-----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, RZTVU5yzP/S6wp6CMKieWRuL7re18sHb/98JrvIGlmiMWi6eFaLryAY5phfstsdc jMEM1ICBxZHSVrlMI8075w== 0001016843-98-000167.txt : 19980401 0001016843-98-000167.hdr.sgml : 19980401 ACCESSION NUMBER: 0001016843-98-000167 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-21743 FILM NUMBER: 98580204 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 10KSB40 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM 10 - KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ___ TO ___ COMMISSION FILE NUMBER 0-21743 NEOMEDIA TECHNOLOGIES, INC. -------------------------------------------- (Name of Small Business Issuer in Its Charter) DELAWARE 36-3680347 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2201 SECOND STREET, SUITE 600, FORT MYERS, FLORIDA 33901 - -------------------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number (Including Area Code) 941-337-3434 Securities Registered Under Section 12(b) of the Exchange Act: NONE Securities Registered Under Section 12(g) of the Exchange Act: TITLE OF EACH CLASS COMMON STOCK, PAR VALUE $.01 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X] Issuer's consolidated revenue for its most recent fiscal year was $24,434,000. The aggregate market value of the voting stock held by non-affiliates of the issuer based on the price at which shares of common stock closed on March 16, 1998 was $35,911,097. As of March 16, 1998, there were outstanding 8,319,732 shares of the issuer's Common Stock. PART I ITEM 1. BUSINESS GENERAL ORGANIZATIONAL HISTORY. The Registrant, NeoMedia Technologies, Inc. ("NeoMedia"), was incorporated under the laws of the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech Associates, Inc. ("Dev-Tech"), NeoMedia's predecessor, which was organized in Illinois in December, 1989. In March, 1996, Dev-Tech's common stock was split, with an aggregate of 2,551,120 shares of common stock being issued in exchange for the 164 then issued and outstanding shares of common stock. On August 5, 1996, NeoMedia acquired all of the shares of Dev- Tech in exchange for the issuance of shares of NeoMedia's common stock to Dev-Tech's stockholders ("Dev-Tech Merger"). Each stockholder of Dev-Tech received one share of NeoMedia's common stock in exchange for one share of Dev-Tech's common stock. An aggregate of 2,551,120 shares of NeoMedia's common stock were issued in the exchange. The Dev-Tech Merger was effected under applicable provisions of the Internal Revenue Code as a tax-free transaction to the corporations and stockholders. As a result of the Dev-Tech Merger, holders of options and warrants to purchase Dev-Tech's common stock have the right to purchase NeoMedia's common stock. As an additional result of the Dev-Tech Merger, NeoMedia is the successor to the business and operations of Dev-Tech. In November, 1996, a reverse stock split was effected whereby each NeoMedia shareholder received .90386 shares of common stock for each one share of common stock then owned. In November, 1996, Dev-Tech Migration, Inc., an Illinois corporation ("DTM") and an affiliate of Dev-Tech, was merged into a subsidiary of NeoMedia. DTM provides migration services. Migration services consist of adapting computer software that operates only with a specific brand of hardware and operating and data base software (called a "legacy system"), such as Wang, to operate with most, if not all brands of hardware and operating software (called an "open system platform" or an "open system environment"). Management determined that DTM's services complimented Dev-Tech's services as a systems integrator, and that the synergies between the two companies would be beneficial. Accordingly, on November 20, 1996, DTM was merged ("Migration Merger") into NeoMedia Migration, Inc. ("Migration), a wholly-owned subsidiary of NeoMedia in exchange for the issuance of shares of NeoMedia's common stock to Charles W. Fritz, the sole stockholder of DTM and a principal shareholder, officer and director of NeoMedia. Mr. Charles Fritz received an aggregate of 827,525 shares of common stock on the basis of one share of DTM's common stock for .90386 share of NeoMedia's Common Stock. As a result of the Migration Merger, holders of options to purchase DTM common stock have the right to purchase NeoMedia's common stock. Accordingly, an aggregate of 330,816 shares of NeoMedia's common stock have been reserved for issuance upon exercise of such options. The Migration Merger was also effected under applicable provisions of the Internal Revenue Code as a tax free transaction to the corporations and Mr. Fritz. As a result of Migration Merger, Migration is the successor to the business and operations of DTM. These two mergers were accounted for in a manner similar to the pooling of interests method of accounting using historical book values rather than fair market value as all entities involved were under common control. In August, 1996, Migration formed a wholly-owned subsidiary, Distribuidora Vallarta, S.A., a Guatemalan corporation where NeoMedia employs computer software developers and system integrators. On September 25, 1997, in accordance with a Stock Purchase Agreement (the "Allegiant Merger") entered into between the parties, NeoMedia acquired from George G. Luntz and Gerald L. Willis all of the stock in Allegiant Legacy Solutions, Inc. ("Allegiant"), which was founded on February 16, 1996. Allegiant primarily sells licenses to proprietary software tools (including "ADAPT/2000") that identify, seek and automatically correct date data that is stored in various formats across both program code and specific data files. In addition to converting legacy systems written in COBOL computer language to comply with the Year 2000 requirements, ADAPT/2000 works to convert 1 other restrictive source and application codes, such as fractions to a decimal measurement system and monetary systems such as the impending European Economic Community's Eurodollar. Mr. Luntz and Mr. Willis received an aggregate of 1,070,000 shares of authorized, but unissued, common stock of NeoMedia. 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. Mr. Luntz entered into an employment agreement with NeoMedia and Mr. Willis entered into a consulting agreement with NeoMedia. The Allegiant Merger was accounted for as a pooling of interests, and accordingly, all financial information has been restated as if the entities were combined for all prior periods. On December 22, 1997, Allegiant was dissolved and merged into NeoMedia. Unless the context indicates otherwise, all references herein to "NeoMedia" or the "Company" mean and refer to the Registrant and its wholly-owned subsidiaries. INITIAL PUBLIC OFFERING. On November 25, 1996, NeoMedia completed an initial public offering of 1,700,000 units at $6.00 per unit (the"IPO"). Each unit consisted of one share of common stock, $.01 par value, and one five-year redeemable common stock purchase warrant ("Warrant"). The common stock trades on The Nasdaq Stock Market/SM/ under the symbol "NEOM," and until December 18, 1997, the warrants were traded under the symbol "NEOMW." Of the 1,700,000 units of NeoMedia offered, 1,235,000 shares of common stock and 1,700,000 warrants were sold by NeoMedia and 465,000 shares of common stock were sold by certain stockholders of NeoMedia (the "Bridge Financing Selling Stockholders"). NeoMedia did not receive any of the proceeds from the