ .............. 156,250 156,250 0 /*/ Novus Holding Corp./23/#/ ..................... 154,060 154,060 0 /*/ Robert Fessler/23/#/ .......................... 4,100 4,100 0 /*/ David Kaminer/24/#/ ........................... 32,486 32,486 0 /*/ Mirabaud & Ce./25/#/ .......................... 21,500 21,500 0 /*/ Constantia Privatbank/26/#/ ................... 18,000 18,000 0 /*/ Bank von Ernst Zuerich/27/#/ .................. 15,000 15,000 0 /*/ HSBC Republic Bank/28/#/ ...................... 30,000 30,000 0 /*/ Total .................................... 30,679,146 28,773,860 1,905,286 4.7%
51 /*/ denotes ownership of less than one percent of issued and outstanding shares of our common stock. /#/ denotes selling stockholder. /%/ denotes shares issued for a total of $0.17 per share, $0.01 per share of which was paid in cash and $0.16 per share of which subscription price was paid by means of a limited recourse promissory note maturing on the earlier of (1) the date which is on or about May 11, 2002, and (2) 30 days following the effective date of this registration statement. /&/ the following amounts of shares in this offering are issuable upon exercise of outstanding warrants held by: William E. Fritz, 4,286 shares; Edna Fritz, 8,237 shares; Thornhill Capital, LLC, 404,900 shares; Digital: Convergence Corp., 1,400,000 shares. 1. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes generally voting power and/or investment power with respect to securities. Options and warrants to purchase shares of common stock currently exercisable or exercisable within sixty days of April 4, 2002 are deemed outstanding for computing the beneficial ownership percentage of the person holding such options, but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Except as indicated by footnote, to our knowledge, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. 2. The address of the referenced holder(s) is c/o NeoMedia Technologies, Inc., 2201 Second Street, Suite 600, Fort Myers, FL 33901 3. Shares beneficially owned include 400 shares of common stock, 100 shares owned by each of Mr. Fritz's four minor children for an aggregate of 400 shares, 869,600 shares of common stock issuable upon exercise of options granted under our 1998 stock option plan, 42,186 shares of common stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of common stock held by the CW/LA II Family Limited Partnership, a family limited partnership for the benefit of Mr. Fritz's family. 4. William E. Fritz, our corporate secretary, and his wife, Edna Fritz, are the general partners of the Fritz Family Limited Partnership and therefore each are deemed to be the beneficial owner of the 1,511,742 shares held in the Fritz Family Partnership. As trustee of each of the Chandler R. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust, William E. Fritz is deemed to be the beneficial owner of the shares of NeoMedia held in each trust. Accordingly, Mr. William E. Fritz is deemed to be the beneficial owner of an aggregate of 2,107,519 shares, 165,467 of which as a result of being trustee of the Chandler T. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust, 1,511,742 shares as a result of being co-general partner of the Fritz Family Partnership, 268,787 shares owned by Mr. Fritz or his spouse, 12,523 shares to be issued upon the exercise of warrants held by Mr. Fritz or his spouse and 149,000 shares to be issued upon the exercise of options held by Mr. Fritz or his spouse. Mr. William E. Fritz may be deemed to be a parent and promoter of NeoMedia, as those terms are defined in the Securities Act. 5. William E. Fritz is the trustee of this Trust and therefore is deemed to be the beneficial owner of such shares. 6. Chandler T. Fritz, son of William E. Fritz, is the primary beneficiary of this trust. 7. Charles W. Fritz, son of William E. Fritz and our president, chief executive officer, an Chairman of the Board, is the primary beneficiary of this trust. 8. Debra F. Schiafone, daughter of William E. Fritz, is the primary beneficiary of this trust. 9. Includes 517,186 shares of common stock issuable upon exercise of options granted under our 1996 and 1998 stock option plans. 10. Includes 164,000 shares of common stock issuable upon exercise of options granted under our 1996 and 1998 stock option plans. The address of the referenced individual is c/o Barclay & Damisch Ltd. 115 West Wesley Street Wheaton, IL 60187. 52 11. Includes 123,000 shares of common stock issuable upon exercise of options granted under NeoMedia's 1996 and 1998 stock option plans. The address of the referenced individual is c/o Keil & Keil Associates 733 15th Street, N.W. Washington 20005 12. Includes an aggregate of 1,822,786 currently exercisable options to purchase shares of common stock granted under our 1996 stock option plan and 1998 stock option plan and 12,523 currently exercisable warrants to purchase shares of common stock. 13. The address of the referenced holder(s) is c/o SBI-E2 (USA) Capital, 23 Corporate Plaza, Suite 210, Newport Beach, CA, 92660. 14. Dispositive control of the referenced shares lies with Shelly Singhal, c/o SBI-E2 (USA) Capital, 23 Corporate Plaza, Suite 210, Newport Beach, CA, 92660. 15. Dispositive control of the referenced shares lies with Shelly Singhal, Matthew McGovern, and John Buttles, c/o SBI-E2 (USA) Capital, 23 Corporate Plaza, Suite 210, Newport Beach, CA, 92660, as co-managers of BMS Capital LLC. Each of Shelly Singhal, Matthew McGovern and John Buttles own 1/3 of the membership interests of BMS Capital LLC. 16. The address of the referenced holder(s) is c/o William Leftwich, 9101 N. Central Expressway, 6th Floor, Dallas, TX, 75231. 17. Dispositive control of the referenced shares lies with Ronald Breckner, President of Data Sales Corporation, Inc., 3450 West Burnsville Parkway, Burnsville, MN, 55337. 18. The address of the referenced holder(s) is c/o Alan Refkin, 3709 Fielding Drive, Springfield, IL, 62707. 19. The address of the referenced holder(s) is c/o Tom Rogers, PRIMEDIA, Inc. (parent company of About.com, Inc.) 745 Fifth Avenue, New York, NY, 10151. These shares are subject to a right of first refusal in favor of us, sale volume restrictions and sale price restrictions pursuant to a certain Agreement for Payment in Stock, with us. These restrictions are only applicable to the Seller and will not bind subsequent purchasers of its shares. Subject to the right of first refusal described above, control over the disposition of these shares is held by Primedia, Inc., a Delaware corporation, by virtue of its position as sole parent corporation of About.com, Inc. Primedia, Inc. is publicly-listed on the New York Stock Exchange, under the trading symbol, "PRM". The directors of Primedia, Inc. are Thomas S. Rogers, Charles G. McCurdy and Beverly C. Chell, and the Chief Executive Officer of Primedia, Inc. is Thomas S. Rogers. 20. Up to 1,676,500 shares are being registered in the name of Qode.com, Inc. The shares have been held in escrow pending the results of negotiations between us 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. Dispositive control rests with William Carpenter, President of Qode.com, Inc., 659 Rock Cove Lane, Severna Park, MD, 2114. 21. The address of the referenced holder(s) is c/o Sieglinde Brand, Obere Donastrausse AG, A-1020, Vienna, Austria. 22. The address of the referenced holder(s) is c/o Thomas Lungkofler, Stadtle 28, FL-9490, Vaduz, Liechtenstein. Dispositive control of the referenced shares lies with its directors: IPC Management Trust reg., of which the trustees are Dr. Nicola Feuerstein, Dr. Erik Muller, Sandro Prete, and Wolfgang Bosch; Dr. Nicola Feuerstein; Sandro Prete; and, Renato Pool. 23. The address of the referenced holder(s) is c/o Robert Fessler, 620 NW 35th Street, Boca Raton, FL, 33431. Dispositive control of the referenced shares lies with Robert G. Fessler, Chairman of Novus Holding Corp. Robert Fessler is a director of Qode.com, Inc., the assets of which have been acquired by NeoMedia. 24. The address of the referenced individual is 108 Ralph Avenue, White Plains, NY, 10606-3812. 25. The address of the referenced holder(s) is c/o P.J. Marti and L. Morgillo, 3 Boulevard du Theatre, 1204, Geneva, Switzerland. 26. The address of the referenced holder(s) is c/o Dominik Pflanzer, Bankgasse 2, 1010, Wien, Austria. 53 27. The address of the referenced holder(s) is c/o Robert Faaz, Stauffacherplatz 6, 8026, Zurich, Switzerland. Dispositive control of the referenced shares lies with Amitie Investment S.A., a corporation organized under the laws of the Republic of Panama. The President of Amitie Investment S.A. is Roberto Pollak - Aichelburg 28. The address of the referenced holder(s) is c/o Ezra Marcos, Paradeplatz 5 - Postfach, 8039, Zurich, Switzerland. /A/ Assumes all shares eligible for sale by selling stockholder under this prospectus are sold. /B/ Includes 1,400,000 shares of common stock to be issued upon exercise of warrants held by Digital:Convergence Corporation. 54 RELATED PARTY TRANSACTIONS In January 1996, we provided to one of our directors and principal stockholders, William E. Fritz, an advance of $472,000 payable within 30 days of demand by us. This loan bore interest at 8% payable on a monthly basis. The loan was repaid in full in February, 1997. In March 1996, we borrowed $135,000 from William E. Fritz and $36,000 from Charles W. Fritz, payable within 30 days of demand, bearing interest at 8% per annum. In June 1996, we borrowed an additional $200,000 from William E. Fritz and $36,000 from a principal stockholder, payable within 30 days of demand, bearing interest at 8% per annum. The net proceeds from these financing transactions were used for general corporate operating purposes. These loans were repaid in full during 1996. In connection with the June 1996 notes, we granted a warrant to the stockholder to purchase up to 260,000 shares of our common stock at an exercise price of $8.85. In December 1997, the Board of Directors granted a warrant to purchase up to an additional 300,000 shares of our common stock at an exercise price of $7.875 to Charles W. Fritz, our Chief Executive Officer and a principal stockholder. This warrant is exercisable until December 11, 2002 and was granted in consideration of the accelerated exercise of the warrant for 260,000 shares which provided capital to us on a more favorable basis to us than obtaining other capital funds. Assuming a risk-free interest rate of 6.0%, an expected life of 1.5 years, an expected volatility of 37% and no expected dividends, the Black-Scholes model computed a fair value of approximately $515,000. In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of our common stock from us at a price of $3.03 per share. In January 1999, William Fritz purchased 42,857 shares of our common stock from us at a price of $3.50 per share. As part of these purchases, Edna Fritz received a total of 8,237 warrants to purchase stock at $3.04 per share and William Fritz received 4,286 warrants to purchase stock at $3.50 per share, exercisable until January 2003. In June 1999, we sold a license for the right to utilize our Neolink Information Server to Daystar Services L.L.C. ("Daystar") a Tennessee limited liability company, owned in part by an officer and one of our board members , for $500,000. The original business purpose of the sale was to generate revenue through the sale of an exclusive license to Daystar. In April 2000, in anticipation of either a potential acquisition of the Company by Digital:Convergence, or a long-term intellectual property license with Digital:Convergence, we purchased substantially all the assets of Daystar, including the rights to the license we sold to Daystar in 1999, for approximately $3.5 million of our common stock. In order to enter into a 10-year intellectual property license agreement with Digital:Convergence, we were required to re-purchase the exclusive license agreement. Additional Daystar assets purchased were to be employed in our MLM/Affinity licensing program. The assets purchased were recorded as intangible assets at approximately $3.5 million on the accompanying consolidated balance sheets. We believe this transaction was comparable to a transaction entered into at arm's length. In July 1999, the Company paid professional fees in the amount of $73,000 to James J. Keil, a director of the Company, for services related to the recruitment of our then President and Chief Operating Officer and one sales representative. During the years ended December 31, 1999 and 1998, we leased from William E. Fritz a trade show booth for rental payments totaling $31,000 and $34,000, respectively. The lease expired during 1999. During each of the years ended December 31, 2000 and 1999, we leased office and residential facilities from related parties for rental payments totaling $5,000 and $13,000, respectively. The lease expired during 2000. During October 2001, we borrowed $4,000 from Charles W. Fritz, our Chairman, Chief Executive Officer and a director, under a note payable bearing interest at 10% per annum with a term of six months. During March 2002, we borrowed $190,000 from William E. Fritz, under a note payable bearing interest at 8% per annum with a term of 16 days. We believe that all of the above transactions were conducted at "arm's length", representing what we believe to be fair market value for those services. 55 DESCRIPTION OF SECURITIES The following description of our capital stock and certain provisions of our certificate of incorporation and bylaws is a summary and is qualified in its entirety by the provisions of our certificate of incorporation and bylaws, which have been filed as exhibits to our registration statement of which this prospectus is a part. In General We are authorized by our certificate of incorporation to issue an aggregate of 50,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. At the date of this prospectus, 38,686,594 shares of common stock were outstanding. We estimate that, as many of our shares of common stock are held in "street name", we have approximately 3,000 beneficial holders of our common stock. None of our shares of preferred stock are outstanding as of the date of this prospectus. Our Board of Directors has adopted, subject to stockholders approval, an amendment to the certificate of incorporation increasing the authorized shares of our common stock and preferred stock to 200,000,000 and 25,000,000 respectively, of the same par value. Common Stock Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Holders of the common stock do not have cumulative voting rights, which means that the holders of more than one half of our outstanding shares of common stock, subject to the rights of the holders of preferred stock, can elect all of our directors, if they choose to do so. In this event, the holders of the remaining shares of common stock would not be able to elect any directors. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of common stock are entitled to receive ratably, dividends when, as, and if declared by the Board of Directors out of funds legally available for that purpose and, upon our liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is duly authorized and validly issued, fully-paid, and nonassessable. In the event we were to elect to sell additional shares of common stock following this offering, investors in this offering would have no right to purchase additional shares. As a result, their percentage equity interest in us would be diluted. The shares of our common stock offered in this offering will be, when issued and paid for, fully-paid and not liable for further call and assessment. Except as otherwise permitted by Delaware law, and subject to the rights of the holders of preferred stock, all stockholder action is taken by the vote of a majority of the outstanding shares of common stock voted as a single class present at a meeting of stockholders at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or proxy. Preferred Stock We may issue preferred stock in one or more series and having the rights, privileges, and limitations, including voting rights, conversion rights, liquidation preferences, dividend rights and preferences and redemption rights, as may, from time to time, be determined by the Board of Directors. Preferred stock may be issued in the future in connection with acquisitions, financings, or other matters as the Board of Directors deems appropriate. In the event that we determine to issue any shares of preferred stock, a certificate of designation containing the rights, privileges, and limitations of this series of preferred stock shall be filed with the Secretary of State of the State of Delaware. The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control of the Company without further action by our stockholders, and may adversely affect the voting and other rights of the holders of our common stock. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of our common stock, including the loss of voting control to others. See "Risk Factors - Risks Specific To NeoMedia - Some Provisions Of Our Certificate Of Incorporation And By-Laws May Deter Takeover Attempts, Which May Limit The Opportunity Of Our Stockholders To Sell Their Shares At A Premium To The Then Market Price." During December 1999, our Board of Directors approved a "Certificate of Resolutions Designating Rights and Preferences of Preferred Stock", filed with the Secretary of State of the State of Delaware on December 20, 1999. By this approval and filing, 200,000 shares of Series A Preferred Stock ("Series A Preferred") were designated. Series A Preferred carries the following rights: 56 - The right to receive mandatory cash dividends equal to the greater of $0.001 per share and 100 times the amount of all dividends (cash or non-cash, other than dividends of shares of common stock) paid to holders of the common stock, which dividend is payable 30 days after the conclusion of each calendar quarter and immediately following the declaration of a dividend on common stock; - One hundred votes per each share of Series A Preferred on each matter submitted to a vote of our stockholders; - The right to elect two directors at any meeting at which directors are to be elected, and to fill any vacancy on the Board of Directors previously filled by a director appointed by the Series A Preferred holders; - The right to receive an amount, in preference to the holders of common stock, equal to the amount per share payable to holders of common stock, plus all accrued and unpaid dividends, and following payment of 1/100th of this liquidation preference to the holders of each share of common stock, an additional amount per share equal to 100 times the per share amount paid to the holders of common stock. - The right to exchange each share of Series A Preferred for 100 times the consideration received per share of common stock in connection with any merger, consolidation, combination or other transaction in which shares of common stock are exchanged for or converted into cash, securities or other property. - The right to be redeemed in accordance with our stockholders rights plan. While accrued mandatory dividends are unpaid, we may not declare or pay dividends or distributions on, or redeem, repurchase or reacquire, shares of any class or series of junior or parity stock. The Series A Preferred was created to be issued in connection with our stockholders rights plan, described below. No shares of Series A Preferred have been issued to date. On June 19, 2001, our Board of Directors approved a "Certificate of Designations to Create a Class of Series A Convertible Preferred Stock for NeoMedia Technologies, Inc," filed with the Secretary of State of the State of Delaware on June 20, 2001. Our Series A Convertible Preferred Stock, par value $0.01 per share ("Series A Convertible Preferred"), has the following rights: - Series A Convertible Preferred is convertible into shares of our common stock at a one-to-one ratio, subject to proportional adjustments in the event of stock splits or combinations, and dividends or distributions of shares of common stock, at the option of the holder; shares are subject to automatic conversion as determined in each agreement relating to the purchase of shares of Series A Convertible Preferred; - Each share of Series A Convertible Preferred is entitled to receive a liquidation preference equal to the original purchase price of such share in the event of liquidation, dissolution, or winding up; - Upon merger or consolidation, or the sale, lease or other conveyance of all or substantially all of our assets, shares of Series A Convertible Preferred are automatically convertible into the number of shares of stock or other securities or property (including cash) to which the common stock into which it is convertible would have been entitled; - Shares of Series A Convertible Preferred are entitled to one vote per share, and vote together with holders of common stock. In June 2001, 452,489 shares of Series A Convertible Preferred were issued to About.com, Inc. pursuant to a certain Agreement for Payment in Common Stock, in lieu of cash payment to About.com for online advertising services. On January 2, 2002, such shares were converted into 452,489 shares of common stock, which are being registered for sale hereby. On January 16, 2002, our Board of Directors approved a "Certificate of Designation, Preferences, Rights and Limitations of Series B 12% Convertible Redeemable Preferred Stock of NeoMedia Technologies, Inc.", filed with the Secretary of State of the State of Delaware on February 28, 2002. Our Series B 12% Convertible Redeemable Preferred Stock, par value $0.01 per share ("Series B Preferred"), has the following rights: - Series B Preferred shares accrue dividends at a rate of 12% per annum, or $1.20 per share, between the date of issuance and the first anniversary of issuance; - Series B Preferred is redeemed to the maximum extent permitted by law (based on our funds legally available for redemption) at a price per share of $15.00, plus accrued dividends (a total of $16.20 per share) on the first anniversary of issuance; - Series B Preferred receive proceeds of $12.00 per share upon our liquidation, dissolution or winding up; - To the extent, not redeemed on the first anniversary of issuance, Series B Preferred is automatically convertible into our then existing general class of common stock on the first anniversary of issuance at a price equal to $16.20 divided by the greater of $0.20 and the lowest publicly-sold share price during the 90 day period preceding the conversion date, but in no event more than 19.9% of our outstanding capital stock as of the date immediately prior to conversion. 57 - - Upon merger or consolidation, or the sale, lease or other conveyance of all or substantially all of our assets, shares of Series B Preferred are automatically convertible into the number of shares of stock or other securities or property (including cash) to which the common stock into which it is convertible would have been entitled; and - - Shares of Series B Preferred are entitled to one vote per share and vote with common stock, except where the proposed action would adversely affect the Series B Preferred or where the non-waivable provisions of applicable law mandate that the Series B Preferred vote separately, in which case Series B Preferred vote separately as a class, with one vote per share. Our Preferred Stock is currently comprised of 10,000,000 shares, par value $0.01 per share, of which 200,000 shares are designated as Series A Preferred Stock, none of which are issued or outstanding, and, following the conversion into common stock of 452,489 shares of Series A Convertible Preferred Stock issued to About.com, 47,511 shares are designated as Series A Convertible Preferred Stock, none of which are issued and outstanding, and 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock, none of which are issued and outstanding. We have no present agreements relating to or requiring the designation or issuance of additional shares of preferred stock. Stockholders Rights Plan On December 10, 1999, our Board of Directors adopted a stockholders rights plan and declared a non-taxable dividend of one right on each outstanding share of our common stock to stockholders of record on December 10, 1999 and each share of common stock issued prior to the rights plan trigger date. The stockholder rights plan was adopted as an anti-takeover measure, commonly referred to as a "poison pill." The stockholder rights plan was designed to enable all stockholders to receive fair and equal treatment in any proposed takeover of the corporation and to guard against partial or two-tiered tender offers, open market accumulations and other hostile takeover tactics to gain control of NeoMedia. The stockholders rights plan, which is similar to plans adopted by many leading public companies, was not adopted in response to any effort to acquire control of NeoMedia at the time of adoption. Certain of our directors, officers and principal stockholders, Charles W. Fritz, William E. Fritz and The Fritz Family Limited Partnership and their holdings were exempted from the triggering provisions of our "poison pill" plan, as a result of the fact that, as of the plans adoption, their holdings might have otherwise triggered the "poison pill". Quotation on Nasdaq SmallCap Market and Frankfurt Stock Exchange Our common stock quoted on the Nasdaq Small Cap Market under the symbol "NEOM". We may be de-listed from the Nasdaq Small Cap Market. See "Risk Factors - - Risk Specific to NeoMedia - Our Shares May Be De-Listed From Trading On The Nasdaq Small Cap Market, Which May Have A Material Adverse Effect On Your Ability To Resell Your Shares Or Obtain Accurate Price Quotations." Transfer Agent The transfer agent and registrar for our common stock is American Stock Transfer, located in New York, New York. Warrants As of April 4, 2002 there were outstanding warrants to purchase an aggregate 3,239,897 shares of our common stock exercisable on or prior to dates ranging from May 27, 2002, with respect to 5,000 shares to April 15, 2009 with respect to 175,000 shares. The exercise prices range from $0.10 with respect to 8,612 shares to $15.00 with respect to 125,000 shares. The number of shares issuable upon exercise and the exercise prices of the warrants are subject to adjustment in the event of certain events such as stock dividends, splits and combinations, capital reorganization and with respect to certain warrants, issuance of shares of common stock at prices below the then exercise price of the warrants. In March 2002, we adopted a warrant repricing program. The program entitles holders of up to 1.2 million warrants to exercise the warrants within a period ending the earlier of September 19, 2002 or the expiration date of the warrant at a price per share equal to the greater of $0.12 or 50% of the closing sales per share price on the Nasdaq Small Cap Market of our common stock on the trading date immediately preceding the date of exercise. To participate in the program, the warrant holder must agree to open an account with VFinance Inc., a broker dealer registered under the Securities Exchange Act of 1934 and to effect the exercise of the warrants and sell the shares acquired through such broker. The participating warrantholder has agreed that such exercise will be immediately followed by a sale of the acquired shares. Commissions with respect to the sales are to be paid by the warrant holder. 58 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering assuming full payment of the promissory notes and exercise of all the outstanding warrants, we will have 40,315,153 shares of common stock outstanding with an additional 1,817,423 shares to be issued upon exercise of warrants by certain selling stockholders. Of these shares, 38,673,727 shares, including the 28,773,860 shares offered in this offering, will be freely tradeable without further registration under the Securities Act. Of the balance, 5,509,617 are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities if held for at least one year, would be eligible for sale in the public market in reliance upon, and in accordance with, the provisions of Rule 144 following the expiration of such one-year period. In general, under Rule 144 as currently in effect, a person or persons whose shares are aggregated, including a person who may be deemed to be an "affiliate" of ours as that term is defined under the Securities Act, would be entitled to sell within any three month period a number of shares beneficially owned for at least one year that does not exceed the greater of (1) 1% of the then outstanding shares of common stock, or (2) the average weekly trading volume in the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and the availability of current public information about us. However, a person who is not deemed to have been an affiliate of us during the 90 days preceding a sale by such person and who has beneficially owned such shares of common stock for at least two years may sell such shares without regard to the volume, manner of sale, or notice requirements of Rule 144. We cannot predict the effect, if any, that sales of shares of common stock pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales of a substantial number of shares of common stock in the public market could materially adversely affect prevailing market prices for the common stock. In addition, we have 7,384,760 shares of our common stock reserved for issuance upon exercise of options granted under our stock option plans. Such shares have been registered under the Securities Act. Sale of such shares could materially adversely affect prevailing market prices for our common stock. Under our option repricing program, we are encouraging the exercise within a six month period ending October 9, 2002 of outstanding options and the immediate resale of shares acquired upon exercise. During the program options with respect to an aggregate of 6,503,680 shares of our common stock will have vested and therefore will be eligible for exercise and resale. See "Management - Stock Options", "Risk Factors-Future Sales of Common Stock By Our Existing Stockholders Could Adversely Affect Our Stock Price." 59 PLAN OF DISTRIBUTION The selling stockholders may offer their shares at various times in one or more transactions on the Nasdaq Small Cap Market or any other exchange on which the shares may be listed, in the over-the-counter market or in private transactions. The selling stockholders may sell their shares at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices. The selling stockholders will pay all commissions, transfer taxes, and other expenses associated with the sale of securities by them. Of the shares registered in this offering, 1,817,423 are issuable upon exercise of outstanding warrants, and 19,000,000 shares were issued for $0.17 per share, $0.01 per share of which was paid in cash, and $0.16 per share of which was paid by means of promissory notes. The promissory notes become due and payable on the earlier of (1) on or about May 11, 2002, or (2) 30 days following the effectiveness of this registration statement. The promissory notes are limited recourse in nature. If any portion of the notes are unpaid, our sole recourse will be, if effected prior to resale of the shares acquired with the notes, to cancel the shares of common stock issued in respect of such unpaid promissory notes or, if shares have been sold, to pursue the note obligor for the unpaid balance payable from the sale. 60 LEGAL MATTERS The validity of the shares of common stock offered hereby as to their being fully paid, legally issued and non-assessable will be passed upon for us by Reitler Brown LLC, New York, New York. EXPERTS The audited consolidated financial statements of NeoMedia Technologies, Inc. and its subsidiaries for the year ended December 31, 2001, included in this prospectus and elsewhere in the registration statement have been audited by Stonefield Josephson, Inc., independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Reference is made to said report, which includes an explanatory paragraph with respect to the uncertainty regarding the Company's ability to continue as a going concern, as discussed in Note 3 to the financial statements. The audited consolidated financial statements of NeoMedia Technologies, Inc. and its subsidiaries for the years ended December 31, 2000 and 1999, included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Reference is made to said report, which includes an explanatory paragraph with respect to the uncertainty regarding the Company's ability to continue as a going concern, as discussed in Note 3 to the financial statements. The audited financial statements of Qode.com, Inc. for the year ended December 31, 2000, included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Reference is made to said report, which includes an explanatory paragraph with respect to the uncertainty regarding the Company's ability to continue as a going concern as discussed in Note 1 to the financial statements. The financial statements of Qode.com, Inc. (a development stage enterprise) at December 31, 1999 and for the period from March 29, 1999 (inception) through December 31, 1999, appearing in this Registration Statement on Form S-1 have been audited by Ernst & Young LLP, independent certified public accountants, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 1 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On June 7, 1999, we filed a Report on Form 8-K reporting that KPMG LLP had resigned as our independent auditors. In connection with the audit of the Company's financial statements for the fiscal year ended December 31, 1998 and in the subsequent interim periods, there were no disagreements with KPMG LLP on any matters of accounting principles or practice, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the matter in their report. Effective July 14, 1999, we engaged Arthur Andersen LLP to audit our consolidated financial statements for the fiscal year ending December 31, 1999. On October 29, 2001, we filed a Report on Form 8-K reporting that we had dismissed Arthur Andersen LLP as our independent auditors. In connection with the audit of the Company's financial statements for the fiscal years ended December 31, 2000 and 1999 and in the subsequent interim periods, there were no disagreements with Arthur Andersen LLP on any matters of accounting principles or practice, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Arthur Andersen LLP would have caused Arthur Andersen LLP, to make reference to the matter in their report. Effective October 25, 2001 we engaged Stonefield Josephson, Inc. as our new independent accountants. 61 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission. You may read and copy any document we file at the SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the operation of the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov where certain information regarding issuers, including NeoMedia, may be found. Our Web site is http://www.neom.com. This prospectus is part of a registration statement that we filed with the SEC. The registration statement contains more information than this prospectus regarding NeoMedia and its common stock, including certain exhibits and schedules. You can get a copy of the registration statement from the SEC at the address listed above or from its Internet site, www.sec.gov. 62 INDEX OF FINANCIAL STATEMENTS Qode.com Inc. financial statements for the year ending December 31, 2000..........................................................F-2 Qode.com, Inc. financial statements for Period from March 29, 1999 (inception) to December 31, 1999...........................F-20 Pro-forma financial information.............................................F-38 NeoMedia Technologies, Inc. consolidated financial statements for the years ended December 31, 2001, 2000 and 1999,.....................F-43 F-1 FINANCIAL INFORMATION Report of Independent Certified Public Accountants To Qode.com, Inc.: We have audited the accompanying balance sheet of Qode.com, Inc. (a Florida corporation in the development stage) as of December 31, 2000, and the related statements of operations, changes in redeemable preferred stock and stockholders' deficit, and cash flows for the year then ended and the related statements of operations and cash flows for the period from inception (March 29, 1999) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of Qode.com, Inc. for the period from inception to December 31, 1999. Such statements are included in the cumulative inception to December 31, 2000, totals of the statements of operations and cash flows and reflect total revenues and net loss of zero percent and 13 percent, respectively, of the related cumulative totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to amounts for the period from inception to December 31, 1999, included in the cumulative totals, is based solely upon the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Qode.com, Inc. as of December 31, 2000, and the results of its operations and its cash flows for the year then ended and for the period from inception to December 31, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered losses from operations and the current cash position of the Company raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP Tampa, Florida, May 4, 2001 (except with respect to the matter discussed in Note 13, as to which the date is June 30, 2001) QODE.COM, INC. (A Development Stage Enterprise) BALANCE SHEET - DECEMBER 31, 2000 ASSETS Amount ------ CURRENT ASSETS: Cash and cash equivalents $18,686 Accounts receivable 6,041 Inventory 218,690 Other current assets 13,499 ------ Total current assets 256,916 PROPERTY AND EQUIPMENT, net 875,263 CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,359,932 DEPOSITS 39,539 ------ Total assets $3,531,650 ========== F-2 QODE.COM, INC. (A Development Stage Enterprise) BALANCE SHEET - DECEMBER 31, 2000 (continued) LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Amount ------ CURRENT LIABILITIES: Accounts payable $982,610 Dividends payable 94,119 Accrued expenses 425,103 Current portion of notes payable 3,617,323 Current portion of capital lease obligations 368,574 Loans from officers 224,740 --------- Total current liabilities 5,712,469 NOTES PAYABLE, net of current portion 5,857 CAPITAL LEASE OBLIGATIONS, net of current portion 168,176 --------- Total liabilities 5,886,502 --------- COMMITMENTS AND CONTINGENCIES SERIES A 15% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value; 3,000,000 shares authorized, 2,044,560 shares issued and outstanding, liquidation value of $2,502,641 2,480,991 STOCKHOLDERS' DEFICIT: Common stock, $.0001 par value; 25,000,000 shares authorized, 8,023,000 shares issued and outstanding 802 Additional paid-in capital - common stock 1,927,313 Series U convertible preferred stock, $.0001 par value; 1,500,000 shares authorized, issued and outstanding 150 Additional paid-in capital - preferred stock 2,999,850 Accumulated deficit (9,763,958) ----------- Total stockholders' deficit (4,835,843) ----------- Total liabilities, redeemable preferred stock and stockholders' deficit $3,531,650 ========== The accompanying notes are an integral part of this balance sheet. F-3 QODE.COM, INC. (A Development Stage Enterprise) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000
Cumulative from Inception March 29, 1999 Year Ended to December 31, December 31 2000 2000 ---- ---- REVENUE $211,952 $211,952 COST OF GOODS SOLD 213,345 213,345 --------- ------- GROSS MARGIN (1,393) (1,393) COSTS AND EXPENSES: Research and development 1,109,686 1,505,928 Sales and marketing 556,541 598,516 General and administrative 5,839,413 6,686,825 ------------ ------------ Total costs and expenses 7,505,640 8,791,269 NET INTEREST EXPENSE 1,008,938 971,296 ------------ ------------ NET LOSS (8,515,971) (9,763,958) PREFERRED STOCK DIVIDENDS (356,203) (552,200) ACCRETION OF BENEFICIAL CONVERSION FEATURE ON PREFERRED STOCK (15,296) (20,010) ---------- ----------- Net LOSS AVAILABLE TO COMMON STOCKHOLDERS $(8,887,470) $(10,336,168) ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED $(1.11) $(1.29) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES 8,023,000 8,018,071 ============ ============
The accompanying notes are an integral part of these statements. F-4 QODE.COM, INC. (A Development Stage Enterprise) STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 2000
Additional Series A Paid-in Series U Convertible Redeemable Capital for Preferred Stock Preferred Common Stock Common Stock Shares Amount Stock Shares Amount ----- ------ ------ ----- ------ ------ BALANCE, December 31, 1999 $2,154,711 8,023,000 $802 $(49,557) -- $-- Issuance of 19,560 shares of Series A preferred stock in exchange for services 48,900 -- -- -- -- -- Issuance of Series U preferred stock -- -- -- -- 1,500,000 150 Issuance of 372,780 warrants in exchange for services -- -- -- 1,126,790 -- -- Issuance of 326,666 warrants attached with notes payable -- -- -- 675,681 -- -- Issuance of employee stock options with exercise price below market -- -- -- 150,216 -- -- value Re-pricing of employee stock options -- -- -- 395,682 -- -- Series A preferred stock dividends 262,084 -- -- (262,084) -- -- Series U preferred stock dividends -- -- -- (94,119) -- -- Accretion of beneficial conversion feature on preferred stock 15,296 -- -- (15,296) -- -- Net loss -- -- -- -- -- -- -- -- -- -- -- -- BALANCE, December 31, 2000 $2,480,991 8,023,000 $802 $1,927,313 1,500,000 $150 ========== ========= ==== ========== ========= ====
Additional Paid-in Capital for Total Preferred Accumulated Stockholders' Stock Deficit Deficit ----- ------- ------- BALANCE, December 31, 1999 -- $(1,247,987) $(1,296,742) Issuance of 19,560 shares of Series A preferred stock in exchange for services -- -- -- Issuance of Series U preferred stock 2,999,850 -- 3,000,000 Issuance of 372,780 warrants in exchange for services -- -- 1,126,790 Issuance of 326,666 warrants attached with notes payable -- -- 675,681 Issuance of employee stock options with exercise price below market -- -- 150,216 value Re-pricing of employee stock options -- -- 395,682 Series A preferred stock dividends -- -- (262,084) Series U preferred stock dividends -- -- (94,119) Accretion of beneficial conversion feature on preferred stock -- -- (15,296) Net loss -- (8,515,971) (8,515,971) -- ----------- ----------- BALANCE, December 31, 2000 $2,999,850 $(9,763,958) $(4,835,843) ========== ============ ============
The accompanying notes are integral part of this statement. F-5 QODE.COM, INC. (A Development Stage Enterprise) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000
Cumulative from Inception Year Ended (March 29, 1999) December 31, to 2000 December 31, 2000) ---- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(8,515,971) $(9,763,958) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 417,410 434,932 Series A preferred stock issued for services 48,900 48,900 Warrants issued in exchange for services 1,126,790 1,884,627 Stock options issued with exercise price below market value 150,216 150,216 Expense related to the re-pricing of employee stock options 395,682 395,682 Changes in assets and liabilities- Accounts receivable (6,041) (6,041) Inventory (218,690) (218,690) Other current assets 4,652 (13,499) Deposits (9,310) (39,539) Accounts payable 831,022 982,610 Accrued expenses 377,857 425,103 ------------ ----------- Net cash used in operating activities (5,397,483) (5,719,657) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (382,222) (509,013) Capitalization of software development costs (2,498,752) (2,498,752) ------------ ----------- Net cash used in investing activities (2,880,974) (3,007,765) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable and detachable warrants 4,298,861 3,623,180 Proceeds from loans from officers 151,407 224,740 Principal repayments of capital lease (125,612) (125,612) Proceeds from the issuance of common stock -- 23,800 Proceeds from the issuance of Series A redeemable preferred stock net of issuance costs of $25,000 -- 2,000,000 Proceeds from issuance of Series U convertible preferred stock 3,000,000 3,000,000 ------------ ----------- Net cash provided by financing activities 7,324,656 8,746,108 ------------ ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (953,801) 18,686 CASH AND CASH EQUIVALENTS, beginning of year 972,487 -- ------------ ----------- CASH AND CASH EQUIVALENTS, end of year $18,686 $18,686 ============ ===========
F-6 QODE.COM, INC. A Development Stage Enterprise STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000 (continued)
Cumulative from Inception (March 29, 1999) Year Ended To December 31, December 31, 2000 2000 ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $180,000 $160,189 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accretion of redeemable preferred stock $15,296 20,010 Accrued dividends on Series A preferred stock $262,084 458,081 Accrued dividends on Series U preferred stock $94,119 94,119 Property and equipment acquired under capital lease $662,362 662,362
The accompanying notes are an integral part of these statements. F-7 QODE.COM, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 1 NATURE OF BUSINESS ORGANIZATION Qode.com, Inc. (Qode.com or the Company) commenced operations on March 29, 1999, and is incorporated in the State of Florida. Qode.com is a development stage company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting By Development Stage Enterprises". The Company intends to provide manufacturers, retailers, advertisers and users a unique tool for Website navigation through the use of imbedded standard bar codes and Uniform Product Codes (UPC). It is the Company's mission to develop, operate, maintain and promote the use of Qode.com technologies to enable any bar code to interface with their technology. The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since its inception and during its development stage as it has devoted substantially all of its efforts toward building network infrastructure, internal staffing, developing systems, expanding into new markets, building a proprietary database and raising capital. The Company has generated little revenue to date and is subject to a number of risks, including dependence on key individuals, the ability to demonstrate technological feasibility, and the need to obtain adequate additional financing necessary to fund the development and marketing of its products and services, and customer acceptance. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may results from the outcome of this uncertainty. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventory Inventory is stated at the lower of cost or market, and at December 31, 2000 was comprised of Qoder(TM) handheld scanning systems. Cost is determined using the weighted average method. F-8 Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Computer hardware and purchased software are being depreciated over a three-year period, and furniture and fixtures are being depreciated over a five-year period. Depreciation expense was $278,590 for the year ended December 31, 2000. Capitalized Software Development Costs In accordance with the American Institute of Certified Public Accountants Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," all costs related to the development or purchase of internal use software other than those incurred during the application development stage are to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the useful life of the software. The Company has expensed $1,109,686 in research and development costs for the year ended December 31, 2000. The Company has capitalized $2,498,752 in software development costs for the year ended December 31, 2000. Amortization expense was $138,820 for the year ended December 31, 2000. Redeemable Preferred Stock Redeemable preferred stock is carried at the net consideration to the Company at time of issuance, increased by accrued and unpaid cumulative dividends and periodic accretion to redemption value using the interest method. Accrued and unpaid dividends and redemption accretion are affected by charges against retained earnings, or, in the absence of retained earnings, additional paid-in capital. Revenue Recognition Revenue is generated from the sale of Qode's proprietary hand held bar code scanners. Revenue is recognized when the product is delivered to the customer. Income Taxes In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", income taxes are accounted for using the assets and liabilities approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The Company has recorded a 100% valuation allowance as of December 31, 2000. F-9 Computation of Net Loss Per Share Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The Company has excluded all common stock equivalents from the calculation of diluted net loss per share because these securities are anti-dilutive. The shares excluded from the calculation of diluted net loss per share and reserved for future issuance are detailed in the table below: 2000 ---------- Outstanding stock options 1,540,511 Outstanding warrants 1,229,146 Shares issuable on conversion of notes payable 6,800,000 Shares issuable on conversion of Series A preferred stock 4,049,701 Shares issuable on conversion of notes payable were calculated based on the terms of the notes as if they were converted on December 31, 2000. Financial Instruments The Company believes that the fair value of its financial instruments approximate carrying value. Concentration of Credit Risk Revenue was generated from the selling of barcode scanners with approximately 91 percent of those sales to one customer. Accounting for Stock-based Compensation The Company has adopted SFAS No. 123, "Accounting for Stock-Based compensation." The provisions of SFAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), but disclose the pro forma effects on net income or loss as if the fair value had been expensed. The Company has elected to apply APB 25 in accounting for its employee stock options and, accordingly recognizes compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the measurement date. Recent Accounting Pronouncements In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets of liabilities in the balance sheet and measure those instruments at fair value. The adoption of these new accounting standards did not have an impact on the Company's financial position or results of operations. On December 3, 1999 the Securities and Exchange Commission (SEC) staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition". This SAB provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company implemented SAB No. 101 for the quarter ended June 30, 2000. It did not have an impact on the Company's results of operations. F-10 Comprehensive Income For the year ended December 31, 2000, there were no differences between the balance sheet and income statement and therefore no comprehensive income. 3 LOANS FROM OFFICERS Between October and December 2000, several of the Company's officers elected to defer their salaries due to cash flow difficulties experienced by the Company. The total amount deferred was $83,154. On November 28, 2000, the Company issued promissory notes to officers totaling $135,000, with an interest rate of 6.09 percent. The principal and interest are payable on February 26, 2001 4 PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 2000: 2000 ---- Computer hardware and purchased software $1,139,578 Furniture and fixtures 31,797 ----------- 1,171,375 Less- Accumulated depreciation (296,112) ----------- $875,263 =========== 5 NOTES PAYABLE Convertible Notes On January 18, 2000, the Company entered into a note purchase agreement with an investor for $3,000,000, with an interest rate of 12 percent. The principal and interest were due July 17, 2000. The principal and interest are convertible at the option of the holder upon or after a $10 million financing. The conversion rate is 85 percent of the price per share in the financing. In connection with this note, 200,000 warrants were issued with an exercise price of $4.50 per share for the Company's common stock. These warrants may be exercised at anytime following the closing of a $10 million financing and expire January 17, 2005. The Company allocated the proceeds from the issuance of the note between the note and warrants based on the relative fair value method. The difference between the face amount of the note and the amount allocated to it was recorded as a discount, and amortized to interest expense over the life of the note. On August 1, 2000, the Company extended this note to November 17, 2000. As additional consideration for the extension of the note, the Company reduced the exercise price of the 200,000 warrants to $1.00. The additional expense of $63,180 that resulted from the re-pricing was charged to interest expense. As of December 31, 2000, the note had not been repaid. F-11 During 2000, the Company entered into four separate note purchase agreements with investors totaling $400,000 with interest rates of 12 percent. The principal and interest on three of the notes were due October 9, 2000 through November 4, 2000, and principal and interest on the other note is due January 6, 2001. The principal and interest are convertible at the option of the holder upon or after a $7 million financing. The conversion rate is 85 percent of the price per share in the financing. In connection with these notes, 26,666 warrants were issued with an exercise price of $2.00 per share for the Company's common stock. These warrants may be exercised at anytime following the closing of a $7 million financing. The proceeds from the issuance of these notes and warrants were allocated between the two using the relative fair value method. The resulting discount on the notes was amortized to interest expense over the life of the notes. Other Note Payable During March 2000, the Company entered into a note agreement in the amount of $42,500, bearing interest at a rate of 11 percent per year and expiring on March 15, 2002, to finance its phone system. The note is secured by telephone equipment. On November 28, 2000 and December 14, 2000, the Company signed two promissory notes in the amounts of $20,000 and $200,000, bearing interest at a rate of 6.09 percent and 15 percent per year, with principal and accrued interest payable February 26, 2001 and January 28, 2001, respectively. In connection with the December 14, 2000 note, 100,000 warrants were issued with an exercise price of $.50 per share for the Company's common stock. These warrants may be exercised at anytime following the closing of the Next Financing, as defined in the warrant agreement. The proceeds from the issuance of this note and warrants were allocated between the two using the relative fair value method. The resulting discount on the note is being amortized to interest expense over the life of the note. Notes payable consists of the following:
Amount ------ Convertible notes, interest bearing at 12% per annum $3,400,000 Note payable, interest bearing at 11% per annum, due in monthly installments through March 2002 27,679 Note payable, unsecured interest bearing at 6.09% per annum, due February 2001 20,000 Note payable, unsecured interest bearing at 15% per annum, due January 2001 200,000 ----------- Total notes payable 3,647,679 Less discount (24,499) Less- Current portion (3,617,323) ----------- Notes payable, net of current portion $5,857 ===========
As of December 31, 2000 there was $197,740 of accrued interest. 6 INCOME TAXES For the years ended December 31, 2000, the components of income tax expense were as follows: 2000 ---- Current $- Deferred - - Income tax expense $- F-12 The net amounts of deferred tax assets recorded in the balance sheet at December 31, 2000, are as follows: 2000 ---- Deferred tax asset: Depreciation of property and equipment $ 17,901 Start-up costs 199,566 Net operating loss carryforward 3,443,643 Less- Valuation allowance (3,661,110) ----------- Total deferred tax asset $ -- =========== Deferred tax liabilities: $ -- ----------- Total net deferred taxes $ -- =========== SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not, that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a $3,661,110 valuation allowance at December 31, 2000 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year is $3,194,880. At December 31, 2000, the Company has available net operating loss carryforwards of $9,151,323, which expire in the year 2020 and 2019. A reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense for the year ended December 31, 2000, is as follows: 2000 ---- Taxes at the U.S. statutory rate $ (2,895,430) State taxes, net of federal benefit (309,129) Nondeductible items 9,679 Change in valuation allowance 3,194,880 ------------- Total income tax expense $ -- ============= 7 COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company is not presently a party to any significant litigation. From time to time, however, the Company is involved in various legal actions arising in the normal course of business, which the Company believes will not materially affect the financial position or results of operations. Employment Contracts The Company has employment contracts with William Carpenter, Greg Miller and Michael Miller beginning November 1, 2000. Future payments under the above employment contracts are: F-13 2001 $450,000 2002 450,000 2003 375,000 ---------- Total $1,275,000 ========== Capital Lease Obligations During April 2000, the Company acquired computer equipment for $662,362 under a capital lease, expiring on April 26, 2002. Accumulated depreciation on this equipment was approximately $166,000 at December 31,2001 Future minimum lease payments on capital lease obligations as of December 31,2000, are as follows: Year Amount ------ 2001 $415,358 2002 173,519 ------- 588,877 Less - Amount representing interest on obligations under capital leases (15%) (52,127) Current portion of capital lease obligations (368,574) --------- Capital lease obligations, net of current portion $ 168,176 ========= Operating Lease Obligations The Company leases its office facility under a non-cancelable operating lease expiring in March 2005. Rental expense, net of sub-lease income, was $73,036 for the year ended December 31, 2000. Lease commitments under this non-cancelable operating leases as of December 31, 2000, are as follows: Year Ending Amount ------ 2001 $391,399 2002 233,876 2003 154,905 2004 117,768 2005 5,103 ---------- $ 903,051 ========== 8 PREFERRED STOCK Series A 15% Cumulative Convertible Redeemable Preferred Stock The Board of Directors (the Board) has authorized the issuance of up to 3,000,000 shares of Series A 15 percent $.0001 par value, voting, cumulative, redeemable, convertible preferred stock (the Series A Preferred Stock). Series A Preferred Stock is convertible at any time at the option of the holder prior to the closing of a Public Offering, as defined in the agreement, or within 20 days following receipt of a Notice of Redemption, as defined in the agreement, into the Company's common stock for each share of the Series A Preferred Stock held plus accrued and unpaid dividends on the Series A Preferred Shares. The Series A Preferred Stock has a liquidation preference of $1 per share and is mandatorily redeemable on April 15, 2004. F-14 In June 2000, the Company issued 19,560 shares of the Series A Preferred Stock at $2.50 per share for services rendered. Dividends on the Series A Preferred Stock accrue, on a daily basis, commencing on the date of issuance at an interest rate of 15 percent per annum and are payable on a semi-annual basis. The Company, at its option, may pay dividends either in cash or by the issuance of additional shares of Series A Preferred Stock. Aggregate cumulative dividends in arrears at December 31, 2000 totaled $458,081, and are included in Series A 15 % cumulative convertible redeemable preferred stock on the accompanying balance sheet. Series U Convertible Preferred Stock The Board has authorized the issuance of up to 1,500,000 shares of Series U, 8 percent $.0001 par value, voting, cumulative, convertible preferred stock (the Series U Preferred Stock). Series U Preferred Stock is convertible at any time at the option of the holder prior to the closing of a Public Offering into the Company's common stock for each share of the Series U Preferred Stock held plus accrued and unpaid dividends on the Series U Preferred Shares. Between May and October 2000, the Company issued 1,500,000 at $2 per share, with proceeds to the Company of $3,000,000. Dividends on the Series U Preferred Stock accrue, on a daily basis, commencing on the date of issuance at an interest rate of 8 percent per annum and are payable on a semi-annual basis. The Company, at its option, may pay dividends either in cash or by the issuance of additional shares of Series U Preferred Stock. Aggregate cumulative dividends in arrears at December 31, 2000, totaled $94,119. 9 COMMON STOCK The Company is authorized to issue up to 25,000,000 shares of its $.0001 par value common stock. During 2000, no shares of common stock were issued. As of December 31, 2000, 8,023,000 shares were issued and outstanding. 10 STOCK BASED COMPENSATION Stock Warrants Granted in Exchange for Services During 2000, the Company granted 372,780 warrants, with exercise prices ranging from $1.00 to $4.50 per share, to consultants for certain advisory and consulting services. The warrants vest immediately upon issuance and can be exercised over a five-year period. In August 2000, 250,000 warrants granted at $4.50 were re-priced to $1.00 per share. In September 2000, 100,000 warrants granted at $1.50 were re-priced to $0.01 per share. The Company valued these warrants, and their re-pricing, at $1,126,790 in accordance with SFAS 123, and recognized the entire amount in 2000 as general and administrative expenses in the accompanying statement of operations. Stock Warrants Granted Attached to Debt Agreements During 2000, the Company granted 326,666 warrants, with exercise prices ranging from $.50 to $4.50, attached to various debt agreements. The warrants vest immediately upon issuance and can be exercised over a five-year period. The Company applied APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", and accounted for the portion of the proceeds of the debt issued with warrants, which was allocable to the warrants, as additional paid-in capital based on the relative fair values of the securities at the time of issuance, and also recognized a discount on the debt as a result. In September 2000, 200,000 warrants granted at $4.50 were re-priced to $1.00 per share in connection with an extension of the term date of the debt. The Company valued the re-pricing at $63,180, and recognized the entire amount in 2000 as interest expense in the accompanying statement of operations. F-15 Warrant activity for the year ended December 31, 2000, is as follows: Balance December 31, 1999 529,700 Issued 699,446 Exercised - Expired - - Balance December 31, 2000 1,229,146 ========= The following table summarizes information about warrants outstanding at December 31, 2000, all of which are exercisable:
Weighted Average Number of Remaining Range of Exercise Outstanding Contractual Life Weighted Average Prices Warrants (Years) Exercise Price ------ -------- ------- -------------- $0.01 to $0.50 200,000 3.3 $0.26 $1.00 527,780 4.2 $1.00 $1.50 429,700 3.8 $1.50 $2.00 26,666 4.3 $2.00 $2.50 45,000 4.2 $2.50 --------- --- ----- 1,229,146 3.9 $1.13 ========= === =====
Stock Options The Board approves all issuances of stock options. All stock options expire five years from the grant date. In general, options vest and become exercisable one third on the one year anniversary of the date of grant, and the remainder vest evenly over the two years subsequent to that date. The following table summarizes stock option activity for the year ended December 31, 2000: F-16 2000 Wtd Avg Options Exercise (in 000's) Price ---------- ----- Outstanding at Beginning of Year 881 $1.36 Granted 1,000 1.10 Exercised -- 0.00 Forfeited (340) 1.63 ----- ---- Outstanding at end of year 1,541 $1.15 ===== ===== Vested Options 846 $0.56 Remaining Options available for Grant 3,459 In June 2000, the Company reduced the exercise price on all its outstanding stock options. As a result, the Company recognized $395,682 in compensation expense in 2000 for the vested portion of these options, and will recognize $933,568 in subsequent periods as these options vest. The Company accounts for issuances to employees under APB 25, and accordingly, $545,898 of compensation expense, including the amount discussed above, has been recognized for the year ended December 31, 2000. SFAS 123 requires pro forma information regarding net income as if the Company has accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) risk-free interest rate of 6 percent, which approximates the four-year U.S. Treasury Bill rate at the date of grant, (ii) dividend yield of 0 percent (iii) expected volatility of 80 percent (iv) and an average expected life of the option of four years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: Year Ended December 31, 2000 ---- Net loss: As reported $(8,515,971) SFAS 123 pro forma $(8,902,427) The following table summarizes the weighted average fair value of options granted to employees during the year ended December 31, 2000: 2000 ---- Stock Price Greater than Exercise Price Weighted Average Fair Value $2.98 Stock Price Equal to Exercise Price Weighted Average Fair Value $0.84 Stock Price Less than Exercise Price Weighted Average Fair Value $0.82 F-17 The following table summarizes information about Company's stock options outstanding as of December 31, 2000:
Options Outstanding Options Exercisable Avg. Shares Wtd. Avg Wtd. Avg Options Wtd. Avg. Range of Exercise Outstanding Remaining Exercise Exercisable Exercise Prices (in 000's) Life Price (in 000's) Price $.25 350 3.5 $0.25 239 $0.25 $.50 371 4.3 $0.50 341 $0.50 $.75 375 4.2 $0.75 185 $0.75 $1.00 to $1.50 445 4.4 $1.05 81 $1.26 --- --- ----- -- ----- 1,541 846 $0.56 ===== === =====
11 RELATED PARTIES The Company's primary legal counsel holds 3,200,000 shares of the Company's common stock in trust for the law firm's partners. During 2000, the Company recorded expenses of approximately $123,000 related to services performed by its primary legal counsel. The Company owed its primary legal counsel approximately $61,000 at December 31, 2000. F-18 During 2000, Q Productions, Inc., whose owners also own 4,800,000 shares of the Company, provided various information technology services to the Company. The Company recorded approximately $930,364 in expenses related to services performed by Q Productions, Inc. for the year ended December 31, 2000. The Company owed Q Productions, Inc. approximately $171,000 at December 31, 2000. Q Productions, Inc. rented space from Qode.com in 2000 for $43,167 in total. During 2000, the Company granted 20,000 warrants with an exercise price of $1.00 per share to Q Productions, Inc. The Company has issued several promissory notes to officers (see Note 3). 12 SUBSEQUENT EVENTS On January 11, 2001, the Company entered into a note purchase agreement with an investor for $300,000, with an interest rate of 18 percent. The principal and interest are due March 1, 2001. In January 2001, the Company entered into a short-term loan agreement with NeoMedia Technologies, Inc. ("NeoMedia") for the amount of $440,000. The note was forgiven in March 2001 upon the acquisition of substantially all of the Company's assets by NeoMedia. On March 1, 2001, NeoMedia purchased all of the assets of the Company other than cash including but not limited to, contracts, customer lists, licenses and intellectual property. In consideration for these assets, the Company received 1,676,500 shares of NeoMedia's Common Stock. In addition, NeoMedia issued 274,699 of its Common Stock to certain creditors of the Company, for the repayment of $1,561,037 of debt, forgave the $440,000 short-term note due from the Company (see above paragraph), and assumed approximately $1,407,000 of the Company's liabilities. The 1,676,500 shares paid to the Company are to be held in escrow for one year, and are subject to downward adjustment, based upon the achievement of certain performance targets over the period of March 1, 2001 to February 28, 2002. Notes payable as of December 31, 2000 that were not acquired as part of the March 1, 2001 sale totaled 3,000,000 as of December 31, 2000. 13. SUBSEQUENT EVENTS 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 consulted with legal counsel and will be opposing the Chapter 7 proceeding and plans to proceed under Chapter 11, U.S. Code to reorganize its debts. F-19 FINANCIAL STATEMENTS Qode.com, Inc. (A Development Stage Enterprise) Period from March 29, 1999 (inception) to December 31, 1999 with Report of Independent Auditors F-20 Qode.com, Inc. (A Development Stage Enterprise) Financial Statements Period from March 29, 1999 (inception) to December 31, 1999 Contents Report of Independent Certified Public Accountants F-23 Audited Financial Statements Balance Sheet F-24 Statement of Operations F-25 Statement of Changes in Redeemable Preferred Stock and Stockholders' Deficit F-26 Statement of Cash Flows F-27 Notes to Financial Statements F-28 F-21 Report of Independent Certified Public Accountants The Stockholders and Board of Directors Qode.com, Inc. We have audited the accompanying balance sheet of Qode.com, Inc. (the Company) (a development stage enterprise) as of December 31, 1999 and the related statement of operations, and statement of changes in redeemable preferred stock and stockholders' deficit, and statement of cash flows for the period from March 29, 1999 (inception) through December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Qode.com, Inc. at December 31, 1999, and the results of its operations and its cash flows for the period March 29, 1999 (inception) through December 31, 1999, in conformity with accounting standards generally accepted in the United States. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully described in Note 1, the Company, which is in the developmental stages has incurred a net operating loss, experienced negative cash flow from operations and has a net capital deficit. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP West Palm Beach, Florida July 21, 2000, except for the seventh paragraph of Note 8, as to which the date is June 30, 2001 F-22 Qode.com, Inc. (A Development Stage Enterprise) Balance Sheet December 31, 1999 Assets Current assets: Cash and cash equivalents $972,487 Other current assets 18,151 --------- Total current assets 990,638 Property and equipment, net 109,269 Deposits 30,229 Total assets $1,130,136 ========== Liabilities, redeemable preferred stock and stockholders' deficit Current liabilities: Accounts payable $ 151,588 Accrued expenses 47,246 Due to officers 73,333 ---------- Total current liabilities 272,167 15% cumulative convertible redeemable preferred stock, $.0001 par value, 3,000,000 shares authorized, 2,025,000 shares issued and outstanding, liquidation value of $2,221,000 2,154,711 Commitments Stockholders' deficit: Common stock, $.0001 par value, 25,000,000 shares authorized, 8,023,000 shares issued and outstanding 802 Capital deficiency (49,557) Deficit accumulated during the development stage (1,247,987) Total stockholders' deficit (1,296,742) Total liabilities, redeemable preferred stock and stockholders' deficit $1,130,136 ========== See accompanying notes. F-23 Qode.com, Inc. (A Development Stage Enterprise) Statement of Operations Period from March 29, 1999 (inception) to December 31, 1999 Costs and expenses: Research and development $396,242 Sales and marketing 41,975 General and administrative 847,412 ------- Total costs and expenses 1,285,629 Net interest income (37,642) -------- Net loss (1,247,987) Preferred dividends and redemption accretion (200,711) --------- Net loss applicable to common stockholders $(1,448,698) ============ See accompanying notes. F-24 Qode.com, Inc. (A Development Stage Enterprise) Statement of Changes in Redeemable Preferred Stock and Stockholders' Deficit Period from March 29, 1999 (inception) to December 31, 1999
Deficit Accumulated Redeemable Common Stock During the Total Preferred Capital Development Stockholders' Stock Shares Amount Deficiency Stage Deficit ----- ------ ------ ---------- ----- ------- Issuance of common stock on March 29, 1999 $ -- 8,000,000 $800 $-- $-- $ 800 (inception) Issuance of redeemable preferred stock with detachable warrants valued at $46,000, net of issuance costs of 1,954,000 -- -- 46,000 -- 46,000 $25,000 Issuance of common stock -- 23,000 2 22,998 -- 23,000 Issuance of warrants in exchange for services -- -- -- 82,156 -- 82,156 Preferred dividends and redemption accretion 200,711 -- -- (200,711) -- (200,711) Net loss -- -- -- -- (1,247,987) (1,247,987) --------- --------- --------- --------- ----------- ---------- Balance at December 31, 1999 $2,154,711 8,023,000 $ 802 $ (49,557) $(1,247,987) $(1,296,742) ========== ========= ========= ========= =========== ===========
See accompanying notes. F-25 Qode.com, Inc. (A Development Stage Enterprise) Statement of Cash Flows Period from March 29, 1999 (inception) to December 31, 1999
Operating activities Net loss $(1,247,987) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 17,522 Issuance of warrants in exchange for services 82,156 Changes in assets and liabilities: Other current assets (18,151) Deposits (30,229) Accounts payable 151,588 Accrued expenses 47,246 Due to officers 73,333 ------ Net cash used in operating activities (924,522) --------- Investing activities Purchases of property and equipment (126,791) --------- Net cash used in investing activity (126,791) --------- Financing activities Proceeds from the issuance of redeemable preferred stock, net of issuance costs of $25,000 2,000,000 Proceeds from the issuance of common stock 23,800 --------- Net cash provided by financing activities 2,023,800 --------- Net increase in cash and cash equivalents 972,487 Cash at beginning of period -- -- Cash at end of period $ 972,487 ========= Supplemental disclosure of cash flow information Interest paid $ 171 Noncash financing and investing activities Accrued dividends on redeemable preferred stock $195,997 Accretion of redeemable preferred stock $4,714
See accompanying notes. F-26 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements Period from March 29, 1999 (inception) to December 31, 1999 1. Nature of Business Organization Qode.com, Inc. (the Company) commenced operations on March 29, 1999 and is incorporated in the state of Florida. Qode.com is a development stage company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting By Development Stage Enterprises. The Company intends to provide manufactures, retailers, advertisers, and users a unique tool for Web site navigation by the use of imbedded standard bar codes and Uniform Product Codes (UPC). It is the Company's mission to develop, operate, maintain and promote the use of Qode.com technologies to enable any bar code to interface with their technology. The Company has incurred losses since its inception as it has devoted substantially all of its efforts toward building network infrastructure, internal staffing, developing systems, expanding into new markets, building a proprietary database and raising capital. The Company has generated no revenue to date and is subject to a number of risks similar to those of other development stage companies, including dependence on key individuals, the ability to demonstrate technological feasibility, and the need to obtain adequate additional financing necessary to fund the development and marketing of its products and services, and customer acceptance. The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a limited operating history and intends to significantly increase its operational expenses in fiscal year 2000 to pursue certain sales and marketing plans. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may results from the outcome of this uncertainty. In fiscal year 2000, the Company plans to raise additional financing from private equity financing. The Company entered into a financing agreement subsequent to year end that will provide the Company with an additional $3 million, see Note 8. F-27 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Computer hardware and software are being depreciated over a three year period and furniture and fixtures are being depreciated over a five year period. Software Development Costs In accordance with the AICPA SOP No. 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use, all costs related to the development or purchase of internal use software other than those incurred during the application development stage are to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the useful life of the software. The Company has incurred $259,480 in software development costs for the period from March 29, 1999 (inception) through December 31, 1999. All costs have been expensed since the Company has not entered the application development stage as of December 31, 1999. F-28 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Income Taxes The Company accounts for income taxes under the liability method, which requires the establishment of a deferred tax asset or liability for the recognition of future deductions or taxable amounts, and operating loss and tax credit carryforwards. Deferred tax expense or benefit is recognized as a result of the change in the deferred asset or liability during the year. If necessary, the Company will establish a valuation allowance to reduce any deferred tax asset to an amount which will, more likely than not, be realized. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and cash equivalents with high quality financial institutions to mitigate this credit risk. Redeemable Preferred Stock Redeemable preferred stock is carried at the net consideration to the Company at time of issuance (fair value), increased by accrued and unpaid cumulative dividends and periodic accretion to redemption value using the interest method. Accrued and unpaid dividends and redemption accretion are affected by charges against retained earnings, or, in the absence of retained earnings, paid-in capital (capital deficiency). Accounting for Stock-Based Compensation The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The provisions of SFAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Public Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees but disclose the pro forma effects on net income or loss as if the fair value had been expensed. The Company has elected to apply APB 25 in accounting for its employee stock options and, accordingly, recognizes compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the date of grant. F-29 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 3. Property and Equipment Property and equipment consists of the following: December 31, 1999 ------------ Computer hardware and software $120,791 Furniture and fixtures 6,000 --------- 126,791 Less accumulated depreciation (17,522) --------- $109,269 ========= Depreciation and amortization expense was $17,939 for the period from March 29, 1999 (inception) to December 31, 1999. 4. Income Taxes The net amounts of deferred tax assets recorded in the balance sheet at December 31, 1999 are as follows: 1999 --------- Deferred tax asset: Net operating loss carryforward $469,050 Less valuation allowance (466,230) --------- Total deferred tax asset $2,820 Deferred tax liabilities: Fixed assets $(2,820) -------- Total net deferred taxes $- == FASB 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a $466,230 valuation allowance at December 31, 1999 is F-30 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 4. Income Taxes (continued) necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year is $466,230. At December 31, 1999, the Company has available net operating loss carryforwards of $1,246,478, which expire in the year 2019. A reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense for the year ended December 31, 1999 is as follows: 1999 ------- Taxes at the U.S. statutory rate $(424,315) State taxes, net of federal benefit (44,975) Nondeductible items 3,060 Change in valuation allowance 466,230 ------- Total income tax expense $- == 5. Commitments The Company leases its office facility under a non-cancelable operating lease expiring March 2005. Rental expense was $19,711 for the period from March 29, 1999 (inception) to December 31, 1999. Lease commitments under these non-cancelable operating leases as of December 31, 1999 are as follows: 2000 $100,656 2001 104,682 2002 108,876 2003 113,238 2004 117,768 ------- $545,220 ======== F-31 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 6. Stockholders' Equity 15% Cumulative Convertible Redeemable Preferred Stock Series A The Board of Directors has authorized the issuance of up to 3,000,000 shares of Series A 15% $.0001 par value, voting, cumulative, redeemable, convertible, preferred stock (the Preferred Stock) which may be issued in series from time to time with such designations, rights, preferences and limitations as the Board of Directors may declare by resolution. In May 1999, the Company issues 2,025,000 shares of Preferred Stock at $1.00 per share, less issuance costs of $25,000. One detachable warrant was attached to each share of the Preferred Stock. The Preferred Stock was recorded at $1,954,000, net of the value of the detachable warrants which was estimated to be $46,000. The detachable warrants were valued in accordance with SFAS No. 123 at $.23 per share and are convertible into common stock at $1.50 per share. The Preferred Stock is convertible at any time at the option of the holder prior to the closing of a Public Offering, as defined in the agreement, or within 20 days following receipt of a Notice of Redemption, as defined in the agreement, into the Company's common stock for each share of the Preferred Stock held plus accrued and unpaid dividends on the Series A Preferred Shares. The Preferred Stock has a liquidation preference of $1 per share and is mandatorily redeemable on April 15, 2004. As of December 31, 1999, all 2,025,000 shares of the Preferred Stock and related 202,500 detachable warrants remain outstanding. Dividends on the preferred stock accrue on a daily basis commencing on the date of issuance at an interest rate of 15% per annum and are payable on a semi-annual basis. The Company, at its option, may pay dividends either in cash or by the issuance of additional shares of Series A Preferred Stock. Aggregate cumulative dividends in arrears at December 31, 1999 totaled $195,997. Common Stock The Company is authorized to issue up to 20,000,000 shares of its $.0001 par value common stock. On March 29, 1999 (inception) the Company received $800 by issuing 8,000,000 shares of its common stock to its founders. F-32 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 6. Stockholders' Equity (continued) Additionally, the Company issued 13,000 shares of common stock to a Company employee in lieu of relocation expense reimbursement of $13,000, and 10,000 shares of common stock to an executive recruiter for a corporate staffing fee of $10,000. These amounts were expensed. Stock Options and Warrants Granted in Exchange for Services During 1999, the Company granted 327,200 common stock warrants with an exercise price of $1.50 per share to consultants for certain advisory and consulting services performed during the Company's start-up phase. The warrants vest immediately upon issuance and can be exercised over a five year period. The Company valued the warrants at $82,156 in accordance with SFAS No. 123, and recognized the entire amount as a general and administrative expense in the accompanying statement of operations. The Company had 327,200 warrants outstanding at December 31, 1999. During 1999, the Company granted 400,000 in common stock options to purchase shares of common stock at an exercise price of $.10 per share to an investment advisor in exchange for investment advisory services. The options expired on June 30, 2000 without being exercised and accordingly no expense has been recorded. Stock Options In 1999, the Company's Board of Directors and stockholders approved the 1999 Equity Compensation Plan (the Plan). The Plan provides for the issuance of incentive stock options, nonqualified stock options and restricted stock to directors, officers, and key employees of the Company as well as non-employee directors, advisors, and consultants. The Board administers the Plan. The Company has reserved 5,000,000 shares of common stock to be issued under the Plan. The exercise price (as established by the Board) of the stock options granted is in excess of fair market value of the Company's Common Stock on the date of the grant. All stock options expire five years from the grant date in 2004. Options granted under the Plan are exercisable as determined by the Board. F-33 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 6. Stockholders' Equity (continued) The following table summarizes stock option activity for the period from March 29, 1999 (inception) to December 31, 1999: Weighted Number of Average Shares Exercise Price Outstanding at March 29, 1999 (inception) - $- Granted 880,600 1.36 Exercised - - Forfeited - - - - Outstanding at December 31, 1999 880,600 $1.36 ======= ===== At December 31, 1999, 142,642 options are exercisable, at a weighted average exercise price of $1.28 per share. The weighted-average remaining contractual life of the options is 4.7 years. During 1999, all of the stock options issued were granted to employees of the Company. The Company accounts for issuances to employees under APB 25 and accordingly, no compensation cost has been recognized for the period from March 29, 1999 (inception) to December 31, 1999. SFAS No. 123 requires pro forma information regarding net income as if the Company has accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates equal to the three-year U.S. Treasury Bill rate on the grant date, dividend yield of 0%, expected volatility of 81.1%, and an average expected life of the option of three years. F-34 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 6. Stockholders' Equity (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. All employee options granted to date vest over a one to three year period. The Company's pro forma information is as follows: Period from March 29, 1999 (inception) to December 31, 1999 --------------------- Net loss: As reported $(1,247,987) SFAS No. 123 pro forma $(1,305,831) The weighted average fair value of options granted to employees during the period from March 29, 1999 to December 31, 1999 for which the estimated fair value of the stock is less than the exercise price is $0.29 per share. The weighted average fair value of options granted to employees during the period from March 29, 1999 to December 31, 1999 for which the estimated fair value of the stock equals the exercise price is $0.47 per share. Shares Reserved for Future Issuance At December 31, 1999, the Company has reserved the following shares of stock for issuance: Common stock 11,977,000 Convertible preferred stock 975,000 ---------- 12,952,000 F-35 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 7. Related Parties The Company's primary legal counsel holds 3,200,000 shares of the Company's common stock in trust for the firm's partners. During 1999, the Company recorded expenses of approximately $32,000 related to services performed by its primary legal counsel. The Company owed its primary legal counsel approximately $3,000 at December 31, 1999. During 1999, Q Productions, Inc. provided various information technology services to the Company. Two owners of Q Productions, Inc. also aggregately own 4,800,000 shares of the Company. The Company recorded approximately $129,000 in expenses related to services performed by Q Productions, Inc. The Company owed Q Productions, Inc. approximately $97,000 at December 31, 1999. 8. Subsequent Events On January 18, 2000, the Company issued a convertible subordinated promissory note for $3 million with a fixed interest rate of 12% to Novus Holding Corporation. Principal and accrued interest on the note are payable upon the earlier of a) the day immediately following the closing of financing or successive financings which cumulatively aggregate proceeds of $10,000,000 or b) 180 days from the date of the note. The debt is convertible into common stock at a price equal to 85% of the purchase price per share paid by investors in the next financing or successive financings of $5,000,000 or more. On February 11, 2000, the Company entered into a letter of intent with a major supplier to produce portable bar code scanning devices in exchange for payments ranging from $32,000,000 to $35,000,000 over a 16 month period commencing April 28, 2000 through August 1, 2001. On March 15, 2000, the Company entered into a two year term note with a major lender. The principal amount of the note was $42,500 with a fixed interest rate of 11%. Principal and interest payments of $1,984 are due monthly through maturity on March 15, 2002. On March 24, 2000, the Company obtained a letter of credit for $1,400,000 with the lender of their term note. F-36 Qode.com, Inc. (A Development Stage Enterprise) Notes to Financial Statements (continued) 8. Subsequent Events (continued) On March 27, 2000, the Company entered into a consulting agreement with a consultant for a five month period in return for 250,000 common stock options convertible into the Company's common stock. The options have a term of five years and an exercise price of $2 per share. 125,000 options vest 45 days from the commencement of the agreement based on the fulfillment of certain contractual obligations. The remaining 125,000 options vest 90 days from the commencement of the agreement based on the fulfillment of certain contractual obligations. Additionally, the Company will pay the consultants $100,000 over the period of the contract. On May 22, 2000, the Board of Directors authorized the issuance of 1,500,000 shares of Series U Convertible Preferred Stock (the Series U Preferred Stock). Dividends on the preferred stock accrue on a daily basis commencing on the date of issuance at an interest rate of 8% per annum. The Series U Preferred Stock is convertible at any time at the option of the holder prior to the closing of a Public Offering, as defined in the agreement, into one share of the Company's common stock for each share of the Company's Series U Preferred Stock held plus accrued and unpaid dividends on the Series U Preferred Shares. In the event of the closing of the next financing of $4,000,000 or more within 90 days from the authorization of the Series U Preferred Stock, the holder of the Series U Preferred Stock shall have the right to convert all Series U Preferred Shares into a number of shares of stock issued in the next financing which represents the equivalent amount for the consideration paid for the Series U Preferred Stock. The Series U Preferred Stock has a liquidation preference of $2.00 per share. On May 22, 2000, the Company entered into an agreement for the issuance of 1,500,000 shares of Series U Preferred Stock in exchange for $3,000,000. The shares will be issued in three separate financings. The initial 500,000 shares are to be issued on the date of the agreement. The next 500,000 shares are to be issued upon the Company meeting certain performance goals defined in the agreement. The remaining 500,000 shares are to be issued, not earlier than August 1, 2000 nor later than October 15, 2000, upon the Company meeting certain performance goals defined in the agreement. 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 consulted with legal counsel and will be opposing the Chapter 7 proceeding and plans to proceed under Chapter 11, U.S. Code, to reorganize its debts. F-37 PRO FORMA FINANCIAL INFORMATION The unaudited pro forma condensed combined statements of operations give effect to the acquisition by NeoMedia Technologies, Inc. of the assets of Qode.com, Inc. The pro forma condensed combined statement of operations for the year December 31, 2000 gives effect to the acquisition as if it had occurred as of January 1, 2000, combining the results of NeoMedia Technologies, Inc. for the year ended December 31, 2000 with those of the same period for Qode.com, Inc. The pro-forma condensed combined statement of operations for the year ended December 31, 2001, gives effect to the acquisition as if it had occurred as of January 1, 2001, combining the results of NeoMedia Technologies, Inc. for the year ended December 31, 2001 with those of Qode.com, Inc. through the acquisition date. The pro forma adjustments are based on estimates, available information and certain assumptions that management deems appropriate. The pro forma financial data do not purport to represent what our results of operations would actually have been if such transactions had occurred on those dates and are not necessarily representative of our results of operations for any future period. The pro forma financial statements should be read in conjunction with the separate historical financial statements and footnotes of NeoMedia Technologies, Inc. and Qode.com, Inc. Purchase Price On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc. (Qode), except for cash. Qode is a development stage company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting By Development Stage Enterprises". In consideration for these assets, NeoMedia issued 274,699 shares of common stock, valued at $1,359,760. Additionally, the Company placed in escrow 1,676,500 shares of its common stock valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the average closing price for the few days before and after the measurement date of March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of common stock from escrow for performance for the period March 1, 2001 to August 31, 2001. The remaining 1,641,426 shares held in escrow as contingent compensation will not be issued due to the business unit not attaining certain performance targets. The Company accounted for this purchase using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations". The excess fair market value of the net assets acquired over the purchase price was allocated to reduce proportionately the values assigned to noncurrent assets. The accompanying consolidated statements of operations include the operations of Qode from March 1, 2001, through September 30, 2001. The purchase price at the original purchase date was calculated and allocated as follows: Original Shares: 274,699 issued at $4.95 1,360,000 Contingent shares: 35,074 issued at $0.39 $ 13,000 ------------- Total purchase price $ 1,373,000 ------------- Purchase price allocated as follows: Assets purchased Trade receivables $ 5,000 Inventory 144,000 Prepaid expenses 49,000 Furniture & fixtures 913,000 Capitalized development costs 2,132,000 Capitalized software 83,000 Refundable deposits - non-current 38,000 F-38 Liabilities assumed Accounts payable (981,000) Forgiveness of note receivable (440,000) Interest receivable (10,000) Current portion of long-term debt (117,000) Note payable (24,000) Capitalized lease obligation (419,000) ------------- Total purchase price allocated $ 1,373,000 ============= During the third quarter of 2001, the Company issued an additional 35,074 shares under the terms of the earn-out with Qode.com, Inc. (see explanation below). The value of these shares in the amount of $13,000 was allocated $9,000 to capitalized development costs and $4,000 to furniture and fixtures. Contingent consideration In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has placed 1,676,500 shares of its common stock in escrow for a period of one year, subject to downward adjustment, based upon the achievement of certain performance targets over the period of March 1, 2001 to February 28, 2002. As of March 1, 2002, these performance targets were not met and therefore, the remaining 1,641,426 shares held in escrow were not issued. The criteria used to determine the number of shares released from escrow is a weighted combination of revenue, page views, and fully allocated earnings before taxes relating to the Qode Universal Commerce Solution. At the end of each of certain interim periods as outlined in the purchase agreement, the number of cumulative shares earned by Qode.com is calculated based on revenue and page views and the shares are released. The resulting financial impact on NeoMedia is a proportionate increase in the long-term assets acquired from Qode, with a corresponding increase in depreciation expense from that point forward. The amount of the increase in long-term assets is dependent upon the number of shares released from escrow, as well as the value of NeoMedia stock at the time of measurement. The first such measurement date is July 1, 2001. At the end of the 12-month measurement period (February 28, 2002), the final number of shares issued to Qode under the earn-out was 309,773, allocated as outlined in the table above. 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. Disposal of Qode Business Unit On August 31, 2001, the Company signed a non-binding letter of intent to sell the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which it acquired in March 2001, to The Finx Group, Inc., a holding company based in Elmsford, NY. The final contract is contingent upon the completion of due diligence and definitive terms and conditions stated in the letter of intent. The Company intends to sell the assets and liabilities of Qode, which consist of all inventory, equipment and the ownership and operation of the comprehensive universal internet database along with the corresponding patents. The Finx Group will assume $620,000 in Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of the Finx Group, right to use and sell Qode services, and up to $5 million in affiliate revenues over the next five years. As of December 31, 2001, the transaction had not been consummated due to the encumbrance of certain of NeoMedia's Qode-related assets under the Company's note payable to Airclic, Inc. The Finx group has taken possession of certain Qode system assets and has taken over ongoing expenses related to the business unit. Management believes that the sale will be completed immediately upon resolution of Airclic litigation. During the third and fourth quarters of 2001, the company recorded a $2.6 million expense from the write-down of the Qode assets/liabilities to the following net realizable value: F-39 December 31, 2001 (Balances in Thousands) Inventory $ 144 Equipment 265 Intangible Assets 1,027 ------ Assets 1,436 ----- Accounts Payable $1,108 Note Payable 15 Capital Lease 103 ------- Liabilities 1,226 ------ Net Realizable Value $ 210 ====== The loss for discontinued operations during the phase-out period from August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No further loss is anticipated. On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has converted the proceedings to Chapter 11, U.S. Code to re-organize its debts. F-40 Qode.com, Inc. Pro-forma Condensed Combined Consolidated Statement of Operations For the year ended December 31, 2000 (In thousands, except per share data)
Pro-forma Pro-forma NeoMedia Qode.com Adjustments Combined -------- -------- ----------- -------- Revenue License fees $8,417 $ -- $ -- $ 8,417 Resales of software and technology equipment and service fees 19,148 212 -- 19,360 ---------- --------- -------- ---------- Total Revenue 27,565 212 -- 27,777 ---------- --------- -------- ---------- Cost of goods sold License fees 1,296 -- -- 1,296 Resales of software and technology 17,237 213 -- 17,450 ---------- --------- -------- ---------- Total cost of goods sold 18,533 213 -- 18,746 ---------- --------- -------- ---------- Gross profit 9,032 (1) -- 9,031 Selling & marketing expense 6,504 557 -- 7,061 General & administrative expense 7,010 5,839 (27)(a) 12,822 Research & development expense 1,101 1,110 -- 2,211 ---------- --------- -------- ---------- Loss from operations (5,583) (7,507) 27 (13,063) Interest expense/(income) (174) 1,009 -- 835 ---------- --------- -------- ---------- Net loss (5,409) (8,516) 27 (13,898) Dividends & accretion -- 371 -- 371 -- --- -- Net income applicable to common stockholders $(5,409) $(8,887) $27 $ (14,269) ========== ========= ========= ========== Loss per share $(0.39) $(1.11) $ (1.00) ========== ========= ========== Weighted average shares outstanding 13,931,104 8,023,000 14,205,803 =========== ========= ========== Pro-forma adjustments
(a) adjustment of amortization of assets F-41 NeoMedia Technologies, Inc. Pro-forma condensed Combined Consolidated Statement of Operations For the Year Ended December 31, 2001 (in thousands, except per share data)
Pro-forma Pro-forma NeoMedia Qode.com Adjustments Combined -------- -------- ----------- -------- Revenue License fees $ 576 $ $86 $ - $ 662 Resales of software and technology equipment and service fees 7,566 - - 7,566 ---------- --------- --------- ----------- Total revenue 8,142 86 - 8,228 Cost of goods sold License Fees 2,355 34 - 2,389 Resales of software and technology equipment and service fees 6,511 - - 6,511 ---------- --------- --------- ----------- Total cost of goods sold 8,866 34 - 8,900 Gross profit (724) 52 - (672) Selling & marketing expense 2,519 16 - 2,535 General & administrative expense 4,772 1,064 276(a) 6,112 Research & development expense 549 20 - 569 Loss on impairment of assets 2,871 - - 2,871 Write-off of Digital Convergence license contract 7,354 - - 7,354 ---------- --------- --------- ----------- Loss from operations (18,789) (1,048) (276) (20,113) Interest expense/(income) (21) 111 14(b) 104 ---------- --------- --------- ----------- Net Loss (18,768) (1,159) (290) (20,217) Loss from operations of discontinued business units (3,613) - - (3,613) Loss on disposal of discontinued business units, including provsion of $503 for losses during phase-out period (3,088) - - (3,088) ----------- --------- ---------- ----------- Net loss applicable to common shareholders $ (25,469) $ (1,159) $ (290) $ (26,918) =========== ========== ========== =========== Loss per share $ (1.55) $ (0.14) $ (1.64) =========== ========== =========== Weighted average shares outstanding 16,410,246 8,023,000 16,456,029 =========== ========== ===========
Pro-forma adjustments (a) - adjustment of amortization of assets (b) - adjustment of interest expense F-42 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To NeoMedia Technologies, Inc.: We have audited the accompanying consolidated balance sheets of NeoMedia Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NeoMedia Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and the current cash position of the Company raises substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP Tampa, Florida March 30, 2001 F-43 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Neomedia Technologies, Inc. We have audited the accompanying consolidated balance sheet of Neomedia Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neomedia Technologies, Inc. and subsidiaries as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company's significant operating losses and current cash flow position raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ STONEFIELD JOSEPHSON, INC. - ------------------------------ Irvine, California March 28, 2002 F-44 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, -------------- 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents.............................................. $ 134 $ 4,453 Restricted cash........................................................ -- 750 Short-term investments................................................. -- -- Trade accounts receivable, net of allowance for doubtful accounts of $65 and $484 in 2001 and 2000........................... 2,583 4,370 Digital Convergence receivable......................................... 5,144 Costs and estimated earnings in excess of billings on uncompleted contracts............................................... 43 89 Inventories............................................................ 197 116 Assets held for sale................................................... 210 -- Prepaid expenses and other current assets.............................. 582 946 --------- --------- Total current assets............................................. 3,749 15,868 Property and equipment, net............................................... 205 365 Digital Convergence receivable, net of current portion.................... -- 10,288 Prepaid - Digital Convergence............................................. -- 4,116 Intangible assets, net.................................................... 4,328 9,043 Other long-term assets.................................................... 757 914 --------- --------- Total assets..................................................... $ 9,039 $ 40,594 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $5,169 $2,301 Accrued expenses....................................................... 1,922 2,691 Stock liability........................................................ -- -- Current portion of long-term debt...................................... 149 137 Note Payable........................................................... 750 -- Sales taxes payable.................................................... 135 261 Billings in excess of costs and estimated earnings on uncompleted contracts............................................... 13 49 Deferred revenues - Digital Convergence................................ -- 1,543 Deferred revenues...................................................... 767 449 ---------- ------- Total current liabilities........................................ 8,912 7,442 Long-term debt, net of current portion.................................... 390 539 Long-term deferred revenue - Digital Convergence.......................... -- 13,503 --------- -------- Total liabilities................................................ 9,302 21,484 --------- -------- Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, 452,289 issued and outstanding in 2001, none issued and outstanding in 2000.... 5 -- Additional paid-in capital, preferred stock........................... 878 -- Common stock, $.01 par value, 50,000,000 shares authorized, 20,446,343 shares issued and 18,804,917 outstanding in 2001, 14,460,384 shares issued and outstanding in 2000........... 188 145 Additional paid-in capital............................................. 63,029 57,619 Stock subscriptions receivable......................................... (240) -- Accumulated deficit.................................................... (63,344) (37,875) Treasury stock, at cost, 201,230 shares of common stock................ (779) (779) --------- -------- Total shareholders' equity.................................. (263) 19,110 --------- -------- Total liabilities and shareholders' equity.................... $ 9,039 $ 40,594 ========= ========
The accompanying notes are an integral part of these consolidated balance sheets. F-45 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years Ended December 31, 2001 2000 1999 ---- ---- ---- NET SALES: License fees........................................................... $ 576 $8,417 $2,430 Resales of software and technology equipment and service fees... 7,566 19,148 22,826 ---------- ------- -------- Total net sales................................................. 8,142 27,565 25,256 ---------- ------- -------- COST OF SALES: License fees........................................................... 2,355 1,296 1,790 Resales of software and technology equipment and service fees.......... 6,511 17,237 20,680 ---------- -------- -------- Total cost of sales.............................................. 8,866 18,533 22,470 ---------- -------- -------- GROSS PROFIT.............................................................. (724) 9,032 2,786 Sales and marketing expenses.............................................. 2,519 6,504 6,765 General and administrative expenses....................................... 4,772 7,010 5,281 Research and development costs............................................ 549 1,101 986 Loss on impairment of assets.............................................. 2,871 -- -- Loss on Digital:Convergence license contract.............................. 7,354 -- -- ---------- ------- -------- Loss from operations...................................................... (18,789) (5,583) (10,246) Interest (income) expense, net............................................ (21) (174) 226 ---------- -------- --------- Loss from continuing operations........................................... (18,768) (5,409) (10,472) Discontinued operations (Note 1): Loss from operations of discontinued business unit................... (3,613) -- -- Loss on disposal of discontinued business unit, including provision of $439 in 2001 for operating losses during phase-out period....... (3,088) -- -- ---------- --------- -------- NET LOSS.................................................................. $(25,469) $(5,409) (10,472) ========== ======== ======== NET LOSS PER SHARE FROM CONTINUING OPERATIONS- BASIC AND DILUTED............................................... $(1.14) $ (0.39) $(1.01) ========== ========= ======= NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS- BASIC AND DILUTED............................................... $(0.41) $ -- $ -- ========== ======== ========= NET LOSS PER SHARE--BASIC AND DILUTED................................. $(1.55) $(0.39) $(1.01) =========== ========= ========== Weighted average number of common shares--basic and diluted 16,410,246 13,931,10 10,377,478 ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-46 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, 2001 2000 1999 -------- ------ -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................................. $(25,469) $ (5,409) $(10,472) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................................... 3,369 2,336 2,029 Loss on disposal of discontinued business units........................ 2,649 -- -- Loss on disposal of and impairment of assets........................... 2,871 58 -- Effect of loss on Digital:Convergence contract......................... 7,354 -- -- Preferred stock issued to pay advertising expense...................... 882 -- -- Expense associated with warrant repricing.............................. 947 -- -- Fair value of stock based compensation granted for professional services............................................... 69 437 28 Changes in operating assets and liabilities Trade accounts receivable, net...................................... (709) 1,548 2,271 Digital Convergence receivable...................................... (2,767) -- Prepaid - Digital Convergence....................................... 118 -- -- Costs and estimates earnings in excess of billings on uncompleted contracts............................................. 46 (89) 222 Other current assets................................................ (109) (121) 382 Other long-term assets............................................. -- (194) -- Accounts payable, accrued expenses and stock liability.............. 2,502 (2,676) (1,286) Billings in excess of costs and estimates earnings on uncompleted contracts............................................. (36) (82) 131 Deferred revenue.................................................... 318 184 (391) Other current liabilities........................................... (4) -- 76 ----- ------- -------- Net cash used in operating activities..................................... (5,202) (6,775) (7,010) ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of software development and purchased intangible assets.... (2,883) (2,317) (1,470) (Increase)/decrease in value of life insurance policies................... 158 (199) (522) Acquisition of property and equipment..................................... (81) (123) (127) ------ ------- ------- Net cash used in investing activities..................................... (2,806) (2,639) (2,119) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, net of issuance costs of $149 in 2001, $74 in 2000, and $148 in 1999................. 1,638 9,203 8,172 Net proceeds from exercise of stock warrants.............................. 1,045 2,877 75 Net proceeds from exercise of stock options............................... 138 537 1,061 Common stock repurchased.................................................. -- (779) -- Borrowings under notes payable and long-term debt......................... 504 -- 2,000 Change in restricted cash................................................. 750 194 (194) Repayments on notes payable and long-term debt............................ (386) (625) (125) ------- ------- ------- Net cash provided by financing activities................................. 3,689 11,407 10,989 ------- -------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................. (4,319) 1,993 1,860 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............................. 4,453 2,460 600 ------- ------ ----- CASH AND CASH EQUIVALENTS, END OF YEAR.................................... $ 134 $4,453 $2,460 ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid/(received) during the year ................................. $ (61) $ 170 $ 146 Non-cash investing and financing activities: Net assets acquired as part of Qode purchase agreement in exchange for common stock and forgiveness of note.......................... 1,800 -- -- Shares earned by Qode.com under purchase agreement.................... 13 Accounts payable converted to note payable............................ 246 -- -- Common stock issued in exchange for note receivable................... 240 -- -- Net assets classified as "Liabilities held for sale".................. 210 -- -- Daystar assets purchased with shares of common stock.................. -- 3,520 -- Conversion of short-term debt to equity............................... -- -- 2,000 Issuance costs for shares issued through private placement............ 149 96 112 Stock liability due upon issuance of patent........................... -- -- 1,863 Warrants issued for license contract.................................. -- 4,704 -- Deferred revenue relating to license contract......................... -- 15,432 --
The accompanying notes are an integral part of these consolidated financial statements. F-47 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data)
Common Stock Preferred Stock Treasury Stock ------------------------------ --------------------------- -------------- Additional Stock Additional Total Paid-in Subscription Paid-in Accumulated Stockholders' Shares Amount Capital Receivable Shares Amount Capital Deficit Shares Amount Equity --------- ------ ------- ------------ ------ ------- -------- --------- -------- ------ ------- BALANCE, DECEMBER 31, 8,699,080 $87 $25,168 - - - - ($21,994) - - $ 3,261 1998.................... Exercise of employee options................ 611,854 6 1,055 - - - - - - - 1,061 Issuance of common stock through Private placement, net of $260 of Issuance costs......... 1,978,794 20 8,039 - - - - - - - 8,059 Fair value of warrants issued for professional services rendered...... - - 28 - - - - - - - 28 Exercise of warrants..... 231,764 1 74 - - - - - - - 75 Fair value of stock granted in Conjunction with financing......... 501,897 5 2,003 - - - - - - - 2,008 Net Loss................. - - - - - - - (10,472) - - (10,472) ----------- ------- ------- ----- ----- --- ---- -------- --- --- ------- BALANCE, DECEMBER 31, 1999..................... 12,023,389 $119 $36,367 - - - - ($32,466) - - $4,020 ----------- ------- ------- ----- ----- --- ---- -------- --- --- ------- Exercise of employee options................ 182,787 2 535 - - - - - - - 537 Issuance of common stock through Private placement, net of $170 of Issuance costs...... 1,415,279 15 9,188 - - - - - - - 9,203 Fair value of warrants issued for Professional services rendered...... - - 253 - - - - - - - 253 Fair value of stock issued for professional Services rendered...... 21,500 1 183 - - - - - - - 184 Fair value of warrants issued Related to license agreement With Digital Convergence............ - - 4,704 - - - - - - - 4,704 Exercise of warrants..... 495,600 5 2,872 - - - - - - 2,877 Stock issued to purchase assets......... 321,829 3 3,517 - - - - - - 3,520 Treasury stock at cost... - - - - - - - - 201,230 ( 779) (779) Net Loss................. - - - - - - - (5,409) - - (5,409) BALANCE, DECEMBER 31, 2000..................... 14,460,384 $1 45 $57,619 - - - ($37,875) 201,230 ($779) $19,110 Exercise of employee options................ 38,560 - 138 - - - - - - - 138 Issuance of Common Stock through Private Placement, Net of $149 of issuance costs...... 3,490,750 35 1,843 - - - - - - - 1,878 Expense associated with warrant repricing...... - - 947 - - - - - - - 947 Fair value of options issued for Professional services rendered...... - - 69 - - - - - - - 69 Exercise of Warrants..... 505,450 5 1,040 - - - - - - - 1,045 Stock issued to purchase assets................. 309,773 3 1,373 - - - - - - - 1,376 Issuance of Preferred Stock for services..... - - - - 452,489 5 878 - - - 883 Stock Subscription Receivable............. (240) (240) Net Loss................. - - - - - - - (25,469) - (25,469) ----------- ------- ------- ----- ----- --- ---- -------- --- --- ------- BALANCE, DECEMBER 31, 2001..................... 18,804,917 $188 $63,029 (240) 452,489 $5 $878 ($63,344) 201,230 ($779) ($263)