sale of common stock by the Bridge Financing Selling Stockholders. On January 16, 1997, an additional 255,000 units were sold by NeoMedia upon the exercise by Joseph Charles & Associates, Inc., the representative of the underwriters in the IPO ("Joseph Charles"), of its option to cover over-allotments in the IPO. On November 10, 1997, NeoMedia announced the redemption of all of its outstanding publicly-traded warrants. The warrant holders had until December 18, 1997 to convert each warrant to a share of common stock at an exercise price of $7.375 or to sell the warrant. Any warrants outstanding on December 18, 1997 were redeemed by NeoMedia for $.05 per warrant. Of the 2,700,938 warrants outstanding, 1,662,633 warrants were exercised for total proceeds to NeoMedia of $12.3 million, and 1,038,305 warrants were redeemed by NeoMedia at $.05 per warrant, or a total of $52,000. BRIDGE FINANCING PRIVATE PLACEMENT. Prior to the IPO, in August 1996, NeoMedia consummated the sale of an aggregate of $2,975,000 principal amount of 10% Unsecured Subordinated Convertible Promissory Notes, due September 30, 1997 (the "Bridge Promissory Notes"), in a private placement to certain investors (the "Bridge Financing Private Placement"). On November 23, 1996, NeoMedia prepaid an aggregate of $262,500 principal amount of the Notes. Upon consummation of the IPO, the Bridge Promissory Notes were automatically converted for each $50,000 principal amount into 13,750 shares of common stock and 13,750 warrants. Since $2,712,500 aggregate principal amount of Notes were outstanding following such prepayment, upon the consummation of the IPO, the Bridge Promissory Notes were automatically converted into an aggregate of 745,938 shares of common stock of NeoMedia and 745,938 warrants, and the Bridge Promissory Notes were no longer outstanding. 465,000 of the converted common shares were sold in IPO and the remaining 280,938 converted common shares were retained by the holders of the converted common shares (the "Bridge Financing Selling Stockholders"). BUSINESS OVERVIEW NeoMedia provides computer software and consulting services: * through its INTELLIGENT DOCUMENT/TM/ SOLUTIONS UNIT ("IDOCS//TM//") to embed active data elements in standard printed documents or on physical objects for the purpose of launching computer programs and creating automated links to the World Wide Web; 2 * through its DOCUMENT SYSTEMS SOLUTIONS UNIT to assist clients in optimizing the creation, production and management of printed documents and printed document processes; and * through its YEAR 2000 / MIGRATION SOLUTIONS UNIT to enable and assist clients to implement mass changes in computer software and hardware systems, including (i) identifying, seeking and automatically correcting restrictive source and application fields which store data, including among other items, dates (adding two digits to a two-digit date field when four digits are required to correct the Year 2000 problem), stock prices (converting stock prices from a fractional to a decimal measurement system) and European currencies (converting to the new European Monetary Unit of Measure, commonly known as the "Eurodollar"), and (ii) conversions from legacy to open systems. NeoMedia currently offers its services and products through its three principal business units - the Intelligent Document//TM// Solutions Unit, the Document Systems Solutions Unit and the Year 2000 / Migration Solutions Unit which, although separate in name, often function as a team in providing solutions for its customers. As part of the services provided in connection with the solutions it offers, NeoMedia often recommends, specifies, supplies and installs equipment and software products from third-party suppliers, many of whom have strategic alliances with NeoMedia. NeoMedia acts as a re-marketer of equipment and software products for a number of suppliers, such as IBM Corporation, Sun Microsystems Computer Company, Xerox Corporation, Symbol Technologies, Inc. and Oracle Corporation, and, to date, has generated the largest portion of its revenue from these activities. INTELLIGENT DOCUMENT(/TM/) ("IDOCS//TM//") SOLUTIONS UNIT NeoMedia has developed its own technology, and has rights to use the technology of others, to generate printed documents and enhance physical objects which can be automatically "read" by machines, such as computers equipped with scanners and appropriate software. These "machine readable" documents or physical objects incorporate printed codes which contain thousands of bytes of information, including computer programs rendering them functionally equivalent to a computer floppy disk. With this functionality, a user may access additional information about, assess validity of, or determine authenticity of, such document or object. These codes are referred to in the industry as "high capacity symbologies" and "multi-dimensional" or "two-dimensional" bar codes. Two-dimensional bar code technology has been thoroughly designed, developed and tested during the past decade. NeoMedia believes its technology is broad and generally innovative enough to be applied to a variety of industries including information management services, banking and financial services, health care and pharmaceuticals, government services, publishing, advertising, gaming, travel and entertainment. To date, a variety of applications have been commercially introduced in the United States and abroad, including fraud-proof negotiable instruments ("Secure Documents"), traceable shipping documents, and public and medical identification cards. NEOMEDIA'S IDOCS/TM/ TECHNOLOGY LINKS THE WORLDS OF PRINT AND ELECTRONIC MEDIA. Printed documents provide the basis and infrastructure for formal communication and commerce worldwide. In addition, the generation of printed documents has increased significantly, not decreased, with the adoption of electronic data processing systems during the past half century. However, the improvement in processes to generate printed documents has been a one way street from electronic media to a printed form. The process to re-convert human readable text to machine readable form, which is required in all business operations, has been labor intensive, exceedingly difficult and often impossible. Therefore, management believes among other applications that NeoMedia's technology can be used in all businesses to increase operational efficiencies by reducing manual re-entry of data for business transaction document and record management purposes. Management believes, therefore, its Intelligent Documents//TM// technology will provide the industry standard for linking the worlds of print and electronic media. Furthermore, NeoMedia will label any printed document or physical object incorporating its technology as "IDOCs//TM// Enabled". 3 HIGH CAPACITY SYMBOLOGIES: PRESERVING MACHINE READABLE INFORMATION IN HUMAN READABLE PRINT DOCUMENTS. The use of high capacity symbologies is today the most effective and efficient means of transmitting printed information between computers. High capacity symbologies are data communications protocols which allow the preservation and communication of virtually all machine readable data represented as highly structured patterns on conventional print media. These patterns can be decoded using conventional document scanning devices and appropriate software. The result is a system which literally functions as a "modem" for print, virtually eliminating the need for manual or optical character recognition ("OCR") conversion while providing 100% accuracy and preserving the "latent" elements previously available only in the electronic data processing environment. It is common in business and government operations to take information stored in an electronic media format and print it into human readable form and then re-enter the same information back into electronic format. This process of printing and re-entering into electronic format often occurs multiple times since the information in the electronic format must be available for multiple parties or business departments in traditional human readable print in addition to its original electronic format. Text conversion from printed "human readable" form to a machine readable format can be accomplished through either manual re-entry or through the use of OCR software contained in scanning devices. Neither manual transcription nor the use of scanning devices are an efficient or effective method of conversion. Manual transcription is both labor intensive and error prone. Scanning devices are, at best, 98% efficient which is not suitable for transcription of un-proofed text and is potentially disastrous for the conversion of documents containing numerical information. Furthermore, neither method can fully restore a print document to its original machine readable form which often contains non-printable "latent" information, such as spreadsheet formulas, database references, embedded programs and multi-media data. In contrast to traditional "first generation" linear bar codes which, due to space limitations, only hold up to 40 characters, the high capacity symbologies used in Intelligent Documents//TM// convey significantly greater amounts of information - up to 2,000 characters in single symbols and tens of thousands when multiple symbols are used. In addition, unlike traditional linear bar codes, high capacity symbologies are not limited to storing character information but can also convey pure binary data including formatting information, charts and graphs, multi-media elements such as color photographs and audio and fully executable programs and macros. High capacity symbologies, in conjunction with other Intelligent Document//TM// software technology that NeoMedia has developed or licensed to use, can also be used to automatically link any printed document, such as books, newspapers, magazines, invoices and cards to on-line sources of computer information including those available through the Internet and the World Wide Web. SERVICES AND PRODUCTS. NeoMedia either currently provides or plans to provide the following Intelligent Document//TM// service and software products: /BULLET/ TECHNOLOGY AND SOLUTIONS CONSULTING are engagements where NeoMedia consults with clients to advise them on general capabilities of Intelligent Document//TM// technology and specific advantages and limitations of different implementations, including custom solution designs and impact studies to assist them in their businesses. /BULLET/ SYSTEMS DEVELOPMENT AND INTEGRATION is the design, development, implementation and service of Intelligent Document//TM// systems and applications for client purposes. It is anticipated that these systems will incorporate both equipment and software available from third party suppliers, as well as proprietary components and licenses developed by and controlled by NeoMedia. /BULLET/ INTELLIGENT DOCUMENT MIDDLEWARE includes multi-platform utility software products, such as print drivers, symbology encoders and decoders, compaction modules and application engines which support and enable Intelligent Document//TM// applications. NeoMedia believes that it is currently the leading provider of high capacity symbology print drivers to the high speed printing environment. NeoMedia has provided such services to various customers, such as UPS 4 and Symbol Technologies, Inc. and their customers, such as J.C.Penney, Amway, various state departments of motor vehicles, and the country of Bahrain. /BULLET/ INTELLIGENT DOCUMENT/TM/ APPLICATIONS includes specific applications software which apply Intelligent Document/TM/ technology and principles to provide specific commercial solutions, including WebDispatch, Paper Data, MedThread and Commerce Thread. In addition to these services, NeoMedia plans to engage in the design and development of proprietary applications to enhance ported systems. These proprietary systems will include the support of Virtual Private Networks which emulate local area network access via the Internet using secure encryption methods to route data traffic. The result will be a Virtual Private Web which will allow computers within companies to be networked via the Internet, with the assurance of security so that there would not be any unauthorized use. Since the Intelligent Document/TM/ Solutions Unit has only been formed recently, to date it has provided only limited software and consulting services. However, due to the rapidly emerging era of electronic commerce fostered by the proliferation of the Internet and the World Wide Web, NeoMedia anticipates that the large number of potential Intelligent Document//TM// applications will, in terms of revenue, make this a fast growing unit of NeoMedia, although to date this has not occurred and no assurances can be given that this will occur in the future. DOCUMENT SYSTEMS SOLUTIONS UNIT The Document System Solutions Unit assists clients in optimizing their document creation, production and management processes. These efforts have historically focused on designing and providing complete, client specific, high speed and high volume document formatting and printing solutions. Recently, services of the Document System Solutions Unit have been expanded to include Integrated Document Factories ("IDF's"), a complete, client specific system solution for automating, monitoring and managing print-to-mail processes. IDF's incorporate manufacturing principles and IDOCs/TM/ technology, enabling clients not only to achieve maximum efficiencies in their print processes, but to also ensure document integrity and traceability. NeoMedia's customers currently using the Document Systems Solutions Unit's services and products, include Principal Financial Group, Fidelity Investments, Discover Card Services, Inc., Charles Schwab & Co., Inc. and the State of Wisconsin, and they are able to reduce their costs through efficiencies, by generating on demand customized forms instead of purchasing expensive pre-printed stock forms, and by enabling implementation of their printing systems on lower-cost distributed client-server platforms. In addition, clients in the future may realize significant cost savings from obtaining postage discounts which may be awarded by the United States Postal Service ("USPS") to businesses that, through use of the Document System Solutions Unit's services and products, prepare and print mail in USPS specified delivery sequence. In providing complete document system solutions and IDF's, NeoMedia often "partners" with companies such as Xerox Corporation, IBM Corporation, Dazel Corporation, and I-Data. These arrangements often result (i) in the "partner" introducing to NeoMedia customers which purchase NeoMedia's and the business partner's services and products, (ii) in the use by the partner of NeoMedia as a subcontractor, (iii) in the re-marketing