The accompanying notes are an integral part of these consolidated financial statements. F-48 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS Basis of Presentation The consolidated financial statements include the financial statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A. incorporated in Guatemala; NeoMedia Technologies of Canada, Inc. incorporated in Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Technologies do Brasil Ltd. incorporated in Brazil and NeoMedia Technologies UK Limited incorporated in the United Kingdom, and are collectively referred to as "NeoMedia" or the "Company". The consolidated financial statements of NeoMedia are presented on a consolidated basis for all periods presented. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. Nature of Business Operations The Company is structured and evaluated by its Board of Directors and Management as two distinct business units: NeoMedia Internet Switching Services (NISS), and NeoMedia Consulting and Integration Services (NCIS) NeoMedia Internet Switching Services (NISS) NISS (physical world-to-Internet offerings) is the core business and is based in the United States, with development and operating facilities in Fort Myers, Florida. NISS develops and supports the Company's physical world to Internet core technology, including our linking "switch" and application platforms. NISS also manages the Company's valuable intellectual property portfolio, including the identification and execution of licensing opportunities surrounding the patents. NeoMedia Consulting and Integration Services (NCIS) NCIS (systems integration service offerings) is the original business line upon which the Company was organized. This unit resells client-server equipment and related software. The unit also provides general and specialized consulting services targeted at software driven print applications, and especially at process automation of production print facilities through its integrated document factory solution. Systems integration services also identifies prospects for custom applications based on NeoMedia's products and services. The operations are based in Lisle, Illinois. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents For the purposes of the consolidated balance sheets and consolidated statements of cash flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition License fees, including Intellectual Property license, represent revenue from the licensing of NeoMedia's proprietary software tools and applications products. NeoMedia licenses its development tools and application products pursuant to non-exclusive and non-transferable license agreements. Resales of software and technology equipment represent revenue from the resale of purchased third party hardware and software products and from consulting, education, maintenance and post contract customer support services. F-49 Under American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended, license revenue is recognized if persuasive evidence of an agreement exists, delivery has occurred, pricing is fixed and determinable, and collectibility is probable. Software and technology equipment resale revenue is recognized when all of the components necessary to run software or hardware have been shipped. Service revenues include maintenance fees for providing system updates for software products, user documentation and technical support and are recognized over the life of the contract. Software license revenue from long-term contracts has been recognized on a percentage of completion basis, along with the associated services being provided. Other service revenues, including training and consulting, are recognized as the services are performed. The Company uses stand-alone pricing to determine an element's vendor specific objective evidence (VSOE) in order to allocate an arrangement fee amongst various pieces of a multi-element contract. NeoMedia records an allowance for uncollectible accounts on a customer-by-customer basis as appropriate. Purchase and Disposal of Qode.com, Inc. On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc. (Qode), except for cash. Qode is a development stage company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting By Development Stage Enterprises". In consideration for these assets, NeoMedia issued 274,699 shares of common stock, valued at $1,359,760. Additionally, the Company placed in escrow 1,676,500 shares of its common stock valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the average closing price for the few days before and after the measurement date of March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of common stock from escrow for performance for the period March 1, 2001 to August 31, 2001. The remaining 1,641,426 shares held in escrow as contingent compensation will not be issued due to the business unit not attaining certain performance targets. The Company accounted for this purchase using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations". The excess fair market value of the net assets acquired over the purchase price was allocated to reduce proportionately the values assigned to noncurrent assets. The accompanying consolidated statements of operations include the operations of Qode from March 1, 2001, through September 30, 2001. F-51 The purchase price at the original purchase date was calculated and allocated as follows: Original Shares: 274,699 issued at $4.95 1,360,000 Contingent shares: 35,074 issued at $0.39 $ 13,000 ------------ Total purchase price $ 1,373,000 ------------ Purchase price allocated as follows: Assets purchased Trade receivables $ 5,000 Inventory 144,000 Prepaid expenses 49,000 Furniture & fixtures 913,000 Capitalized development costs 2,132,000 Capitalized software 83,000 Refundable deposits - non-current 38,000 Liabilities assumed Accounts payable (981,000) Forgiveness of note receivable (440,000) Interest receivable (10,000) Current portion of long-term debt (117,000) Note payable (24,000) Capitalized lease obligation (419,000) ------------ Total purchase price allocated $ 1,373,000 ============ During the third quarter of 2001, the Company issued an additional 35,074 shares under the terms of the earn-out with Qode.com, Inc. (see explanation below). The value of these shares in the amount of $13,000 was allocated $9,000 to capitalized development costs and $4,000 to furniture and fixtures. Contingent consideration In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has placed 1,676,500 shares of its common stock in escrow for a period of one year, subject to downward adjustment, based upon the achievement of certain performance targets over the period of March 1, 2001 to February 28, 2002. As of March 1, 2002, these performance targets were not met and therefore, the remaining 1,641,426 shares held in escrow were not issued. The criteria used to determine the number of shares released from escrow is a weighted combination of revenue, page views, and fully allocated earnings before taxes relating to the Qode Universal Commerce Solution. At the end of each of certain interim periods as outlined in the purchase agreement, the number of cumulative shares earned by Qode.com is calculated based on revenue and page views and the shares are released. The resulting financial impact on NeoMedia is a proportionate increase in the long-term assets acquired from Qode, with a corresponding increase in depreciation expense from that point forward. The amount of the increase in long-term assets is dependent upon the number of shares released from escrow, as well as the value of NeoMedia stock at the time of measurement. The first such measurement date is July 1, 2001. At the end of the 12-month measurement period (February 28, 2002), the final number of shares issued to Qode under the earn-out was 309,773, allocated as outlined in the table above. 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. F-52 ii). Capitalized software development costs relating to the development of the Qode Universal Commerce Solution. Proforma information Proforma results of operations as though the companies had combined at the beginning of the period is as follows: YEAR ENDED December 31, 2001 December 31, 2000 ----------------- ----------------- Revenue $ 8,228 $ 27,776 Net Loss $ (20,959) $ (14,297) EPS - basic and diluted $ (1.28) $ (1.01) Disposal of Qode Business Unit On August 31, 2001, the Company signed a non-binding letter of intent to sell the assets and liabilities of its Ft. Lauderdale-based Qode business unit, which it acquired in March 2001, to The Finx Group, Inc., a holding company based in Elmsford, NY. The final contract is contingent upon the completion of due diligence and definitive terms and conditions stated in the letter of intent. The Company intends to sell the assets and liabilities of Qode, which consist of all inventory, equipment and the ownership and operation of the comprehensive universal internet database along with the corresponding patents. The Finx Group will assume $620,000 in Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of the Finx Group, right to use and sell Qode services, and up to $5 million in affiliate revenues over the next five years. As of December 31, 2001, the transaction had not been consummated due to the encumbrance of certain of NeoMedia's Qode-related assets under the Company's note payable to Airclic, Inc. The Finx group has taken possession of certain Qode system assets and has taken over ongoing expenses related to the business unit. Management believes that the sale will be completed immediately upon resolution of Airclic litigation. During the third and fourth quarters of 2001, the company recorded a $2.6 million expense from the write-down of the Qode assets/liabilities to the following net realizable value: December 31, 2001 (Balances in Thousands) Inventory $ 144 Equipment 265 Intangible Assets 1,027 ------ Assets 1,436 ----- Accounts Payable 1,108 Note Payable 15 Capital Lease 103 ------- Liabilities 1,226 ------- Net Realizable Value $ 210 ======= The loss for discontinued operations during the phase-out period from August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No further loss is anticipated. On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has converted the proceedings to Chapter 11, U.S. Code to re-organize its debts. Digital:.Convergence Corporation Intellectual Property License Agreement The Company entered into an agreement with a competitor, Digital:Convergence Corporation ("DC"), a private company located in the US, in October 2000, granting them a worldwide, non-exclusive license of the Company's extensive patent portfolio for directly linking documents, objects, transaction and voice commands to the internet. The agreement provided for annual license fees over a period of ten years in excess of $100 million through a combination of cash and equity. The Company recognized $7.8 million of revenue in 2000 related to this contract, including a $5.0 million cash payment received in October 2000 for royalties earned before contract execution, $2.5 million related to the $10 million of payments in DC common stock and cash expected to be received in the first year of the contract, and $0.3 million related to DC stock received by NeoMedia to be recognized over the life of the contract. F-53 As part of the contract, the Company issued to DC a warrant to purchase 1.4 million shares of NeoMedia common stock. In the first quarter of 2001, DC issued the Company an interest bearing $3 million note payable in lieu of a $3 million cash payment due in January 2001. The Company also received shares of DC stock in January with a contractual value of $2 million as part of the first contract-year royalties due. The note was originally due on April 24, 2001, however, on that date the Company agreed to extend it until June 24, 2001. The Company also partially wrote down, in the first quarter of 2001, the value of the remaining DC stock receivable, and DC stock that had been received in January, to a value that management believed was reasonable at the time (50% of the valuation stipulated in the contract). The write-down consisted of a reduction in assets of $7.7 million and a corresponding reduction in liabilities of $7.7 million. The DC stock received in January 2001 was valued at $1 million and the DC receivable was valued at $9.2 million. In April 2001, the Company received additional shares of DC stock with a $5 million value based on the valuation method stipulated in the contract. No revenue was recognized related to these shares and the shares were not recorded as an asset due to DC's worsening financial condition. All assets and liabilities relating to the contract were subsequently written off in the second quarter (see below). Also in April, an agreement was entered into with DC whereby for a period from the date of registration of the shares underlying the warrant to purchase 1.4 million shares of the Company's common stock until October 24, 2001, if the Company would identify a purchaser for the Company's shares, DC would exercise the warrant and purchase 1.4 million shares of common stock and sell the shares to the identified purchaser. One third of the net proceeds received by DC on the sale of the Company's common stock shall be paid to the Company toward repayment of DC's obligations under the note to the Company in the amount of $3 million. In consideration for this, the warrant exercise price was reduced during this period to 38 percent of the closing sale price of the Company's common stock on the day prior to the date of exercise, subject to a minimum price. Because the exercise of the warrants at this reduced price is contingent upon the Company finding a purchaser of the underlying 1.4 million shares, the value of this re-pricing will be measured and recorded at the time the shares are sold. As of October 24, the Company was not able to locate a purchaser and therefore, the warrant was not exercised. On June 24, 2001, DC did not pay the note that was due, and on June 26, 2001, the Company filed a $3 million lawsuit against DC for breach of contract regarding the $3 million promissory note. It was also learned in the second quarter of 2001 that DC's capital raising efforts and business operations were having difficulty, and the Company decided to write off all remaining amounts related to the DC contract. The following table represents balance sheet balances at December 31, 2000 and March 31, 2001, as well as all amounts written off during the second quarter of 2001:
March 31, December 31, 2000 Balances Write-off 2000 Balances (Unaudited) June 30, 2001 -------------------------------------------------------- (Dollars in thousands) -------------------------------------------------------- ASSETS Available for sale securities - Digital Convergence $ - $ 1,000 $ 1,000 Trade Accounts Receivable 2,500 1,500 1,500 Digital Convergence receivable 5,144 5,144 5,144 Prepaid expenses (current portion) 470 470 470 Digital Convergence receivable, net of current portion 10,288 2,572 2,572 Prepaid DC (long-term portion) 4,116 3,998 3,998 ---------- ------- --------- Total assets $ 22,518 $14,684 $ 14,684 ========== ======= ======== LIABILITIES Deferred revenues DC $ 1,543 $ 772 $ 772 Long-term deferred revenues - DC 13,503 6,558 6,558 ---------- --------- -------- Total liabilities $ 15,046 $ 7,330 $ 7,330 ========== ========= ========
F-54 The net effect of the write-off is a $7,354,000 non-cash charge to income during the second quarter, which is included in Loss on Digital:Convergence License Contract in the consolidated statements of operations for the year ending December 31, 2001. Any future revenues related to this contract will be recorded as payments are received. AirClic, Inc. Relationship On July 3, 2001, NeoMedia signed a non-binding letter of intent with AirClic, Inc. to cross-license the companies' intellectual property. The terms of the proposed agreement called for NeoMedia to: (i) acquire an equity interest in AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic, which interest would likely have exceeded 50% of NeoMedia's outstanding equity securities. Further terms of the agreement called for NeoMedia to acquire AirClic's Connect2 comparison shopping business unit, which was to be combined with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a secured note due on the earlier of (i) the date on which NeoMedia raises $5 million in equity financing from a source other than AirClic, (ii) a change in control of NeoMedia, or (iii) January 11, 2002. During the negotiation of a definitive set of agreements between the companies, it was determined that the consummation of the transaction as provided in the non-binding letter of intent would not be completed. As a result, additional notes aggregating $1,500,000 will not be executed between the companies. On September 6, 2001, AirClic filed suit against the Company in the Court of Common Pleas, Montgomery County, PA, for breach of contract relating to the July 3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic claims that the Company violated express representations and warranties relating to the Company's assets and state of business affairs. AirClic seeks a judgment to accelerate repayment of the $500,000 note due January 11, 2002, and to relieve AirClic from any obligation to make further loans to the Company as outlined in the letter of intent. AirClic has also filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania. In this second action, AirClic seeks a declaration that certain core intellectual property securing the note issued by us to AirClic, some of which is patented and others for which a patent application is pending, is invalid and in the public domain. (see "Legal Proceedings" in Footnote 11) Advertising Expense During the year ended December 31, 2001, the Company entered into a one-year license agreement with About.com, Inc. to provide the Qode Universal Commerce SolutionTM to About.com's users. In June 2001, About.com ran banner ads on its site promoting the Qode Universal Commerce SolutionTM. As part of this transaction, About.com received 452,489 shares of our Series B Convertible Preferred Stock, par value $0.01 per share, of the 500,000 total Series B Convertible Preferred shares the Company is authorized to issue, in consideration for these promotions. The Company recorded an advertising expense of $882,000 associated with this transaction in sales and marketing expense in the accompanying consolidated statements of operations. The agreement with About.com was terminated on August 31, 2001, in anticipation of the sale of the Qode assets to the Finx Group. Severance Expense During the third quarter of 2001, the Company laid off 55 employees, including the chief technology officer and the chief operating officer, representing a 60% decrease in its total workforce. In connection with the layoffs, the Company recognized a severance expense of approximately $494,000 during the third quarter of 2001. The layoffs were part of a company-wide cost reduction initiative. Executive Incentive Expense In June 2001, the Company's compensation committee approved an adjustment, relating to the Digital:Convergence patent license fees, to the 2000 executive incentive plan that reduced the bonus payout by approximately $1.1 million. This was recorded as a negative expense in the accompanying consolidated statement of operations. Warrant Repricing Program In May 2001, the Company re-priced approximately 1.5 million additional warrants subject to a limited exercise period and other conditions, including certain warrants issued in connection with NeoMedia's initial public offering in 1996, which will expire at the end of 2001. The repricing program allowed the warrant exercise price to be reduced to 33 percent of the closing sale price of the Company's common stock (subject to a minimum) on the day prior to the date of exercise for a period of six months from the date the repricing program began. The exercise of the warrants and sale of the underlying common stock was at the discretion of a broker selected by the Company, within the parameters of the repricing arrangement. In accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock Transactions, the award was accounted for as variable from the date of modifications on May 1, 2001. Accordingly, $181,000 was recorded as compensation in the accompanying consolidated statement of operations. F-55 Warrant Issuance In June 2001, the Board of Directors' approved the issuance of 414,000 warrants for Charles W. Fritz, NeoMedia's Chairman, CEO, and president at a exercise price of $2.09. However, the warrants were not issued during 2001. The Company does not intend to issue these warrants in 2002. Valuation and Reserves Allowance for doubtful accounts activity for the years ended December 31, 2001 and 2000 was as follows: (dollars in thousands) ---------------------- 2001 2000 ---- ---- Beginning balance............................... $ 484 $ 888 Bad debt expense................................ (169) 303 Write-off of uncollectible accounts............. (68) (17) Collection of accounts previously written off... (182) (75) Adjustment to general allowance................. - (615) ------ ------- Ending balance............................... $ 65 $484 ====== ======= Inventories Inventory is stated at the lower of cost or market, and at December 31, 2001, 2000 and 1999 was comprised of purchased computer technology resale products. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are carried at cost less allowance for accumulated depreciation. Repairs and maintenance are charged to expense as incurred. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives range from three to five years for equipment and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the life of the lease or the useful lives of the related assets. Upon retirement or sale, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations. Depreciation expense was $249,000, $263,000 and $367,000 for the years ended December 31, 2001, 2000 and 1999 respectively. Intangible Assets Intangible assets consist of capitalized software development costs and patents. Software development costs are accounted for in accordance with Statement of Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs associated with the planning and designing phase of software development, including coding and testing activities necessary to establish technological feasibility, are classified as research and development and expensed as incurred. Once technological feasibility has been determined, additional costs incurred in development, including coding, testing, quality assurance and documentation are capitalized. Once a product is made available for sale, capitalization is stopped unless the related costs are associated with a technologically feasible enhancement to the product. Amortization of purchased and developed software is provided on a product-by-product basis over the estimated economic life of the software, generally three years, using the straight-line method. F-56 Patents (including patents pending and intellectual property) and acquired customer lists are stated at cost, less accumulated amortization. Patents are generally amortized over periods ranging from five to seventeen years. Intangible assets activity for the years ended December 31, 2001 and 2000 was as follows: December 31, 2001 2000 ---- ---- Beginning Balance $9,043 $ 5,296 Additions 2,493 5,837 Intangible Assets Moved To "Assets Held for Sale" (1,027) -- Amortization/Write-offs (6,181) (2,090) ------- ------ Ending Balance $ 4,328 $9,043 ======= ====== Amortization expense of intangible assets was $3,120,000 $2,073,000 and $1,662,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Loss on impairment of assets In connection with the Company's reduction in work force during the third quarter 2001, the Company sold the rights to its Pacer Advantage end-user software product for $40,000 cash. Accordingly, the Company wrote off all its assets aggregating $2.9 million related to the MLM/Affinity program including assets pertaining to the purchase of Daystar services, LLC and a customer list purchased in 1998. Revenue related to the MLM/Affinity program was $92,000, $259,000, and $0 for the years ended December 31, 2001, 2000, and 1999, respectively. Net loss allocated to the MLM/Affinity program was $832,000, $1,075,000, and $0 for the years ended December 31, 2001, 2000, and 1999, respectively. Evaluation of Long-Lived Assets The Company periodically performs an evaluation of the carrying value of its long-lived assets, including intangible assets, in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This evaluation consists primarily of a comparison to the future undiscounted net cash flows from the associated assets in comparison to the carrying value of the assets. As of December 31, 2001, the Company is of the opinion that no impairment of its long-lived assets has occurred. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes", income taxes are accounted for using the assets and liabilities approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The Company has recorded a 100% valuation allowance as of December 31, 2001, 2000 and 1999. Computation of Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per share because these securities are anti-dilutive for all years presented. The shares excluded from the calculation of diluted net loss per share are detailed in the table below:
December 31, 2001 December 31, 2000 December 31, 2000 ----------------- ------------- ----------------- Outstanding Stock Options.............. 4,214,000 4,294,000 3,418,000 Outstanding Warrants................... 3,240,000 3,968,000 2,676,000
F-57 Financial Instruments The Company believes that the fair value of its financial instruments approximate carrying value. Concentrations of Credit Risk Financial instruments that potentially subject NeoMedia to concentrations of credit risk consist primarily of trade accounts receivable with customers. Credit risk is generally minimized as a result of the large number and diverse nature of NeoMedia's customers, which are located throughout the United States. NeoMedia extends credit to its customers as determined on an individual basis and has included an allowance for doubtful accounts of $65,000, $484,000 and $888,000 in its December 31, 2001, 2000 and 1999 consolidated balance sheets, respectively. NeoMedia had net sales to one major customer in the telecommunications industry (Ameritech) of $2,983,000, $5,824,000 and $5,843,000 during the years ended December 31, 2001, 2000 and 1999, respectively, resulting in trade accounts receivable of $1,499,000, $229,000 and $225,000 as of December 31, 2001, 2000 and 1999, respectively. In addition, a single company supplies the equipment and software, which is re-marketed to this customer. Accordingly, the loss of this supplier would materially adversely affect NeoMedia CIS. Revenue generated from the remarketing of computer software and technology equipment has accounted for a significant percentage of NeoMedia's revenue. Such sales accounted for approximately 73%, 66% and 78% of NeoMedia's revenue for the years ended December 31, 2001, 2000 and 1999, respectively. NeoMedia had license fees to one major customer (DC) of $7,768,000 during the year ended December 31, 2000, resulting in an accounts receivable of $2,500,000 as of December 31, 2000. Revenue generated from this licensing agreement accounted for approximately 28% of NeoMedia revenue for the year ended December 31, 2000. No revenue was recognized under this agreement during the year ended December 31, 2001. Reclassifications Certain reclassifications have been made to the 1999 and 2000 financial statements to conform to the 2001 presentation. Comprehensive Income For the years ended December 31, 2001, 2000 and 1999, the Company did not have other comprehensive income and therefore has not included the statement of comprehensive income in the accompanying financial statements. Recent Accounting Pronouncements On July 21, 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill; SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. It also provides that intangible assets that have finite useful lives will continue to be amortized over their useful lives, but those lives will no longer be limited to forty years. SFAS No. 141 is effective for all business combinations after June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1, 2002. The Company is considering the provisions of SFAS No. 141 and No. 142 and at present has not determined the impact of adopting SFAS No. 141 and SFAS No. 142. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. F-58 3. LIQUIDITY During the years ended December 31, 2001, 2000 and 1999 the Company's net loss totaled approximately $25,469,000, $5,409,000 and $10,472,000 respectively. As of December 31, 2001 the Company had an accumulated deficit of approximately $63,344,000 and approximately $134,000 in unrestricted cash balances. As of December 31, 2001, the working capital was negative $5,163,000 and cash flow from operations was negative $5,202,000. The Company's unrestricted cash balance as of March 12, 2002 was approximately $134,000 (unaudited). The Company cannot be certain that anticipated revenues from operations will be sufficient to satisfy its ongoing capital requirements. Management's belief is based on the Company's operating plan, which in turn is based on assumptions that may prove to be incorrect. If the Company's financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. Subsequent to December 31, 2001, the Company has undertaken the following initiatives: o During February 2002, the Company sold 19 million shares of its common stock at $0.17 per share in exchange for promissory notes maturing at the earlier of i) 90 days from the date of issuance, or ii) 30 days from registration of the shares. Proceeds from this transaction will be $3,230,000. o During March 2002, the Company repriced 1.2 million of its common stock warrants for a period of six months. During the term of the warrant repricing program, participating holders are entitled to exercise qualified warrants at an exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the NASDAQ Small Cap Market on the trading date immediately preceding the date of exercise. Should these financing sources fail to materialize, management would seek alternate funding sources through sale of common and/or preferred stock. Management's plan is to secure adequate funding to bridge to revenue generation from the Company's valuable intellectual property portfolio and PaperClick(TM) internet "switching" software. To this end, the Company has retained the law firm of Baniak Pine & Gannon to pursue potential license agreements, and plans to implement a sales strategy for PaperClick(TM) upon receipt of adequate funding. 4. CONTRACT ACCOUNTING NeoMedia periodically enters into long-term software development and consultation agreements with certain customers. As of December 31, 2001, 2000 and 1999, certain contracts were not completed and information regarding these uncompleted contracts was as follows:
2001 2000 ---- ---- Costs Incurred on Contracts .......................... $ 50 $ 321 Profit to Date ....................................... 15 1,087 ------- ------- Total Costs and Estimated Earnings ............... 65 1,408 Less - Billings to Date .............................. (35) (1,368) ------- ------- Costs and Estimated Earnings in Excess of Billings $ 30 $ 40 ======= =======
The above are included in the accompanying consolidated balance sheets under the following captions: F-59 2001 2000 ------ ---- Costs and Estimated Earnings in Excess of Billings .... $ 43 $ 89 Billing in Excess of Costs and Estimated ---- Earnings ............................................ (13) (49) ---- ---- Costs and Estimated Earnings in Excess of Billings, Net $ 30 $ 40 ==== ==== 5. PROPERTY AND EQUIPMENT As of December 31, 2001, 2000 and 1999, property and equipment consisted of the following: 2001 2000 ---- ---- (In thousands) Furniture and fixtures .................. $ 643 $ 314 Leasehold improvements .................. 109 124 Equipment 326 504 ------ ----- Total .............................. 1,078 942 Less accumulated depreciation ........... (608) (577) Less property and equipment held for sale (265) - ------ ---- Total property and equipment, net .. $ 205 $ 365 ====== ==== 6. INTANGIBLE ASSETS As of December 31, 2001 and 2000, intangible assets consisted of the following: 2001 2000 ---- ---- (in thousands) Capitalized and purchased software costs $ 8,520 $ 6,418 Customer list .......................... -- 1,143 Repurchased license rights and other ... -- 3,520 Patents and related costs .............. 3,125 3,026 -------- -------- Total .................................. 11,645 14,107 Less accumulated amortization .......... (6,290) (5,064) Less intangible assets held for sale ... (1,027) -------- -------- Total intangible assets, net ........... $ 4,328 $ 9,043 ======== ======== At December 31, 1999, the Company had a liability of $1,862,500 to the seller of a patent purchased by the Company in 1998. The liability was settled by the Company in cash during 2000. The patent is being amortized over seventeen years. 7. FINANCING AGREEMENTS The Company has an agreement with a commercial finance company that provides short-term financing for certain computer hardware and software purchases. Under the agreement, there are generally no financing charges for amounts paid within 30 or 45 days, depending on the vendor used to source the product. Under this agreement there are two separate lines of credit. The first line has credit availability of $750,000. The second line has credit availability of up to $2,000,000, based upon the Company's customer credit rating. Borrowings are collateralized by all inventory, property and equipment, and accounts receivable. In addition, as of December 31, 2000, a $750,000 letter of credit was issued to the benefit of the commercial finance company. At December 31, 2000, NeoMedia collateralized this letter with a restricted cash balance of $750,000. As of December 31, 2001 and 2000, amounts due under this financing agreement included in accounts payable were $2,344,000 and $1,101,000, respectively. 8. LONG-TERM DEBT As of December 31, 2001 and 2000, long-term debt consisted of the following: F-60
2001 2000 ---- ---- (In thousands) Note payable to International Digital Scientific, Inc. (IDSI), non-interest bearing with interest imputed at 9%, due with minimum monthly installments of $16,000 through March 2005 .............................................. $ 624 $ 816 Less: unamortized discount .................................. (84) (140) ----- ----- Total long-term debt .................................... 540 676 Less: current portion ....................................... (150) (137) ----- ----- Long-term debt, net of current portion ....................... $ 390 $ 539 ===== =====
The long-term debt repayments for each of the next five fiscal years ending December 31 are as follows: (In thousands) 2002...................................................... $ 192 2003...................................................... 192 2004...................................................... 192 2005...................................................... 48 2006...................................................... - ------- Total..................................................... $ 624 ------- In October 1994, the Company purchased, via seller financing, certain computer software from IDSI. The aggregate purchase price was $2,000,000 and was funded by the seller with an uncollateralized note payable, without interest, in an amount equal to the greater of: (i) 5% of the collected gross revenues of NeoMedia Migration for the preceding month; or (ii) the minimum installment payment as defined, until paid in full. The minimum installment payment is the amount necessary to provide an average monthly payment for the most recent twelve month period of $16,000 per month. The present value of $2,000,000 discounted at 9% (the Company's then incremental borrowing rate) for 125 months was approximately $1,295,000, the capitalized cost of the assets acquired. The discount is being accreted to interest expense over the term of the note. The software acquired was amortized over its estimated useful life of three years. As of December 31, 2001 and 2000, the balance of the note payable, net of unamortized discount, was $540,000 and $676,000, respectively. 9. INCOME TAXES For the years ended December 31, 2001, 2000 and 1999, the components of income tax expense were as follows: 2001 2000 1999 ---- ---- ---- (In thousands) Current .................... $ $ $ - - -- Deferred.................... - - -- - - -- Income tax expense/(benefit) $ $ $ = = == As of December 31, 2001, 2000 and 1999, the types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts which gave rise to deferred taxes, and their tax effects were as follows:
2001 2000 1999 ---- ---- ---- (In thousands) Accrued employee benefits ............................. $ 62 $ 30 $ 31 Provisions for doubtful accounts ...................... 26 182 337 Deferred revenue ...................................... -- 13 -- Capitalized software development costs and fixed assets 676 284 98 Net operating loss carryforwards (NOL) ................ 22,916 15,021 12,724 Research and Development Credit ....................... -- -- 91 Accruals .............................................. 470 864 51 Loss on disposal of Qode business unit ................ 1,060 -- -- Other ................................................. -- 17 8 Alternative minimum tax credit carryforward ........... 45 45 45 -------- -------- -------- Total deferred tax assets ............................. 25,255 16,456 13,385 Valuation Allowance ................................... (25,255) (16,456) (13,385) ------------------------------------------------------- -------- -------- -------- Net deferred income tax asset ......................... $ -- $ -- $ -- ======== ======== ========
F-61 Because it is more likely than not that NeoMedia will not realize the benefit of its deferred tax assets, a valuation reserve has been established against them. For the years ended December 31, 2001, 2000 and 1999, the income tax benefit differed from the amount computed by applying the statutory federal rate of 34% as follows:
2001 2000 1999 ---- ---- ---- (In thousands) Benefit at federal statutory rate ............................ $(8,659) $(1,839) $(3,561) State income taxes, net of federal ........................... (1,009) (196) (380) Foreign income taxes, net of federal ......................... -- -- 61 Exercise of non-qualified stock options ...................... (17) (1,874) (176) Permanent difference - write-off of Digtal Convergence stock . 1,190 -- -- Permanent and other, net ..................................... (304) (860) (12) Change in valuation allowance ................................ 8,799 3,071 5,766 ------- ------- ------- Income tax expense/(benefit) ................................. $ -- $ -- $ -- ======= ======= =======
As of December 31, 2001, NeoMedia had net operating loss carryforwards for federal tax purposes totaling approximately $57.3 million which may be used to offset future taxable income, or, if unused expire between 2011 and 2020. As a result of certain of NeoMedia's equity activities occurring during the year ended December 31, 1997, NeoMedia anticipates that the annual usage of its pre-1998 net operating loss carryforwards may be further restricted pursuant to the provisions of Section 382 of the Internal Revenue Code. 10. TRANSACTIONS WITH RELATED PARTIES In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of the Company's common stock at a price of $3.03 per share. In January 1999, William Fritz purchased 42,857 shares of the Company's common stock at a price of $3.50 per share. As part of these purchases, Edna Fritz received a total of 8,237 warrants to purchase stock at $3.04 per share and William Fritz received 4,286 warrants to purchase stock at $3.50 per share. In June 1999, the Company sold a license for the right to utilize its Neolink Information Server to Daystar Services L.L.C. ("Daystar") a Tennessee limited liability company, owned in part by an officer and one of the Company's board members, for $500,000. The original business purpose of the sale was to generate revenue through the sale of an exclusive license to Daystar. In April 2000, in anticipation of either a potential acquisition of the Company by Digital:Convergence ("DC") (which subsequently did not occur), or a long-term intellectual property license with DC, the Company purchased substantially all the assets of Daystar, including the rights to the license it sold to Daystar in 1999, for approximately $3.5 million of our common stock. In order to enter into a 10-year intellectual property license agreement with DC, the Company was required to re-purchase the exclusive license agreement. Additional Daystar assets purchased were to be employed in our MLM/Affinity licensing program. The assets purchased were recorded as intangible assets at approximately $3.5 million on the accompanying consolidated balance sheets. The Company believes this transaction was conducted on terms as good as favorable as those would have been derived from an arm's length negotiation. In July 1999, the Company paid professional fees in the amount of $73,000 to James J. Keil, a director of the Company, for services related to the recruitment of the Company's President and Chief Operating Officer and one sales representative. During the years ended December 31, 1999 and 1998, the Company leased from William E. Fritz a trade show booth for rental payments totaling $31,000 and $34,000, respectively. The lease expired during 1999. F-62 During each of the years ended December 31, 2000 and 1999, the Company leased office and residential facilities from related parties for rental payments totaling $5,000 and $13,000, respectively. The lease expired during 2000. During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its Chairman and Chief Executive Officer, under a note payable bearing interest at 10% per annum with a term of six months. The Company believes this transaction was conducted on terms as good as favorable as those would have been derived from an arm's length negotiation. 11. COMMITMENTS AND CONTINGENCIES NeoMedia leases its office facilities and certain office and computer equipment under various operating leases. These leases provide for minimum rents and generally include options to renew for additional periods. For the years ended December 31, 2001, 2000 and 1999, NeoMedia's rent expense was $1,246,000, $1,067,000 and $1,268,000, respectively. The following is a schedule of the future minimum lease payments under non-cancelable operating leases as of December 31, 2001: Payments (In thousands) 2002............................................. $ 844 2003............................................. 473 2004............................................. 56 2005............................................. 2 2006............................................. - -------- Total............................................ $ 1,375 ======== Of the $844,000 minimum lease payment due in 2002, approximately $205,000 relates to leases for Qode Universal Commerce Solution equipment that will be assumed by the Finx Group, Inc. upon consummation of The Finx Group's letter of intent with the Company. As of December 31, 2001, none of the Company's employees were under contract. Additionally, the Company was not party to any long-term consulting agreements as of December 31, 2001. Legal Proceedings The Company is involved in various legal actions arising in the normal course of business, both as claimant and defendant. While it is not possible to determine with certainty the outcome of these matters, it is the opinion of management that the eventual resolution of the following legal actions could have a material adverse effect on the Company's financial position or operating results. On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the Company in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, the accelerated repayment of a $500,000 loan it advanced to the Company under the terms of a letter of intent entered into between AirClic and the Company. The letter of intent was subsequently abandoned on the basis of the Company's alleged breach of certain representations made by the Company in the promissory note issued by the Company to AirClic in respect of such advance. The note issued by the Company in respect of AirClic's $500,000 advance is secured by substantially all of the Company's intellectual property, including its core physical world-to-Internet technologies. If the Company is deemed to have defaulted under the note, and does not pay the judgment, AirClic, which is one of the NeoMedia's key competitors, could acquire the Company's core intellectual property, which would have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. The Company is vigorously defending this lawsuit and has interposed counterclaims against AirClic. The lawsuit is in its preliminary stages and, as such, at this time it is difficult to assess the outcome. Whether or not AirClic is successful in asserting its claims that the Company breached certain representations made by the Company in the note, the note became due and payable in accordance with its terms on January 11, 2002. Based on the cash currently available to the Company, payment of the note and related interest would have a material adverse effect on the Company's financial condition. If the Company faisl to pay such note, AirClic could proceed against the Company's intellectual 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. F-63 AirClic has also filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania. In this second action, AirClic seeks a declaration that certain core intellectual property securing the note issued by the Company to AirClic, some of which is patented and others for which a patent application is pending is invalid and unenforceable. Any declaration that the Company's core patented or patentable technology is invalid and unenforceable would have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. The Company is vigorously defending against this lawsuit as well. The Company has not accrued any liability in connection with this matter. On June 26, 2001, the Company filed a $3 million lawsuit in the U.S. District Court, Northern District of Texas, Dallas Division, against Digital:Convergence Corporation for breach of contract regarding a $3 million promissory note due on June 24, 2001 that was not paid. The Company is seeking payment of the $3 million note plus interest and attorneys fees. The Company has not accrued any gain contingency related to this matter. In April 2001, the former President and director of NeoMedia filed a lawsuit against the Company and several of its directors. The suit was filed in the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim alleges the individual was fraudulently induced into accepting employment and that the Company breached the employment agreement. The individual's employment with the Company ended in January 2001. The Company believes the claim is without merit and is vigorously defending itself. Final outcome of this matter is uncertain and a range of loss cannot reasonably be estimated. The Company has accrued approximately $347,000 in severance and incentive payments payable to Mr. Goins. The Company has not accrued any additional liability related to the suit. On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San Francisco County Superior Court seeking payment of $138,000 under a software license agreement entered into between the Company and Ripfire in May 2001 relating to implementation of the Qode Universal Commerce Solution. The Company has entered into a letter of intent with the Finx Group, Inc. to sell certain assets and liabilities relating to Qode. As part of the letter of intent, the Finx Group will assume all liabilities up to $138,000 relating to the Ripfire contract. Accordingly, the Company has not accrued a liability in the accompanying financial statements. The Company, along with the Finx Group, is currently negotiating settlement of this matter. On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages in the Circuit Court of the Seventeenth Judicial Circuit for Broward County, Florida. Headway Associates, Ltd. is seeking payment of all amounts due under the terms the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode business unit. The lease commenced on March 3, 2000 and terminates on March 31, 2005. On February 25, 2002, Headway agreed to accept $100,000 cash payment over a two-month period for settlement of all past-due and future amounts owed under the lease. This amount is accrued in the accompanying financial statements. On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking payment in full of approximately $525,000 relating to a software and services contract associated with implementation of the Qode Universal Commerce Solution. The Company has entered into a letter of intent with the Finx Group, Inc. to sell certain assets and liabilities relating to Qode. As part of the letter of intent, the Finx Group will assume all liabilities up to $530,000 relating to the Orsus contract. Accordingly, the Company has not accrued a liability in the accompanying financial statements. The Company, along with the Finx Group, is currently negotiating settlement of this matter. On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment of approximately $38,700 relating to past due and future payments under an office equipment lease. The Company has returned the equipment and intends to settle the past due amounts. As of December 31, 2001, the Company had recorded a liability of approximately $10,000 relating to this matter. 12. DEFINED CONTRIBUTION SAVINGS PLAN NeoMedia maintains a defined contribution 401(k) savings plan. Participants may make elective contributions up to established limits. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The plan provides for matching and discretionary contributions by NeoMedia, although no such contributions to the plan have been made to date. F-64 13. EMPLOYEE STOCK OPTION PLAN Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 1,500,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price shall be equal to or in excess of the fair market value per share of NeoMedia's common stock on the date of grant. These options granted expired ten years from the date of grant. These options vest 100% one year from the date of grant. Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 8,000,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant. Options granted during 2000 and 1999 were granted at an exercise price equal to fair market value on the date of grant. Options generally vest 20% upon grant and 20% per year thereafter. The options expire ten years from the date of grant. Effective January 1, 1996, NeoMedia adopted SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair-value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, SFAS 123 also allows an entity to continue to measure compensation cost for stock-based compensation plans using the intrinsic-value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to continue using the accounting method in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair-value method of accounting had been adopted. Because NeoMedia elected to continue using the accounting method in APB 25, no compensation expense was recognized in the consolidated statements of operations for the years ended December 31, 2000 and 1999 for stock-based employee compensation. For grants in 2001, 2000 and 1999, the following assumptions were used: (i) no expected dividends; (ii) a risk-free interest rate of 4.5% for 2001, 6% for 2000 and 5% for 1999; (iii) expected volatility of 135% for 2001, 80% for 2000 and 70% for 1999 and (iv) an expected life of 5 years for options granted in 2001 and 4 years for options granted in 2000 and 1999. The fair-value was determined using the Black-Scholes option-pricing model. The estimated fair value of grants of stock options and warrants to non-employees of NeoMedia is charged to expense in the consolidated financial statements. These options vest in the same manner as the employee options granted under the 1998 Stock Option Plan. Utilizing the assumptions detailed above, our net loss and loss per share, as reported, would have been the following pro forma amounts ($ in thousands except per share data). 2001 2000 1999 ---- ---- ---- Net Loss As reported....................... $25,469 $5,409 $10,472 Pro forma......................... $27,888 $7,498 $11,731 Net loss per share As reported....................... $1.55 $0.39 $ 1.01 Pro forma......................... $1.70 $0.54 $ 1.13 A summary of the status of NeoMedia's 1996 and 1998 stock option plans as of and for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ------------------ ----------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price (In (In (In thousands) thousands) thousands) Outstanding at beginning of year .... 4,294 $ 4.71 3,418 $ 4.43 3,164 $ 4.40 Granted ............................. 3,499 2.00 1,192 4.87 1,721 4.71 Exercised ........................... (38) 3.60 (170) 2.83 (599) 1.77 Forfeited ........................... (3,541) 4.13 (146) 5.78 868) 5.79 ------ ------- ------ ------- ----- ------ Outstanding at end of year .......... 4,214 $ 2.96 4,294 $ 4.71 3,418 $ 4.43 ===================================== ====== ======= ====== ======= ====== ====== Options exercisable at year-end ..... 2,452 2,140 1,398 Weighted-average fair value of options granted during the year...... $ 1.81 $ 3.05 $2.68 Available for grant at the end of the year......................... 4,158 4,116 5,162
F-65 The following table summarizes information about NeoMedia's stock options outstanding as of December 31, 2001:
Options Outstanding Options Exercisable ----------------------------------------------------------------------- ---------------------------- Weighted- Weighted- Weighted- Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price ------------------ --------------- ---------------- --------- --------------- -------- (In thousands) (In thousands) $ -- to $ 0.84 1,441 9.4 years $ 0.24 667 $ 0.28 1.88 to 2.91 767 8.0 years 2.52 429 2.52 3.25 to 4.98 1,055 7.9 years 3.81 619 3.76 5.06 to 7.88 836 7.2 years 6.15 632 6.25 8.44 to 10.88 115 7.7 years 8.89 105 8.92 --------- ------- ------ --------- --------- ------ --------- $ 0.84 to $ 10.88 4,214 8.3 years $ 2.96 2,452 $ 3.46 ========= ======= ===== ========= ========= ===== =========
In December 1999, the Company issued 20,000 options to buy shares of the Company's common stock to an outside consultant at a price of $7.00 per share for consulting services rendered, and recognized $28,200 in expense in its 1999 consolidated financial statements. These options vest in the same manner as the employee options granted under the 1998 Stock Option Plan. All these options were outstanding at December 31, 2000 and 1999. Of these options, 8,000 and 4,000 were vested at December 31, 2000 and 1999, respectively. In October 2000, the Company issued 80,000 warrants to buy shares of the Company's common stock to an outside consultant at a price of $4.13 per share for consulting services rendered, and recognized approximately $253,000 in expense in its 2000 consolidated financial statements. These warrants vest in the same manner as the employee options granted under the 1998 Stock Option Plan. All these warrants were outstanding at December 31, 2001. Of these warrants, 16,000 were vested at December 31, 2001. In September 2001, the Company issued 150,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.20 per share for consulting services rendered, and recognized $18,800 in expense in the 2001 consolidated financial statements. The warrants vest 40% upon grant and the remaining 60% one year from the grant date. As of December 31, 2001, all 150,000 warrants were outstanding and 60,000 were vested. Warrants Warrant activity as of December 31, 2001, 2000 and 1999, is as follows: Balance December 31, 1998 1,639,832 Warrants issued 1,118,630 Warrants exercised 82,100 --------- F-66 Balance December 31, 1999 2,676,362 Warrants issued 1,787,073 Warrants exercised 495,600 ---------- Balance December 31, 2000 3,967,835 Warrants issued 887,512 Warrants exercised 505,450 Warrants expired 1,110,000 --------- Balance December 31, 2001 3,239,897 ========= During 2000, the Company issued 1,400,000 warrants as part of a ten year license of the Company's intellectual property. These warrants were immediately vested and exercisable. The associated expense is being recognized over the life of the contract. During 2000, $118,000 was recorded as a reduction of the license revenue related to the contract. During 2001, the Company re-priced approximately 1.5 million additional warrants subject to a limited exercise period and other conditions, including certain warrants issued in connection with NeoMedia's initial public offering in 1996, which expired at the end of 2001. The repricing program allowed the warrant exercise price to be reduced to 33 percent of the closing sale price of the Company's common stock (subject to a minimum) on the day prior to the date of exercise for a period of six months from the date the repricing program began. The exercise of the warrants and sale of the underlying common stock was at the discretion of a broker selected by the Company, within the parameters of the repricing arrangement. In accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock Transactions, the award was accounted for as variable from the date of modifications on May 1, 2001. Accordingly, $181,000 was recorded in during 2001 as compensation expense. In June 2001, the Board of Directors approved the issuance of 404,900 warrants to an outside consultant at an exercise price of $2.09. The Company recognized an expense of approximately $742,000 related to this transaction, which is included in general and administrative expense in the accompanying consolidated statements of operations. The Company used the Black-Scholes option-pricing model to value the shares, with the following assumptions: (i) no expected dividends (ii) a risk-free interest rate of 4.5% (iii) expected volatility of 135% and (iv) an expected life of 3 years. The following table summarizes information about warrants outstanding at December 31, 2001, all of which are exercisable: Weighted Average Weighted Remaining Average Range of Warrants Contractual Exercise Exercise Prices Outstanding Life (Years) Price --------------- ----------- ------------ ----- $0.10 to $5.50 927 2.6 $2.51 $5.51 to $6.99 1,558 3.5 $6.02 $7.00 to $9.99 524 1.0 $8.04 $10.00 to $15.00 231 1.1 $12.74 ----- --- ------ $0.10 to $15.00 3,240 2.7 $ 5.82 ===== === ====== 14. SEGMENT INFORMATION Beginning with the year ended December 31, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that business enterprises report information about operating segments in annual financial statements. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. F-67 The Company is organized into two business segments: (a) NeoMedia ISS, and (b) NeoMedia CIS. Performance is evaluated and resources allocated based on specific segment requirements and measurable factors. Management uses the Company's internal income statements to evaluate each business unit's performance. Assets of the business units are not available for management of the business segments or for disclosure. Operational results for the two segments for the years ended December 31, 2001, 2000 and 1999 are presented below (in thousands):
NeoMedia ISS NeoMedia CIS (formerly (formerly NeoMedia ASP) NeoMedia SI) Consolidated ------------- ------------ ------------ Year Ended December 31, 2001 Net Sales Qode Business Unit................... $ 13 $ - $ 13 Paperclick/Amway/MLM................. 140 140 Software and equipment resales and related services.............. - 8,002 8,002 ----- ------ ----- Total gross sales.................... 153 8,002 8,155 Less: Qode Business Unit Sales...... (13) - (13) ----- ----- ----- Total net sales..................... 140 8,002 8,142 ===== ===== ===== Loss from Continuing Operations......... (17,639) (1,129) (18,768) Loss from operations of and disposal of discontinued business unit.......... (6,701) - (6,701) Net Loss................................ (24,340) (1,129) (25,469) Year Ended December 31, 2000 Net Sales................................ $8,083 $19,482 $27,565 Net Loss................................. (4,225) (1,184) (5,409) Year Ended December 31, 1999 Net Sales................................ $795 $24,461 $25,256 Net Loss................................. (5,916) (4,556) (10,472)
15. QUARTERLY INFORMATION (UNAUDITED) The summarized quarterly financial data presented below reflects all adjustments which, in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.