by NeoMedia of the business partner's hardware and software products, and (iv) in the sharing of the responsibility with the business partner. Depending upon the product or service involved, the association with the business partner may be on an exclusive basis. Currently, in connection with the services of the Document Systems Solutions Unit, NeoMedia is a supplier of proprietary and third-party software and third-party equipment. The companies represented by NeoMedia in the remarketing of software and equipment include Oracle Corporation, IBM Corporation, Sun Microsystems Computer Company, Xerox Corporation, Symbol Technologies, Dazel Corporation, Elixir Technologies and I-Data. 5 SERVICES. NeoMedia provides services in this market as both a consultant and systems integrator, consisting of the following: /BULLET/ ENTERPRISE OUTPUT STRATEGIES are consulting engagements in which NeoMedia professionals analyze customer business requirements and design comprehensive document systems solutions to resolve business problems. NeoMedia has rendered services to a number of Fortune 100 and 500 clients since its inception in 1989, which typically have focused on business enablement and market share growth through enhanced document solutions. Recent emphasis has focused on the design of systems that provide a technology bridge from paper to electronic media. /BULLET/ DOCUMENT MANUFACTURING EXECUTION SYSTEMS is the application of technology used in the typical manufacturing operation to the document production process. Large scale print-to-mail operations are essentially manufacturing operations. However, unlike successful manufacturing operations, print-to-mail operations typically lack control systems, such as those to ensure quality. NeoMedia actively consults in these areas and is currently developing customized versions of established manufacturing execution systems for the document generation environment. /BULLET/ INTELLIGENT DOCUMENT/TM/ SOLUTIONS, in the context of the Document Systems Solutions Unit, are the consulting and systems integration of the software products and applications provided by the Intelligent Document/TM/ Solutions Unit. As related to the document production process, Intelligent Documents/TM/ can also be used to control such processes and facilitate document return processing and archive retrieval. /BULLET/ MICRO-MAINFRAME PORTS. In the first half of 1996, IBM introduced a family of products (IBM P390, R390 and S390 processors), which allows users to run mainframe applications on a downsized air-cooled platform in addition to either OS2 or AIX (IBM's version of Unix). On these new systems, users can run and maintain the integrity of existing and proven mainframe systems at a price and support cost comparable to the cost of an open system. While the transfer of applications to these new processors is not a conversion, it does involve migration services since special expertise is required in the configuration and tuning of the new processors in order to co-host the proprietary IBM applications in conjunction with either OS2 or AIX. NeoMedia, as an authorized re-marketer for IBM, offers these new systems and provides migration services in connection with their installation. /BULLET/ INTERNET EXTENSIONS. Information currently on the Internet is predominately housed in open system environments, primarily UNIX servers which have become the machine of choice in academic and other distributed computing environments during the past decade. The vast majority of new information currently being formatted for the World Wide Web is also hosted in open system environments. However, the majority of corporate information is housed in legacy mainframe and mini-computer environments which are not connected to the Internet, primarily for security reasons. This condition is the major barrier to the application of Internet technology to inter and intra enterprise communications and applications often referred to as Intranet solutions. NeoMedia offers services in this arena, which include: * Implementation of new Internet compatible systems through open systems integration products and services. * Migrations of existing proprietary legacy applications and databases to open system platforms compatible with modernization to the Internet environment. * Porting of IBM mainframe applications to air cooled micro-frames which bridge both legacy and open system environments. 6 SOFTWARE PRODUCTS. NeoMedia offers a variety of third-party and proprietary software products to be used in connection with its document systems solutions, including AFP Toolkit, AFP Interpreter and Maxicode. The services performed by the Document Solutions Unit represented 87.2% of NeoMedia's total sales for the year ended December 31, 1997. As a systems integrator, NeoMedia supplies and installs, as a re-marketer for a number of companies, a variety of computer and related products. For the years ended December 31, 1997 and 1996, revenues from this activity represented 78.5% and 82.9%, respectively, of NeoMedia's total revenue. YEAR 2000 / MIGRATION SOLUTIONS UNIT The Year 2000 / Migration Solutions Unit provides proprietary and third-party software tools to assist clients in (i) identifying and automatically correcting software with the "Year 2000 problem," and (ii) converting ("migrating") from closed legacy systems to more cost effective and functional open systems. In addition, due to the unique, flexible architecture on which the Year 2000 / Migration Solutions Unit's software tools are built, solutions for other mass change problems (such as, but not limited to, the impending Eurodollar problem and the conversion of stock prices from a fractional to a decimal measurement system) may be easily developed. RESOLVING "YEAR 2000" AND OTHER RESTRICTIVE SOURCE AND APPLICATION CODE PROBLEMS. The "Year 2000 problem" refers to the use of a two-digit date field primarily found in legacy software programs. For example, "89" represents the calendar year "1989." Programs using such two-digit year codes will become invalid on January 1, 2000, as they will read "00" as "1900." As a result, serious errors will occur in calculations dependent upon dates, such as mortgage calculations, in particular, and calculations used throughout the financial industry in general. NeoMedia sells licenses to proprietary software tools (including "ADAPT/2000") that unlike many other competitive tools, not only identify occurrences of the date code problem in software programs, but automatically correct ("remediate") up to what NeoMedia believes to be potentially 90% of these occurrences. NeoMedia's ADAPT/2000 tool, unlike other competitive tools, works across various hardware platforms and remediates legacy programs written in COBOL and new IBM COBOL ("MLE") computer languages. In addition, ADAPT/2000 works to convert other restrictive source and application code, such as fractions to a decimal measurement system and monetary systems such as the impending European Economic Community's Eurodollar. NeoMedia is seeking to expand its strategic relationships to undertake Year 2000 services in conjunction with others. NeoMedia anticipates serving in a subcontractor capacity to companies undertaking modernization and remediation efforts to large system users, such as Columbia Hospital Corporation. NeoMedia may from time to time seek its own direct engagements with end-users, as well. MIGRATION SOLUTIONS. Prior to the late 1980's, software and hardware manufacturers developed business software that would only run on their proprietary systems in an attempt to "lock in" existing customers. This in turn resulted in the development of business software which would run only on these closed proprietary systems. These "closed" systems and applications are referred to in the industry as "legacy systems." However, in the late 1980's and early 1990's, technological advances resulted in widespread development of software and hardware in standard computer languages that could be installed in a variety of systems. Subsequently, these "open" systems have generated price and performance advantages and greater functionality. Through the use of NeoMedia's migration tools and services, businesses desiring to convert from a legacy system may avoid the time and cost of rewriting applications or the loss of an application's functionality when transferred directly to an open client-server system. Instead, NeoMedia's migration tools automatically translate legacy applications from proprietary source code to code that can be run directly on open systems. This automated solution provides advantages such as (i) most, if not all, of the functionality of the original legacy application is maintained, (ii) the conversion entails less time, resources and disruption risk than the other methods, and (iii) the conversion provides a base for modernization of the legacy application in the new open environment. 7 NeoMedia's "migration and modernization" approach provides one-stop shopping for clients to migrate existing systems to open platforms and then modernize these same systems to incorporate current or new technologies. A variety of modernization paths are available to clients upon completing migration. NeoMedia management will also use this approach to further the introduction of their IDOCs(/TM/) technology. NeoMedia's Migration Solutions Unit provides consulting and systems integration services to facilitate the migration of business applications running on legacy systems, such as the Wang environment, to open-system platforms, such as Unix. Such migrations can reduce customer capital, training and operating costs, as well as improve performance and increase functionality in the new system environment. NeoMedia's Migration Solutions Unit has a group of proprietary programs ("tools") which facilitate this process and reduce the time, cost and risk involved in such development efforts. The products and services offered by Migration complement NeoMedia's more general systems integration products and services, which management believes provide clear synergies with NeoMedia's other commercial activities. Since technology in the computer industry changes so rapidly, the "new and improved" system of today is the legacy system of tomorrow. Consequently, NeoMedia believes that there is a substantial and continuing market for transition services. THE NEOMEDIA SOLUTION. In 1994, Migration acquired and has since further developed a group of automated legacy conversion tools. These proprietary tools support migrations from proprietary Wang VS and Hewlett Packard HP3000 to multiple varieties of UNIX systems. NeoMedia takes an evolutionary, rather than a revolutionary, approach to migration. When assisted by NeoMedia, the client takes smaller, safer and more manageable steps toward its conversion objective. At the completion of each "migration" stage, the client evaluates a variety of "modernization" paths which may be available to it, such as running Microsoft Windows interfaces to their applications, taking advantage of special features of a new database or development environment, integrating their custom application with third-party applications or enhancing their abilities to create custom form documents from their internal applications. The "modernization" aspect of NeoMedia's migration services highlights the synergies that exist with NeoMedia's expertise in providing products and services for open systems. After NeoMedia has completed the migration of the client's legacy software to an open system, this software can be modernized (i.e. updated) to take advantage of modern technologies to improve system performance, enhance user interfaces and generally bring the system into an up-to-date condition. NeoMedia's "migration and modernization" approach allows for fast, cost effective migration of legacy software with a minimum of disruption to the client's business operations, coupled with controlled modernization projects that, in a well-planned and logical manner, result in the legacy software having the latest technology. Since NeoMedia has the expertise to accomplish both the migration from the legacy platform to the open system and to modernize the software, it acts as "one-stop shopping" for all of its client's needs. NeoMedia believes that since it has the capability to be a single source of solutions for its customers, it has a competitive advantage. SERVICES. The Year 2000 / Migration Solutions Unit of NeoMedia presently offers two approaches to assist clients to implement business applications in open computing environments: /BULLET/ OPEN SYSTEM DEVELOPMENT. This approach is employed when an application must be written or rewritten for use on an open systems platform. NeoMedia provides consulting services for technology assessment, systems analysis and design as well as full systems integration and support services. These services include mainframe and workstation integration, application program selection and design, custom program development, equipment and software installation, customer training and acceptance testing. The initial focus of these services was on the Unix workstation and server environment due to its "open" nature and ability to support enterprise database applications on workstation environments. These services have 8 broadened to include other platforms, including Windows NT, which NeoMedia believes will be increasingly competitive during the latter half of this decade. /BULLET/ TOTAL ASSISTED MIGRATION. This approach is employed when the legacy application effectively can be converted and "ported" (moved) to the open system environment using largely automated processes with minimal custom development. This approach is superior to the Open System Development in time, cost and development risk. Consequently, it is usually preferred. Conversion and porting of the legacy application is accomplished by the use of the proprietary migration tools employed by NeoMedia. NeoMedia's migration-development tools and application products are based on the widely used technology of Informix, Microsoft Corporation, IBM, Hewlett Packard, Oracle Corporation, Sun Microsystems Computer Company, Micro Focus Cobol and Accucobol. PROPRIETARY MIGRATION SOFTWARE TOOLS AND PRODUCTS. NeoMedia has acquired and developed a line of proprietary products and software tools utilized in its migrations services solutions, including WISP, WISP NT, WISP/UNIX, CoStar for WISP, PacePort and Legacy Liberator. In each of these areas of service, NeoMedia provides consulting services which include strategic consulting, analysis and evaluation of user applications, systems analysis, design, implementation, integration and support services and client training and configuration, installation and maintenance of equipment. The services performed by the Year 2000 / Migration