(dollars in thousands except per share data) ----------------------------------------------------------- Total Fourth Third Second First 2001 - ---- Total net sales ................ $ 8,142 $ 4,459 $ 908 $ 1,237 $ 1,538 Gross profit ................... ($ 724) $ 597 ($ 503) ($ 404) ($ 414) (Loss) before income taxes and discontinued operations ($18,768) $ 771 ($ 5,072) ($11,042) ($ 3,425) Net (loss) ..................... ($25,469) ($ 1,692) ($ 9,310) ($11,042) ($ 3,425) Net (loss) per share: basic and diluted ......... ($ 1.55) ($ 0.11) ($ 0.60) ($ 0.72) ($ 0.24)
F-68
2000 - ---- Total net sales ................ $27,565 $ 9,875 $ 4,049 $ 9,547 $ 4,094 Gross profit ................... $ 9,032 $ 7,571 $ 42 $ 879 $ 540 (Loss) before income taxes and discontinued operations ($ 5,409) $ 2,667 ($ 3,555) ($ 2,085) ($ 2,436) Net (loss) ..................... ($ 5,409) $ 2,667 ($ 3,555) ($ 2,085) ($ 2,436) Net (loss) per share: basic and diluted ......... ($ 0.39) $ 0.21 ($ 0.25) ($ 0.15) ($ 0.19) 1999 ---- Total net sales ................ $25,256 $ 5,091 $ 5,019 $ 7,342 $ 7,804 Gross profit ................... $ 2,786 ($ 156) ($ 11) $ 1,269 $ 1,684 (Loss) before income taxes and discontinued operations ($10,472) ($ 3,881) ($ 2,937) ($ 1,888) ($ 1,766) Net (loss) ..................... ($10,472) ($ 3,881) ($ 2,937) ($ 1,888) ($ 1,766) Net (loss) per share: basic and diluted ......... ($ 1.01) ($ 0.34) ($ 0.27) ($ 0.19) ($ 0.20)
16. COMMON STOCK On October 24, 2001, the Company filed a proxy statement with the SEC to request a shareholder vote to increase the number of the Company's authorized shares of common stock from 50,000,000 shares to 100,000,000 and increase the number of the Company's authorized shares of preferred stock from 10,000,000 shares to 25,000,000. The shareholder meeting was held on December 11, 2001. This resolution did not pass as a result of the failure to secure favorable votes from holders of a majority of the outstanding shares. The proxy also requested approval to sell 19,000,000 shares of common stock to accredited investors in exchange for limited recourse promissory notes accruing interest at a rate of 6% per annum, with a term of three months, providing for mandatory repayment of principal in the amount of the proceeds of any sale of the shares of common stock (or other securities or assets issued in respect of such shares of common stock) purchased by means of such promissory notes, with sole recourse under the event of default under the promissory note limited to recovery of the shares of common stock purchased (or other assets or securities issued in respect thereof) by means of such promissory note. This resolution passed. During the fourth quarter of 2001, the Company issued 3,000,000 of the 19,000,000 shares at $0.08 per share in exchange for limited recourse promissory notes as described above. The Company has recorded a stock subscription receivable of $240,000 as of December 31, 2001 with respect to these shares. Subsequent to December 31, 2001, the Company has cancelled the 3,000,000 shares issued in 2001 and re-issued them, along with 16,000,000 additional shares, at a price of $0.17 per share, subject to the same terms described above. During the year ended December 31, 2001, the Company issued through private placements 3,490,750 shares of the Company's Common Stock for proceeds of $1,637,000. During the year ended December 31, 2000, the Company issued through private placements 1,415,279 shares of the Company's Common Stock for proceeds of $9,203,000. In connection with these private placements, the Company also issued 387,073 warrants with strike prices ranging from $6.00 to $12.74. These warrants were immediately vested and have a life of three to five years. In 1999, an unrelated third party converted their $2.0 million note receivable from the Company into shares of the Company's common stock at a price of $4.00 per share. The unrelated third party also received 200,000 warrants. These warrants were 100% vested upon issuance. Of these warrants, 100,000 were issued at $5.00 and 100,000 were issued at $7.00. All 200,000 warrants had a three-year expiration and were subsequently exercised in 2000. 17. PREFERRED STOCK In June 2001, the Company entered into a one-year license agreement with About.com, Inc. to provide the Qode Universal Commerce Solution(TM) to About.com's estimated 36 million worldwide users. The Company and About.com intended to promote the co-branded shopping service throughout the About.com network. In June 2001, About.com ran banner ads on its site promoting the Qode Universal Commerce Solution(TM). As part of the emerging About.com and NeoMedia relationship, About.com received 452,489 shares of our Series B Convertible Preferred Stock, par value $0.01 per share, of the 500,000 total Series B Convertible Preferred shares which we are authorized to issue, in consideration for these promotions. Each share was convertible into one share of NeoMedia common stock. We recorded an expense of $882,000 associated with this transaction in the second quarter in sales and marketing expense in the accompanying consolidated statements of operations. The agreement with About.com was terminated on August 31, 2001, in anticipation of the sale of the Qode assets to the Finx Group, Inc. Subsequent to December 31, 2001, the Series B Convertible Preferred Stock issued to About.com automatically converted to 452,289 shares of NeoMedia common stock on January 2, 2002. F-69 18. SUBSEQUENT EVENTS Subsequent to December 31, 2001, the following events have occurred: o During January 2002, certain of the Company's shareholders filed a complaint with the Securities and Exchange Commission, alleging that the shareholders were not included in the special shareholders meeting of November 25, 2001, to vote on the issuance of 19 million shares of NeoMedia common stock. On March 11, the Company filed its response claiming that the Company had fully complied with all of its obligations under the laws and regulations administered by the Securities and Exchange Commission, as well as with its obligation under Delaware General Corporation Law. o During February 2002, the Company sold 19 million shares of its common stock at $0.17 per share in exchange for promissory notes maturing at the earlier of i) 90 days from the date of issuance, or ii) 30 days from registration of the shares. During 2001, the Company had issued 3 million shares to unrelated investors at $0.08 per share payable in the same manner. Those shares were cancelled and re-issued as part of the 19 million share offering in 2002. o During February 2002, the Company issued 1,646,987 shares of its common stock to two separate vendors as settlement of past due liabilities and future payments relating to equipment leases. o During March 2002, the Company requested a hearing before a Nasdaq listing qualifications panel to review a staff determination issued by Nasdaq. The determination indicated that as of December 31, 2001 the Company did not comply with either the minimum $2 million net tangible assets or the minimum $2.5 million stockholders' equity requirement for continued listing, and that the company's shares were therefore subject to delisting. NeoMedia responded by requesting a hearing before a Nasdaq listing panel to review the staff determination. The hearing is scheduled for April 18, 2002. o During March 2002, the Company repriced 1.2 million of its common stock warrants for a period of six months. During the term of the warrant repricing program, participating holders are entitled to exercise qualified warrants at an exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock on the NASDAQ Small Cap Market on the trading date immediately preceding the date of exercise. F-70 (Outside back cover page) PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by the Delaware General Corporation Law ("DGCL"), we have included in our Certificate of Incorporation a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, except for liability (i) for any breach of the director's duty of loyalty to NeoMedia or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases, as provided in Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The effect of this provision is to eliminate the rights of NeoMedia and its stockholders (through stockholders' derivative suits on behalf of NeoMedia) to recover monetary damages against a director for breach of the fiduciary duty of care as a director except in the situations described in (i) through (iv) above. This provision does not limit nor eliminate the rights of NeoMedia or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. These provisions will not alter the liability of directors under federal securities laws. The certificate of incorporation and the by-laws of NeoMedia provide that we are required and permitted to indemnify our officers and directors, employees and agents under certain circumstances. In addition, if permitted by law, we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them in their capacity as a director or officer for which they may be indemnified upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to indemnification. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of NeoMedia in which indemnification would be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers or controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered. All of the amounts shown are estimates except the Securities and Exchange Commission registration fee. Securities and Exchange Commission Registration Fee.............................................. $ 946.00 Legal fees and expenses....................................... 25,000.00 Accounting fees and expenses.................................. 25,000.00 Miscellaneous................................................. 1,000.00 -------- Total......................................................... $51,946.00 ========== ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below in chronological order is information regarding the numbers of shares of Common Stock sold by the Company, the number of warrants issued by the Company, and the principal amount of debt instruments issued by the Company since November 16, 1998, the consideration received by the Company for such shares, warrants, and debt instruments and information relating to the section of the Act or rule of the Securities and Exchange Commission under which exemption from registration was claimed. None of these securities was registered under the Act. Except as otherwise indicated, no sales of securities involved the use of an underwriter and no commissions were paid in connection with the sale of any securities. Neither the Company nor any entity acting on its behalf offered or sold the referenced securities by means of any general solicitation or advertising. Each of such transactions was exempt from registration under the Act by virtue of the provisions of Section 4(2) and/or Section 3(a)(9) of the Act. Each purchaser of the securities described below has represented that he/she/it understands that the securities acquired may not be sold or otherwise transferred absent registration under the Act or the availability of an exemption from the registration requirements of the Act and that such purchaser was an "accredited investor," as defined in Rule 501(a) of Regulation D under the Act. Each certificate evidencing the securities purchased by each purchaser bears a legend to the effect that such securities may not be sold or otherwise transferred absent registration under the Act or the availability of an exemption from the registration requirements of the Act. i All share numbers set forth below give effect to all stock splits and reverse stock splits effected prior to the date of the filing of this Registration Statement. In November 1998, NeoMedia borrowed $500,000, in two separate notes from unrelated third parties. These notes were due in November, 1999 with an interest rate of 20%. One $250,000 note was extended until January 6, 2000, and the other was extended until February 25, 2000. These notes were secured by 375,000 shares of NeoMedia's common stock by placing them in an escrow account. These shares were considered issued but not outstanding for 1999. As part of obtaining the financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to the lender. These warrants were exercised in February 2000. During 2000, both notes were repaid and the 375,000 shares securing the notes have been released from escrow and retired by the Company. In January, 1999, NeoMedia issued 82,372 shares of NeoMedia's common stock to an individual related party at a price of $3.04 per share. In connection with the sale, NeoMedia also issued 8,237 warrants with an exercise price of $3.04. The gross proceeds of such transaction were approximately $250,000. In January, 1999, NeoMedia issued warrants to purchase 230,000 shares of common stock at a price of $2.13 per share to an outside consultant for services performed. In January and February, 1999, NeoMedia issued an aggregate of 145,000 shares of NeoMedia's common stock at a price of $3.50 per share to five individual and one institutional unrelated parties. In connection with the sale, NeoMedia also issued an aggregate of 3,000 warrants with an exercise price of $3.50. The gross proceeds of such transaction were approximately $507,500. In connection with the sale, NeoMedia also issued as a commission 280,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $2.13 per share In January, 1999, NeoMedia issued 42,857 shares of NeoMedia's common stock at a price of $3.50 per share to an individual related party. In connection with the sale, NeoMedia also issued 4,286 warrants with an exercise price of $3.50. The gross proceeds of such transaction were approximately $150,000. In February, 1999, NeoMedia issued 250,000 shares of NeoMedia's common stock at a price of $4.00 per share to A.T. Cross Company, an unrelated party. In connection with the sale, NeoMedia also issued 100,000 warrants with an exercise price of $5.00. The gross proceeds of such transaction were $1,000,000. In April, 1999, NeoMedia issued an aggregate of 1,000,000 shares of NeoMedia's common stock at a price of $3.45 per share to two individual and three institutional unrelated parties. The gross proceeds of such transaction were approximately $3,450,000. In connection with the sale, NeoMedia issued as a commission 175,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $3.45 per share. In April, 1999, NeoMedia issued warrants to purchase 50,000 shares of common stock at a price of $0.01 per share to an outside institution for services performed. In May, 1999, NeoMedia issued an aggregate of 65,000 shares of NeoMedia's common stock at a price of $4.75 per share to two individual unrelated parties. In connection with the sale, NeoMedia also issued an aggregate of 6,500 warrants with an exercise price of $5.00. The gross proceeds of such transaction were approximately $309,000. In connection with the sale, NeoMedia paid commissions of $3,375 cash plus 3,250 warrants to purchase shares of NeoMedia common stock at an exercise price of $5.00 per share. In June, 1999, NeoMedia issued 250,000 shares of NeoMedia's common stock at a price of $4.00 per share to A.T. Cross Company, an unrelated party. In connection with the sale, NeoMedia also issued 100,000 warrants with an exercise price of $7.00. The gross proceeds of such transaction were approximately $1,000,000. In September, 1999, NeoMedia issued an aggregate of 210,000 shares of NeoMedia's common stock at a price of $7.00 per share to one individual and two institutional unrelated parties. The gross proceeds of such transaction were approximately $1,470,000. In connection with the sale, NeoMedia issued as a commission 105,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $6.00 per share. ii In September, 1999, NeoMedia issued an aggregate of 275,231 shares of NeoMedia's common stock at a price of $5.75 per share to two individual and three institutional unrelated parties. In connection with the sale, NeoMedia also issued an aggregate of 27,523 warrants with an exercise price of $6.75. The gross proceeds of such transaction were approximately $1,583,000. In connection with the sale, NeoMedia paid commissions of $30,000 cash, and also issued 11,172 shares of its common stock valued at $6.19 per share and 10,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $6.19 per share. In October, 1999, NeoMedia issued 15,000 shares of NeoMedia's common stock at a price of $4.38 per share to an individual unrelated party. In connection with the sale, NeoMedia also issued 1,500 warrants with an exercise price of $4.38. The gross proceeds of such transaction were approximately $66,000. In November, 1999, NeoMedia issued an aggregate of 143,334 shares of NeoMedia's common stock at a price of $3.75 per share to two individual and two institutional unrelated parties. In connection with the sale, NeoMedia also issued an aggregate of 5,067 warrants with an exercise price of $5.50, 1,267 warrants with an exercise price of $4.75, 5,333 warrants with an exercise price of $4.67, and 2,667 warrants with an exercise price of $5.84. The gross proceeds of such transaction were approximately $538,000. In connection with the sale, NeoMedia paid commissions of approximately $35,000. In January, 2000, NeoMedia issued an aggregate of 301,368 shares of NeoMedia's common stock at a price of $3.75 per share to ten individual and four institutional unrelated parties. In connection with the sale, NeoMedia also issued an aggregate of 12,570 warrants with an exercise price of $7.19, 5,400 warrants with an exercise price of $6.44, and 12,167 warrants with an exercise price of $7.37. The gross proceeds of such transaction were approximately $1,130,000. In connection with the sale, NeoMedia issued as commissions 9,502 shares of its common stock valued at $7.09 per share. In February, 2000, NeoMedia issued 39,535 shares of NeoMedia's common stock at a price of $6.88 per share to one individual and one institutional unrelated party. In connection with the sale, NeoMedia also issued 2,500 warrants with an exercise price of $12.74 and 1,454 warrants with an exercise price of $9.56. The gross proceeds of such transaction were approximately $272,000. In February, 2000, NeoMedia issued 50,000 shares of NeoMedia's common stock at a price of $6.00 per share to an institutional unrelated party. In connection with the sale, NeoMedia also issued 2,982 warrants with an exercise price of $10.06. The gross proceeds of such transaction were approximately $300,000. In February, 2000, NeoMedia issued 37,500 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $2.00 per share. The gross proceeds of such transaction were approximately $75,000. In March, 2000, NeoMedia issued an aggregate of 1,000,000 shares of NeoMedia's common stock at a price of $7.50 per share to 20 individual and one institutional unrelated party. The gross proceeds of such transaction were approximately $7,500,000. In connection with the sale, NeoMedia issued as a commission 125,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $7.50 per share, 125,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $15.00 per share, and 100,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $7.20 per share. In May, 2000, NeoMedia issued 187,500 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $7.38 per share. The gross proceeds of such transaction were approximately $1,383,000. In October, 2000, NeoMedia issued warrants to purchase 1,400,000 shares of common stock at a price of $6.00 per share to Digital:Convergence Corporation as consideration for a 10-year intellectual property license agreement. In March and April 2001, NeoMedia issued 316,500 shares of NeoMedia's common stock at a price of $3.40 per share to an institutional unrelated party. The gross proceeds of such transaction were approximately $1,076,000. In connection with the sale, NeoMedia issued as a commission 50,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $3.56 per share. In March, 2001, NeoMedia issued 18,000 shares of NeoMedia's common stock at a price of $3.41 per share to an institutional unrelated party. The gross proceeds of such transaction were $61,000. In March, 2001, NeoMedia issued 156,250 shares of NeoMedia's common stock at a price of $3.20 per share to an institutional unrelated party. The gross proceeds of such transaction were $500,000. iii In March, 2001, NeoMedia issued an aggregate of 170,000 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $2.13 per share. The gross proceeds of such transaction were approximately $362,000. In April, 2001, NeoMedia issued warrants to purchase 50,000 shares of common stock at a price of $0.01 per share to an outside institution for services performed In May, 2001, NeoMedia issued an aggregate of 320,050 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $2.00 per share. The gross proceeds of such transaction were $641,000. In June, 2001, NeoMedia issued an aggregate of 4,100 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $2.00 per share. The gross proceeds of such transaction were $8,000. In July, 2001, NeoMedia issued an aggregate of 11,300 shares of NeoMedia common stock upon the exercise of outstanding warrants at a price of $2.00 per share. The gross proceeds of such transaction were $23,000. In January 2002, the Company issued 452,489 shares of common stock to About.com, Inc. The shares were issued upon conversion of 452,489 shares of Series B Preferred Stock issued to About.com, Inc. as payment for advertising expense incurred during 2001. In January 2002, NeoMedia issued 1,646,987 shares of common stock to two unrelated vendors as settlement of past-due accounts payable and future payments under equipment lease agreements. There were no cash proceeds to NeoMedia in these transactions. In February 2002, NeoMedia issued 19,000,000 shares of NeoMedia's common stock at a price of $0.17 per share to five individuals and two institutional unrelated parties. The shares were issued in exchange for limited recourse promissory notes maturing at the earlier of i.) 90 days from the date of issuance, or ii.) 30 days from the date of registration of the shares. The gross proceeds of such transaction will be approximately $3,040,000 upon maturity of the notes, as a purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash. ITEM 27. EXHIBITS. (a) Exhibits (1) The following exhibits required by Item 601 of Regulation S-B to be filed herewith are hereby incorporated by reference: Exhibit No. Description --- ----------- 3.1 Restated Certificate of Incorporation of DevSys, Inc. (Incorporated by reference to Exhibit 3.3 to NeoMedia's Registration Statement, No. 333-5534 (the "Registration Statement")). 3.2 By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4 to NeoMedia's Registration Statement). 3.3 Certificate of Amendment to Certificate of Incorporation of DevSys, Inc. changing its name to NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 3.13 to NeoMedia's Registration Statement). 3.4 Form of Certificate of Amendment to Certificate of Incorporation of NeoMedia Technologies, Inc. authorizing a reverse stock split (Incorporated by reference to Exhibit 3.14 to NeoMedia's Registration Statement). 3.5 Form of Certificate of Amendment to Restated Certificate of Incorporation of NeoMedia Technologies, Inc. increasing authorized capital and creating preferred stock. (Incorporated by reference to Exhibit 3.5 of NeoMedia's Form 10-KSB for the year ended December 31, 2000) 3.6 Certificate of Designation of Series B 12% Convertible Preferred Stock. 4.1 Form of Certificate for Common Stock of DevSys, Inc. (Incorporated by reference to Exhibit 4.1 to NeoMedia's Registration Statement). iv 4.2 Form of Joseph Charles' Warrant Agreement (Incorporated by reference to Exhibit 4.2 to NeoMedia's Registration Statement). 4.3 Form of Principal Stockholder's Warrant (Incorporated by reference to Exhibit 4.6 to NeoMedia's Registration Statement). 4.4 Form of Placement Agent's Warrant for the Purchase of Shares of Common Stock and Warrants (Incorporated by reference to Exhibit 4.8 to NeoMedia's Registration Statement). 4.5 Form of Warrant to Charles W. Fritz (Incorporated by reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.6 Form of Warrant to Dominick & Dominick, Incorporated (Incorporated by reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.7 Form of Warrant to Compass Capital, Inc. (Incorporated by reference to Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.8 Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.9 Form of Warrant to Southeast Research Partners, Inc. (Incorporated by reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.10 Form of Warrant to Joseph Charles & Associates, Inc. (Incorporated by reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 10.1 Form of Nonsolicitation and Confidentiality Agreement (Incorporated by reference to Exhibit 10.2 to NeoMedia's Registration Statement). 10.2 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles W. Fritz (Incorporated by reference to Exhibit 10.3 to NeoMedia's Registration Statement). 10.3 Employment Agreement dated April 1, 1996 between Dev-Tech Associates, Inc. and Robert T. Durst, Jr. (Incorporated by reference to Exhibit 10.4 to NeoMedia's Registration Statement). 10.4 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles T. Jensen (Incorporated by reference to Exhibit 10.5 to NeoMedia's Registration Statement). 10.5 Dev-Tech Associates, Inc. Annual Incentive Plan for Management (Incorporated by reference to Exhibit 10.43 to NeoMedia's Registration Statement). 10.6 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto (Incorporated by reference to Exhibit 10.50 to NeoMedia's Registration Statement). 10.7 First Amendment and Restatement of NeoMedia Technologies, Inc. 1996 Stock Option Plan (As Established Effective February 1, 1996, and as amended through November 18, 1996) (Incorporated by reference to Exhibit 10.60 to NeoMedia's Registration Statement). 10.8 Agreement of Lease Between First Union National Bank of Florida and NeoMedia Technologies, Inc. Dated November 27, 1996 (Incorporated by reference to Exhibit 10.43 to NeoMedia's Form 10-KSB for the year ended December 31, 1996). 10.9 Agreement for Wholesale Financing (Security Agreement) Between IBM Credit Corporation and NeoMedia Technologies, Inc. Dated February 20, 1997 (Incorporated by reference to Exhibit 10.47 to NeoMedia's Form 10- KSB for the year ended December 31, 1996). 10.10 Collateralized Guaranty Between IBM Credit Corporation and NeoMedia Migration, Inc. Dated February 20, 1997 (Incorporated by reference to Exhibit 10.48 to NeoMedia's Form 10-KSB for the year ended December 31, 1996). v 10.11 NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated by reference to Appendix A to NeoMedia's Form 14A Filed on February 18, 1998). 10.12 Amendment to NeoMedia Technologies 1998 Stock Option Plan (Incorporated by reference to text of NeoMedia form 14A filed on July 2, 1999) 10.13 Employment Agreement dated August 2, 1999 between NeoMedia Technologies, Inc. and William Goins (incorporated by reference to exhibit 10.32 of NeoMedia's Form 10-KSB for the year ended December 31, 1999.) 10.14 Licensing Agreement between Digital:Convergence Corporation and NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 10.1 of NeoMedia Form 10-QSB filed on October 30, 2000) 10.15 Sale and Purchase Agreement between Qode.com, Inc. and NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 10.1 of NeoMedia Form 8K filed on March 15, 2001) 10.16 Warrant repricing letter dated March 19, 2002. (Incorporated by reference to Exhibit 1.2 of NeoMedia Form 8K filed on April 2, 2002) 10.17 Option repricing letter dated April 3, 2002. (Incorporated by reference to Exhibit 1.2 of NeoMedia Form 8K filed on April 15, 2002) 10.18 Intellectual Property licensing agreement between NeoMedia and A.T. Cross Company 10.19 Intellectual Property licensing agreement between NeoMedia and Symbol Technologies, Inc. 10.20 Sponsorship and advertising agreement between NeoMedia and About.com, Inc. 10.21 Letter of Intent regarding proposed strategic transaction between NeoMedia and AirClic, Inc. 10.22 Form of Promissory note issued to AirClic, Inc. 10.23 Form of limited recourse promissory note issued in exchange for 19 million shares of common stock 10.24 Nasdaq Staff Determination Letter with respect to de-listing of NeoMedia securities from the Nasdaq SmallCap market 10.25 Revised warrant repricing letter dated April 3, 2002 20 Subsidiaries (Incorporated by reference to description of Company's subsidiaries contained in Part I of this registration statement.) Consents: Exhibit No. Description --- ----------- 5 Opinion of Reitler Brown LLC 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Stonefield Josephson LLP 23.5 Consent of Reitler Brown LLC (included in Exhibit 5 opinion letter) vi ITEM 17. UNDERTAKINGS. A. The undersigned registrant hereby undertakes: 1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; PROVIDED, HOWEVER, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. 2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. vii SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Pre-effective Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Myers, State of Florida on April 22, 2002. NEOMEDIA TECHNOLOGIES, INC. By: /s/ Charles W. Fritz Charles W. Fritz Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this Form S-1/A has been signed below by the following persons in the capacities and on the dates indicated: Signatures Title Date - ---------- ----- ---- /s/ Charles W. Fritz Chief Executive Officer, - -------------------- Charles W. Fritz Chairman of the Board and Director April 22, 2002 /s/ William E. Fritz Secretary and Director April 22, 2002 - -------------------- William E. Fritz /s/ Charles T. Jensen Chief Financial Officer, - --------------------- Charles T. Jensen Treasurer and Director April 22, 2002 /s/ A. Hayes Barclay Director April 22, 2002 - -------------------- Hayes Barclay /s/ James J. Keil Director April 22, 2002 - ----------------- James J. Keil viii EX-3.6 3 b317965_ex3-6.txt CERTIFICATE OF DESIGNATION EXHIBIT 3.6 CERTIFICATE OF DESIGNATION, PREFERENCES, RIGHTS, AND LIMITATIONS OF SERIES B 12% CONVERTIBLE REDEEMABLE PREFERRED STOCK OF NEOMEDIA TECHNOLOGIES, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware (the "GCL"), Neomedia Technologies, Inc., a Delaware corporation (the "Corporation"), does hereby certify that: FIRST: The Corporation was incorporated in the State of Delaware on July 29, 1996, and the authorized number of shares of preferred stock, par value US$0.01 per share, of the Corporation is 10,000,000, of which (i) 200,000 have been designated as Series A Preferred Stock, of which no shares are issued and outstanding and (ii) 47,511 are currently designated Series A Convertible Preferred Stock (following the conversion of 452,489 shares of Series A Convertible Preferred Stock into shares of the Corporation's common stock, par value US$0.01 per share, on January 2, 2002, as a result of which 452,489 shares of Series A Convertible Preferred Stock were returned to the undesignated and unissued shares of preferred stock of the Corporation pursuant to the terms of the Certificate of Designations To Create A Class Of Series A Convertible Preferred Stock, filed with the Secretary of State of the State of Delaware on June 20, 2001), of which no shares are issued and outstanding; and SECOND: Pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation and by the provisions of Sections 141 and 151 et seq. of the GCL, the Board of Directors, at a meeting duly called pursuant to notice duly given, adopted the following resolutions authorizing the designation of an aggregate of 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock, which resolutions are still in full force and effect and are not in conflict with any provisions of the Certificate of Incorporation or By-Laws of the Corporation: "WHEREAS, the Board of Directors of the Corporation is authorized, within the limitations and restrictions stated in the Certificate of Incorporation, to fix by resolution or resolutions the designation of each series of preferred stock and the powers, preferences, and relative participating, optional, voting, or other special rights, and the qualifications, limitations, or restrictions thereof; and WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the terms of one series of preferred stock. NOW, THEREFORE, BE IT RESOLVED, that pursuant to authority vested in the Board of Directors of the Corporation (the "Board of Directors") by Section 151 of the GCL, and in accordance with the provisions of the Certificate of Incorporation of the Corporation, one series of preferred stock, par value US$0.01 per share, of the Corporation designated as Series B 12% Convertible Redeemable Preferred Stock and consisting of 100,000 shares (the "Series B Preferred Stock") be, and it hereby is, created and provided for with the terms, powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions set forth below: 1. Dividend Rights. (a) Holders of Series B Preferred Stock, in preference to the holders of all classes and series of common stock of the Corporation, the Series A Preferred Stock of the Corporation, the Series A Convertible Preferred Stock of the Corporation and any other class or series of preferred stock of the Corporation which is not expressly designated as senior to, or on parity with, the Series B Preferred Stock of the Corporation (collectively, "Junior Stock") with respect to the payment of dividends or distributions, shall be entitled to receive out of funds that are legally available therefor, cash dividends at the rate of twelve percent (12.0%) of the Original Issue Price (as defined below) per annum on each outstanding share of Series B Preferred Stock. The "Original Issue Price" of the Series B Preferred Stock shall be Ten Dollars (US$10.00) per share (as adjusted for any stock split, combination or similar event or transaction directly affecting the Series B Preferred Stock). Such dividends shall accrue from the date of issuance of the relevant shares of Series B Preferred Stock and shall cease to accrue on the date immediately preceding the Redemption Date (as defined in Section 5). (b) Except as provided in Section 1(a), Section 3 (Liquidation Rights) and Section 5 (Redemption Rights) hereof, no dividends or distributions shall be declared or paid on, or in respect of, the Series B Preferred Stock. 2. Voting Rights. (a) General Rights. Except as otherwise provided herein or as required by law, the Series B Preferred Stock shall vote as one class with the shares of the common stock of the Corporation and not as a separate class, at any annual or special meeting of stockholders of the Corporation, and may act by written consent in the same manner as the holders of the common stock of the Corporation, in each case upon the following basis: each holder of shares of Series B Preferred Stock shall be entitled to one vote per each share of Series B Preferred Stock held by such holder. (b) Separate Vote of the Series B Preferred Stock. Notwithstanding anything to the contrary in Section 2(a), for so long as any shares of Series B Preferred Stock remain outstanding, in addition to any other vote or consent required by non-waivable provisions of the GCL to be taken by the holders of Series B Preferred Stock separately as a class, the affirmative vote or written consent of the holders of at least a majority of the outstanding Series B Preferred Stock, voting separately as a class, shall be necessary for the Corporation to effect or validate any alteration or amendment to the Corporation's Certificate of Incorporation (including this certificate) having an adverse effect on the terms, powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Series B Preferred Stock; provided, that, the creation or designation of a class or series of the capital stock of the Corporation with any powers, designations, preferences and relative, participating, optional or other special rights senior to, or on parity with, the Series B Preferred Stock in one or more regards shall not be deemed to require the affirmative vote of holders Series B Preferred Stock voting separately as a class. 3. LIQUIDATION RIGHTS. (a) Upon the occurrence of a Liquidation Event (as defined in Section 2(c)), before any distribution or payment shall be made to the holders of any Junior Stock with respect to the entitlement to receive of liquidation proceeds upon the occurrence of a Liquidation Event, the holders of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation legally available therefor an amount equal to Twelve Dollars (US$12.00) for each outstanding share of Series B Preferred Stock (as adjusted for any stock split, combination or similar event or transaction directly affecting the Series B Preferred Stock) held by them (such amount payable as to each such share of Series B Preferred Stock, the "Liquidation Preference"). If, upon any such Liquidation Event, the remaining assets of the Corporation legally available for payment of the aggregate amount of all Liquidation Preferences payable in respect of outstanding shares of Series B Preferred Stock (after payment of requisite liquidation distributions or payments to holders of shares of any class or series of capital stock of the Corporation with a liquidation preference senior to the Series B Preferred Stock) shall be insufficient to make payment in full of all Liquidation Preferences payable with respect to outstanding shares of Series B Preferred Stock in accordance with this Section 3(a), then all such remaining assets legally available therefor shall be distributed among the holders of shares of Series B Preferred Stock at the time outstanding and the holders of shares of any class or series of capital stock of the Corporation at the time outstanding with a liquidation preference on parity with the Series B Preferred Stock, ratably among them in proportion to the full amounts to which they would otherwise be respectively entitled. 2 (b) After the payment of the full Liquidation Preference on each share of Series B Preferred Stock as provided in Section 3(a) above, the remaining assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of any Junior Stock with respect to the entitlement to receive liquidation proceeds upon the occurrence of a Liquidation Event, in accordance with the respective terms and provisions of such Junior Stock. (c) For the purposes hereof, any liquidation, dissolution, or winding up of the Corporation which occurs prior to the Redemption Date, whether voluntary or involuntary, shall be deemed to be a "Liquidation Event". (d) In any Liquidation Event, if the assets or liquidation proceeds available for distribution are other than cash, the value of any such property will be deemed its fair market value as determined by the Board of Directors. Any securities included in such consideration shall be valued as follows: (i) securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below: (A) if listed or traded on the Nasdaq Stock Market (or a similar national market or exchange), the value shall be deemed to be the average of the closing prices of the securities on such quotation system over the thirty (30) day period ending three (3) days prior to the date of the relevant Liquidation Event, or such shorter period as the relevant securities are listed or traded thereon for the period ending three (3) days prior to the relevant Liquidation Event; (B) if traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the date of the relevant Liquidation Event, or such shorter period as the relevant securities are listed or traded thereon for the period ending three (3) days prior to the relevant Liquidation Event; (C) if the relevant securities are listed or traded on a national market or exchange or over-the-counter as described in Sections 3(d)(i)(A) and 3(d)(i)(B), but no such securities are sold during the thirty (30) day period ending three (3) days prior to the date of the relevant Liquidation Event, the value shall be deemed to be the average of the high bid and low asked prices at closing over such thirty (30) day period; and (D) if there is no public market in the relevant securities, the value shall be the fair market value thereof, as determined by the Board of Directors. (ii) the method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i) (A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Board of Directors, or such shorter period as the relevant securities are listed or traded three (3) days prior to the relevant Liquidation Event. 4. Conversion Rights. The Series B Preferred Stock shall be converted into shares of the common stock of the Corporation upon the following terms: (a) Mandatory Conversion. Subject to, and in compliance with, the provisions of this Section 4, on the Redemption Date, all shares (and any fractional shares) of Series B Preferred Stock which are not redeemed on the Redemption Date in accordance with Section 5 shall, immediately following redemption pursuant to Section 5, be converted automatically into fully-paid and nonassessable shares of Existing Common Stock (as defined below). The number of shares of Existing Common Stock to which a holder of Series B Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the Series B Conversion Rate (as defined in Section 4(b)) then in effect by the number of shares (and fractional shares) of Series B Preferred Stock held by such holder which are being converted. 3 (b) Series B Conversion Rate. Except as otherwise provided in Section 4(c), the conversion rate for conversion of the Series B Preferred Stock pursuant to Section 4(a) (the "Series B Conversion Rate") shall be the quotient obtained by dividing the Series B Conversion Price (as defined in Section 4(d)) by the Ninety Day Share Price (as defined in Section 4(d)). (c) Notwithstanding anything to the contrary herein, if the number of shares of Existing Common Stock issuable upon conversion of outstanding shares of Series B Preferred Stock in accordance with Section 4(a) would, following the issuance of such shares of Existing Common Stock, represent in the aggregate more than 19.9% of the outstanding shares of the capital of the Corporation on an as-converted basis as of the time immediately prior to the Redemption Date, then the Series B Conversion Rate shall be adjusted to the extent necessary to cause the shares of Existing Common Stock issuable upon conversion of the outstanding shares of Series B Preferred Stock in accordance with Section 4(a) to equal, upon issuance thereof, 19.9% of the outstanding shares of the capital stock of the Corporation on an as-converted basis, in the aggregate, as of the time immediately prior to the Redemption Date (the Series B Conversion Rate as adjusted, the "Adjusted Conversion Rate"). (d) Certain Definitions. For the purposes hereof, the following capitalized terms shall have the meanings ascribed to them below: "Existing Common Stock" means the Class A Common Stock, par value US$0.01 per share, of the Corporation; provided, that, if the Class A Common Stock does not exist, for any reason, on the Redemption Date, then "Existing Common Stock" shall mean the Corporation's then-existing class or series of common stock; provided, further, that, in the case of the existence on the Redemption Date of multiple classes or series of common stock of the Corporation other than Class A Common Stock, the "Existing Common Stock" shall be deemed to be the class or series of common stock of the Corporation without preferences or relative, participating, optional or other special rights, and, subject to the preferences and relative, participating, optional or other special rights of any other class or series of capital stock of the Corporation, full voting power and unlimited dividend and liquidation rights. "Ninety Day Share Price" means the lowest sale price for a share of the Existing Common Stock on the principal securities exchange, market, bulletin board or other public quotation system on which the Existing Common Stock is listed or traded on the date immediately preceding the Redemption Date, determined over the ninety (90) day period immediately preceding the Redemption Date or such lesser period as shares of Existing Common Stock have been listed on such exchange, market, bulletin board or other public quotation system, or if no shares of Existing Common Stock are sold during such period, the average of the high bid and low asked prices at closing over such ninety (90) day period; provided, however, that if no shares of the Existing Common Stock are listed or traded on a securities exchange, market, bulletin board or other public quotation system, the "Ninety Day Share Price" shall mean the fair market value of a share of Existing Common Stock on the day immediately preceding the Redemption Date, as determined by the Board of Directors; provided, further, that, notwithstanding anything to the contrary herein, in the event that the Ninety Day Share Price, as determined pursuant to the foregoing provisions, shall be less than US$0.20, the Ninety Day Share Price shall be deemed to be US$0.20. "Series B Conversion Price" means an amount initially equal to the Redemption Price, but subject to adjustment after the Original Issue Date (as defined in Section 4(f)) in accordance with the terms of this Section 4. All references to the "Series B Conversion Price" herein shall mean the Series B Conversion Price as so adjusted as of the relevant date of determination. 4 (e) No further action by the holders of Series B Preferred Stock or the Corporation shall be required to effect the conversion of shares of Series B Preferred Stock on the Redemption Date and following conversion of the unredeemed shares of Series B Preferred Stock in accordance with this Section 4, all rights of the respective holders thereof with respect to such converted shares shall cease, except only the rights of the relevant holders thereof to receive, upon presentation of the certificate or certificates representing the shares of Series B Preferred Stock so converted as described below, a certificate or certificates for shares of the Existing Common Stock or other property issuable upon conversion of such holder's remaining shares of Series B Preferred Stock; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Existing Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series B Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation and its representatives and agents from any loss incurred by such persons or entities in connection with such certificates. On the Redemption Date, each holder of Series B Preferred Stock shall surrender the certificates representing all of such holder's shares of Series B Preferred Stock at the principal offices of the Corporation or any transfer agent for the Series B Preferred Stock in accordance with Section 4(m). Thereupon, there shall be issued and delivered to the relevant holder promptly at such address and in the holder's name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Existing Common Stock into which the shares of Series B Preferred Stock surrendered, and not otherwise redeemed pursuant to Section 5, were converted on the Redemption Date. Such certificates for Existing Common Stock delivered by the Corporation in accordance with this Section 4(e) shall be accompanied by a certificate (the "Conversion Certificate"), signed by an officer of the Corporation certifying (i) the Ninety Day Share Price or the Adjusted Conversion Rate (as appropriate depending on whether the provisions of Section 4(c) are operative with respect to the conversion of the Series B Preferred Stock pursuant to this Section 4), (ii) the number of outstanding shares of (A) Existing Common Stock and (B) outstanding shares of the capital stock of the Corporation on an as-converted basis as of the time immediately prior to the Redemption Date, and (iii) the number of shares (including fractional shares) of Series B Preferred Stock held by the relevant holder immediately following the redemption of Series B Preferred Stock pursuant to Section 5 and immediately prior to conversion of the unredeemed shares of the Series B Preferred in accordance with this Section 4. Certificates for shares of Existing Common Stock delivered in accordance with this Section 4(e) and the Conversion Certificate shall each be deemed to be correct and conclusive absent manifest error. (f) Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the date that the first share of Series B Preferred Stock is issued (the "Original Issue Date") effect a subdivision of the outstanding shares of Existing Common Stock without a corresponding subdivision of the Series B Preferred Stock, the Series B Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Existing Common Stock into a smaller number of shares without a corresponding combination of the Series B Preferred Stock, the Series B Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment pursuant to this Section 4(f), solely to the extent applicable to, or in respect of, the class or series of Existing Common Stock actually issued upon conversion of unredeemed shares of Series B Preferred Stock pursuant to this Section 4, shall be carried forward and become effective as of the Redemption Date. (g) Adjustment for Common Stock Dividends and Distributions. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Existing Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Existing Common Stock without the payment of additional consideration, in each such event the Series B Conversion Price that is then in effect shall be proportionately decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Series B Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Existing Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of shares of Existing Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Existing Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series B Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series B Conversion Price shall be adjusted pursuant to this Section 4(g) to reflect the actual payment of such dividend or distribution. Notwithstanding anything to the contrary herein, any adjustment pursuant to this Section 4(g) shall be carried forward and, solely to the extent applicable to or in respect of the class or series of Existing Common Stock actually issued upon conversion of unredeemed shares of Series B Preferred Stock pursuant to this Section 4, shall become effective as of the Redemption Date. 5 (h) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issue Date, the Existing Common Stock issuable upon the conversion of the Series B Preferred Stock is changed into the same or a different number of shares of any class or classes of stock of the Corporation, whether by recapitalization, reclassification or otherwise (other than in connection with an Acquisition (as defined below) or Asset Transfer (as defined below), or a subdivision or combination of shares, or a stock dividend or distribution, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), in any such event each holder of Series B Preferred Stock shall have the right thereafter to receive upon conversion of their shares of Series B Preferred Stock on the Redemption Date the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the shares of Existing Common Stock into which such shares of Series B Preferred Stock would then be convertible immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. Notwithstanding anything to the contrary herein, any adjustment pursuant to this Section 4(h) shall be carried forward and, solely to the extent applicable to or in respect of the class or series of Existing Common Stock actually issued upon conversion of unredeemed shares of Series B Preferred Stock pursuant to this Section 4, shall become effective as of the Redemption Date. For the purposes hereof, the following capitalized terms shall have the meanings ascribed to them below: "Acquisition" means any consolidation or merger of the Corporation as a result of which the Corporation is not the surviving entity; "Asset Sale" means the sale, lease, license or other disposition of all, or substantially all, of the assets of the Corporation. (i) Reorganizations, Mergers or Consolidations. If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Existing Common Stock (other than a recapitalization, reclassification, subdivision, combination, exchange or substitution of shares provided for elsewhere in this Section 4) or an Acquisition or an Asset Sale shall be consummated, as a part of such capital reorganization, Acquisition or Asset Sale, provision shall be made so that the holders of the Series B Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock on the Redemption Date the number of shares of stock or other securities or property to which a holder of the number of shares of Existing Common Stock then deliverable upon conversion of shares of Series B Preferred Stock would have been entitled upon consummation of such capital reorganization, Acquisition or Asset Sale, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series B Preferred Stock after the capital reorganization, Acquisition or Asset Sale to the end that the provisions of this Section 4 (including adjustment of the Series B Conversion Price then in effect and the number of shares of Existing Common Stock issuable upon conversion of the Series B Preferred Stock on the Redemption Date) shall be applicable after that event and be as nearly equivalent as practicable. Notwithstanding anything to the contrary herein, any adjustment pursuant to this Section 4(i) shall be carried forward and, solely to the extent applicable to, or in respect of, the class or series of Existing Common Stock actually issued upon conversion of unredeemed shares of Series B Preferred Stock pursuant to this Section 4, shall become effective as of the Redemption Date. (j) Certificate of Adjustment. In each case of the occurrence of events or circumstances which would require an adjustment or readjustment of (i) the Series B Conversion Price for the number of shares of Existing Common Stock or other securities issuable upon conversion of the Series B Preferred Stock on the Redemption Date, or (ii) the type or amount of other property issuable upon conversion of the Series B Preferred Stock on the Redemption Date, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall promptly deliver such certificate to each registered holder of Series B Preferred Stock. The certificate shall set forth such adjustment or readjustment, showing in reasonable detail the facts upon which such adjustment or readjustment is based, including a statement of the type and amount, if any, of other property which at the time would then be received upon conversion of the Series B Preferred Stock on the Redemption Date, which statement shall be deemed to be correct and conclusive absent manifest error. 6 (k) Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution described in Section 4(g), or (ii) any Acquisition or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any Asset Transfer, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series B Preferred Stock at least ten (10) days prior to the record date specified therein (or such shorter period approved by the holders of a majority of the then outstanding Series B Preferred Stock) a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such Acquisition, reorganization, reclassification, Asset Transfer, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Existing Common Stock (or other securities) shall be entitled to exchange their shares of Existing Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, Asset Transfer, dissolution, liquidation or winding up. (l) Fractional Shares. No fractional shares of Existing Common Stock shall be issued upon conversion of Series B Preferred Stock. All shares of Existing Common Stock (including fractions thereof) issuable upon conversion of the Series B Preferred Stock shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the aggregate number of shares of Existing Common Stock issuable upon conversion of the Series B Preferred Stock shall be rounded down to the nearest whole share of Existing Common Stock. (m) Notices and Deliveries. Any notice required by the provisions of this Section 4 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified (signature required), (ii) when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with verification of receipt. All notices and other deliveries to holders of Series B Preferred Stock provided for herein shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation or, if to the Corporation or its transfer agent, to the principal offices thereof or such other address as may be designated in a written notice delivered in accordance with this Section 4(m). (n) Payment of Taxes. The Corporation will pay all stock transfer taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Existing Common Stock upon conversion of shares of Series B Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Existing Common Stock in a name other than that in which the shares of Series B Preferred Stock so converted were registered. 7 (o) Converted Shares. All shares of the Series B Preferred Stock converted pursuant to this Section 4, or otherwise acquired by the Corporation in any manner whatsoever, shall be returned to the Corporation's authorized, but unissued, shares of undesignated preferred stock; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series B Preferred Stock accordingly. 5. REDEMPTION RIGHTS. (a) On the first anniversary of the Original Issuance Date (the "Redemption Date"), each holder of Series B Preferred Stock shall surrender all certificates representing such holder's ownership of Series B Preferred Stock to the Corporation as provided in Section 4(e). On the Redemption Date, the Corporation shall redeem the Series B Preferred Stock to the extent of the funds of the Corporation legally available therefor, except as otherwise provided in Section 5(b)(ii). Each share of Series B Preferred Stock shall be redeemed pursuant to this Section 5 for an amount equal to its respective Redemption Price (as defined below). The redemption price per share of Series B Preferred Stock (the "Redemption Price") shall be the sum of Fifteen Dollars (US$15.00) (as adjusted for any stock split, combination or similar event or transaction directly affecting the Series B Preferred Stock) plus all accrued but unpaid dividends thereon, excluding the Redemption Date. The relevant Redemption Price shall be prorated for fractional shares of Series B Preferred Stock. (b) Redemption Procedure. (i) To the extent that, as of the Redemption Date, the funds of the Corporation legally available for redemption payments to the holders of Series B Preferred Stock pursuant to this Section 5 will be, or are anticipated to be, insufficient to redeem all shares of Series B Preferred Stock for their respective Redemption Prices (as determined in the sole discretion of the Board of Directors in good faith), the Corporation shall send a written notice to the holders of Series B Preferred Stock in accordance with the requirements of Section 4(m) not less than thirty (30) days prior to the Redemption Date, which notice (the "Redemption Notice") shall state the assets of the Corporation believed by the Corporation to be legally available for redemption payments to such holders on the Redemption Date. (ii) On the Redemption Date, the Corporation shall redeem the Series B Preferred Stock to the extent of its funds legally available for such redemption, pro rata among the holders of Series B Preferred Stock or as such holders otherwise agree in writing, provided that such written agreement of the holders (the "Redemption Agreement") is delivered to the Corporation in accordance with the requirements of Section 4(m) not less than five (5) days prior to the Redemption Date. Notwithstanding anything to the contrary herein, any holder (or all holders) of Series B Preferred Stock may waive his or its respective rights to redemption of his or its Series B Preferred Stock on the Redemption Date, in which case funds legally available for payment of redemption payments shall be paid pro rata to participating holders of Series B Preferred or as otherwise specified in the Redemption Agreement. (iii) On the Redemption Date, regardless of whether the certificate or certificates representing the shares of Series B Preferred Stock redeemed on such date have been surrendered for cancellation, or whether the respective Redemption Price for such shares (or fractional shares) of Series B Preferred Stock has been received by the relevant holder, each share (or fractional share) of Series B Preferred Stock redeemed in accordance with this Section 5 shall no longer be deemed outstanding and all rights with respect to any such share shall forthwith cease following such redemption, except only the right of the holder thereof to receive, upon presentation in accordance with the requirements in Section 4(e) of the certificate or certificates representing shares redeemed pursuant to this Section 5, the applicable Redemption Price for such share (or fractional share), without interest thereon. Promptly (but in no event more than thirty (30) days) following the Redemption Date, the Corporation shall pay each holder of shares (or fractional shares) of Series B Preferred Stock redeemed on the Redemption Date the aggregate Redemption Price for the shares (or fractional shares) of Series B Preferred Stock redeemed from such holder in accordance herewith; provided, that, notwithstanding anything to the contrary herein, the Corporation shall not be required to make any payment in respect of shares (or fractional shares) of Series B Preferred Stock redeemed pursuant to this Section 5 until actual delivery to the Corporation or its agents of the certificates representing the shares redeemed hereby, such delivery to be conducted in accordance with the requirements in Section 4(e). 8 (iv) All shares (or fractional shares) of the Series B Preferred Stock redeemed pursuant to this Section 5, or otherwise acquired by the Corporation in any manner whatsoever, shall be returned to the Corporation's authorized, but unissued, shares of undesignated preferred stock; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series B Preferred Stock accordingly. All shares (or fractional shares) of Series B Preferred Stock which are not redeemed on the Redemption Date shall be converted into shares of Existing Common Stock in accordance with Section 4. ***** 9 IN WITNESS WHEREOF, NeoMedia Technologies, Inc. has caused this certificate to be executed by its Chief Financial Officer and duly authorized officer, this 28th day of February, 2002. NEOMEDIA TECHNOLOGIES, INC. By: /s/ Charles T. Jensen --------------------------- Name: Charles T. Jensen Title: Chief Financial Officer ATTEST: /s/ Wendi Kline EX-5 4 b317965_ex5.txt OPINION OF REITLER BROWN LLC EXHIBIT 5 Reitler Brown LLC 800 Third Avenue (212) 209-3050 New York, NY 10022-7604 (212) 371-5500 April 23, 2002 NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, Florida 33901-3083 Attention: Chairman of the Board, President and Chief Executive Officer Re: Form S-1 Registration Statement, File No. 1022701 ------------------------------------------------- Gentlemen: As special counsel to NeoMedia Technologies, Inc., a Delaware corporation (the "Company"), we have been asked to opine whether 28,773,860 shares of the Company's common stock, par value $0.01 per share (the "Shares"), which are being registered for sale under the Securities Act of 1933, as amended (the "Act"), pursuant to the Registration Statement filed with the Securities and Exchange Commission on Form S-1, File No. 1022701 (the "Registration Statement"), are legally issued, fully paid and nonassessable. The Shares include 1,817,243 shares of common stock issuable upon the exercise of outstanding warrants (respectively, the "Underlying Shares" and "Warrants"). In connection herewith, we have examined copies of: the Company's Certificate of Incorporation, as amended; the Company's By-Laws, as amended; the Company's Annual Report on Form 10-K for the year ended December 31, 2001; minutes of relevant corporate proceedings; and the form of the Warrants. We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the legal capacity of natural persons, and the conformity to the original of all documents submitted to us as copies. In addition, we have relied upon a certificate of the President and Chief Executive Officer and Treasurer and Chief Financial Officer of the Company and certificates of public officials as to certain matters relating to this opinion. Based upon, the foregoing, it is our opinion that the Shares other than the Underlying Shares are, and the Underlying Shares when issued in accordance with the terms of the Warrants will be, when sold as described in the Registration Statement, legally issued, fully paid and nonassessable. We are members of the Bar of the State of New York. The opinion expressed herein is limited to the laws of the State of New York, the Federal laws of the United States of America, and the General Corporation Law of the State of Delaware. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the reference to our firm in the Registration Statement under the caption "Legal Matters". By doing so, we do not admit that we come within the category of persons whose consent is required by the Act or the rules and regulation promulgated thereunder. Very truly yours, REITLER BROWN LLC /s/ Reitler Brown LLC EX-10.18 5 b317965ex_10-18.txt INTELLELCTURAL PROPERTY LICENSING AGREEMENT EXHIBIT 10.18 PATENT LICENSE AGREEMENT - DEVICES This Patent License Agreement - Devices (the "Agreement") is made effective as of the date last signed below (the "Date of Execution") by and between A.T. Cross Company, a Rhode Island corporation having its principal place of business at One Albion Road, Lincoln, RI 02865, (hereinafter Licensee) and NeoMedia Technologies, Inc., a Delaware corporation having its principal place of business at 2201 Second Street, Suite 600, Fort Myers, Florida 33901 (hereinafter "NeoMedia"). RECITALS WHEREAS, NeoMedia is the owner of, or has acquired rights under, numerous U.S. patents and patent applications, as well as foreign patent applications, relating to methods and systems for using bar code symbols or other auto-ID media (such as RFID tags) to connect users to and transmit data over the Internet; WHEREAS, Licensee is desirous of obtaining a worldwide, non-exclusive license under the NeoMedia Licensed Patents as defined herein; WHEREAS, NeoMedia is willing to grant such license under such patent rights in consideration of royalty payments to be made by Licensee; NOW THEREFORE, in consideration of the premises, Licensee and NeoMedia hereby agree as follows: SECTION 1 - DEFINITIONS 1.1 "Auto ID Technology" shall mean any technology that enables a Device to scan, read, identify, or otherwise input machine-readable data from a carrier in an automatic or semi-automatic manner (i.e. not manually entered by a human operator such as by keyboard entry) which is listed on Exhibit A attached hereto, as may be amended by a fully signed amendment to this Agreement as executed by both parties. Examples of Auto ID Technology include but are not limited to any type of bar code scanning, radio frequency identification (RF-ID), audio signal decoding and voice recognition techniques. 1.2 "Devices" shall mean those products which are intended for use by an end-user to facilitate communication by the end-user over a Computer Network in conjunction with a Switch. Devices licensed hereunder are identified in Exhibit A attached hereto as may be amended by a fully signed amendment to this Agreement as executed by both parties and may be referred to hereinafter as "Licensed Devices". 1.3 "Computer Network" shall mean a network of computers or computer networks, such as the Internet, comprising one or more computing devices connected by data transmission means (both wired and wireless). 1.4 "Licensed Patents" shall mean all patents and patent applications existing and owned by NeoMedia as of the Date of Execution as well as those obtained or created thereafter, together with all parents, improvements, provisional applications, continuations, continuations-in-part, divisions, extensions, re-examinations or reissues thereof and patents issuing thereon, and any counterpart foreign patent applications and patents. 1.5 "Switch" shall mean any computing product that receives data, such as (but not limited to) data obtained from a bar code, from a Device via a Computer Network and performs a task as a function of the received data. An example of a Switch includes, but is not limited to, a server computer programmed with a database that receives bar code data from a Device, retrieves a URL (or IP address, computer name, or other resource locator) from the database as a function of the index, and returns the URL to enable the Device to communicate with the computing device designated by the URL and retrieve the resource. 1.6 "Affiliate" means, with respect to a party of this Agreement, any corporation, company, division, partnership, joint venture or other firm or entity in which such party to this Agreement directly or indirectly owns or controls, (a) in the case of a corporate Affiliate, fifty percent (50%) or more of the participating shares entitled to vote for the election of directors; or (b) in the case of a non-corporate Affiliate, fifty percent (50%) or more of the equity interest or beneficial interest of such non-corporate Affiliate. SECTION 2 - LICENSE GRANT 2.1 Non-Exclusive License Grant. NeoMedia hereby grants to Licensee a personal, non-transferable (except as provided herein), worldwide, non-exclusive license, under the Licensed Patents, subject to the terms of this Agreement, to make, have made, use, sell and offer for sale Devices (hereinafter "Licensed Devices"). 2.2 (a) No Switch Flow-Through Rights Granted. No rights, implied or express, to make, have made, use, operate, sell or offer for sale a Switch are granted herein, nor are any such rights conveyed directly or indirectly to Licensee or to any owner or user of a Licensed Device. (b) Third Party Switch Licenses. Licensee may, however, derive certain license rights for Devices under third party Switch licenses issued by NeoMedia, which extends certain patent rights to manufacturers, distributors, etc. of Devices used exclusively with a Switch licensed by NeoMedia. Such rights (hereinafter referred to as "Third Party License Rights") are governed exclusively by the terms of such third party Switch license. For example, as of the date of execution of this Agreement, NeoMedia is a party to a Third Party Switch license with Digital Convergence ("DC"), which provides in pertinent part as follows: "The non-exclusive grant provided hereunder includes flow-through rights sufficient to allow (i) DC's Affiliates, distributors, business partners, dealers, agents, franchisees, licensees (direct and indirect), and customers to act in furtherance of DC's license hereunder. . . ." 2.3 Covenant Not To Sue. Licensee, and the owner or operator of a Licensed Device shall be immune from claims of patent infringement by NeoMedia due solely to the use of such Licensed Device. Such immunity from suit shall be limited to the use of a Licensed Device and shall not extend in any manner whatsoever to the manufacture, use, or sale of a Switch (whether or not used with a Licensed Device), and NeoMedia reserves any and all rights it may have to proceed with a claim of patent infringement or otherwise against any person or entity that makes, uses or sells a Switch that is not otherwise licensed by NeoMedia. 2.4 No Sub-License Rights. Licensee is granted no rights to grant sublicenses to third parties under the Licensed Patents. 2.5 Reservation of Rights by NeoMedia. NeoMedia reserves all rights under the Licensed Patents not expressly conveyed to Licensee under this Agreement. NeoMedia retains full discretion regarding prosecution of its Licensed Patents, including but not limited to abandonment of any pending patent application or lapse of any issued patent. SECTION 3 - ROYALTIES AND PAYMENT 3.1 (a) Royalty. Licensee shall pay to NeoMedia a royalty of (i) Two Dollars ($2.00) per Licensed Device sold incorporating one Auto-ID Technology, (ii) Two Dollars and Seventy Five Cents ($2.75) per licensed Device incorporating two Auto-ID Technologies; and (iii) an additional Fifty Cents ($0.50) per Licensed Device for the third as well as each additional Auto-ID Technology incorporated into the Licensed Device (collectively, the "Royalty"). The Royalty shall be payable quarterly within forty-five days (45) after the end of each calendar quarter and shall be accompanied by a report setting forth (i) the computation of the Royalty payment for such quarter, (ii) including a computation of the number of Licensed Devices sold for that calendar quarter and (ii) the number of Technologies incorporated into each such Licensed Device; and (iv) a 12 month forward looking rolling forecast of Licensed Devices (the "Royalty Report"). (b) Third Party License Rights. No Royalty shall be due NeoMedia from Cross for Devices duly licensed pursuant to Third Party License Rights, as described in Section 2.2 of this Agreement. 3.2 Payment Location. All Royalty payments to NeoMedia, shall be made in U.S. Dollars at the address specified in Section 6.16 below. 3.3 Record Keeping; NeoMedia Audit Rights. In connection with such royalty payments under this Section 3, Licensee shall maintain, throughout the Term of this Agreement for three (3) years thereafter, all usual, proper, complete and accurate relevant sales and accounting records of Licensee necessary to determine the Royalties due NeoMedia hereunder. Such records shall be available for inspection by NeoMedia during usual business hours and upon reasonable notice of not less than fifteen (15) days prior to the proposed beginning of the audit, for the purpose of verifying such reports. NeoMedia's Audit Rights shall be limited to a maximum of one (1) audit per Licensee fiscal year, and any audit must be initiated within twelve (12) months of the end of the license year, except that if such audit reveals payment irregularities. NeoMedia shall be entitled to audit any prior license years. Such inspection shall be at NeoMedia's expense; however, if the audit reveals overdue payments in excess of five percent (5%) of the payments owed during the period covered by the audit, Licensee shall pay the reasonable costs of such audit. SECTION 4 - REPRESENTATIONS, COVENANTS, INDEMNIFICATION 4.1 Corporate Power; Patent Ownership. Licensee and NeoMedia each represents and warrants that it has full corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, and that this Agreement has been duly and validly authorized, executed and delivered by each of Licensee and NeoMedia, and constitutes the legal, valid and binding obligation of Licensee and NeoMedia, enforceable against each of them in accordance with its terms. NeoMedia represents and warrants that it holds United States Patent Nos. 5,933,829; 5,978,773; and 6,108,656. 4.2 Limitation of Liability. Licensee acknowledges and agrees that NeoMedia, in its capacity, solely as licensor of the Licensed Patents hereunder, has no obligation to and will in no way supervise or control (directly or indirectly) the design, production, marketing, instructions relating to use, notices, distribution or sales of Licensed Devices and/or any component thereof. NeoMedia shall have no liability, responsibility or obligation whatsoever, regardless of the form of action or basis of the claim (whether in contract, tort, including negligence, or otherwise), with respect to Licensee's customers, potential customers or any other third parties as a result of the acts, omissions or activities of Licensee or any other third party in connection with or as a result of the design, production, marketing, distribution or sales of the Licensed Devices. 4.3 Indemnification. Licensee hereby agrees to defend, indemnify and hold NeoMedia, its affiliates and their respective officers, directors, employees and agents harmless from and against any and all costs, liabilities, obligations, judgments, fines, penalties, expenses or damages (including reasonable attorneys' fees and court costs) arising out of or in connection with any claim, demand or cause of action relating to (a) Licensee's design, manufacture, distribution, demonstration, advertising, promotion, offering for sale and/or sale of the Licensed Devices and/or Licensee's customer's use thereof including, but not limited to, any actual or alleged misuse or infringement of any trademark, copyright, patent, process, idea, method, device, logo, symbol, insignia, name, term or material contained therein other than those licensed by NeoMedia pursuant to the terms and conditions of this Agreement; (b) any actual or alleged defect(s) of the Licensed Devices; and/or (c) a breach of any representation or warranty made by Licensee under this Agreement. Licensee shall have the right to conduct the defense of any such claim or action and all negotiations for its settlement or compromise using counsel of its own choosing, subject to the prior approval of NeoMedia; provided, however, that (i) NeoMedia may fully participate with Licensee's full cooperation in such defense to protect its own interests, if NeoMedia determines that such participation is necessary; and (ii) under no circumstances shall Licensee settle or otherwise compromise any such claim or action without fifteen days (15) prior written notice of the proposed settlement agreement to NeoMedia. In the event that the proposed settlement: (i) shall have a material adverse impact on NeoMedia, NeoMedia shall notify Cross within five (5) days after expiration of the notice period and Cross shall not settle such matter unless NeoMedia provides its prior written consent to an acceptable settlement, such consent not to be unreasonably withheld by NeoMedia; or (ii) shall result in any impact upon NeoMedia's patents or intellectual property rights, then notwithstanding the terms of the immediately foregoing subsection (i), NeoMedia shall notify Cross within five (5) days after expiration of the notice period and Cross shall not settle such matter unless NeoMedia provides its prior written consent, in NeoMedia's sole discretion. In either event, NeoMedia agrees to cooperate with Licensee, at Licensee's expense, and provide copies of any documents or materials reasonably requested by Licensee in support of its defense of NeoMedia hereunder, unless otherwise mutually agreed upon in writing. 4.4 Prohibition against use of Trademarks. Except as may be required by law in Section 6.8 ("Patent Marking") nothing in this Agreement shall be construed as conferring upon either party any right to include in advertising, packaging or other commercial activities related to products (and components thereof), processes, methods, systems, Devices, any reference to the other party, its trade names, trademarks or service marks in a manner which would be likely to cause confusion or to indicate that such Devices are in any way certified by the other party hereto. 4.5 Press Releases; Confidentiality. Neither NeoMedia nor Licensee shall make public information that the parties have reached an agreement or regarding the terms and conditions of the agreement without the review and written consent of the other party, which shall be provided within three (3) business days of receipt. Notwithstanding the foregoing, either party may unilaterally make factually accurate public disclosures as may be required under applicable law but each party agrees to provide the other with a draft of such disclosure at least three (3) business days prior to such disclosure. The provisions of Exhibit A shall be kept confidential by NeoMedia. SECTION 5 - TERM AND TERMINATION 5.1 Term. This Agreement shall commence on the Date of Execution and shall continue in full force and effect until the expiration of the last to expire patent of the Licensed Patents, unless sooner terminated as permitted by this Agreement. 5.2 Breach. In case of material breach of this Agreement by a party, the other party shall have the right to terminate this Agreement if such material breach remains uncured after written notice to the breaching party and sixty (60) days opportunity to cure the breach to the reasonable satisfaction of the other party, except that monetary breaches shall be cured within five (5) business days of notice. Cure periods for monetary breaches shall not be used as a means to generally extend terms of payment. Any monetary breach that is not cured as set forth herein shall result in the automatic termination of the license rights granted herein. Any termination hereunder shall not preclude the ability of the parties to pursue any other remedies they may have in law or equity. 5.3 Accounting. After any termination or expiration of this Agreement, Licensee shall render an accounting for all unpaid Royalties pursuant to the license from the last such report up to the termination date. Such final accounting and payment shall be made within sixty (60) days after the termination or expiration date. 5.4 Sums Payable. Termination or expiration of this Agreement shall not excuse Licensee's obligation to make payments of sums due and payable at the time of any termination or expiration hereof. 5.5 Minimum Device Sales. Licensee agrees to maintain annual minimum sales of Devices ("Annual Minimums") in the aggregate amounts set forth on Exhibit A attached hereto and made a part hereof. In the event Licensee fails to attain the aggregate of the Annual Minimums, then NeoMedia, at its option, may, but is not required to, terminate this Agreement. SECTION 6 - MISCELLANEOUS 6.1 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties as to the subject matter hereof, and supersedes and replaces all prior or contemporaneous agreements, written or oral, as to the subject matter. This Agreement may be changed only in a writing that states that it is an amendment or modification to this Agreement, and is signed by an authorized representative of each of the parties hereto. 6.2 Unenforceability. Any term or provision of this Agreement which is invalid or unenforceable or in conflict with the law of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without affecting the validity of the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms and provisions of this Agreement in any other jurisdiction. Further, the parties agree that an arbitrator or a court of competent jurisdiction in a particular jurisdiction may reform a specific term of this Agreement should the applicability of such term or provision be held invalid or unenforceable in that jurisdiction so as to reflect the intended agreement of the parties hereto solely with respect to the applicability of such provision in said jurisdiction. 6.3 Modifications. Neither this Agreement nor any provision hereof may be released, discharged, waived, abandoned or modified in any manner, except by an instrument in writing signed on behalf of both of the parties hereto by their duly authorized officers or representatives. 6.4 Waiver. Any waiver of a default or condition hereof by either party shall not be deemed a continuing waiver of such default or condition. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any right hereunder. All of the rights of either party under this Agreement shall be cumulative and may be exercised separately or concurrently. 6.5 Not a Joint Venture. This Agreement does not constitute a partnership, joint venture or agency between the parties hereto, nor shall either of the parties hold itself out as such contrary to the terms hereof by advertising or otherwise, nor shall either of the parties become bound or become liable because of any representation, action, or omission of the other. 6.6 Attorney's Fees. In the event of any dispute arising out of a breach of or a default under this Agreement by one party, the prevailing party shall recover from the other, in addition to any other damage assessed, its reasonable outside attorneys' fees and court costs incurred in litigating such dispute. As used in this Section, a "prevailing party" is defined as the party for which a favorable judgment is entered on all, or substantially all, of the disputed issues between the parties, after exhaustion of all appeals. 6.7 Product Marking. Licensee shall provide all products that are Licensed Devices with product markings or the like appropriate to enable identification of such products as being Licensed Devices. 6.8 Patent Marking. Licensee shall abide by the provisions of 35 U.S.C. 287 relating to marking of all licensed Devices distributed or provided by it as soon as practicable after the Date of Execution with the patent numbers applicable thereto and licensed hereunder, which may be provided in writing from time to time to Licensee by NeoMedia. 6.9 Headings. The headings of sections and other subdivisions hereof are inserted only for the purpose of convenient reference and it is recognized that they may not adequately or accurately describe the contents of the provisions that they head, such headings shall not be deemed to govern, limit, modify or in any other manner affect the scope, meaning or intent of the provisions of this Agreement or any part or portion thereof, nor shall they otherwise be given any legal effect. 6.10 Grammar. Where the context of this Agreement requires, singular terms shall be considered plural, and plural terms shall be considered singular. 6.11 Choice of Law. This Agreement shall be governed by, performed under and construed in accordance with the laws of the State of Florida without giving effect to the conflicts of law principles thereof. Each party hereto irrevocably consents to jurisdiction and venue in the United States District Court in and for the Middle District of Florida, Ft. Myers Division. 6.12 Assignability. This Agreement may not be assigned by Licensee, or transferred under operation of law or otherwise by Licensee, without the prior written consent of NeoMedia, except that this Agreement may be assigned to Licensee's Affiliate or to any successor to all or substantially all of Licensee's stock, assets or business operations in the related field, provided that the assignee of all or substantially all of the assets or business operations of Licensee in the related field agrees in writing to accept the terms and conditions of this Agreement, and further provided that if this Agreement is assigned to Licensee's Affiliate or successor without consent of NeoMedia, the Licensee shall maintain financial accountability for the obligations hereunder. This Agreement shall be binding on the successors and assigns of NeoMedia, and the permitted successors and assigns of Licensee. 6.13 Interpretation. The parties and their attorneys have each had opportunity to review and comment on this Agreement. Accordingly, the parties agree that the legal rule construing ambiguity against the drafter shall not apply in interpreting this Agreement. 6.14 Survival of Terms. The provisions of Sections 3.1, 3.2, 3.3, 4, 5.2, 5.3, 5.4 and 6 shall survive termination of this Agreement. 6.15 Facsimile Signatures and Counterparts. This Agreement may be executed in counterparts and by facsimile signatures. 6.16 Notification Address. Except as otherwise set forth herein, all notices given in connection with this Agreement shall be in writing and shall be delivered either by personal delivery, by certified or registered mail, return receipt requested, or by express courier or delivery service, addressed to the attention of the General Counsel and President of the parties at their address specified herein or at such other address and number as either party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. In addition, notices require a copy to be delivered to: If to NeoMedia: If to Cross: Anthony Barkume, Esq. Elizabeth Myers, Esq. Greenberg Traurig, LLP Hinckley, Allen & Snyder Met Life Building 1500 Fleet Center 200 Park Avenue Providence, RI 02903 New York, New York 10166 Fax: 212/801-6400 Fax: 401/ 277-9600 Notices shall be deemed given when received; and when delivered and receipted for (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year last signed below. NEOMEDIA: LICENSEE: NEOMEDIA TECHNOLOGIES, INC. A.T. CROSS COMPANY /s/ Charles W. Fritz________________ /s/ David G. Whalen________________ Print Name: Charles W. Fritz Print Name: David G. Whalen Title: CEO Title: President and Chief Executive Officer Date: Jan. 10, 2001 Date: January 10, 2001 EX-10.19 6 b317965ex_10-19.txt INTELLECTUAL PROPERTY LICENSING AGREEMENT EXHIBIT 10.19 LICENSE AGREEMENT This License Agreement (the "Agreement") is made effective as of the 9th day of May, 2001 (the "Effective Date") by and between SYMBOL TECHNOLOGIES, INC., a Delaware corporation having its principal place of business at One Symbol Plaza, Holtsville, NY 11742, and NEOMEDIA TECHNOLOGIES, INC., a Delaware corporation having its principal place of business at 2201 Second Street, Suite 600, Ft. Myers, FL 33901. RECITALS WHEREAS, NeoMedia is the owner, or has acquired rights under numerous U.S. Patents and Patent applications, as well as foreign patent applications, relating to methods and systems using bar code symbols or other auto-ID media (such as RFID tags) to connect users to and transmit data over the Internet; WHEREAS Symbol is a leading designer, developer, and manufacturer of bar code scanners and portable terminal products, including voice communication handsets, and believes that certain customers of Symbol products may wish to acquire a license to NeoMedia's patents; WHEREAS, Symbol is desirous of having access to licenses under the NeoMedia patents, including a right to grant End User Licenses and to sublicense the NeoMedia patents in a defined field of use related to Symbol's devices or handsets; WHEREAS, NeoMedia is willing to grant such license under such patent rights to Symbol and Symbol's customers because of Symbol's pre-eminent position as a manufacturer of bar code reading devices; NOW THEREFORE, in consideration of the premises, Symbol and NeoMedia hereby agree as follows: ARTICLE 1 - DEFINITIONS 1.1 "Bar Code Symbology" shall mean indicia for representing data or information in the form of bars, marks, dots, shapes or other varying-contrast elements of various widths or dimensions, including, without limitation, (i) one dimensional symbologies, such as UPC, EAN and Code 39, which represent data or information in the form of bars or elements of various heights and/or widths arranged in a predetermined pattern, such as rows or columns, (ii) all stacked bar codes such as Code 49, Composite Code and PDF 417, (iii) all matrix code symbologies, and (iv) dot codes. 1.2 "Devices" shall mean any present or future product or category of product, or any hardware, software, part, assembly or sub-assembly, including without limitation scan engines, for incorporation into any such product, including without limitation all of the products and types of products currently available for purchase from Symbol as identified in its website, unless any such product is a Switch. An example of a Device includes but is not limited to a bar code scanning device (or other automatic identification device), regardless of whether such device is wired, wireless, or mobile, operating in conjunction with computing means (integral or non-integral to such bar code scanning device), which is adapted to read a Bar Code Symbology (or other machine-readable indicia) and use index data read therefrom in communication with a Switch to determine the location of a resource located on another computing device. Notwithstanding anything to the contrary in this Agreement, a Switch is not a Device. 1.3 "Field" shall mean any use of Devices for acquiring, processing, displaying, reading, decoding, transmitting, managing, inputting, storing or otherwise connecting data (including without limitation voice and audio). For the purposes of this definition, the use of any Device for any purpose that would read on any claim in any of the Patent Rights pending or issued as of the Effective Date are considered in the Field. The Field also includes, without limitation, all Devices currently sold by Symbol, all Devices of the type or kind currently sold by Symbol, and all Devices that relate to, arise out of, or are in any way connected with Symbol's businesses as set forth in its most recent filing on form 10-K with the Securities and Exchange Commission. Notwithstanding the foregoing, for a period of eighteen months from the Effective Date the Field shall not include the subject matter set forth in Exhibit 1.3 attached hereto. After the expiration of eighteen months from the Effective Date, the Field shall include the subject matter set forth in Exhibit 1.3 attached hereto. 1.4 "NeoMedia" shall mean NeoMedia Technologies, Inc. 1.5 "NeoMedia Switch Services" shall mean those NeoMedia services offered by NeoMedia at the present time or any time in the future in connection with any Switch owned and operated by or on behalf of NeoMedia. Current NeoMedia Switch Services are set forth on Exhibit 1.5 hereto. 1.6 "Patent Rights" shall mean all patents and patent applications in any jurisdiction now or hereafter owned by NeoMedia or its Subsidiaries or by any entity controlled by NeoMedia. An entity is controlled by NeoMedia for the purposes of this Agreement if it is controlled, directly or indirectly, by NeoMedia and/or its officers and directors (excluding independent directors). Patent Rights shall also include any patent that is owned by a party other than NeoMedia, any of its Subsidiaries, or any entity controlled by NeoMedia, and licensed to NeoMedia, any of its Subsidiaries, or any entity controlled by NeoMedia , but only if (i) NeoMedia, its Subsidiary, or any entity controlled by NeoMedia has been granted rights from the patent owner to grant further license rights thereunder, such as sublicense rights, and (ii) upon identification by NeoMedia of any costs actually incurred by NeoMedia, its Subsidiaries, or any entity controlled by NeoMedia as a direct result of any election and/or exploitation by Symbol of such patent that are in excess of the costs actually incurred by NeoMedia, its Subsidiaries, or any entity controlled by NeoMedia for such rights but for sublicensing such rights to Symbol, Symbol elects to compensate NeoMedia for such additional costs. Those current patents and patent applications included within the Patents Rights are set forth in Exhibit 1.6 hereto. In the event that NeoMedia is acquired by a third party, then the Patent Rights shall not be expanded to include any patent or patent application owned by that third party other than those owned by NeoMedia prior to such acquisition. 2 1.7 "Subsidiary" shall mean a corporation, company, or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right other than as affected by events of default, to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company or other entity shall be deemed to be a Subsidiary only at such time and for so long as such ownership or control exists. 1.8 "Switch" shall mean a system embodied in any combination of hardware and/or software that: (a) receives data from a Device, accesses a database, registry, or other similar functionality, and then performs a task as a function of the received data to enable direct or indirect communication between that Device and a separate Device and (b) is designed to communicate with, at a minimum, thousands of Devices. 1.9 "Symbol" shall mean Symbol Technologies Inc. and its Subsidiaries. 1.10 "End User License" shall mean the license or grant of any or all of the rights under the Patent Rights for Devices in the Field, except for the right to sublicense. ARTICLE 2 - LICENSE GRANT 2.1 License Grant to Symbol. NeoMedia hereby grants to Symbol a personal, worldwide, non-exclusive right, but not the obligation, under the Patent Rights to grant to third parties or itself a license to use, make, have made, import, sell and offer for sale Devices in the Field (such license grant included in the category referred to herein as an "End User License"), in which case such Device will be considered a "Licensed Device" for all purposes under this Agreement. Neither the End User License rights nor the rights conveyed with the sale of a Licensed Device shall include any right to transfer or sublicense any of the Patent Rights to another party, except that the license rights to use the Licensed Device shall transfer with any conveyance of the Licensed Device, and if the Licensed Device is a Symbol Device the license rights to make, have made, import, sell and offer for sale that Symbol Device and a Device that contains or uses that Symbol Device as a component of such Device or as part of a system, application, or in combination with such Device shall also transfer with any conveyance of that Symbol Device. Notwithstanding the foregoing, the rights of anyone other than Symbol to make, have made, import, sell or offer for sale Devices under an End User License granted to that party by Symbol shall be limited to making, having made, importing, selling, and offering to sell a Symbol Device or a Device that contains or uses a Symbol Device as a component of the Device or as part of a system, application, or in combination with the Device. 2.2 Sublicenses. Symbol shall have the right, but not the obligation, to sublicense its rights under Articles 2.1 to other parties within the Symbol marketing, distribution and resale channel (the "Sublicensees") provided that any license issued by the Sublicensee contain the same terms and conditions (except for price) as licenses that Symbol is permitted to issue, and that Symbol shall remain primarily liable to NeoMedia for all obligations of its Sublicensees under any Sublicenses. Notwithstanding the foregoing, any sublicensee of make, have made, import, sell and offer to sell rights shall be limited to those rights set forth in the last sentence of Article 2.1 of this Agreement. 3 2.3 Rights Attach to Device. The license rights conveyed with a Licensed Device shall not include any right to transfer or sublicense any of the Patent Rights to another party, except that the license rights for the Licensed Device shall flow with the Licensed Device to anyone in the Licensed Device's chain of use. For example, the use of a Licensed Device by an end user to connect to a Switch and further destinations shall be considered a licensed use of any applicable Patent Rights by the end user of the Licensed Device, the manufacturer and seller of the Licensed Device, as well as the Switch and further destinations, and such Switch and further destinations shall not be considered infringing for the purpose of any transaction with a Licensed Device. Accordingly, no liability under the Patent Rights shall be incurred by any third party solely as a result of the sale of the Licensed Device, or solely due to the execution of any commands, instructions or other usage initiated with a Licensed Device. Notwithstanding anything herein to the contrary, no rights express or implied are granted for any party to use a Switch with an unlicensed Device, even though use of such Switch would be permissible with a Licensed Device. In no event shall any party whatsoever incur any liability under any of the Patent Rights as a result of the use of a Licensed Device, whether alone or in combination with other components or elements, unless such other components or elements include an unlicensed Device operating in conjunction with a Switch under the Patent Rights. For example, an unlicensed internet data provider will incur no liability solely as a result of an act covered by the Patent Rights which is initiated or otherwise performed as a result of the use of a Licensed Device. Symbol shall in writing inform its licensees that no rights to the Patent Rights extend to any use of an unlicensed Device with any Switch not otherwise licensed by NeoMedia. 2.4 Condition to Grant. All licenses to Symbol set forth in this Agreement are expressly conditioned on Symbol maintaining at least Five Hundred Million Dollars ($500,000,000) in sales of Devices, manufactured by or for Symbol, capable of reading Bar Code Symbologies on an annual fiscal year basis throughout the term of this Agreement. The terms granted to Symbol in this Agreement would not have been granted to Symbol but for Symbol's ability to comply with the immediately preceding sentence. 2.5 Reservation of Rights by NeoMedia. NeoMedia reserves all rights under the Patent Rights not explicitly conveyed to Symbol under this Agreement, including but not limited to the right to grant a license to a third party to operate a Switch in conjunction with Non-Licensed Devices, in which case such third party would not need to use Licensed Devices with such licensed Switch in order to avoid infringement of the Patent Rights. ARTICLE 3 - ROYALTY 3.1 Royalties Paid by Symbol. To the extent and only to the extent Symbol or its sublicensee grants an End User License to itself or to a third party, Symbol shall make a royalty payment (the "Article 3.1 Royalty") for each End User License to NeoMedia as set forth in Exhibit 3.1 hereto. The foregoing royalty payments, including the 3.1 Minimum Royalty (which for all purposes under this Agreement is defined in Exhibit 3.1 hereto), are also subject to adjustment pursuant to Article 3.2 and Exhibit 3.2 of this Agreement. If Symbol sublicenses a third party pursuant to Article 2.2 of this Agreement, the grant of such sublicense right to a third party does not constitute a grant of an End User License within the meaning of this Article 3.1. 4 3.2 Most Favorable Licensee. The parties have agreed on a most favorable licensee clause, the terms of which are contained in Exhibit 3.2 to this Agreement. 