Solutions Unit represented 12.8% of NeoMedia's total sales for the year ended December 31, 1997. CUSTOMERS Although NeoMedia provides services and products to a spectrum of customers, ranging from closely-held companies to Fortune 100 and 500 companies, for the years ended December 31, 1997 and 1996, one customer, Ameritech Services, Inc. ("Ameritech"), accounted for 38.7% and 38.3%, respectively, of NeoMedia's revenue. NeoMedia expects sales to Ameritech as a percentage of total sales to decline in the future. Furthermore, NeoMedia does not have a written agreement with Ameritech and, therefore, there are no contractual provisions to prevent Ameritech from terminating its relationship with NeoMedia at any time. Accordingly, the loss of this customer, or a significant reduction by it in buying the products and services offered by NeoMedia, absent diversification, would materially and adversely affect NeoMedia's revenues and results of operations. In addition, the equipment and software which is remarketed to this customer is supplied by a single supplier. Accordingly, the loss of this supplier would materially adversely affect NeoMedia. For these reasons, NeoMedia is seeking, and continues to seek, to diversify its sources of revenue. SALES AND MARKETING NeoMedia markets its products, as well as those for which it acts as a re-marketer, and its services primarily through its direct sales force, which was composed of 25 personnel as of December 31, 1997. NeoMedia currently maintains sales locations in five states. The sales organization is responsible for achieving quarterly and annual sales quotas, and, to a significant extent, is compensated based upon the profitability of their efforts. NeoMedia also relies upon its strategic alliances with industry leaders to help market its products and services, provide lead referrals and establish informal co-marketing arrangements. Although NeoMedia in the past has engaged in limited telemarketing activities, it may in the future expand such marketing activities. Representatives of NeoMedia also attend seminar and trade shows, both as speakers and participants, to help market its products and services. NeoMedia currently has arrangements with independent distributors to promote their products and services outside of the United States. NeoMedia currently has representation in England, the Netherlands, Canada, Central America and South America, although its revenue from sales outside the United States is insignificant. NeoMedia is in the process of establishing direct sales offices in Austria, Brazil, Mexico and the United Kingdom. 9 In addition, NeoMedia has an indirect sales channel of value added resellers in the United States, and to a limited extend in foreign countries, of its Year 2000 products and services. NeoMedia anticipates that the indirect sales channel will account for an increasingly significant portion of NeoMedia's total revenue in future periods. There is no assurance that NeoMedia will be successful in further developing such channels, that such relationships will result in significant additional sales or that any sales through such channels will have the same profitability, if any, of sales obtained through NeoMedia's direct sales force. In addition, NeoMedia expects its direct and indirect sales channels to compete with each other. Successful indirect sales efforts depend on the abilities, resources, reputations, motivations and strategies of third parties over which NeoMedia has little control. If NeoMedia's efforts at further developing these indirect sales channels are unsuccessful, if such channels are unproductive or if NeoMedia were to lose one or more of its value added resellers, there could be a material adverse effect on NeoMedia's results of operations or financial position. CUSTOMER SUPPORT ORGANIZATION NeoMedia believes that strong customer support is crucial to both the initial marketing of its products and maintenance of customer satisfaction, which in turn, enhances NeoMedia's reputation and generates repeat orders. In addition, NeoMedia believes that the customer interaction and feedback involved in its ongoing support functions provide NeoMedia with information on market trends and customer requirements that is critical to future product development efforts. Pre-sales support is provided by sales personnel and post-sales support is provided by NeoMedia's customer support organization pursuant to renewable annual maintenance contracts. NeoMedia maintains toll-free telephone support during regular business hours to current users and potential customers evaluating NeoMedia's products. Maintenance contracts provide for technical and emergency support, as well as software upgrades, on an if and when available basis. RESEARCH AND DEVELOPMENT The computer industry is characterized by rapid technological change, frequent new product and service introductions, evolving industry standards and changes in customer demands. The introduction of products and services embodying new technologies and the emergence of new industry standards can, in a relatively short period of time, render existing products and services obsolete and unmarketable. NeoMedia, therefore, believes that its success depends upon its ability continuously to develop new products and services, as well as enhancements to its existing products, and to introduce them promptly into the market. Research and development is especially critical to NeoMedia's intention to develop new software products and services related to high capacity symbologies. NeoMedia employed 15 persons in the area of product development as of December 31, 1997. During the years ended December 31, 1997 and 1996, NeoMedia incurred total research and development costs of $1,180,000 and $645,000, respectively, of which $428,000 and $293,000, respectively, were capitalized as software development costs and $752,000 and $352,000, respectively, were expensed as research and development costs. Although, NeoMedia currently is seeking patents for certain of its proprietary technology related to Intelligent Documents/TM/, NeoMedia presently has no patents with respect to its proprietary technology and products. No assurances can be given that such patent protection will be granted, and if granted, that it will be adequate to protect NeoMedia's rights. In addition, NeoMedia relies upon copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions, all of which afford only limited protection, to protect its proprietary technology and products. Although NeoMedia takes steps to protect its trade secrets, such as requiring employees with access to NeoMedia's proprietary information to execute confidentiality and non-disclosure agreements, it may be possible for unauthorized parties to copy or reverse engineer all or part of any one of NeoMedia's proprietary technology and products. Furthermore, just as there can be no assurance that a misappropriation of NeoMedia's proprietary technology and products will not occur, there can be no assurance that copyright, trademark and trade secret laws will be available in all circumstances to protect NeoMedia's rights. In addition, although the laws of the United States may protect NeoMedia's proprietary rights in its technology and products, the laws of foreign countries where 10 NeoMedia's products may be used may not protect its proprietary rights at all or to the same extent as the laws of the United