3.3 Accrual. Royalties payable hereunder shall accrue at the date of the invoice of an End User License granted by Symbol or its Sublicensee. All royalties payable hereunder shall be net of returns and reasonable write-offs on uncollectable accounts consistent with Symbol's standard practice. Notwithstanding anything to the contrary, in the event of a return or uncollected account, the associated license rights shall be automatically rescinded. 3.4 Payment Schedule. Royalty payments payable by Symbol shall be made quarterly within sixty (60) days after the end of each calendar quarter and shall be accompanied by a report setting forth the computation of the royalty payment for such quarter, including a list of unit sales of End User Licenses by Symbol or its Sublicensee. Royalty payments to NeoMedia shall be made in U.S. Dollars at the office of NeoMedia specified below. NeoMedia may request that Symbol inform it as to whether a particular entity has taken an End User License, and the quantity, model number and serial number of Devices that are licensed to that entity. Symbol will either inform NeoMedia that it cannot provide such information at Symbol's customer's request, or Symbol will provide the information if the customer consents. 3.5 NeoMedia Audit Rights. In connection with such royalty accruals and payments under Sections 3.3 and 3.4, the relevant sales and accounting records, including model and serial number, of Symbol shall be available for inspection by NeoMedia's independent public accountants during usual business hours and upon reasonable notice for the purpose of verifying such reports; provided, however, that such independent public accountants shall not transmit to NeoMedia any confidential information, including, without limitation, customer identities, in connection with such inspection. NeoMedia shall obtain Symbol's consent to the firm conducting the audit; provided that such consent shall not be unreasonably withheld. The auditor shall be required to sign a standard form non-disclosure agreement. 3.6 Symbol's Audit Right. In connection with the most favored license provision of Article 3.2, the relevant sales and accounting records, including model and serial number, of NeoMedia shall be available for inspection by Symbol's independent public accountants during usual business hours and upon reasonable notice for the purpose of verification of compliance; provided, however, that such independent public accountants shall not transmit to Symbol any confidential information, including, without limitation, customer identities, in connection with such inspection. Symbol shall obtain NeoMedia's consent to the firm conducting the audit; provided that such consent shall not be unreasonably withheld. The auditor shall be required to sign a standard form non-disclosure agreement. 5 ARTICLE 4 - REPRESENTATIONS and COVENANTS 4.1 Corporate Power. Symbol and NeoMedia each represents and warrants as to itself only that it has full corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, including without limitation to grant all of the rights and interests to the Patent Rights made herein, and that this Agreement has been duly and validly authorized, executed and delivered by each of Symbol and NeoMedia, and constitutes the legal, valid and binding obligation of Symbol and NeoMedia, enforceable against each of them in accordance with its terms. 4.2 Patent Ownership. NeoMedia represents and warrants: a) that it has full title and ownership of the Patent Rights listed in Exhibit 1.6 hereto, as of the Effective Date, b) free and clear, to its knowledge, of any third party liens, claims or encumbrances, other than licenses already granted, c) that it has not transferred ownership of any Patent Rights to another entity, and d) that NeoMedia knows of no claims by a third party challenging the ownership or validity of any such patents, except as set forth in Exhibit 4.2 hereto. NeoMedia further represents that to the best of its knowledge, it is aware of no material information other than as set forth in the patent file histories that has a material adverse impact on any issued claims included in the Patent Rights granted hereunder. NeoMedia further represents that it has not granted, and will not grant, any rights, options or licenses which impair the rights granted Symbol hereunder except as specifically set forth herein. 4.3 Third Party Claims. NeoMedia represent and warrants that, to the best of its knowledge, as of the Effective Date, there are no known claims by a third party that the practice of the inventions claimed in the Patent Rights infringes any patents of a third party, except as set forth in Exhibit 4.3. 4.4 Disclosure of Information. Upon Symbol's request, after NeoMedia has paid the issue fee for an allowed patent application, NeoMedia shall provide Symbol with a copy of the allowed claims. Information regarding the NeoMedia patent applications that has been disclosed to Symbol shall remain confidential and may not be disclosed or used by Symbol until such time that a patent may issue on such application or the application is published by the United States Patent and Trademark Office or any other patent office in which the application was filed, in which case only the information that is made publicly available by such patent office shall be considered to no longer be confidential. 4.5 Intellectual Property. NeoMedia represents and warrants that: (a) (i) Any Security Interest in any Patent Rights pursuant to Article V of the Purchase Agreement, dated December 31, 1998, and related Exhibits, between Solar Communications, Inc. and NeoMedia Technologies, Inc.; Amendment and Clarification dated February 15, 1999 between Solar Communications, Inc. and NeoMedia Technologies, Inc. (the "Solar Agreement") has been released, and (ii) any rights of Solar Communications, Inc. in and to any Patent Rights under the Solar Agreement have been terminated and/or extinguished. (b) If NeoMedia decides not to maintain any of the issued patents under the Patent Rights during the term of this Agreement, then NeoMedia shall provide Symbol sixty (60) days notice prior to the expiration of any applicable right or due date of any applicable payment, Symbol shall have the right in such an event to make the applicable payment or perform the applicable act on NeoMedia's behalf and deduct any such expense from royalties due NeoMedia hereunder. 6 (c) As of the Effective Date, there are no third party judgments or settlements to be paid by NeoMedia or pending litigation relating to any of the Patent Rights, that adversely affect the rights granted to Symbol hereunder; ARTICLE 5 - RELEASE AND COVENANT NOT TO SUE 5.1 Release of Symbol. NeoMedia hereby releases and forever discharges Symbol, its Subsidiaries and all of their respective successors, officers, directors, employees, and agents (collectively, the "Symbol Releasees") from any claims, demands, and actions, causes and causes of action, suits, damages, judgments, claims and demands whatsoever in law, admiralty or in equity, whether known or unknown, contingent or fixed, certain or uncertain, arising on account of any infringement or alleged infringement, including without limitation contributory infringement or inducement to infringe, of any Patent Rights by Symbol, which against the Symbol Releasees individually, collectively, or in combination, NeoMedia, NeoMedia's successors and assigns ever had, now have, or hereafter can, shall or may have, upon or by reason of any matter, cause or thing whatsoever, occurring from the beginning of the world to the Effective Date. For purposes of this section 5.1, Symbol Releasees shall also include any company that made Devices for or on behalf of Symbol, and their Subsidiaries and their respective successors, officers, directors, employees and agents, to the extent engaged in such activity. 5.2 Release of NeoMedia. Symbol hereby releases and forever discharges NeoMedia, its Subsidiaries and all of their respective successors, officers, directors, employees, and agents (collectively, the "NeoMedia Releasees") from any claims, demands, and actions, causes and causes of action, suits, damages, judgments, claims and demands whatsoever in law, admiralty or in equity, whether known or unknown, contingent or fixed, certain or uncertain, arising on account of any alleged or actual misappropriation of: i) trade secrets, or derivations thereof, and ii) intellectual property, other than copyrights, patents and trademarks of Symbol, only as the foregoing i) and ii) are contained in any patents or patent applications of NeoMedia published as of the Effective Date, which are set forth in their entirety in Exhibit 5.2, which against the NeoMedia Releasees individually, collectively, or in combination, Symbol, Symbol's successors and assigns ever had, now have, or hereafter can, shall or may have, upon or by reason of any matter, cause or thing whatsoever occurring from the beginning of the world to the Effective Date. 5.3 Covenant Not to Sue Symbol. NeoMedia hereby covenants and agrees that neither NeoMedia nor any other person will bring suit or otherwise assert a claim against the Symbol Releasees individually, collectively, or in combination, arising out of, related to or alleging infringement of any of the Patent Rights in the Field, including without limitation any claims for direct, contributory infringement or inducement to infringe. This covenant not to sue shall run with title to the Patent Rights, and shall bind any permitted assignee or other person to whom NeoMedia may convey an interest in any of its Patent Rights. For purposes of this section 5.3, Symbol Releasees shall also include any company that made, is making or will make Devices for or on behalf of Symbol, and their Subsidiaries and their respective successors, officers, directors, employees and agents, to the extent engaged in such activity. 7 5.3.1 Switch Operation by Symbol. Notwithstanding anything herein to the contrary, in the event that Symbol operates a Switch in conjunction with an unlicensed Device, or outsources the operation of the Symbol Switch to a third party in conjunction with an unlicensed Device, then this Covenant Not to Sue Symbol shall not be effective with respect to such Switch operation and Neomedia is free to pursue whatever remedies it may have against Symbol solely as a result of the operation of said Switch. Symbol's immunity under Articles 5.3 and 6.2 with regard to the sale, lease or other disposal of Devices shall continue to be effective. 5.4 No License to Any Symbol Intellectual Property. Notwithstanding anything to the contrary contained in this Agreement, Symbol is not licensing any of its intellectual property to NeoMedia or any other party, and no Article of this Agreement shall be interpreted as granting such a license. Except for the specific claims released in Article 5.2 of this Agreement, Symbol retains all of its rights to enforce its intellectual property against NeoMedia or any other party. Symbol agrees that, in the event it believes NeoMedia or any NeoMedia product infringes any intellectual property right of Symbol, before bringing legal action against NeoMedia, Symbol shall notify NeoMedia in writing and enter into discussions concerning the issue, but under no circumstances shall Symbol be obligated to grant a license to NeoMedia. ARTICLE 6 - MARKETING 6.1 Marketing. Symbol shall announce the availability of the NeoMedia End User Licenses to its direct sales force and distributors by listing and maintaining the End User Licenses in Symbol's electronic product ordering guide (EPOG) (or other like means as may be offered by Symbol from time to time) and through a published "Product Announcement" distributed by e-mail and other means as conventional within Symbol to Symbol's sales associates and through its Channel Management group to distributors. Symbol shall also inform its value added resellers and its direct sales force of the NeoMedia End User Licenses and of NeoMedia's Switch Services at training sessions or other scheduled events as is reasonably necessary to maintain awareness of the End User Licenses and NeoMedia Switch Services. Symbol shall also, within a reasonable time period after the execution of this Agreement, create text describing the NeoMedia End User License product offering. Symbol shall be responsible for its own allocation and management of expenses in connection with the promotion and distribution of End User Licenses covered by this Agreement. NeoMedia shall have the right to exhibit at Symbol's worldwide sales conference, provided it complies with the standards for participation, and shall have the right to participate in Symbol's standard channel programs provided it satisfies the criteria for such programs. 6.2 No Obligation to Purchase Licenses. Notwithstanding anything to the contrary contained in this Agreement, Symbol may sell, lease or otherwise dispose of Devices to customers, even if Symbol or such customers decline to take a license under Article 2.1 of this Agreement, without being liable to NeoMedia for patent infringement, but in such event it is understood that the customer remains subject to infringement action if its use infringes the Patent Rights. 8 ARTICLE 7 - TERM AND TERMINATION 7.1 Term. This Agreement shall commence on the Effective Date and shall continue in full force until the last to expire of any issued patents included within the Patent Rights unless earlier terminated as provided below. 7.2 Breach. In case of breach of this Agreement by a party, the other party shall have the right to terminate this Agreement by giving the breaching party at least sixty (60) days written notice of its intention specifying the cause for default; provided, however, that if the breaching party shall remedy such failure during such sixty (60) day period, then this Agreement shall not be terminated on the date specified in such notice, except that for any monetary breach, the notice and cure period shall be twenty (20) days, but such cure period shall not be used as a means to generally extend terms of payment. Any termination hereunder shall not preclude the ability of the parties to pursue any other remedies they make have in law or equity. An uncured breach of Section 6.1 shall constitute a material breach of this Agreement. 7.3 Accounting. After any termination of this Agreement, including the expiration of the last of the Patent Rights, Symbol shall render an accounting for all unpaid royalties pursuant to the license from the last such report up to the termination date. Such final accounting shall be made within sixty (60) days after the termination date. 7.4 Sums Payable. Termination of this Agreement shall not excuse either party's obligation to make payments of sums due and payable at the time of any termination thereof, or sums due and payable at a time after the termination date based upon the licenses or sublicenses of rights under this Agreement prior to termination. 7.5 Survival of End User Licenses. All licenses granted by Symbol or its Sublicensees to their customers during and pursuant to this Agreement shall survive any termination or expiration of this Agreement. The licenses contained in this Agreement shall be considered intellectual property licenses within the meaning of any applicable federal or state statute, including 11 U.S.C. section 365(n). ARTICLE 8 - NOTICES 8.1 Notification Address. Except as otherwise set forth herein, all notices given in connection with this Agreement shall be in writing and shall be delivered either by personal delivery, by certified or registered mail, return receipt requested, or by express courier or delivery service, addressed to the parties hereto at the following addresses: To Symbol: To NeoMedia: Symbol Technologies, Inc. NeoMedia Technologies, Inc. One Symbol Plaza 2201 Second Street Holtsville, NY 11742-1300 Suite 600 Ft. Myers, FL 33901. Attn: President Attn: President With a copy to General Counsel With a copy to: General Counsel Fax: 631/738-4110 Fax: 941/337-3661 and a copy to: Anthony R. Barkume, Esq. Greenberg, Traurig LLP 200 Park Avenue New York, NY 10166 Fax: 212-801-6400 9 or at such other address and number as either party shall have previously designated by written notice given to the other party in the manner hereinabove set forth. Notices shall be deemed given when received; and when delivered and receipted for (or upon the date of attempted delivery where delivery is refused), if hand-delivered, sent by express courier or delivery service, or sent by certified or registered mail, return receipt requested. ARTICLE 9 - MISCELLANEOUS 9.1 Entire Agreement. This Agreement, including the Exhibits annexed hereto, constitutes the entire Agreement and understanding between the parties as to the subject matter thereof, and supersedes and replaces all prior or contemporaneous agreements, written or oral, as to the subject matter. This Agreement may be changed only in writing stating that it is an amendment or modification to this Agreement, and signed by an authorized representative of each of the parties hereto. 9.1.5 Patent Marking. Symbol shall disclose the appropriate patent numbers for the licenses in the license description in its EPOG, and the parties shall work together to find appropriate methodologies to comply with the requirements of 35 USC 287. 9.2 Unenforceability. Any term or provision of this Agreement which is invalid or unenforceable or in conflict with the law of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without affecting the validity of the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms and provisions of this Agreement in any other jurisdiction. Further, the parties agree that an arbitrator or a court of competent jurisdiction in a particular jurisdiction may reform a specific term of this Agreement should the applicability of such term or provision be held invalid or unenforceable in that jurisdiction so as to reflect the intended agreement of the parties hereto solely with respect to the applicability of such provision in said jurisdiction. 9.3 Release. Neither this Agreement nor any provision thereof may be released, discharged, waived or abandoned in any manner, except by an instrument in writing signed on behalf of both of the parties hereto by their duly authorized officers or representatives. 9.4 Waiver. Any waiver of a default or condition hereof by either party shall not be deemed a continuing waiver of such default or condition. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any right hereunder. All of the rights of either party under this Agreement shall be cumulative and may be exercised separately or concurrently. 10 9.5 Not a Joint Venture. This Agreement does not constitute a partnership, joint venture or agency between the parties hereto, nor shall either of the parties hold itself out as such contrary to the terms hereof by advertising or otherwise, nor shall either of the Parties become bound or become liable because of any representation, action, or omission of the other. 9.6 Confidential Information. Except for those terms announced in the joint press release, the terms of this Agreement are confidential and shall not be disclosed by one party without the prior written consent of the other party, except to the extent necessary for a party to enforce its rights hereunder, for a period that ends three (3) years after termination of this Agreement. Confidential Information shall not include information or data which is required to be disclosed by a party or by their officers, agents or representatives in connection with any judicial or administrative order, proceeding or investigation, or under applicable law or government regulation. Notwithstanding anything to the contrary, provided NeoMedia has first given Symbol an opportunity to review its proposed disclosure: i) NeoMedia may disclose to any third party only those portions of this Agreement necessary to fulfill its obligations to such third party under a "Most Favored Nation/Licensee" or similar provision, and ii) to the Securities and Exchange Commission if required by law. 9.7 Attorney's Fees. In the event of any dispute arising out of a breach of or a default under this Agreement by one party, the prevailing party shall recover from the other, in addition to any other damage assessed, its attorneys' fees and court costs incurred in litigating or otherwise settling or resolving such dispute. 9.8 Press Release. Promptly after the execution of this Agreement, but in any event not later than seven (7) days after the Effective Date, Symbol and NeoMedia shall issue a joint press release in form and substance acceptable to both parties. Except as may be required by law or regulation, any additional press release or public statement pertaining to this Agreement shall be made only after consultation with and consent of the other party (whose consent shall not be unreasonably withheld). NeoMedia may mention its relationship with Symbol in the "About NeoMedia" section of its press releases or in public statement without obtaining Symbol's consent each time, provided that Symbol has previously approved the description or statement. Each party agrees not to describe this Agreement or the transaction hereunder in any financial statement or filing with any Federal or State securities authority or in any disclosure document prepared in connection with a securities offering without first giving the other party an opportunity to review the description. Neither party is required to resubmit to the other party language that it desires to include in any such financial statement or filing if such language has been previously approved by the other party, and such approval has not been revoked in writing by the other party. 9.9 Headings. The headings of articles, sections and other subdivisions hereof are inserted only for the purpose of convenient reference and it is recognized that they may not adequately or accurately describe the contents of the provisions which they head. Such headings shall not be deemed to govern, limit, modify or in any other manner affect the scope, meaning or intent of the provisions of this Agreement or any part or portion thereof, nor shall they otherwise be given any legal effect. 9.10 Grammar. Where the context of this Agreement requires, singular terms shall be considered plural, and plural terms shall be considered singular. 11 9.11 Choice of Law. This Agreement shall be governed by, performed under and construed in accordance with the laws of the State of New York without giving effect to the conflicts of law principles thereof. 9.12 Assignability. This Agreement may not be assigned by Symbol, except in the event of a merger or sale of substantially all of the assets of Symbol to a third party. This Agreement shall be binding on the successors and assigns of NeoMedia or any of the Patent Rights, and the permitted successors and assigns of Symbol. 9.13 Interpretation. The parties and their attorneys have each had opportunity to review and comment on this Agreement. Accordingly, the parties agree that the legal rule construing ambiguity against the drafter shall not apply in interpreting this Agreement. 9.14 Survival of Terms. The provisions of Articles 1, 2.3, 2.5, 3, 4 (except for 4.4 and 4.5(b)), 5.1-5.2, 5.3, (only as to Devices sold, leased or otherwise disposed of by Symbol, or other events or things that occurred, during the term of the Agreement), 5.3.1, 5.4 (except for the last sentence), 6.2(only as to Devices sold, leased or otherwise disposed of by Symbol, or other events or things that occurred, during the term of the Agreement), 7 (except for 7.1), 8 and 9 (except for 9.1.5 and 9.8), and any Exhibits to the foregoing Articles, shall survive the expiration or termination of this Agreement, and the representations and warranties in Article 4 shall survive the execution of this Agreement also. 9.15 Facsimile Signatures and Counterparts. This Agreement may be executed in counterparts and by facsimile signatures. 9.16 Limitation of Liability. TO THE EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, INCLUDING WITHOUT LIMITATION LOST PROFITS OR LOST OPPORTUNITIES, WHETHER DUE TO A BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE OR OTHERWISE. 9.17 Jury Trial Waiver. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY COUNTERCLAIMS BROUGHT BY ANY PARTY. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year last written below. SYMBOL TECHNOLOGIES, INC. NEOMEDIA TECHNOLOGIES, INC BY: /s/ Tomo Razmilovic BY: /s/ Charles W. Fritz________________ TITLE: Chief Executive Officer TITLE: President and CEO Date: 5/9/01 13 EX-10.20 7 b317965ex_10-20.txt SPONSORSHIP AND ADVERTISING AGREEMENT EXHIBIT 10.20 SPONSORSHIP AND ADVERTISING AGREEMENT This Agreement (the "Agreement"), dated this 23 day of May, 2001 (the "Effective Date"), is by and between About.com, Inc. ("About"), a Delaware corporation, located at 1440 Broadway, 19th Floor, New York, New York 10018 and NeoMedia ("NeoMedia"), a Delaware corporation, located at 2201 Second Street, Suite 600, Ft. Myers, FL 33901-3083. About and NeoMedia hereby agree to the following: 1. Definitions "About Marks" shall have the meaning set forth in Section 12.B herein. "About Search Box" means those areas of the About Network which provide the About User the opportunity to perform a search, and expressly excluding those areas of the About Network which provide an opportunity to perform a search of a third party Web site. "About Site" means the United States version of the About Web site on the World Wide Web owned and operated by About and located at http://www.about.com, including all channels, guide sites and sub-domains thereof. "About Network" means the About Site, all Web sites owned and operated solely by About, and those third party Web sites in which About has a right to sell advertisements. "About User" means any user of, or visitor to, the About Network. "Co-Branded Page" shall have the meaning set forth in Section 2. "Launch Date" means the date on which the Qode Universal Commerce Solution is commercially available to the public via the About Network. The Launch Date shall occur on or before July 1, 2001. "NeoMedia Marks" shall have the meaning set forth in Section 12.A. "Net Commerce Revenue" means gross revenue generated by NeoMedia in connection with the sale of goods and services made available to the About User via the Qode Universal Commerce Solution, less taxes, returns and cost of goods sold, which amount deducted from gross revenue shall not exceed ten percent (10%) in the aggregate. "Operating Quarter" means a three (3) month period during the Operating Term commencing either on July 1, 2001, October 1, 2001, January 1, 2002 or April 1, 2002. "Operating Term" means the period commencing upon the Launch Date and expiring upon the end of the Term, unless terminated earlier as set forth herein. "Qode Universal Commerce Solution" means the product search engine and shopping system developed and operated by NeoMedia which entails the use of NeoMedia's proprietary technology, involving the application of an indexed database of product information, coupons, rebates, promotions and purchase opportunities from online and offline retailers. "Search Result Page" means those Web pages hosted by or on behalf of About, which display search results. "Term" shall have the meaning as set forth in Section 7.A. 2. Integration. A. During the Term, when an About User enters a search query within an About Search Box, upon receiving the search results, the user will also have the opportunity to receive product search results provided via the Qode Universal Commerce Solution. In furtherance thereof, About shall include a link which reads "Search Product", or as otherwise determined by About, within the About Search Box . Upon an About User "clicking" on such link, the About User shall be directed to a Web page containing only the search results generated from the Qode Universal Commerce Solution (the "Co-Branded Page"). NeoMedia shall operate, maintain and support the Co-Branded Page, which shall be surrounded by an About branded frame. NeoMedia shall not modify, disable or delete the About branded frame and upon the expiration or earlier termination of this Agreement, NeoMedia shall remove the Co-Branded Page from its servers, rendering it unavailable to users. B. During the Term, the Qode Universal Commerce Solution shall be the only third party comparison shopping engine which utilizes the "UPC" database and technology and About shall not promote comparision shopping services provided by the entities set forth on Exhibit A. NeoMedia may, not more than once during each consecutive six (6) month period during the Term, replace not more than two (2) competitors set forth on Exhibit A, provided however, that About may preclude NeoMedia from any such replacement in the event that About has a pre-existing relationship with any such proposed replacement entity. At no time during the Term shall the list of competitors on Exhibit A exceed five (5) entities. 3. NeoMedia Obligations: A. Materials. NeoMedia shall promptly provide About with all code, graphics and other materials necessary for About to perform its obligations as set forth hereunder. B. Customer Support and Service. NeoMedia shall provide telephone, e-mail and Web-based support to About as reasonably necessary to implement and maintain the Qode Universal Commerce Solution. NeoMedia's customer support representatives will be available between the hours of 8 a.m. and 6 p.m. E.S.T. Monday through Friday. NeoMedia shall promptly forward to About all questions directed to NeoMedia regarding the About Network and services offered by About. NeoMedia shall provide to About such training as required to implement the Qode Universal Commerce Solution, and shall provide About with a dedicated contact who shall be available during standard business hours to answer About's questions. C. Uptime. The Qode Universal Commerce Solution and the Co-Branded Page shall be operational and fully functional at least 99.8% of the time during the Term of this Agreement, measured on a monthly basis, without taking into account scheduled downtime and maintenance, which shall not exceed in the aggregate, thirty (30) minutes in any one (1) month period. In the event of any downtime and/or maintenance in excess of one hundred eighteen (118) minutes, such shall be deemed a material breach and NeoMedia shall have four (4) hours in which to cure such breach. If such breach is not cured to About's satisfaction, About may terminate this Agreement immediately. D. Reporting. NeoMedia shall provide to About on a monthly basis (on a consistent day of the month to be mutually agreed upon by the parties), the Net Commerce Revenue generated during the previous month as well as the total amount of Net Commerce Revenue generated during the Term as of such date. Likewise, About shall provide to NeoMedia on a monthly basis (on a consistent day of the month mutually agreed upon by the parties that is at least 10 days prior to the date Neomedia is required to report Net Commerce Revenue to About), a report of page views generated in connection with the deisplay of each About Search Box. Such report of page views shall be a condition precedent to NeoMedia's reporting obligations hereunder. Failure on the part of NeoMedia to provide a monthly report shall be considered a material breach of this Agreement and notwithstanding anything herein to the contrary, if such material breach is not cured within two (2) business days of the date on which the report was due, About may terminate this Agreement immediately. 2 4. About Obligations A. During the Term, About shall generate a minimum of 3,420,000,000 page views. About shall use commercially reasonable efforts to generate 855,000,000 during each three (3) month period during the Operating Term. Page views shall be generated in connection with the display of each About Search Box. In the event that About does not generate the total number of page views by the expiration of the Term, the Term shall extend until the total number of page views have been generated and during such extension of the Term, all terms and conditions set forth herein shall continue in full faith and effect. If an extension is required to meet the minimum total page views and if About has received a minimum of One Million Fifty Thousand Dollars ($1,050,000) in aggregate payments from NeoMedia pursuant to this Sponsorship and Advertising Agreement, then NeoMedia will have no further obligations for any minimum payment in the extension period. About shall track the number of page views generated and the number thus calculated shall govern the satisfaction of About's obligations hereunder. B. If this Agreement is terminated by either party prior to its expiration, About shall only be obligated to generate a pro-rated number of page views, based on the number of months and partial months in which the Term was in effect; and if this Agreement is terminated by About prior to its expiration pursuant to Section 7.B. (material breach on the part of NeoMedia), About shall not be obligated to deliver any minimum number of page views. 6. Credit. About will receive all impression, page view and reach credit resulting from About Users accessing the Co-Branded Page. 7. Term and Termination. A. This Agreement will commence on the Effective Date and will remain in effect for twelve (12) months from the Launch Date, unless terminated earlier or further extended, as set forth herein (the "Term"). B. If there is a material breach of this Agreement by either party, the other party may give the defaulting party written notice specifying the particular action or condition that is claimed to constitute a material breach. Except as otherwise set forth herein, the defaulting party will have thirty (30) days (or five (5) days in the case of non-payment) from its receipt of notice to cure the breach. If the material breach is not cured by the end of the thirty (30) day period or the five (5) day period or the ten (10) day period, as the case may be, the other party may terminate this Agreement effective immediately upon written notice to the defaulting party. C. In addition, either party may terminate this Agreement in writing (i). Upon thirty (30) days written notice stating its intention to terminate, or (ii) immediately in the event the other party (a) ceases to function as a going concern or to conduct operations in the normal course of business, (b) has a petition filed by or against it under any state or federal bankruptcy or insolvency law which petition has not been dismissed or set aside within ninety (90) days of its filing, or (c) sells all or substantially all of the assets of such party or any event or series of events whereby any entity acquires beneficial ownership of capital stock of such party representing fifty percent (50%) of the voting power of all capital stock of such party. 3 8. Payment, Revenue Share, Payment Terms: A. NeoMedia shall pay About a fee of Three Hundred Fifty Thousand Dollars ($350,000) (the "Quarterly Net Commerce Revenue Fee"), which shall be paid on or before the first day of the second, third and fourth Operating Quarter. Payable via cash or wire transfer. If About generates less than 855,000,000 page views during any Operating Quarter, then the Quarterly Net Commerce Revenue Fee that is due on the first day of the subsequent Operating Quarter will be reduced by a percentage equal to the percentage shortfall for page views as calculated by dividing the actual number of page views generated by 855,000,000. For example, if About generates 755,000,000 page views in the first Operating Quarter, then NeoMedia shall only be obligated to pay About a fee of $309,064 at the beginning of the second Operating Quarter ((855,000,000 - 755,000,000) / (855,000,000) * $350,000). The parties shall share the Net Commerce Revenue as follows: NeoMedia shall receive Ninety Five Percent (95%) of the cumulative Net Commerce Revenue generated during the Term until NeoMedia generatesOne Million Five Hundred Thousand Dollars ($1,500,000). Once One Million Five Hundred Thousand Dollars ($1,500,000) of Net Commerce Revenue is generated by NeoMedia, the parties shall share the Net Commerce Revenue as follows on a monthly basis, to be paid by NeoMedia to About within thirty (30) days of the end of each month in which Net Commerce Revenue is generated: For the first Two Hundred and Fifty Thousand Dollars of Net Commerce Revenue generated in a given month, About shall receive Sixty Percent (60%) of the Net Commerce Revenue and NeoMedia shall receive Forty Percent (40%) in connection with such month; and if more than Two Hundred and Fifty Thousand Dollars in Net Commerce Revenue is generated in a given month, About shall receive forty percent (40%) of the amount in excess of Two Hundred and Fifty Thousand Dollars ($250,000) while retaining Sixty Percent (60%) of the initial Two Hundred and Fifty Thousand Dollars in Net Commerce Revenue and NeoMedia shall receive Forty Percent (40%) of the amount in excess of Two Hundred and Fifty Thousand Dollars ($250,000). For example, if NeoMedia generates $400,000 of Net Commerce Revenue in a given month, about shall receive $210,000 ($250,000*60% + ($400,000 - $250,000)*40%). B. If any of the abovementioned payment is not received on or before the appropriate dates as described above, About shall have the right to charge NeoMedia interest on the overdue amount at the then current prime rate, calculated from the date due for such payment of such overdue amount until the date of NeoMedia's payment of such amount, which interest shall be in addition to such fees due and owing About. C. In the event this Agreement is terminated by NeoMedia, NeoMedia shall pay a portion of Net Commerce Revenues to About, prorated based on the cumulative number of page views at the time of termination, and calculated as follows: Net Commerce Revenue generated prior to the date of termination, plus 1 Million Dollars, multiplied by the cumulative number of page views through the date of termination, divided by 3.4 Million page views. 9. Confidentiality and Public Announcements: A. The terms and existence of this Agreement are strictly confidential and shall not be disclosed by either party including but not limited to any disclosure to its stockholders, without the prior express, written approval of the other party, which shall not be unreasonably withheld or delayed. All material non-public information, communication or data, in any form ("Confidential Information") shall remain the sole property of the disclosing party and its confidentiality shall be maintained and protected by the receiving party with at least the same degree of care as the receiving party uses for the protection of its own confidential and proprietary information. Other than as set forth herein, the receiving party shall not disclose such Confidential Information to any third party. These restrictions shall not apply to any Confidential Information: (i) after it has become generally available to the public without breach of this Agreement by the receiving party; (ii) is rightfully in the receiving party's possession before disclosure to it by the disclosing party; (iii) is independently developed by the receiving party; (iv) is rightfully received by the receiving party from a third party without a duty of confidentiality; or (v) is required to be disclosed under operation of law or administrative process. Upon expiration or termination of this Agreement for any reason, each party will promptly and at the direction of the other party, either destroy or return to the disclosing party, and will not take or use, all items of any nature which belong to the disclosing party and all records (in any form, format or medium) containing or relating to Confidential Information. 4 B. The parties agree to issue a joint press release, the timing and content of such must be approved in advance by both parties. 10. Right to Redesign and Re-index: About may, at any time, revise the design, look and feel and layout of the About Network. If, in About's reasonable opinion, any such revision would result in the need for NeoMedia to modify its links to and/or from the About Network, About shall provide NeoMedia with a written notice stating the need for such revision, and NeoMedia shall, within not more than thirty (30) days from the date of such notice, modify its links. About shall have the right to approve in advance such modification, which approval shall not be unreasonably withheld or delayed. 11. Ownership: Other than as set forth herein, all intellectual and proprietary property and information, supplied or developed by either party shall be and remain the sole and exclusive property of the party who supplied or developed same. 12. Grant of License: A. During the Term of this Agreement, NeoMedia hereby grants to About, a non-exclusive, royalty-free worldwide right and license to use, distribute, publicly perform, transmit, store, display, reproduce and copy NeoMedia tradenames, trademarks, service marks and logos delivered by NeoMedia to About (collectively, the "NeoMedia Marks"), to the extent necessary to enable About to perform its obligations under this Agreement. Except as set forth herein, no right, title, license, or interest in any NeoMedia Marks is intended to be given to or acquired by About by the execution of or the performance of this Agreement. B. During the Term of this Agreement, About hereby grants to NeoMedia, a non-exclusive, worldwide, royalty-free right and license to distribute, publicly perform, transmit, store, display, reproduce and copy About.com's tradenames, trademarks, service marks and logos delivered by About to NeoMedia (collectively, the "About Marks"), to the extent necessary to enable NeoMedia to perform its obligations under this Agreement. Except as set forth herein, no right, title, license, or interest in any About Marks is intended to be given to or acquired by NeoMedia by the execution of or the performance of this Agreement. 13. Representations & Warranties: A. About represents and warrants that: (i) it is authorized to do business under the rules of the state in which it is incorporated; (ii) it is authorized to enter into this Agreement and to perform its obligations; and (iii) the About Marks do not infringe or violate any copyright, trade secret, trademark, or other proprietary right. B. NeoMedia represents and warrants that: (i) it is authorized to do business under the rules of the state in which it is incorporated; (ii) it is authorized to enter into this Agreement and to perform its obligations; (iii) the NeoMedia Marks, do not infringe or violate any copyright or trademark, or other proprietary right. C. THE QODE UNIVERSAL COMMERCE SOLUTION IS PROVIDED ON AN "AS IS" BASIS. ALTHOUGH NEOMEDIA WILL USE COMMERCIALLY REASONABLE EFFORTS TO MAINTAIN THE Qode Universal Commerce Solution, ABOUT UNDERSTANDS AND AGREES THAT THE Qode Universal Commerce Solution IS OF SUCH COMPLEXITY THAT IT MAY CONTAIN INHERENT DEFECTS. NEOMEDIA MAKES NO WARRANTY EXPRESS OR IMPLIED, WITH RESPECT TO ANY EQUIPMENT, SCANNING OR OTHER INPUT DEVICE, COMPUTER HARDWARE OR THIRD PARTY SOFTWARE USED OR PURCHASED BY ABOUT OR ANY OTHER PARTY AND USED IN CONNECTION WITH THE Qode Universal Commerce Solution. NEOMEDIA DISCLAIMS ANY AND ALL WARRANTIES, REPRESENTATIONS OR GUARANTEES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING BUT NOT LIMITED TO (I) ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE; (II) ANY WARRANTY THAT THE Qode Universal Commerce Solution WILL OPERATE UNINTERRUPTED OR ERROR-FREE; AND (III) ANY WARRANTY REGARDING CONTINUED PROVISION OR ACCURACY OF INFORMATION. THIS MEANS THAT YOU ASSUME RESPONSIBILITY FOR ANY LIABILITY ASSOCIATED WITH USE OF THE QODE UNIVERSAL COMMERCE SOLUTION. 5 14. Indemnification: A. About agrees to indemnify, defend and hold harmless NeoMedia and its parent, subsidiaries, affiliates, successors and assigns from any and all losses, liabilities, damages, actions, claims, expenses and costs (including reasonable attorneys' fees) relating to a breach of any representation, warranty, obligation or covenant of About as set forth herein. B. NeoMedia agrees to indemnify, defend and hold harmless About and its parent, subsidiaries, affiliates, successors and assigns from any and all losses, liabilities, damages, actions, claims, expenses and costs (including reasonable attorneys' fees) relating to (i) a breach of any representation, warranty, obligation or covenant of NeoMedia as set forth herein ; (ii) a violation or infringement of a third party patent relating to and as a result of the use of the Qode Universal Commerce Solution by About as authorized by this Agreement C. NeoMedia shall extend protection of the Indemnification provisions included in the Qode Universal Commerce Solution end user "Terms of Use" agreement to apply to About as a co-branded licensee. D. In connection with any claim or action described in this Section, the party seeking indemnification (i) will give the indemnifying party prompt written notice of the claim, (ii) will cooperate with the indemnifying party (at the indemnifying party's expense) in connection with the defense and settlement of the claim, and (iii) will permit the indemnifying party to control the defense and settlement of the claim, provided that the indemnifying party may not settle the claim without the indemnified party's prior written consent (which will not be unreasonably withheld). Further, the indemnified party (at its cost) may participate in the defense and settlement of the claim. 15. Limitation of Liability; Disclaimer: A. ABOUT SHALL HAVE NO LIABILITY TO NEOMEDIA OR ANY THIRD PARTY FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION, LOSS OF PROFIT OR BUSINESS OPPORTUNITIES, WHETHER OR NOT ABOUT WAS ADVISED OF THE POSSIBILITY OF SUCH. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY OR NOTICE TO ABOUT OF THE POSSIBILITY OF SUCH DAMAGES OR NOTWITHSTANDING WHETHER SUCH DAMAGES WERE FORESEEABLE. EXCEPT AS EXPRESSLY SET FORTH HEREIN, ABOUT DOES NOT MAKE ANY, AND ABOUT HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE SERVICES CONTEMPLATED BY THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. NeoMedia's sole remedy, as it relates to any breach by About of its obligations hereunder, shall be limited to the value associated with the page views not generated. B. IN NO EVENT SHALL NEOMEDIA HAVE ANY LIABILITY TO ABOUT OR ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT, GENERAL, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL OR OTHER DAMAGES OF ANY KIND OR NATURE WHATSOEVER ARISING FROM THE USE OF OR INABILITY TO USE THE QODE UNIVERSAL COMMERCE SOLUTION, INCLUDING BUT NOT LIMITED TO BUSINESS INTERRUPTION, LOSS OF DATA, OR OTHERWISE, HOWEVER CAUSED AND WHETHER ARISING UNDER CONTRACT, TORT OR OTHER THEORY OF LIABILITY. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY OR NOTICE TO NEOMEDIA OF THE POSSIBILITY OF SUCH DAMAGES OR NOTWITHSTANDING WHETHER SUCH DAMAGES WERE FORESEEABLE. THIS LIMITATION SHALL NOT APPLY TO DAMAGES FOR PERSONAL INJURY OR DEATH. ABOUT'S SOLE REMEDY, AS IT RELATES TO ANY OF NEOMEDIA'S OBLIGATIONS HEREUNDER, SHALL BE LIMITED TO THE NET COMMERCE REVENUES LESS ANY NET QUARTERLY REVENUE FEES PAID TO ABOUT. 6 C. Both parties represent the establishment of any links and the impressions do not in any way constitute endorsement or acceptance of the content of the other party's Web page or Web site. 16. General. A. Independent Contractors. Each party is an independent contractor and not an employee of the other party and neither party shall be deemed a partner or joint venturer of the other. Each party understands and agrees that (i) its employees are not entitled to any benefits provided to any employee of the other party and (ii) it is solely responsible for reporting as income any compensation received hereunder. Each party is responsible for compliance with all federal, state and local laws, regulations and orders in connection with taxes, unemployment insurance, social security, worker's compensation, disability or like matters. B. Entire Agreement. This constitutes the entire agreement between the parties with respect to the subject matter hereof, and no statement, promise, or inducements made by either party or agent of either party that is not contained in this written Agreement shall be valid or binding. This Agreement may not be modified or altered except in writing signed by both parties and endorsed thereon. C. Severability. In the event any provision of this Agreement is held to be unenforceable, such provision will be reformed only to the extent necessary to make it enforceable, and the other provisions of this Agreement will remain in full force and effect. D. Governing Law. This Agreement will be governed by the laws of the State of New York without giving effect to conflict of laws principles. Both parties submit to exclusive jurisdiction in New York and agree that any cause of action arising under this Agreement shall be brought in the state and federal courts of the State of New York, New York County. E. Force Majeure. Neither party will be liable for, or will be considered to be in breach of or default under this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions that are beyond such party's reasonable control and that such party is unable to overcome through the exercise of commercially reasonable diligence (a "force majeure event"). If any force majeure event occurs, the affected party will give prompt written notice to the other party and will use commercially reasonable efforts to minimize the impact of the event. F. Assignment. Neither party may assign the Agreement without the written consent of the other party, which consent shall not be unreasonably withheld or delayed, except that either party may assign the Agreement to an affiliate or successor by way of purchase, merger, consolidation or similar transaction, subject to the requirement that the Agreement shall be binding and enforceable against any successor or assign. G. Survival. Sections 1, 3.D., 8 (to the extent any fees have not been paid), 9, 11, 13, 14, 15 and 16 shall survive expiration or any earlier termination of this Agreement. I. Notice. Any notice under this Agreement will be in writing and delivered by personal delivery, overnight courier, or certified or registered mail, return receipt requested, and will be deemed given upon personal delivery, one (1) day after deposit with an overnight courier, three (3) days after deposit in the mail, or upon confirmation of receipt of facsimile or email. Notices sent to About will be addressed to General Counsel and notices sent to NeoMedia will be addressed to CEO/President and each will be sent to the appropriate address set forth above or such other address as that party may specify in writing pursuant to this Section. 7 Agreed and Accepted: NEOMEDIA ABOUT.COM, INC. Name: Rudolf F. Mosny Name: Kimberly Krouse Title: Exec. VP International, COO Title: Vice President, Marketing & Strategic Dev Signature: /s/ Rudolf F. Mosny Signature: /s/ Kimberly Krouse Date: May 23, 2001 Date: May 23, 2001
8 EX-10.21 8 b317965ex_10-21.txt LETTER OF INTENT EXHIBIT 10.21 AirClic Inc. 512 Township Line Road Building 5, Suite 200 Blue Bell, PA 19422 June 21, 2001 NeoMedia Technologies, Inc. Ft. Myers, FL Attention: Charles A. Fritz Re: Proposed Transaction with AirClic Inc. Dear Chas: I am pleased to submit the following proposed strategic transaction between AirClic and NeoMedia. We believe this transaction provides an opportunity to realize significant economies of scale and, at the same time, add the needed clarity in the marketplace to facilitate the adoption of industry standards. We are proposing a structure and arrangement that clarifies the intellectual property landscape and the ability for all players in the global industry to efficiently obtain licensing rights to important intellectual property owned by NeoMedia and AirClic. Notwithstanding the foregoing, we understand that each party currently believes that it has sufficient intellectual property rights to conduct its current businesses. We have also proposed within NeoMedia an application keyed to UPCs that will ideally be positioned to become the U.S. and potentially global standard, validating NeoMedia's strategy to date. In turn, AirClic would be able to more closely focus on enhancing its infrastructure capabilities and the sale of Scanlets and enabling technology globally, and thereby become recognized as the global platform for switching services. As we have discussed, in the absence of clear standards, this new industry in which we are each dependent and have each committed substantial investments may not develop until the distant future, if at all. The Transaction The principal business aspects of the proposed transaction are set forth on the Memorandum of Terms attached as Exhibit A hereto. All references herein to this letter shall also include Exhibit A. Definitive Agreements Upon the execution of this letter, we will commence with the preparation of definitive agreements to document the proposed transaction. These agreements will contain such conditions, representations and warranties, indemnities and covenants as are typical of transactions of this type. Each of us will use our respective best efforts to consummate the transactions contemplated by this letter as promptly as practicable. Diligence Upon execution of this letter, each party will commence its business and legal due diligence investigation and seek to conclude its investigation as quickly and efficiently as possible. During this due diligence period, AirClic and NeoMedia will meet to (a) develop a Qode/Connect2 business model acceptable to each party, which will include the related ongoing capital requirements associated with this business model, and (b) assess international joint venture/franchise opportunities for the global switching business. In order to facilitate the completion of due diligence, each party will provide the management, advisors and other representatives of the other party reasonable access to all of its facilities, books and records, and other documents, and will make its key employees available for discussion. Professional fees Each of us shall pay our own fees and expenses that are incurred in connection with this proposed transaction, including all fees and expenses incurred by our respective accountants, lawyers and other advisors. Confidentiality Neither of us will make any statements to the public concerning the proposed transaction without the prior written consent of the other. The parties will use their best efforts to jointly prepare and issue a joint press release announcing the execution of this letter no later than June 27, 2001. Non-Disclosure Agreement Each of us recognizes and agrees that nothing contained herein shall in any manner affect the Non-Disclosure Agreement previously executed by the parties. Exclusivity From and after the date hereof until the earlier of (a) the 60th day following the date this letter agreement is accepted by NeoMedia, or (b) the date the parties hereto have entered into definitive documentation concerning the transactions contemplated by this letter agreement (the "Exclusivity Period"), without the prior written consent of AirClic, NeoMedia shall not, and shall not authorize or permit any of its officers, directors, employees or agents or any investment banker, financial advisor, attorney, accountant or other representative retained by NeoMedia or acting on behalf of NeoMedia to, directly or indirectly, (a) solicit, initiate, or encourage (including by way of furnishing non-public information), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal, or (b) participate in any discussions or negotiations regarding an Acquisition Proposal. NeoMedia shall promptly, but in any event within 24 hours of receipt thereof, (a) advise AirClic orally and in writing of any Acquisition Proposal or any inquiry regarding the making of an Acquisition Proposal, including, without limitation, any request for information, the material terms and conditions of such request, Acquisition Proposal or inquiry and the identity of the party making such request, Acquisition Proposal or inquiry, (b) keep AirClic fully informed of the status and details of such request, Acquisition Proposal or Inquiry, and (c) give AirClic at least five days' advance notice of any agreement to be entered into with, or any information to be supplied to, any party making such request, Acquisition Proposal or inquiry. For purposes of this letter agreement, an "Acquisition Proposal" shall mean a proposal (other than pursuant to this letter or the transactions contemplated hereby) for (a) a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving NeoMedia, (b) any transaction or series of transactions resulting in a purchase or sale in any manner of all or a significant portion of the assets of NeoMedia, (c) any purchase or sale in any manner of any equity interest in NeoMedia of greater than 30% of NeoMedia's then outstanding common stock (including any securities convertible into common stock and other than with respect to the exercise of currently outstanding employee stock options or warrants), or (d) any tender offer by a third party is commenced for more than 30% of NeoMedia's then outstanding common stock (including any securities convertible into common stock). 2 In addition, the parties hereto agree that in the event that the parties hereto enter into definitive documentation concerning the transactions contemplated by this letter agreement, such definitive documentation shall include such provisions as the parties hereto mutually agree are necessary or advisable to provide NeoMedia's Board of Directors with the flexibility necessary to satisfy their fiduciary duties to NeoMedia's stockholders under applicable law. Non-binding nature of this letter Each of us acknowledges that we could have opted to make this a legally "binding" letter of intent with respect to all of the subject matter contained herein. Instead, we have determined that this letter will serve only as a guide to the negotiation and preparation of the definitive agreements. It is further understood that this proposal merely constitutes a statement of our present mutual intentions with respect to the proposed transaction and does not contain all matters upon which agreements must be reached in order for the transaction to be completed. With the exception of the agreements contained herein under the paragraph headings "Professional Fees," "Confidentiality," "Non-Disclosure Agreement," "Exclusivity" and "Non-binding nature of this letter", as to which each of us intends to be legally bound, neither of us shall be bound to the other in the absence of an executed definitive agreement. If the foregoing proposal meets with your approval, please date, sign and return the enclosed copy of this letter. Sincerely, /s/ Phillip Riese Chief Executive Officer Agreed and accepted this 21st day of June 2001. NeoMedia Technologies, Inc. By: /s/ Charles W. Fritz Charles W. Fritz Chairman and Chief Executive Officer 3 EX-10.22 9 b317965ex_10-22.txt FORM OF PROMISSORY NOTE EXHIBIT 10.22 SECURED PROMISSORY NOTE UP TO $2,000,000 July 11, 2001 SECTION I INDEBTEDNESS FOR VALUE RECEIVED, the undersigned, NeoMedia Technologies, Inc., a Delaware corporation ("Maker"), intending to be legally bound, hereby unconditionally promises to pay to the order of AirClic Inc., a Delaware corporation ("Payee"), in lawful money of the United States of America via wire transfer of immediately available funds or certified check at the business office of Payee or at such place as the holder of this Note shall have designated in writing to Maker: (a) the Principal Amount (as defined below), together with all accrued but unpaid interest thereon, ON DEMAND at the earliest to occur of. (1) the date upon which Maker raises not less than $5 million in equity financing from a source other than Payee; (11) six months from the date of this Note, or (111) upon any Change in Control of Maker (in each case, the "Maturity Date"); (b) interest on the unpaid balance of the Principal Amount from time to time outstanding from the date hereof through and including the Maturity Date at a rate equal to 8% per annum (the "Interest Rate"), payable at the Maturity Date, until the entire Principal Amount, together will all accrued interest is paid in full, such payment of interest, if not paid when due, shall be added to the Principal Amount; and (c) after the Maturity Date, or upon the occurrence of an Event of Default (as hereinafter defined), until payment in full of the Principal Amount and all accrued but unpaid interest thereon, the Principal Amount and, to the extent permitted by law, payments of interest due thereunder in cash shall bear interest, payable on demand, at a rate equal to the Interest Rate, plus 2% per annum. (d) Maker shall have the right to prepay this Note, in whole or in part, without penalty; (e) Notwithstanding the foregoing, this Note shall be considered fully satisfied and Maker shall have no payment obligation to Payee hereunder and Payee shall have no further rights hereunder, upon the closing of the proposed transaction between Payee and Maker as contemplated in that certain Letter Agreement dated July 3, 2001 (the"LOI"), SECTION 2 DEFINED TERMS 2.1 Defined Terms. The following terms which are defined in the Uniform Commercial Code in effect in the Commonwealth of Pennsylvania on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Instruments, Inventory and Proceeds; and the following terms shall have the following meanings: "Change in Control " shall mean any of the following: (a) a merger, consolidation or other business combination or transaction to which Maker is a party if the stockholders of Maker immediately prior to the effective date of such merger, consolidation or other business combination or transaction, as a result of such share ownership, have beneficial ownership of voting securities representing less than 50% of the securities of the surviving entity following such merger, consolidation or other business combination or transaction; (ii) an acquisition by any person, entity or group of direct or indirect beneficial ownership of securities of Maker resulting in such person, entity or group having direct or indirect beneficial ownership of more than 30% of the securities of Maker calculated on a fully diluted basis; or (iii) a sale of all or substantially all of the assets of Maker. "Code" means the Uniform Commercial Code as from time to time in effect in the State of Florida, or the State of Illinois, as applicable. "Collateral" shall have the meaning assigned to it in Section 3 of this Note. "Contracts" means the contracts entered into by Maker all such contracts to include (a) all rights of Maker to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of Maker to damages arising out of, or for, breach or Default in respect thereof and (c) all rights of Maker to perform and to exercise all remedies thereunder. "Court Order" means any judgment, decree, injunction, order or ruling of any federal, provincial, state, local or foreign court or governmental, quasi-governmental or regulatory body, commission, bureau, agency or authority that is binding on any Person or its property under applicable Law. "Default" means (a) a breach, default or violation, (b) with respect to any Law, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would constitute a violation or a right to penalties, or cause an Encumbrance to arise, or (c) with respect to any Contract, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would give rise to a right of termination, renegotiation or acceleration or a right to receive damages on a payment of penalties, which, in the case of each of the foregoing subsections (a), (b) and (c) would have a material adverse effect upon Makers ability to repay this Note if such breach, default or violation remains uncured after notice and 30 day opportunity to cure. 2 "Encumbrances" means any lien, mortgage, security interest, pledge, restriction on transferability, defect of title or other claim, charge or encumbrance of any nature whatsoever on any property or property interest, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. Notwithstanding anything to the contrary, Encumbrances shall not include licenses, service agreements or other rights granted in the ordinary course of business relating to Maker's Intellectual Property or its technology or service offering. "Indebtedness" means any obligation for borrowed money, including any capital lease obligation. "Intellectual Property" means all of Maker's Patents, Trademarks and Copyrights (as each such term is defined in the IP Security Agreement). "IP Security Agreement" means the Patents, Trademarks and Copyrights Security Agreement, dated as of the date of this Note, executed by Payee in favor of Maker. "Law" means any statute, law, ordinance, regulation, order, rule or common law of any federal, provincial, state, local, foreign or other governmental or quasi-governmental agency or body or of any other type of regulatory body or court, including those covering environmental, energy, safety, health, transportation, bribery, record keeping, zoning, antidiscrimination, antitrust, wage and hour, and price and wage control matters. "Liability" means any material direct or indirect liability, Indebtedness, obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of or by any person, absolute or contingent accrued or unaccrued, due or to become due, liquidated or unliquidated, known or unknown. "Litigation" means any material lawsuit, claim, action, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry. "Loan Document" means this Note, the IP Security Agreement, the UCC financing statements and any other documents entered into or delivered in connection with the Obligations evidenced by this Note. "LOI" is defined in subsection (e) of Section I hereof. "Obligations" means the unpaid principal of, any premium applicable to, and interest on (including, without limitation, interest accruing after the Maturity Date and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to Maker, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) and all other obligations and liabilities of Maker to Payee, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Note and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, premium, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel to Payee) or otherwise. 3 "Person" means any natural person, business trust, corporation, partnership, limited liability company, joint stock company, proprietorship, association, trust, joint venture, unincorporated association or any other legal entity of whatever nature, "Principal Amount" means a total of $500,000 on the date hereof, plus an additional $500,000 on the date that is 14 days from the date hereof, provided that Payee has made its Required Contribution (as defined below), plus an additional $1,000,000 on the date that the Maker and Payee have entered into definitive documentation with respect to the transactions contemplated by the LOI, provided that Payee has made its Required Contribution (as defined below), plus all accrued interest required to be added to the Principal Amount pursuant to Section I (a) hereof. The parties hereto agree to sign an Exhibit A hereto at each Required Contribution which shall evidence the then current Principal Amount due under this Note (exclusive of any accrued interest thereon) after such Required Contribution. "Required Contribution" means (a) $500,000 which Payee hereby agrees to contribute to the Maker on the date that is 14 days from the date hereof, provided that no Default or Event of Default has occurred under this Note, and provided further, that the Maturity Date has not yet occurred, and (b) $1,000,000 which Payee hereby agrees to contribute to the Maker on the date that the Maker and Payee have entered into definitive documentation with respect to the transactions contemplated by the LOI, provided that no Default or Event of Default has occurred under this Note, and provided further, that the Maturity Date has not yet occurred. Notwithstanding anything herein to the contrary, there shall be no obligation to fund additional loans during the pendancy of any applicable cure period. SECTION 3 SECURITY AGREEMENT 3.1 Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration, demand or otherwise) of the Obligations, Maker hereby grants to the Payee, a security interest in all of the following property now owned or at any time hereafter acquired by Maker or in which Maker now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), all Accounts, Chattel Paper, Contracts, Documents, all Equipment, General Intangibles, Instruments, Inventory, Investment Property, Intellectual Property and to the extent not otherwise included, all Proceeds and products of any and all of the foregoing. SECTION 4 REPRESENTATIONS AND WARRANTIES OF MAKER 4 Maker hereby represents and warrant to Payee as follows: 4.1 Organization and Standing. Maker is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. Maker has all requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. Maker is duly qualified and authorized to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, prospects, or financial condition (a "Material Adverse Effect"). 4.2 Corporate Power. Maker has all requisite legal and corporate power and authority to execute and deliver this Note and the other Loan Documents to carry out and perform its obligations under the terms of this Note, the other Loan Documents and the transactions contemplated hereby. 4.3 Authorization. All corporate action on the part of Maker, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of this Note and the other Loan Documents by Maker, and the performance of all of Maker's Obligations. This Note and the other Loan Documents constitute valid and legally binding obligations of Maker, enforceable in accordance with its terms. The execution, delivery and performance of this Note and the other Loan Documents (a) are not in contravention of Law or the terms of Maker's by-laws, certificate of incorporation or other applicable documents relating to Maker's formation or to the conduct of Maker's business or of any material agreement or undertaking to which Maker is a party or by which Maker is bound, and (b) will not conflict with nor result in any breach in any of the provisions of or constitute a default under or result in the creation of any Encumbrances upon any asset of Maker under the provisions of any material agreement or other instrument to which Maker is a party or by which it or its property may be bound. 4.4 Financial Statements; Solvency (a) The Financial Statements ("Financial Statements") of the Maker that have been filed as part of the Maker's regulatory filings with the U.S. Securities and Exchange Commission are correct and complete in all material respects. The Financial Statements have been prepared using the same methods and criteria and are consistent in all material respects with the books and records of the Company. There have not been any material transactions which have not been recorded in the accounting records underlying such Financial Statements. The Financial Statements present in all material respects the financial position, results of operations and the assets and the known Liabilities of Maker as of the dates thereof, and for the periods then ended, subject to normal recurring year-end adjustments and the absence of notes. Maker is solvent, able to pay its debts in the ordinary course of business, and the fair present saleable value of its assets, calculated on a going concern basis, is in excess of the amounts of its liabilities. 5 4.5 Liabilities. Maker has no material Liabilities, other than Liabilities reflected or reserved for on the Financial Statements and those Liabilities incurred in the ordinary course of business since the date of the most recent Financial Statements. 4.6 Litigation. Except as set forth in Schedule A attached hereto, there is no Litigation that is pending or, to Maker's knowledge, threatened against or related to Maker or reasonably likely to be made against Maker, there has been no material Default under any Laws or Court Orders applicable to Maker, and Maker has not received any written notices from any Person or governmental entity regarding any alleged material Defaults under any Laws. 4.7 Intentionally Deleted 4.8 Licenses and Permits. Maker (a) is in material compliance with and (b) has procured and is now in possession of, all material licenses or pen-nits required by any applicable Law for the operation of its business in each jurisdiction wherein it is now conducting or proposes to conduct business and where the failure to be in such compliance or to procure such licenses or permits could have a Material Adverse Effect. 4.9 Defaults. Maker has not received notice of, and does not have actual knowledge of, any default by Maker in the payment of the principal of or interest on any material Indebtedness or under any instrument or agreement under or subject to which any material Indebtedness has been issued and no Default has occurred under the provisions of any such instrument or agreement. 4.10 Title; No Other Encumbrances. Except as set forth in Schedule B attached hereto, Maker owns each item of the Collateral free and clear of any and all Encumbrances. Except as set forth in Schedule B attached hereto, no security agreement, financing statement or other public notice with respect to any or all of the Collateral is on file or of record in the States of Illinois or Florida, or the US Patent and Trademark Office, which are the states and locations in which substantially all of the assets of Maker are located. To the best of its knowledge, no other security agreement, financing statement or other public notices exist with regard to other jurisdictions. 4.11 Perfected First Priority Security Interest. Except as set forth in Schedule B, the security interest granted pursuant to this Note and the IP Security Agreement will constitute upon the completion of all necessary filings or notices in proper public offices or the taking of any necessary possessions or similar acts, perfected security interests on all Collateral, which are prior to all other Encumbrances on such Collateral created by Maker and in existence on the date hereof. 4.12 Inventory and Equipment. The Inventory and the Equipment are, as of the date hereof, kept at the chief executive office; the Ft. Lauderdale, FL office; the Lisle, IL office of Maker and have not been kept at any other location within the five-month period ending on the date hereof, except to the extent Equipment is issued to employees for use at home, and except for equipment located at the Sterling, VA co-location site and for certain equipment to be disposed of in Guatemala; Public Storage, Inc. storage facility 423104 located in Ft. Lauderdale, FL and Budget Self Storage facility located at 3111 Cleveland Ave, 33901, unit #1034. 6 4.13 Chief Executive Office, Maker's chief executive office and chief place of business is located at 2201 Second Street, Suite 600, Fort Myers, Florida. Maker has no other office, other than Lisle, Illinois; Monterey, Mexico and Ft. Lauderdale, FL. SECTION 5 COVENANTS 5.1 Further Assurances. At any time and from time to time, upon the written request of Payee, and at the sole expense of Maker, Maker will promptly and duly execute and deliver such further instruments and documents and take such further action as Payee may reasonably request for the purpose of obtaining or preserving the full benefits of this Note and the security interests granted hereunder and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any such jurisdiction with respect to the Encumbrances created hereby. In the event Maker fails to or refuses to sign such a financing or continuation statement, Maker also hereby authorizes the Payee to file any such financing or continuation statement without the signature of Maker to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Note shall be sufficient as a financing statement for filing in any jurisdiction 5.2 Encumbrances. Maker (x) shall not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Encumbrances on or to the Collateral, other than the Encumbrances created hereby, other than those set forth on Schedule B and (y) will defend the right, title and interest of Payee in and to any of the Collateral against the claims and demands of all Persons whomsoever, except as set forth on Schedule B. 5.3 Indebtedness. Maker shall not incur, create, assume or have any Indebtedness except pursuant to this Note or as disclosed in the Financial Statements, other than in the ordinary course of business, provided that Maker shall give Payee written notice of any such Indebtedness promptly after incurrence thereof. 5.4 Sale of Collateral. Maker shall not sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so, except in the ordinary course of business and except with respect to the VAR business as contemplated by the LOI. 5.5 Intentionally Deleted. 5.6 Guarantees. Maker shall not become liable upon the obligations of any other person by assumption, endorsement or guaranty thereof or otherwise. 7 5.7 Dividends. Maker shall not declare, pay or make any dividend or distribution on any shares of the common stock or preferred stock of Maker (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or apply any of its funds, property or assets to the purchase, redemption or other retirement of any common or preferred stock, or of any options to purchase or acquire any such shares of common or preferred stock of Maker. 5.8 Prepayments. Maker shall not, at any time, directly or indirectly, prepay any Indebtedness (other than to Payee), or repurchase, redeem, retire or otherwise acquire any Indebtedness of Maker. 5.9 Notice of Default. Maker shall give Payee immediate notice of any Default or Event of Default under this Note. SECTION 6 APPOINTMENT OF ATTORNEY-IN-FACT 6.1. Payee's Appointment as Attorney-in-Fact. (a) Powers. Maker hereby irrevocably constitutes and appoints Payee and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Maker and in the name of Maker or in its own name, from time to time (in the Payee's discretion), during any period in which an Event of Default is continuing after notice and 30 day opportunity to cure, for the purpose of carrying out the terms of this Note, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Note, and, without limiting the generality of the foregoing, Maker hereby gives Payee the power and right, on behalf of Maker, without notice to or assent by Maker, to do the following: (i) at any time when any Event of Default shall have occurred and is continuing after notice and 30 day opportunity to cure, in the name of Maker or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Payee for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Note and to pay all or any part of the premiums therefor and the costs thereof; and 8 (iii) upon the occurrence and during the continuance of any Event of Default, after notice and 30 day opportunity tot cure (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to Payee or as Payee shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against Maker with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as Payee may deem appropriate; (G) to assign any copyright, trademark or patent (along with the goodwill of the business pertaining thereto), throughout the world for such term or terms, on such conditions, and in such manner, as Maker shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Payee were the absolute owner thereof for all purposes, and to do, at the Payee's option and Maker's expense, at any time, or from time to time, all acts and things which Payee deems necessary to protect, preserve or realize upon the Collateral and the Payee's liens thereon and to effect the intent of this Note, all as fully and effectively as Maker might do. Maker hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Obligations are indefeasibly paid in full. (b) No Duty on the Part of the Payee. The powers conferred on Payee hereunder are solely to protect the interests of Payee in the Collateral and shall not impose any duty upon Payee to exercise any such powers. Payee shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Maker for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. SECTION 7 DEFAULT 7.1 Event of Default. An "Event of Default" under this Note means the occurrence of any of the following: (a) the failure of Maker to make any payment of principal or, interest or other sums due under this Note as and when due; (b) if Maker shale (A) apply for or consent to the appointment of a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (B) make a general assignment for the benefit of its creditors, (C) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (D) file a petition seeking to take advantage of any other law providing for the relief of debtors, (E) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under such Bankruptcy Code, or (F) take any corporate action for the purpose of effecting any of the foregoing; 9 (c) if a proceeding or case shall be commenced against Maker in any court of competent jurisdiction for the (A) winding up, or composition or readjustment of debts, of Maker or the Company, (B) appointment of a trustee, receiver, custodian, liquidator or the like of Maker, or of all or any substantial part of any of their assets, or (C) grant of relief similar to that specified in the foregoing clauses (A) and (B) in respect of Maker or the Company under any law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 90 days, or any order for relief against Maker shall be entered in an involuntary case under such Bankruptcy Code; (d) the admission in writing by Maker of its inability to pay its debts as they become due; or (e) the breach or failure to perform by Maker of any other agreement, covenant, representation or warranty contained in this Note, any other Loan Document or any other agreement entered into between Maker and Payee, which (if capable of being cured) remains uncured 30 days after notice thereof. 7.2 Remedies. (a) If an Event of Default exists under the provisions of this Note, which remains uncured after notice and opportunity to cure, Payee may accelerate the entire balance outstanding under this Note by written notice to Maker, and the entire balance outstanding under this Note together with any accrued but unpaid interest or other charges shall become immediately due and payable 3 business days after receipt by Maker of said notice. At such time Payee shall be entitled to exercise any remedies that it may have at law, or in equity, in order to collect its debt hereunder including, without limitation, the commencement of legal proceedings against Maker. 10 (b) If an Event of Default shall occur and be continuing, after notice and opportunity to cure, Payee may exercise, in addition to all other rights and remedies granted in this Note and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, Payee, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind to or upon Maker or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of Payee or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Payee shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Maker, which right or equity is hereby waived, to the extent permitted by applicable law, or released. Payee shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Payee hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as Payee may elect, and only after such application and after the payment by Payee of any other amount required by any provision of law need Payee account for the surplus, if any, to Maker. To the extent permitted by applicable law, Maker waives all claims, damages and demands it may acquire against Payee arising out of the exercise by it of any rights hereunder, provided, that nothing contained in this Section 7 shall relieve Payee from liability arising from its gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. Maker shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by Payee to collect such deficiency. (c) The rights, powers and remedies provided herein in favor of Payee shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other rights and remedies in favor of Payee existing at law or in equity and may be exercised concurrently, independently or successively by Payee hereof in such Payee's discretion. SECTION 8 COSTS Maker shall pay all costs of collection, including without limitation reasonable attorneys' fees and legal expenses, incurred by the holder hereof with respect to any default by Maker hereunder or incurred by Payee in endeavoring to collect any amounts properly payable hereunder. Such amounts, until paid by Maker, shall be added to the principal hereof and shall bear interest, from the date of demand for payment therefor through the date of payment thereof, at the default rate of interest specified in clause (c) of Article I above. 11 SECTION 9 MISCELLANEOUS 9.1 Contents of Note. This Note sets forth the entire understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements or understandings among the parties regarding those matters. 9.2 Governing Law; Venue. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts entered into and wholly to be performed within the Commonwealth of Pennsylvania by residents of the Commonwealth of Pennsylvania. Each of the parties hereto hereby consent that any action or proceeding arising out of this Note shall be brought against any of the parties in the courts of the Commonwealth of Pennsylvania, or if jurisdiction is appropriate, in the United States District Court for the Easter District of Pennsylvania at Philadelphia, and each of the parties hereby submits itself to the exclusive jurisdiction and venue of such court for the purposes of any such action or proceeding. 9.3 Amendment, Parties in Interest, Assignment, Etc. This Note may be amended, modified or supplemented only by a written instrument duly executed by each of the parties hereto. If any provision of this Note shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Note shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, legal representatives, successors and permitted assigns of the parties. Nothing in this Note shall confer any rights upon any person other than the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. Any term or provision of this Note may be waived at any time by the party entitled to the benefit thereof by a written instrument duly executed by such party. 9.4 Interpretation. Unless the context of this Note clearly requires otherwise, (a)references to the plural include the singular, the singular the plural, the part the whole, (b) references to any gender include all genders, (c) "or" has the inclusive meaning frequently identified with the phrase "and/or," (d) "including" has the inclusive meaning frequently identified with the phrase "but not limited to" and (e) references to "hereunder" or "herein" relate to this Note. The section and other headings contained in this Note are for reference purposes only and shall not control or affect the construction of this Note or the interpretation thereof in any respect. Section, subsection, Schedule and Exhibit references are to this Note unless otherwise specified. Each accounting term used herein that is not specifically defined herein shall have the meaning given to it under GAAP. Any reference to a party's being satisfied with any particular item or to a party's determination of a particular item presumes (unless expressly stated otherwise) that such standard will not be achieved unless such party shall be satisfied or shall have made such determination in its sole or complete discretion. 9.5 Counterparts. This Note may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 9.6 Headings. The section headings of this Note are for convenience and shall not by themselves determine the interpretation of this Note. 12 9.7 Notices. All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered or sent by US registered or certified mail, return receipt requested or Federal Express or other delivery service that provides for proof of receipt. Any notices shall be deemed given upon the earlier of the date when received at, or the third day after the date when sent by registered or certified mail or the day after the date when sent by Federal Express to, the address set forth below, unless such address is changed by notice to the other Party hereto: 13 If to Payee: AirClic Inc. 512 Township Line Road Building 5, Suite 200 Blue Bell, PA 19422 Attn: John E. Parker With a copy to: Andrew Hamilton, Esq. Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 If to Maker: NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, Florida 33901 Attn: Charles W. Fritz With a copy to: Steven Merrick, Esq. Merrick & Klimek 401 South LaSalle, Suite 1302 Chicago, IL 60605 9.8 Survival of Warranties. The representations and warranties of the parties contained in or made pursuant to this Note shall survive the execution and delivery of this Note. 9.9. Judicial Proceedings. Each party to this Note agrees that any suit, action or proceeding, whether claim or counterclaim, brought or instituted by any party hereto or any successor or assign of any party, on or with respect to this Note or the dealings of the parties with respect hereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. Further, each party waives any right it may have to claim or recover, in any such suit, action or proceeding, any special, exemplary, punitive or consequential damages. MAKER ACKNOWLEDGES AND AGREES THAT THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS NOTE AND THAT PAYEE WOULD NOT EXTEND CREDIT TO MAKER IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS NOTE. 14 IN WITNESS WHEREOF, Maker has executed this Note as of the date above set forth. "Maker" NEOMEDIA TECHNOLOGIES, INC. By: /s/ Charles W. Fritz ---------------------- Name: Charles W. Fritz Title: CEO & President "Payee" AIRCLIC INC. By: /s/ John E. Parker ---------------------- Name: John E. Parker Title: [Signature Page to Secured Promissory Note] 15 EXHIBIT A TO SECURED PROMISSORY NOTE Principal Amount (exclusive of interest thereon) as of __________= $____________ Acknowledged and Agreed to as of this _____ day of _______________by: "Maker" NEOMEDIA TECHNOLOGIES, INC. By:____________________ Name: Title: "Payee", AIRCLIC INC. By:____________________ Name: Title: 16 SCHEDULE A TO SECURED PROMISSORY NOTE LITIGATION 1. NeoMedia Technologies, Inc. v. Digital: Convergence Corporation 2001 Jurisdiction: US District Court for the Northern District of Texas, Dallas Division Type of Claim: Breach of Contract; $3M promissory note due from Digital Convergence 6-24-01, plus interest and attorneys fees Outcome: pending 2. William Goins, III v. NeoMedia Technologies, Inc., Charles Fritz, JJ Keil and John Lopiano 2001 Jurisdiction: Circuit Court for 20th Judicial Circuit for Sarasota County, FL EEOC charge of Racial and Age Discrimination filed with FL EEOC, transferred to Lee County. Type of Claim: Breach of Contract; Fraudulent Inducement; Fraudulent Misrepresentation, Unpaid Wages, Unjust Enrichment; Violation of FL Statute 448.102; Complaint alleges damages in excess of $15,000. Claims for $90k severance; $257K for year 2000 bonus [On 6-14-01 bonus reduced to $98,550 per admin adjustment by comp committee]; unspecified damages for racial/age discrimination; Outcome: pending 3. Christian Raffler v. NeoMedia Technologies, Inc. 2001 Jurisdiction: no action filed (possibly Austria) Type of Claim: Outcome: Summary: Former Employee of Vienna Austria office, Christian Raffler was let go due to cost cutting measures by company by a notice dated April 30, 1999, effective June 30, 1999. Raffler seeks payment for "per diems" incurred while employed, insurance reimbursement, outstanding salary in the amount of ATS 767.004, plus interest and legal costs for a total of ATS 825.280,97 (approx US$53,551.) 4. Year 2000 Bonus plan 2001 Potential claims re: reduction in approved bonuses, per 6-14-01 comp committee meeting. Original payout balance $1,833,721 vs. $687,091 new payout balance for 19 participants. Difference of $1,146,630. as potential claims. Claim by Bill Goins as part of his lawsuit, potential claim by former employee John Mantica. 5. Guatemalan Labor Court proceedings 2001 17 Guatemalan former employees claims for approx $125,000 in severance payments resulting from closing of the NeoMedia Guatemalan's subsidiary office and termination of employees. Guatemalan subsidiary has no money to make these payments and is being dissolved; NEOM engaged accounting firm to collect the assets (computer equipment, etc.) to sell these and distribute the proceeds among the employees. 6. Qode.com, Inc. 2001 Letter dated April 9, 2001 from the successors-in-interest of Qode.com, Inc. (assets acquired by NEOM 3-1-01) alleging breach of rep/warranty; fraud in the inducement re: status of payment of DC license agreement; and anticipatory breach re: NEOM's funding commitments for Qode business unit. Subsequently, bankruptcy proceedings filed against Qode.com, Inc. by Qode.com's creditors. 7-2-01 Tentative settlement proposal between NEOM & Qode, being submitted to the bankruptcy court. 18 SCHEDULE B TO SECURED PROMISSORY NOTE ENCUMBRANCES Florida Secured Party: IKON Office Solutions, 5850 Corporation Circle, Ft. Myers, FL 33905 Date Filed: 03/12/2001 Expiration: 03/12/2006 Description of Secured Property: Canon IC2100 NLQ 01432 Secured Party: Sanwa Leasing Corporation, P.O. Box 7023, Troy, MI 48007 Date Filed: 12/31/1996 Expiration: 12/31/2001 Description of Secured Property: Not available Secured Party: Sanwa Leasing Corporation, P.O. Box 7023, Troy, MI 48007 Date Filed: 01/28/1997 Expiration: 01/28/2002 Description of Secured Property: 1 586 Dell P166 Computer s/n 81K9X; Lease 2-1207476 Secured Party : Sun Microsystems Finance, 5500 Wayzata Boulevard, Suite 725, Golden Valley, MN 55416 Date Filed: 8/24/1998 Expiration: 08/24/2003 Description of Secured Property: Account # 64120933; 1 Model A25-UDB I -9S-256CD Serial # 828F28D5; I Model 2230A; 3 Model 5214A; I Model 6213A; I Model X3iiL; I Model SOLS 2.6 Secured Party: Sanwa Leasing Corporation, P.O. Box 7023, Troy, MI 48007 Date Filed: 04/21/1997 Expiration: 04/21/2002 Description of Secured Property: 586 Dell P133 Notebook S/N 7YNY5 Secured Party: IBM Credit Corporation, P.O. Box 105061, Atlanta, GA 303489 Date Filed: 04/11/1997 Expiration: 04/11/2002 Description of Secured Property: All of Debtor's right, title and interest in and to, whether now owned or hereafter acquired or existing, (a) all equipment and inventory, and all parts thereof, attachments and accessions thereto, products thereof and documents therefor; (b) all accounts, contract rights, chattel paper, instruments, and other obligations of any kind, and all rights in and to all contracts securing or otherwise relating to any of the same; and (c) all substitutions and replacements for all of the foregoing and all proceeds and insurance proceeds of all of the foregoing. 19 Secured Party : Sun Microsystems Finance, 5500 Wayzata Boulevard, Suite 725, Golden Valley, MN 55416 Date Filed: 03/22/1999 Expiration: 03/22/2004 Description of Secured Property: Account #64121823AB; I Model A22UEAIA9L A256CG Serial # FW83740356; I Model X7121A Serial # 9838KNI996; I Model X7033A; 1 Model X1032A Serial # 043344; 1 Model X1032A Serial # 053337; 1 Model X3856A; I Model SG-XDSKOIOA-9G Serial # 836G2491; I Model SG-XDSKOIOA-9G 836G2493; I Model SG-XDSK01OA-9G Serial # 836G2495; I Model SG-XTAP4MM 01 IA Serial # 839GO181 Secured Party : Inter-Tel Leasing, Inc., 6955 Portwest Drive, Suite 190, Houston, TX 77024 Date Filed: 04/11/1997 Expiration: 04/11/2002 Description of Secured Property: AXXESS Telephone System, including all substitutions, modifications, replacements and proceeds thereof Secured Party : Lease Acceptance Corporation, 30955 Northwestern Highway, Farmington Hills, MI, 48334 Date Filed: 10/22/1997 Expiration: 10/22/2002 Description of Secured Property: Computer hardware, software and peripherals of Lease Agreement Number 118000; 2 Proliant 800 6/200-4300 4.3GB HD, Serial Numbers D719BJW30703, D719BJW307; 2 32MB Memory Module for Compaq Work; 2 4/16G, Turbodat DRV, F/DP XL; 20 4MM 120M Data Cortridge I PK 4.OGB; 2 WNT SVR 4.0, 5 CLT, CD; 2 Syncmaster 3 14".28MM Monitor Serial Numbers H8WG901140, HMEG801043; 2 INT Standard-Wide, SCSI-2 ADPT; 1 Proliant 800 6/200-4300 4.3 G13 HD, 3 Serial Number D719BJW30720; I 32MB Memory Module for Compaq work; 1 4/16, Turbodat DRV, F/DP XL; 10 4MM 120M Data Cartridge lPK 4.OGB; 1 6Ne, 17" 1280NI,.28, 75HZ, ES, P&P Serial Number H7NG600490; 1 SCO open server desktop system V5; I SCO open server Development System; I INT Standard-Wide, SCSI ADPT; I SCO Driver Secured Part : Sun Microsystems Finance, 5500 Wayzata Boulevard, Suite 725, Golden Valley, MN 55416 Date Filed: 11/02/1998 Expiration: 11/02/2003 Description of Secured Property: Account #64121823AA; I Model A22UEAIA9L A256CG Serial # FW83740367; I X7121A Serial # 9836KN2531; I Model X7033A; I Model X1032A Serial # 053561; 1 Model X1032A Serial # 053581; 4 Model X3856A; I Model SG-XDSKOIOA-9G Serial # 836G2477; 1 Model SG-XDSKOIOA-9G Serial # 836G2488; I Model SG-XDSKOIOA-9G Serial # 836G2614; I Model SG-XTAP4MM OlOA Serial 838GI801 20 Secured Party : IKON Office Solutions, 5850 Corporation Circle, Ft. Myers, FL 33905 Date Filed: 03/12/2001 Expiration: 03/12/2006 Description of Secured Property: Canon IR5000 NRF 05924 Finisher XCJ12971 Print Board; Canon IR5000 NRF 00150 Finisher XCJ13160 Print Board; Canon 9500 UFL06350 Secured Party : IKON Office Solutions, Inc., 2725 Center Place, Melbourne, FL 32940 Date Filed: 05/12/1997 Expiration: 05/12/2002 Description of Secured Property: Canon 6050 Copier NDK2105 1; Stapler Sorter ZDW53961; Laserclass, 7500 UBZ53160; Canon L4000 Fax ULM16757; Canon L4000 Fax ULM 16753; Laserclass 7500 Cabin; Canon 6016 Copier; Document Feeder ZBV06437; Power Supply Unistapler Sorter ZCCI 1213 Secured Party : Sanwa Leasing Corporation, P.O. Box 7023, Troy, MI 48007 Date Filed: 03/04/1997 Expiration: 03/04/2002 Description of Secured Property: 2 586 Dell Pent Notebooks Serial Numbers 82JCZ, 82JF2 Secured Party: Hewlett-Packard Company Finance & Remarketing Division, 20 Perimeter Summit Blvd., Atlanta, GA 30319 Date Filed: 04/14/00 Expires: 04/14/05 Status: No filing history Description of Secured Property: All of lessee's right title and interest in the equipment now or hereafter leased from Lessor by Lessee pursuant to Financing Agreement Number LISTED BELOW, together with all schedules, amendments, renewals and modifications thereto, and purchase orders executed thereunder, including without limitation, all computer, medical, analytical, instrumentation, all computer data communication and network control equipment, software and firmware, and all additions, accessions, substitutions, attachments, improvements, repairs thereto and therefor, whether currently existing or hereafter arising, and all proceeds of such equipment and financing Agreement (including insurance proceeds). 24326 Secured Part : EMC Corporation, 171 South Street, Hopkinton, MA 01748, assigned 9/01/00 to Fleet Business Credit Corporation, 1 S Wacker Drive, Chicago, IL 60606 Date Filed: 05/11/00 Expires: 05/11/05 Status: No filing history Description of Secured Property: (1) Symmetrix 3830-36; (14) 3030-36M2; (1) MEM2 5120; (2) DP2-FCD2; See Master Lease Agreement Supplement (12154/1); Including but not limited to all replacements, parts, repairs and attachments, incorporated therein or affixed thereto, now owned or hereafter acquired. 