States. NeoMedia believes that its proprietary technology and products do not infringe upon the rights of any third parties; however, there can be no assurance that a third party will not in the future claim infringement by NeoMedia. Similarly, infringement claims could be asserted against products and technologies which NeoMedia licenses from third parties. NeoMedia has never received notification that any of its products, products it licenses or the technology of such products infringe upon the proprietary rights of third parties. NeoMedia may provide some of its products to end users using non-exclusive, non-transferable licenses which provide that the licensee may use the software solely for internal operations on designated computers at specific sites or by a specified number of users. NeoMedia generally does not make source codes available for NeoMedia's products. Due to the difficulty of doing so, NeoMedia has never policed, nor has it ever attempted to police, the unauthorized use of its products. Even though piracy of NeoMedia's proprietary rights could materially adversely affect it, NeoMedia believes that the threat of piracy, or the unavailability of protection under applicable laws, is less significant to its competitive and fiscal well being than its ability to respond to the rapid change in technology which characterizes the computer industry. COMPETITION The markets in which NeoMedia competes are highly competitive, and NeoMedia believes that such competition is likely to intensify. Many of NeoMedia's competitors have substantially greater financial resources, larger research and development and sales staffs and greater name recognition than NeoMedia and, therefore, can respond more quickly and efficiently to changing technology and user needs. As usually occurs when competition increases, there is corresponding downward pressure on prices and profit margins, either of which could materially and adversely affect NeoMedia. NeoMedia believes that a potential source of competition is from its present customers who could choose to develop and produce products and render services in-house similar to those provided by NeoMedia. Since NeoMedia offers a variety of products and services, no generalities can be made as to its competitors, all of which differ depending upon the product or service offered. 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 the local, small privately held company to the large national and international organizations, including the large consulting firms, such as Andersen Consulting. A large number of companies act as re-marketers of another party's products, and therefore, the competition in this area is intense. In some instances, NeoMedia, in acting as a re-marketer, may compete with the original manufacturer. There are a number of companies that compete with NeoMedia for customers wishing to migrate from a legacy to an open systems environment. In addition, there are different competitors, depending upon the platform from which the migration is being done. Generally, as with competitors for NeoMedia's open systems services and products, the competitors for transition services business range from small to large companies. NeoMedia believes, however, that not a significant number of its competitors for the transition services business use automated tools to facilitate the migration. This, NeoMedia believes, gives it a competitive advantage in this area. Since the development of high capacity symbologies are in their relative infancy, at the current time there is very little competition. However, it can be expected that as this area develops, competitors will appear and competition will be significantly increased. No assurances can be given that NeoMedia will be able to compete successfully in this area should this occur. 11 Within the Year 2000 marketplace, NeoMedia believes that competition will intensify as the Millennia approaches. It is NeoMedia's aim to distinguish itself from most of the competition by offering quality services at competitive prices. Many Year 2000 solutions, once the non-compliant code is identified, will require manual remediation undertaken in a work bench environment. ADAPT/2000, on the other hand, will substantially automate the remediation process. Some of NeoMedia's competitors are more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than NeoMedia. Moreover, other than the need for technical expertise, there are no significant proprietary or other barriers to entry in the millennium consulting industry. As a result, there can be no assurance that one of the Company's competitors will not develop a millennium consulting methodology which achieves greater market acceptance than ADAPT/2000. New or improved products and services can be expected from NeoMedia's competitors in the future. Market participants must compete on many fronts, including development time, engineering expertise, product quality, performance and reliability, price, name recognition, customer support and access to distribution channels. NeoMedia believes that it has been able to compete to date primarily through product quality, technical excellence, customer service and its ability to achieve desired results. NeoMedia's ability to compete in the future will depend upon many factors, including the ability to attract new customers and to diversify its customer base and products and services so as not to be dependent upon any one or several customers or product or service, to attract and retain qualified management, sales and technical personnel, to develop new products and services and to respond quickly and efficiently to new technology. There is no assurance that NeoMedia will be able to compete successfully or develop competitive products and services in the future. PRODUCT LIABILITY INSURANCE NeoMedia has never had any product liability claim asserted against it. However, NeoMedia could be subject to product liability claims in connection with the use of the products and services that it sells. There can be no assurance that NeoMedia would have sufficient resources to satisfy any liability resulting from these claims or would be able to have its customers indemnify or insure NeoMedia against such claims. Although NeoMedia maintains insurance against such claims, there can be no assurance that such coverage will be adequate in terms and scope to protect NeoMedia against material adverse effects in the event of a successful claim. GOVERNMENT REGULATION NeoMedia has no knowledge of any government regulation to which it is subject or which would materially adversely affect its business operations. ENVIRONMENTAL PROTECTION COMPLIANCE NeoMedia has no knowledge of any federal, state or local environmental compliance regulations which affect its business activities. NeoMedia has not expended any capital to comply with any environmental protection statutes and does not anticipate that such expenditures will be necessary in the future. EMPLOYEES As of December 31, 1997, NeoMedia employed 82 full-time and five part-time employees, located in 12 states, which included 16 full-time employees and two part-time employees in systems integration, 15 full-time employees in product development, 25 full-time employees in sales, 12 full-time employees and one part-time employee in marketing and 14 full-time employees and two part-time employees in executive and administrative positions. None of NeoMedia's