21 Illinois Secured Party : Sun Microsystems Finance, 5500 Wayzata Boulevard, Suite 725, Golden Valley, MN 55416 Date filed: 01/20/2000 Description of Secured Property: Invoice # 1945 8 1; 2 Item At 4-UJC I -9S E8/400 128MB/9 I GB/CD 128 CJ, Serial 4's 947H24A9, 947H249D; 4 X7003A Opt Memory 128MB (2*64MB); 2 X1059A OPT SBUS FASTETHERNET 2.0/SW Serial #'s 174523, 174670; 2 X31 I L North American/Asia PWR CRD KT; 2 SOLMS-o7DW9999 Solaris 7 8/99 English Svr; 2 SLSIX-1 10-W999 PC NetLink RTU SS UC E5S-E3500 Secured Party : Sun Microsystems Finance, 5500 Wayzata Boulevard, Suite 725, Golden Valley, MN 55416 Date filed: 06/12/1997 Description of Secured Property: Account #64114193; 2 Model A14-UBA2-IE-128AB Serial #'s 717FODAA, 717FOD89; I Model S5TXI-170-32-PI7 Serial # 716C1343; I Model NETRA-1-3-1-212-Serial # 717FODE4; I Model SOLDC; I Model X350OA; 3 Model X6280A Serial #'s 703G2003, 703G1933, 703GI929; I Model X322A Serial # 9714GN2247; I Model X7002A; I Model X1018A Serial # 044574; 1 Model X5503A Serial # 712G7651; I Model X6003A; I Model X6156A Serial # 9715904588 Secured Party: IBM Credit Corporation, 2707 W. Butterfield Rd., Oak Brook, IL 60521 Original Debtor: Dev-Tech Associates, Inc., 1280 Iroquois Drive, Suite 300, Naperville, IL 60563 Date Filed: 11/20/1992 Description of Secured Property: All of Debtor's right, title and interest in and to, whether now owned or hereafter acquired or existing, (a) all equipment and inventory, and all parts thereof, attachments and accessions thereto, products thereof and documents therefor; (b) all accounts, contract rights, chattel paper, instruments, and other obligations of any kind, and all rights in and to all contracts securing or otherwise relating to any of the same; and (c) all substitutions and replacements for all of the foregoing and all proceeds and insurance proceeds of all of the foregoing. o Amendment Filed on Form UCC-3: 10/27/1995; amend debtor's address to 280 West Shuman Boulevard, Suite 100, Naperville, IL 60563 o Amendment Filed on Form UCC-3: 09/10/1996; amend debtor's name to read Devsys, Inc. o Amendment Filed on Form UCC-3: 10/24/1996; amend debtor's name to read NeoMedia Technologies, Inc. o Amendment Filed on Form UCC-3: 02/19/1997; include additional location to debtor's address: 2201 Second Street, Suite 600, Fort Myers, FL 33901 o Continuation Filed on Form UCC-3: 11/25/1997; continue filing dated 11/20/1992 o Amendment Filed on Form UCC-3: 03/23/1998; amend secured party's zip code to 60523 22 o Amendment Filed on Form UCC-3: 03/29/2000; amend secured party's address to read: P.O. Box 105061, Atlanta, GA 30348-9990 Secured Party: IBM Credit Corporation, 2707 W. Butterfield Rd., Oak Brook, IL 60521 Original Debtor: Devsys, Inc., 280 West Shuman Boulevard, Suite 100, Naperville, IL 60563 Date Filed: 09/10/1996 Description of Secured Property: All of Debtor's right, title and interest in and to, whether now owned or hereafter acquired or existing, (a) all equipment and inventory, and all parts thereof, attachments and accessions thereto, products thereof and documents therefor; (b) all accounts, contract rights, chattel paper, instruments, and other obligations of any kind, and all rights in and to all contracts securing or otherwise relating to any of the same; and (c) all substitutions and replacements for all of the foregoing and all proceeds and insurance proceeds of all of the foregoing. o Amendment Filed on Form UCC-3: 10/24/1996; amend debtor's name to read NeoMedia Technologies, Inc. o Amendment Filed on Form UCC-3: 02/18/1997; include additional location to debtor's address: 2201 Second Street, Suite 600, Fort Myers, FL 33901 o Amendment Filed on Form UCC-3: 03/23/1998; amend secured party's zip code to 60523 o Amendment Filed on Form UCC-3: 03/29/2000; amend secured party's address to read: P.O. Box 105061, Atlanta, 0GA 30348-9990 o Continuation Filed on Form UCC-3: 04/23/2001; continue filing dated 09/10/1996 DuPage County, IL UCC Debtor Search: Clear through June 29, 2001 Lee County, FL UCC Debtor Search: Clear through June 30, 2001 Broward County, FL Secured Part Bank of America, N.A., P.O. Box 31711, Charlotte, NC 24231 Date Filed: 05/11/00 Expires: 05/11/05 Status: No filing history Description of Secured Property: Equipment: Specific Equipment Limited to any and all of Debtor's assets held as equipment which are specifically described in the space below, together with all increases, parts, fittings, accessories, equipment and special tools now or hereafter affixed to any part thereof or used in connection therewith including the following (attach schedule if necessary): Telephone Equipment [Ft. Lauderdale office] 23 PATENTS, TRADEMARKS AND COPYRIGHTS SECURITY AGREEMENT THIS PATENTS, TRADEMARKS AND COPYRIGHTS SECURITY AGREEMENT is made on the 11th day of July, 2001 between NeoMedia Technologies, Inc., Inc., a corporation of the State of Delaware, having an address of 2201 Second Street, Suite 600, Fort Myers, Florida ("Grantor"), and AirClic Inc., a corporation of the State of Delaware., having an office at 512 Township Line Road, Building 5, Suite 200, Blue Bell PA 19422 (the "Lender"). WITNESSETH: WHEREAS, pursuant to a certain Secured Promissory Note dated as of the date hereof (the "Note"), the Lender has agreed to make a loan to the Grantor in the principal amount of up to $2,000,000 (the "Loan"); and WHEREAS, the Grantor owns the United States copyright registrations and applications therefor listed on Schedule A hereto ("Copyrights"), the United States patents listed on Schedule B hereto ("Patents"), and the United States trademark registrations and applications therefor listed on Schedule C hereto ("Trademarks"); and WHEREAS, pursuant to the Note, the Grantor is required to and has conveyed and granted to Lender a collateral security interest in, among other things, all right, title and interest (if any) of the Grantor in, to and under all of the Grantor's Copyrights, Patents and Trademarks, whether presently existing or hereafter arising or acquired, to secure all obligations of the Grantor to Lender; and WHEREAS, capitalized terms used herein but not defined shall have the respective meanings given such terms in the Note. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Grantor does hereby absolutely grant and convey to Lender a collateral security interest in all of the Grantor's Copyrights, Patents and Trademarks, if any, whether presently existing or hereafter arising or acquired: (a) Each of the Copyrights which are presently, or in the future may be, owned by the Grantor, in whole or in part, in the United States, as well as any registrations or applications for a United States copyright registration now or hereafter made with the United States Copyright Office by the Grantor, as the same may be updated hereafter from time to time; (b) Each of the Patents, which are presently, or in the future may be issued to the Grantor, in whole or in part, as the same may be updated thereafter from time to time; and (c) Each of the Trademarks, which are presently, or in the future may be owned by the Grantor, in whole or in part, as well as all registrations or applications for Trademarks now or hereafter owned by the Grantor, as the same may be updated hereafter from time to time. Said security interest includes, without limitation, all proceeds thereof, and all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, in the United States. 1) Grantor covenants and warrants that: (a) It is true and lawful exclusive owner of all the Copyrights listed on Schedule A (if any) and that said Copyrights constitute all the United States Copyrights registered in the United States Copyright Office from 1938 to date, and applications for United States Copyrights that the Grantor now owns; (b) It owns all the Patents listed on Schedule B (if any) and that said Patents constitute all the United States Patents issued to it by the United States Patent and Trademark Office and that the Grantor now owns; (c) It owns all the Trademarks listed on Schedule C (if any) and that said Trademarks constitute all the United States Trademarks registered in the United States Patent and Trademarks Office and applications for Trademarks that the Grantor now owns; (d) The Grantor agrees, at Lender's request and expense, on a semi-annual basis, to execute such additional agreements with respect to any now Patents, Trademarks and/or Copyrights, whether filed or issued, and in which the Grantor hereinafter obtains rights. Except as set forth on Schedule D hereinafter, the Grantor further warrants that it is not aware of any third party claim that any of the aspects of the Grantor's present business operations infringe on any Patent, Trademark or Copyright. The Grantor grants to Lender an absolute power of attorney to sign any document which will be required by the United States Copyright Office or the United States Patent and Trademark Office in order to record the security interests in the Patents, Trademarks and Copyrights; (e) The Patents, Trademarks and Copyrights are subsisting and have not been adjudged invalid or unenforceable; (f) To the best of its knowledge, Grantor owns each of the Patents, Trademarks and Copyrights, free and clear of any liens, charges and encumbrances, including without limitation pledges, assignments, licenses, registered user agreements, and covenants by Grantor not to sue third persons, other than the grant to Lender pursuant to this , subject to (i) any and all liens, claims or encumbrances disclosed in the Note, and (ii) any and all licenses granted thereon to date; (g) To its knowledge, Grantor has the unqualified right to enter into this Agreement and perform its terms; (h) Grantor has used, and will continue to use for the duration of this Agreement, proper statutory notice in connection with its use of the Patents, Trademarks and Copyrights; i) At its own expense, the Grantor shall make timely payment of all post-issuance fees required pursuant to 35 U.S.C. ss.41 to maintain in force rights under each patent, to the extent that Grantor, in the exercise of its reasonable business judgment, deems advisable; (j) The Grantor hereby agrees not to divest itself of any material right under any Copyright, Trademark and/or Patent, which divestiture could have a material adverse effect on Grantor's business, its properties, or its ability to perform its obligations under the Loan Agreement; and (k) The Grantor agrees to promptly, upon receipt of an opinion of counsel, furnish Lender in writing all pertinent information available to the Grantor with respect to any infringement or other violation of the Grantor's tights in any Copyright, Trademark and/or Patent, which infringement or violation could have a material adverse effect on the Grantor, its properties or its ability to perform its obligations under the Loan Agreement and other Loan Documents (as defined in the Loan Agreement). To the extent that the Grantor in the exercise of its reasonable business judgement deems advisable, the Grantor further agrees to take legal action against any Persons infringing upon any Copyright, Trademark and/or Patent to the extent such infringement could have a material adverse effect on the Grantor, its properties or its ability to perform its obligations under the Loan Agreement or other Loan Documents. 2 2) If, before the Obligations have been satisfied in full, Grantor shall obtain rights to any new Trademark or new Copyright, or become entitled to the benefit of any patent for reissue, division continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, then the provisions hereof shall automatically apply thereto and Grantor shall give to the Lender prompt notice thereof in writing. 3) Grantor authorizes Lender to modify Schedule , Schedule B and Schedule C of this Agreement, in writing, to include any future Patents, Trademarks or Copyrights covered hereby. 4) Upon and during the occurrence of any Event of Default under the Note and subject to Grantor's right to cure thereunder: (a) Lender shall have, in addition to all other rights and remedies given to it by this Agreement, the Note, those rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction in which the Patents, Trademarks, or Copyrights may be located, including, without limitation, the right to sue for past, present, and future infringements thereof, and (b) Lender may, in addition to any other remedies which may be available to Lender, without being deemed to have made an election of remedies, and without the assignment hereunder being deemed to be anything less than an absolute assignment, immediately, without demand of performance and without other notice (except as may be set forth below) or demand whatsoever to Grantor, all of which are hereby expressly waived, and without advertisement, sell at public or private sale (or, to the extent required by law, otherwise realize upon in a commercially reasonable manner), all or from time to time, any of the Patents, Trademarks, or Copyrights, or any interest which the Grantor may have therein, and after deducting from the proceeds of sale or other disposition of the Patents, Trademarks, or Copyrights all reasonable expenses (including all reasonable expenses for broker's fees and legal services), may apply the residue of such proceeds to the payment of the Obligations. Any remainder of the proceeds after the payment in full of the Obligations shall be paid over to the Grantor. Notice of any sale or other disposition of the Patents, Trademarks, or Copyrights shall be given to Grantor at least ten (10) business days before the time of any intended public or private sale or other disposition of the Patents, Trademarks, or Copyrights is to be made, which notice Grantor hereby agrees shall be reasonable notice of such sale or other disposition. At any such sale or other disposition, Lender may, to the extent permissible under applicable law, purchase the whole or any part of the Patents, Trademarks, or Copyrights, free from any right or equity of redemption on the part of Grantor, which right and equity of redemption are hereby waived and released. 5) At such time as Grantor shall completely satisfy all of the Obligations, this Agreement shall terminate and Lender shall promptly execute and deliver to Grantor at Grantor's expense all releases and other instruments as may be necessary or proper to release the security interest in and to the Patents, Trademarks, or Copyrights, subject to any disposition thereof which may have been made by Lender pursuant hereto and in accordance with the terms hereof. 3 6) To the extent that Grantor in the exercise of its reasonable business judgement deems it advisable, Grantor shall have the duty, through counsel of its own choosing, to litigate diligently any actions for or of the Patents, Trademarks, or Copyrights pending as of the date of this Agreement or thereafter until the Obligations shall have been paid in full, to file and prosecute opposition and cancellation proceedings and to do any and all acts which are reasonably necessary or desirable to preserve and maintain all rights in the Patents, Trademarks, or Copyrights, Any expenses incurred in connection with the Patents, Trademarks, and Copyrights shall be borne by Grantor. The Grantor shall not abandon any Patents, Trademarks, or Copyrights other than in the ordinary course of business without the consent of Lender, which consent shall not be unreasonably withheld. 7) If Grantor fails to comply with any of its obligations hereunder, Lender may do so in Grantor's name or in Lender's name, but at Grantor's expense, and Grantor hereby agrees to reimburse Lender in full for all expenses, including reasonable attorney's fees, incurred by Lender in protecting, defending and maintaining the Patents, Trademarks, or Copyrights. 8) No course of dealing between Grantor and Lender, nor any failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or privilege hereunder of under the Loan Agreement, or under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 9) All of Lender's rights and remedies with respect to the Patents, Trademarks, or Copyrights, whether established hereby or by the Loan Agreement, or by any other agreement(s) or by law, shall be cumulative and may be exercised singly or concurrently. 10) The provisions of this Agreement are severable, and if any clause of provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 11) This Agreement is subject to modification only by a writing signed by the parties, except as provided elsewhere herein. 12) The benefits and burdens of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. 13) The validity of this Agreement and the rights and obligations of the parties shall be governed by the laws of the State of Delaware. 14) This Agreement and the Note embody the entire agreement and understanding between the Grantor and Lender and supersedes all prior agreements and understandings relating to the subject matter hereof and thereof. 4 WITNESS the execution hereof under seal as of the day and year first above written. ATTEST: NEOMEDIA TECHNOLOGIES, INC. BY: /s/ Marianne Lepera BY: /s/ Charles W. Fritz ------------------- ---------------------- Name: Marianne Lepera Name: Charles W. Fritz Title: Asst Secretary & GC Title: CEO & President AIRCLIC INC. BY: /s/ John E. Parker Name: John E. Parker Title: EVP 5 EX-10.23 10 b317965ex_10-23.txt FORM OF LIMITED RECOURSE PROMISSORY NOTE EXHIBIT 10.23 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS, AND INSTEAD HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS, INCLUDING, BUT NOT LIMITED TO, THE EXEMPTIONS CONTAINED IN SECTION 4(2) AND REGULATION D OF THE SECURITIES ACT. THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD OR TRANSFERRED UNLESS A REGISTRATION STATEMENT HAS BECOME AND IS THEN EFFECTIVE WITH RESPECT TO SUCH SECURITIES, OR THE PROPOSED SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. Limited Recourse Promissory Note US$[DOLLAR VALUE] [LOCATION] [DATE] [PAYOR NAME], (the "Payor"), for value received pursuant to a certain Subscription Agreement (the "Subscription Agreement"), dated as of the date hereof, between the Payor and NeoMedia Technologies, Inc., a Delaware corporation (the "Initial Holder"), hereby promises to pay to the order of the Initial Holder, or its assigns (collectively, the "Holder") at the address set forth in Section 11 hereof, the principal amount of [DOLLAR VALUE] (the "Principal"), plus any accrued and unpaid Interest, in full, on the Maturity Date, except as otherwise provided in Section 6. The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees: 1. Definitions. For the purposes of this Note: (a) "Business Day" means any day that is not a Saturday, Sunday or a legal holiday in the State of New York. (b) "Common Stock" means the common stock, par value $0.01 per share, of the Initial Holder. (c) "Event of Default" shall have the meaning assigned to such term in Section 3. (d) "Interest" means interest on the Principal of this Note, which shall accrue at the rate of 6% per annum, compounded annually, or, following an Event of Default, at the rate of 12% per annum, compounded annually. (e) "Maturity Date" means the earlier to occur of (i) 30 days following the effectiveness of the registration statement on Form S-1 (as the same may be amended), currently filed with the United States Securities and Exchange Commission, by which the Shares are registered for public resale, and (ii) 90 days from the issuance of this Note. (f) "Note" means this limited recourse promissory note. (g) "Sale" means a sale, transfer or other disposition of the Shares. (h) "Shares" means all shares of Common Stock issued to the Payor in consideration of the issuance of this Note and all shares of the capital stock or other property of the Company or its successor (including cash) issued or received in substitution or exchange for, or in respect of, any such shares (including, without limitation, in connection with a dividend, distribution, recapitalization, stock split, combination or a similar event or transaction), other than in connection with a Sale. 2. Limited Recourse. (a) Notwithstanding anything to the contrary in this Note or the Subscription Agreement (as defined in Section 3(a)(i)), in the event of the Payor's breach of the Payor's payment obligations under this Note (in connection with an Event of Default, following the Maturity Date or otherwise), the Holder's recourse against the Payor and the Payor's assets shall be limited to (i) recovery of the Shares then held or owned by the Payor, which, if the Holder is the Initial Holder, shall, in the sole discretion of the Initial Holder, include, without limitation, the cancellation of such Shares without requirement of further notice to the holder of the Shares, (ii) in the event that a Sale has occurred prior to the Maturity Date, recovery of the proceeds of any such Sale, and (iii) in the event of any Sale of a Share prior to the Maturity Date at a price which is less than the Minimum Share Price (as defined in Section 2(b)), the difference in value between the actual consideration received for such share and the Minimum Sale Price. (b) Notwithstanding anything to the contrary in this Note, the Payor hereby covenants and agrees not to effect any Sale (i) at a price of less than US$0.16 per Share (the "Minimum Share Price") or (ii) for consideration other than cash. (c) In the event of the cancellation of any of the Shares by the Initial Holder (i) the aggregate unpaid Principal shall be reduced by an amount equal to US$0.16 per Share so cancelled, and (ii) the aggregate accrued and unpaid Interest attributable to the portion of Principal reduced pursuant to the immediately preceding clause shall be deemed discharged in full. 3. Events of Default. (a) Each of the following shall constitute an Event of Default under this Note: (i) any material breach of or default under any covenant or agreement (including any failure to make any payment of Principal or accrued and unpaid Interest when the same shall become due and payable) to be observed or performed by the Payor for the benefit of the Holder pursuant to this Note or the subscription agreement executed by the Payor in connection with the purchase of the Shares (the "Subscription Agreement"), which such breach or default shall remain uncured and unwaived for a period of five days after written notice thereof is given by the Holder to the Payor and any breach of a representation or warranty of the Payor under the Subscription Agreement; provided, however, that (A) any breach of any representation, warranty, covenant or agreement of the Payor contained in the Subscription Agreement, and (B) any breach of or default under any covenant or agreement regarding Payor's obligations (I) to make any payment of Principal or accrued and unpaid Interest when the same become due and payable under this Note (including pursuant to Section 6(b), or (II) pursuant to Section 2(b), shall be deemed to be a material breach or default; (ii) the Payor shall (A) voluntarily commence any proceeding or file any petition seeking relief under the United States Code or any other Federal or state bankruptcy, insolvency or similar law, (B) consent to the institution of any such proceeding or the filing of any such petition, (C) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Payor or for all or a substantial part of her assets, or (D) make a general assignment for the benefit of creditors; or (iii) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (A) relief in respect of the Payor or of all or a substantial part of her assets, under the United States Code or any other Federal or state bankruptcy, insolvency or similar law, (B) the appointment of a receiver, trustee, custodian, sequestrator, or similar official for the Payor or for a substantial part of her assets, or (C) an order or decree approving or ordering any of the foregoing shall be issued by a court having jurisdiction and continue unstayed and in effect for 60 days. (b) Notwithstanding anything to the contrary in this Note, in case of any Event of Default prior to the Maturity Date, and at any time thereafter during the continuance of such Event of Default prior to the Maturity Date, the Holder may, by written notice to the Payor and subject to the limitations set forth in Section 2(a), declare the Note to be immediately due and payable in full both as to Principal and accrued and unpaid Interest; provided, however, that no notice need be given to the Payor if acceleration is based upon the Events of Default described in clauses (ii) or (iii) of Section 3(a), in either of which cases this Note shall automatically become immediately due and payable, subject to Section 2(a), without requirement of any action on the part of the Holder or the Payor. 4. Extension of Maturity. Notwithstanding anything to the contrary in this Note, should the Principal and accrued and unpaid Interest become due and payable on any day (including, without limitation, the Maturity Date) other than a Business Day, the date upon which such payment is required shall be extended to the next succeeding Business Day, and to such payable amounts shall be added the Interest which has accrued during such extension period at the rate per annum herein specified. 5. Replacement of Note. Upon receipt by the Payor of evidence satisfactory to the Payor of the loss, theft, destruction or mutilation of this Note, and (a) of indemnity reasonably satisfactory to the Payor (in case of loss, theft or destruction only), or (b) upon surrender of this Note (in case of mutilation only), the Payor shall make and deliver a new Note of like tenor in lieu of this Note. Any Note made and delivered in accordance with this Section 5 shall be dated as of the date hereof. 6. Prepayment. (a) The Payor may, in whole or in part, prepay the Principal and accrued and unpaid Interest under this Note, without penalty or charge, upon written notice to the Holder not less than 15 days prior to such prepayment. (b) Notwithstanding anything to the contrary herein, the Payor shall make a payment in reduction of the outstanding Principal and accrued but unpaid Interest immediately following the closing of any Sale. The amount of the payment to be made pursuant to this Section 6(b) shall be equal to the aggregate unpaid Principal plus all accrued but unpaid Interest as of the date of the relevant Sale, multiplied by a fraction (i) the numerator of which is equal to the number of Shares sold in the relevant Sale, and (ii) the denominator of which is equal to the aggregate number of Shares initially purchased by the issuance of this Note which remain in the possession of the Payor immediately prior to the relevant Sale; provided, that, in the event that, in connection with the relevant Sale, all of the Shares or all of the Shares remaining in the possession of the Payor are sold, assigned, transferred or otherwise disposed of, the amount of the payment to be made pursuant to this Section 6(b) shall be equal to the aggregate unpaid Principal plus all accrued but unpaid Interest as of the date of the relevant Sale. 7. Costs and Expenses. The Payor and the Holder shall be responsible for all expenses incurred by such person or entity in connection with the preparation, negotiation, execution, and delivery of this Note. 8. No Waivers by Delay or Partial Exercise. No delay by the Holder in exercising any of his or its powers or rights hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise. 9. Entire Agreement. This Note hereto contains the entire agreement among the Payor and the Holder with respect to the matters contemplated by this Note, and supersedes all prior agreements or understandings among the such persons or entities with respect to the matters contemplated by this Note. 10. Certain Interpretations. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person or entity includes its permitted successors and assigns; and (vi) a reference in this Note to a Section is to the relevant Section of this Note, except as otherwise noted. 11. Notices. All notices, requests and other communications to any party hereunder shall be in writing and sufficient if delivered personally or sent by telecopy (with confirmation of receipt) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Payor: [PAYOR NAME] [PAYOR ADDRESS] [PAYOR FACSIMILE NUMBER] If to the Initial Holder: NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, Florida 33901-3083 Attention: Chief Financial Officer Facsimile: (941) 337-3434 with a copy to: Reitler Brown LLC 800 Third Avenue, 21st Floor New York, New York 10022 Attention: Robert S. Brown, Esq. Facsimile: (212) 371-5500 or to such other address or telecopy number as the party to whom notice is to be given (including a succeeding Holder) may have furnished to the other party in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by mail, when delivered at the address specified in this Section 11 or on the fifth Business Day following the date on which such communication is posted, whichever occurs first. 12. Survival. Unless otherwise expressly provided herein, all representations warranties, covenants and agreements contained in this Note shall survive the execution hereof and the occurrence of the Maturity Date, and shall remain in full force and effect until the payment in full of all Principal and accrued and unpaid Interest under this Note. 13. Benefits of Note. All of the terms and provisions of this Note, including all representations, warranties, covenants and agreements hereunder, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 14. Amendments and Waivers. No modification, amendment or waiver of any provision of, or consent required by, this Note, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the Payor and the Holder. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15. Assignment. This Note and the rights and obligations of the Payor hereunder shall not be assignable or transferable by the Payor without the prior written consent of the Holder, which may be withheld in its sole discretion. Any instrument purporting to make an assignment in violation of this Section 15 shall be void. 16. Enforceability. It is the desire and intent of the parties hereto that the provisions of this Note shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Note shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 17. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAWS PROVISIONS). 18. EFFECTIVENESS OF NOTE. NOTWITHSTANDING ANY TERM OR PROVISION TO THE CONTRARY, THIS NOTE WILL NOT BE DEEMED ISSUED OR EFFECTIVE, NOR WILL INTEREST BE DEEMED TO ACCRUE UNTIL THIS NOTE HAS BEEN RELEASED FROM ESCROW TO THE INITIAL HOLDER IN CONNECTION WITH THE INITIAL HOLDER'S ACCEPTANCE, IN WHOLE OR IN PART, OF THE PAYOR'S SUBSCRIPTION FOR SHARES PURSUANT TO THE SUBSCRIPTION AGREEMENT. 19. Waivers by Payor. The Payor hereby irrevocably waives demand, presentment for payment, notice of dishonor, protest, notice of protest and, except as otherwise provided in Section 3(a), notice of non-payment of this Note. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] In Witness Whereof, the Payor has executed this Note, and the Payor has caused this Note to be issued, as of the date first set forth above, by executing the Signature Page to the related Subscription Agreement and investment Questionnaire. EX-10.24 11 b317965ex_10-24.txt NASDAQ STAFF DETERMINATION LETTER EXHIBIT 10.24 NASDAQ Michael S. Emen Senior Vice President Listing Qualifications (301) 978-8020 By Facsimile and Overnight Mail March 11, 2002 Mr. Charles T. Jensen Vice President, Chief Financial Officer Treasurer and Director NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, FL 33901 Re: NeoMedia Technologies, Inc. (the "Company" or NeoMedia) Nasdaq Symbol: NEOM Dear Mr. Jensen: On November 20, 2001, Staff notified the Company that it did not comply with either the minimum $2,000,000 net tangible assets or the minimum $2,500,000 stockholders' equity requirement for continued listing set forth in Marketplace Rule 4310(c)(2)(B).(1) According to the Form 10-Q for the period ended September 30, 2001, Staff determined that the Company's net tangible assets and stockholders' equity were each $1,331,000.(2) The Company reported net losses from continuing operations of ($5,409,000), ($10,472,000), and ($11,495,000), in its annual filings for the years ended December 31, 2000, 1999, and 1998, respectively. Staff determined that the Company's market capitalization for its common stock was $2,212,688,(3) as of November 16, 2001 and $3,319,033(4) on March 8, 2002. (1) Marketplace Rule 4310(c)(2)(B) states that "For continued inclusion, the issuer Shall maintain: (i) stockholders' equity of $2.5 million; (ii) market capitalization of $35 million; or (iii) net income of $500,000 in the most recently completed fiscal year or two of the last three most recently completed fiscal years." In June 2001, the SEC approved certain changes to Nasdaq's continued listing standards. Among other things, the new rules change the minimum $2,000,000 net tangible assets requirement for continued listing on The Nasdaq SmallCap Market to a minimum $2,500,000 in stockholders' equity requirement. To implement this change, companies listed as of May 1, 2001, will have until November 1, 2002, to achieve compliance with the minimum equity standard. In the meantime, companies which do not meet the new equity listing standard may continue to qualify for continued inclusion under the minimum net tangible assets standard (2) Net tangible assets consists of total assets (including the value of patents, copyrights and trademarks), less goodwill, mezzanine items, and total liabilities. In this case, Staff calculated the Company's net tangible assets as follows: $9,245,000 total assets, less $7,914,000 total liabilities, equals $1,331,000 net tangible assets. (3) The calculation is based on 15,804,917 shares outstanding as of October 31, 2001, multiplied by the closing bid price of $0.14. (4) The calculation is based on 15,804,917 shares outstanding as Of October 31, 2001, multiplied by the closing bid price of $0.21 Mr. Charles T. Jensen March 11, 2002 Page 2 Based on Staff's review, the materials submitted and subsequent conversations with the Company, we have determined to deny the Company's request for continued listing on The Nasdaq SmallCap Market. The Company stated that its financial advisor SBI-E2 Capital (USA) Inc.(5) had identified "accredited investors" to "purchase" in two tranches, an aggregate of 29 million shares of the Company's common stock for gross proceeds of $4.93 million. The offering, which is not a firm commitment, is structured such that an investor receives shares of NeoMedia's common stock in exchange for a promissory note (6) to the Company. To date, 19 million of the shares have been subscribed for, and, at a Special Meeting on December 11, 2001,(7) the Company's shareholders approved the issuance and sale of up to 29 million shares representing 63% of the Company's outstanding common stock, in exchange for these "limited recourse" promissory notes.(8) In addition, the Company has proposed to settle its past due vendor obligations totaling $486,000 for a combination of cash and common stock.(9) However, Staff does not believe that the Company's plan will allow it to sustain compliance with Nasdaq's continued listing requirements. According to the unaudited financial statements included in its submission, the Company will report stockholders' equity of ($10,000) for the fiscal year ended December 31, 2001, and a loss of $1.3 million for the quarter then ended. Given its record of losses, even if the Company successfully settles all its past due vendor obligations in exchange for stock, and places all 29 million shares(10), raising gross proceeds of $4.93 million, Staff believes that the Company will report stockholders' equity of only $2.4 million at June 30, 2002.(11) If the Company's losses continue at the current rate, ($496,000 per month), the offering will be insufficient to allow it to maintain compliance beyond June 30, 2002. Further, to date the Company has only placed 19 million shares for gross proceeds of $3.23 million and Staff has no assurance that the second tranche of 10 million shares will be issued at the same terms, if at all. Moreover, once the shares in this private placement become registered,(12) the note holders may sell their shares in the open market to satisfy their obligations (5) SBI E2-Capital (USA), Inc. is a member of the SoftBank Investment Group. (6) The notes are priced at $0.17 per share, accrue interest at 6% per year and mature three months from the date of issuance. On March 5, 2002, the closing bid price of the Company's common stock was $0.24. Each promissory note will provide for a mandatory prepayment toward the outstanding principal amount of the note upon any sale of shares purchased with such promissory note. (7) See Amended Proxy Statement - Notice of Adjournment filed on November 27, 2001. (8) According to the Company's amended Proxy Statement filed on November 27, 2001, the Company's sole remedy in a default would be to cancel the shares. (9) As of February 12, 2002, the Company confirmed that five of eleven letters of agreement had been signed by the vendors. (10) To date, only 19,000,000 of these shares have been subscribed for. (11) Stockholders' equity at June 30, 2002, calculated as, projected ($10,000) in stockholders' equity at December 31, 2001, plus $4.93 million gross proceeds, plus $486,000 (assuming vendor debt is exchanged for equity), minus $3.0 million ($1.5 million burn rate per quarter multiplied by 2), equals $2,406,000 in stockholders' equity. (12) On November 16, 2001, the Company filed an Amended Registration Statement on Form S-1 to register these shares. Staff understands that this Registration Statement has not been, declared effective. 2 Mr. Charles T. Jensen March 11, 2002 Page 3 to the Company. Staff is concerned that such sales and the related "overhang" could apply downward pressure on the Company's current stock price, thus affecting its ability to achieve compliance with the minimum bid price requirement and possibly limiting its ability to raise additional funds in the future. The Company also stated that on August 31, 2001, it signed a letter of intent with The Finx Group, Inc.(13) ("Finx") for the sale of its Qode Business Unit ("Qode") for 500,000 Finx shares. However, the Company has verbally confirmed that the proposed sale transaction is currently "on hold". Moreover, Staff understands that Qode's assets are already pledged under a $500,000 secured note, which was due and payable to AirClic, Inc. by January 11, 2002. In light of this, Staff has no assurance that the Company can execute a definitive agreement or sell its Qode Business Unit as anticipated. In view of the foregoing, Staff has determined that the Company did not provide a definitive plan evidencing its ability to achieve near term compliance with the continued listing requirements or sustain such compliance over an extended period of time. Accordingly, the Company's securities will be delisted from The Nasdaq SmallCap Market at the opening of business on March 19,2002. In addition, our records indicate that the Company has not yet paid its listing of additional shares fees of $5,253.80 and annual fees of $8,000.00, which were due as of October 31, 2001 and January 24, 2002,(15) respectively, in accordance with Marketplace Rule 4500 Series. Therefore, the Company does not comply with Marketplace Rule 4310(c)(13) (16) and it must either pay the fees within the next seven calendar days or disclose this as an additional basis for delisting in its press release as described below. If the Company determines to pay the fees prior to the issuance of its press release, it must provide documentation to the Hearings Group evidencing payment. (13) Currently trading on the Over The Counter Bulletin Board under ticker symbol FXGP. As of March 6, 2002, the closing bid price was $0.14. (14) According to the Company's Form 10-Q for the period ended September 30, 2001, on July 3, 2001, NeoMedia signed a non-binding letter of intent with AirClic, Inc. to cross-license both companies' intellectual property. Subsequently, on September 6, and October 30, 2001, AirClic filed two suits against the Company for breach of contract and to expedite repayment of its $500,000 note and allegations that the Company's patents are invalid and unenforceable. On February 1, 2002, the Company confirmed that the note has not been repaid. (15) The fees are due immediately upon receipt of the invoice and are now over 30 days past due. To satisfy the Company's outstanding fee balance, please reference your customer number, ISR1002677, and invoice numbers 01NLAS006039 and 02NA002216 and submit payment (separate from any Hearings fee) by wire transfer as follows: Bank: Riggs National Bank, Washington, D.C. ABA Number: 054000030 Beneficiary: Nasdaq Account Number: 08362559 (16) Marketplace Rule 4310(c)(13) states that "[t]he issuer shall pay the Nasdaq Issuer Quotation fee described in the Rule 4500 Series." 3 Mr. Charles T. Jensen March 11, 2002 Page 4 Finally, Staff has concerns about the significant pending litigation against the Company. According to its Form 10-Q for the period ended September 30, 2001, in April 2001, the former President filed suit against the Company and several of its directors, alleging fraud and breach of contract. In addition, in May 2001, three of Qode.com, Inc's creditors have filed an involuntary bankruptcy petition, followed by other lawsuits filed against the Company in September and October 2001 (See Footnote 14). Given the Company's current financial condition, the uncertainty regarding the outcome of these lawsuits could further limit the Company's ability to regain compliance. Should the Company choose to appeal this determination, Marketplace Rule 4815(b) requires that the Company, as promptly as possible but no later than seven calendar days from the receipt of this letter, make a public announcement through the news media which discloses receipt of this letter and the Nasdaq rules upon which it is based.(17) The Company must provide a copy of this announcement to Nasdaq's StockWatch Department and Listing Qualifications Hearings Department (the "Hearings Department") at least 10 minutes prior to its public dissemination.(18) For your convenience, we have enclosed a list of news services. In the event the Company does not make the required public announcement, Nasdaq will halt trading in its securities, even if the Company appeals Staff's determination to a Listing Qualifications Panel (the "Panel") as described below. Please be advised that Marketplace Rule 4815(b) does not relieve the Company of its obligation to assess the materiality of Staff s determination as it relates to the federal securities laws. This rule also does not provide a safe harbor under the federal securities laws. Accordingly, the Company should consult with securities counsel regarding, its disclosure and other obligations mandated by law.(19) The Company may appeal Staffs determination to the Panel, pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800 Series. A hearing request will stay the delisting of the (17) The Company must ensure that the full text of the required announcement is disseminated publicly. The Company has not satisfied this requirement if the announcement is published as a headline only or if the news service determines not to publish the full text of the story. (18) This notice should be provided to the attention of Nasdaq's StockWatch Department (telephone: 240/386-6046; facsimile: 240/386-6047), 9509 Key West Avenue, Rockville, Maryland, 20850, and to Nasdaq's Hearings Department (telephone: 301/978-8079; facsimile: 301/978-8080), 9600 Blackwell Road, Third Floor, Rockville, Maryland 20850. (19) Nasdaq cannot render advice to the Company with respect to the format or content of the public announcement. The following is provided only as a guide that should be modified following consultation with securities counsel: the Company received a Nasdaq Staff Determination on (DATE OF RECEIPT OF STAFF DETERMINATION) indicating that the Company fails to comply with the (NET TANGIBLE ASSETS, MINIMUM BID PRICE, MARKET VALUE OF PUBLIC FLOAT, FILING, etc.) requirement(s) for continued listing set forth in Marketplace Rule(s), and that its securities are, therefore, subject to delisting from (The Nasdaq National/SmallCap Market). The Company has requested a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination. There can be no assurance the Panel will grant the Company's request for continued listing. 4 Mr. Charles T. Jensen March 11, 2002 Page 5 Company's securities pending the Panel's decision. Hearing requests should not contain arguments in support of the Company's position. The Company may request either an oral hearing or a hearing based solely on written submissions. The fee for an oral hearing is $5,000; the fee for a hearing based on written submissions is $4,000. Please note that the hearing fee is non-refundable and that the check must be made payable to "The Nasdaq Stock Market, Inc.". The request for a hearing and a copy of the check must be received by the Hearings Department no later than 4:00 p.m. Eastern Time March 18, 2002. The request must be in writing and faxed, with a copy of the check, to (301) 978-8080, with the original request sent to: David A. Donohoe, Jr. Chief Counsel The Nasdaq Stock Market, Inc. 9600 Blackwell Road, Third Floor Rockville, MD 20850. The Company must send the enclosed Hearing Fee Payment Form with its payment to: If by Regular Mail(20) If by Courier/Overnight - --------------------- ----------------------- The Nasdaq Stock Market, Inc. The Nasdaq Stock Market, Inc P.O. Box 7777-W9740 or W9740 Philadelphia, PA 19175-9740 C/O Mellon Bank, Rm 3490 701 Market Street Philadelphia, PA 19106 Please note that the delisting will be stayed only if the Hearings Department (the Rockville, MD location) receives the Company's hearing request on or before 4:00 p.m. Eastern Time on March 18,2002. If you would like additional information regarding the hearing process, please call the Hearings Department at (301) 978-8203. Marketplace Rule 4890 prohibits communications relevant. to the merits of a proceeding under the Marketplace Rule 4800 Series between the Company and the Hearings Department unless Staff is provided notice and an opportunity to participate. In that regard, Staff waived its right to participate in any oral communications between the Company and the Hearings Department. Should Staff determine to revoke such waiver, the Company will be immediately notified, and the requirements of Marketplace Rule 4890 will be strictly enforced. - ----------------------------- (20) The P.O. Box address will not accept courier or overnight deliveries. 5 Mr. Charles T. Jensen March 11, 2002 Page 6 If you have any questions, please contact Douglas McKerney, Associate Director, at (301) 978-8011 or Moira Keith, Senior Analyst, at (301) 978-8052. Very truly yours, /s/ Michael S. Emen Enclosure 6 News Services List Dow Jones News Wire Spot News Harborsidc Financial Center 800 Plaza Two Jersey City, NJ 07311-1199 (201) 938-5400 (201) 938-5600 FAX Businesswire 40 E. 52nd Street 14th Floor New York, NY 10022 (212) 752-9600 (212) 752-9698 FAX Bloomberg Business News Newsroom P.O. Box 888 Princeton, NJ 08540-0888 (609) 750-4500 (609) 497-6577 FAX Reuters Corporate News Desk 199 Waters Street, 10th Floor New York, NY 10038 (212) 859-1600 (212) 859-1717 FAX PR Newswire 810 70th Avenue, 35th Floor New York, NY 10019 (800) 832-5522 (800) 793-9313 FAX 7 Hearing Fee Payment Form Please complete this form legibly and submit it with your 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 - ------------ The Nasdaq Stock Market, Inc. P.O. Box 7777-W9740 Philadelphia, PA 19175-9740 Courier/Overnigbt - ----------------- The Nasdaq Stock Market, Inc. W9740 C/O Mellon Bank, Rm 3490 701 Market Street Philadelphia, PA 19106 Please note that the P.O. Box address will not accept courier or overnight deliveries. 8 EX-10.25 12 b317965ex_10-25.txt REVISED WARRANT EXHIBIT 10.25 NEOMEDIA T E C H N O L O G I E S April 3, 2002 TO: 1998 Stock Option Plan Option Holder RE: Option Repricing Dear Option Holder: This is to advise you that the Board of Directors of the Company has adopted a program to encourage the exercise of options outstanding under the Company's 1998 Stock Option Plan (the "Plan"). Under the program, the exercise price of each outstanding option under the Plan of the Company (the "Plan"), to the extent then exercisable in accordance with its terms, has been repriced to a price equal to the greater of: 50% of the last sale price of the Company's Common Stock on the NASDAQ SmallCap Market on the trading date immediately preceding the date of exercise, or $0.12, provided the option is exercised during the period beginning on the date hereof and ending the earlier of October 2, 2002, or the expiration date of your option (the "Repricing Period"). The repricing is subject to the following: Alpine Securities ("Broker"), a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the "1934 Act"), has agreed to assist in the exercise of vested options under the Plan during the Repricing Period. An optionee who desires to exercise his or her option will open an account with the Broker with the understanding that the timing of the exercise will be coordinated with the Broker and be based on the anticipated resale through the Broker of the shares acquired upon exercise and the remittance by the Broker to the Company from the resale proceeds of the exercise price, unless an optionee makes direct payment to the Company of the exercise price for the shares being acquired. Upon expiration of the Repricing Period, to the extent an option under the Plan has not been exercised, the option terms will continue in full force and effect as though the repricing had not been effected. By executing this letter, you agree to exercise the option and to sell the underlying shares of Common Stock as provided above and you acknowledge that, by exercising the option and selling the underlying shares of common stock, you will be foregoing any future appreciation in the value of the underlying common stock. An optionee who is an officer, director or beneficial holder of at least 10% of the outstanding shares of Common Stock of the Company and who participates in the Program should note that under Section 16 of the 1934 Act such optionee will be required to pay to the Company any gain resulting from the exercise of the Option and the sale of shares acquired under this program. Your attention is directed to the disclosures attached to this letter regarding access to public information about the Company and regarding risks of an investment in the Company. If you agree to participate in this Repricing Program according to the terms provided above, you must execute the additional copy of this letter and return it in the enclosed envelope by no later than thirty (30) days from the date of this letter. If a signed letter in not received by that date you will be deemed to have determined not to participate. Very truly yours, NEOMEDIA TECHNOLOGIES, INC. By:__________________________ William E Fritz Secretary OPTION HOLDER ACCEPTANCE I agree to participate in the Option Repricing Program on the above terms. Option Holder (exact name as indicated on Option): By: -------------------------------------------- Print Name: ----------------------------------- EX-23.2 13 b317965ex_23-2.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 Consent of Independent Certified Public Accountants As independent certified public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP Tampa, Florida, April 17, 2002 EX-23.3 14 b317965ex_23-3.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.3 Consent of Independent Certified Public Accountants We consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 21, 2000, except for the seventh paragraph of Note 8, as to which the date is June 30, 2001,with respect to the financial statements of Qode.com, Inc. as of December 31, 1999 and for the period from March 29, 1999 (inception) through December 31, 1999 included in the Registration Statement (Amendment No.2 to Form S-1 No. 1022701) and related Prospectus of Neomedia Technologies, Inc. for the registration of 28,773,860 shares of its common stock. /s/ Ernst & Young LLP West Palm Beach, Florida April 19, 2002 EX-23.4 15 b317965ex_23-4.txt CONSENT OF STONEFIELD JOSEPHSON LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS - ------------------------------------------------------------------------------- To the Board of Directors Neomedia Technologies, Inc. We consent to the use of our Independent Auditors' Report dated March 28, 2002, covering the consolidated financial statements of NeoMedia Technologies, Inc. as of December 31, 2001 and for the year then ended, in the Form S-1 registration statement to be filed with the Commission on approximately April 19, 2002. We also consent to the reference to us as experts in matters of accounting and auditing in this registration statement. /s/ Stonefield Josephson, Inc. Irvine, California April 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----