employees are represented by a labor union or bound by a collective bargaining agreement. NeoMedia believes that its employee relations are good. NeoMedia's success depends to a significant extent on the performance of its senior management and certain key employees. Competition for highly skilled employees, including sales, technical and management personnel, is 12 intense in the computer industry. NeoMedia's failure to attract additional qualified employees or to retain the services of key personnel could materially adversely affect NeoMedia's business. SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995 NeoMedia operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for software products is generally characterized by rapidly changing technology, frequent new product introductions and changes in customer requirements which can render existing products obsolete or unmarketable. The statements contained in Item 1 (Business) and Item 6 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in NeoMedia's filings with the Securities and Exchange Commission including, without limitation, those described under "Risk Factors" in NeoMedia's Prospectus dated August 25, 1997. The forward-looking statements are based on the beliefs of the management of NeoMedia, as well as assumptions made by, and information currently available to, NeoMedia's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause NeoMedia's actual growth, results, performance and business prospects and opportunities in 1998 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, NeoMedia's limited operating history on which expectations regarding its future performance can be based, competition from, among others, national and regional software developers and software/hardware sellers that have greater financial, technical and marketing resources and distribution capabilities than NeoMedia, the availability of sufficient capital, NeoMedia's ability to identify the right product mix, NeoMedia's ability to successfully acquire and integrate the operations of additional businesses, NeoMedia's ability to operate effectively in geographical areas in which it has no prior experience, the maturation and success of NeoMedia's strategy to develop, market and sell its products and services, risks inherent in conducting international business, risks associated with selling proprietary licenses and conducting a consulting services business, changes in NeoMedia's product and service mix and product and service pricing, the effectiveness of NeoMedia's efforts to control operating expenses, general economic and business conditions affecting NeoMedia and its customers in the United States and other countries in which NeoMedia sells and anticipates to sell its products and services, charges and costs related to acquisitions, and NeoMedia's ability to: (i) develop, market and sell existing and acquired products for the Intelligent Document/TM/, Year 2000 and other software markets; (ii) successfully integrate its acquired products, services and businesses and continue its acquisition strategy; (iii) adjust to changes in technology, customer preferences, enhanced competition and new competitors in the Intelligent Document/TM/, Year 2000 and other software markets; (iv) protect its proprietary software rights from infringement or misappropriation; (v) maintain or enhance its relationships with business partners and vendors; (vi) attract and retain key employees; and (vii) implement changes in NeoMedia's business strategy or minimize an inability to execute its strategy due to unanticipated changes in the millennium software and consulting market. There can be no assurance that NeoMedia will be able to identify, develop, market, sell or support new products or enhancements successfully, that any such new products or enhancements will gain market acceptance, or that NeoMedia will be able to respond effectively to technological changes. There can be no assurance that NeoMedia will not encounter technical or other difficulties that could delay introduction of new products in the future. If NeoMedia is unable to introduce new products or enhancements and respond to industry changes on a timely basis, its business could be materially adversely affected. NeoMedia is not obligated to update or revise these forward-looking statements to reflect new events or circumstances. ITEM 2. DESCRIPTION OF PROPERTIES NeoMedia's principal executive, marketing and support facility is located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. NeoMedia occupies approximately 10,615 square feet under terms of a written lease from an unaffiliated party expiring on January 31, 2000. NeoMedia's principal sales facility is located at 2150 13 Western Court, Suite 230, Lisle, Illinois 60532. NeoMedia occupies approximately 6,050 square feet under terms of a written lease from an unaffiliated party expiring on April 30, 2000. NeoMedia also leases space, where the principal sales facility was formerly located, at 280 West Shuman Boulevard, Suite 100, Naperville, Illinois 60563. This lease in Naperville covers approximately 9,324 square feet under the terms of a written lease from an unaffiliated party expiring on December 31, 2000. NeoMedia subleases all of the space in the Naperville facility under the terms of a written sublease to an unaffiliated party expiring on December 31, 2000. NeoMedia's facility for the Year 2000 / Migration Solutions Unit is located at 11025 Reed Hartman Highway, Cincinnati, Ohio 45242. NeoMedia occupies approximately 2,000 square feet under terms of a written lease from GEDA, Inc., which is a corporation owned by Gerald Willis who is a shareholder in and consultant to NeoMedia and is a former owner of Allegiant. This lease of space in Cincinnati expires in January, 2000. In addition, NeoMedia leases, from an unaffiliated party, approximately 880 square feet of office space, pursuant to a written lease which terminated on February 28, 1998, at 12 Calle 1-25 Zona 10, Edificio Geminis, Torre Norte Officina 1006, Guatemala City, Guatemala 01010. Effective March 1, 1998, this lease was on a month-to-month basis. NeoMedia also leases from Charles W. Fritz (NeoMedia's President) and his wife, pursuant to a verbal, month-to-month lease, space at 6054 Timberwood Circle, #240, Fort Myers, Florida 33908, which it currently uses as temporary housing for employees relocating to Fort Myers. Although this lease is between affiliated parties, NeoMedia believes that it is on terms no less favorable to it than could be obtained from unaffiliated parties. NeoMedia believes that its existing office space is adequate to meet its current and short-term requirements. ITEM 3. LEGAL PROCEEDINGS As of December 31, 1997, NeoMedia is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of NeoMedia security holders during the fourth quarter of the year ended December 31, 1997. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION. NeoMedia's common stock and warrants began trading on The Nasdaq Stock Market/SM/ under the symbol "NEOM" and "NEOMW," respectively, on November 25, 1996, the date of its initial public offering. Prior to such time there was no established public trading market for NeoMedia's common stock or warrants. On November 10, 1997, NeoMedia announced the redemption of all of its outstanding publicly-traded warrants. The warrant holders had until December 18, 1997 to convert each warrant to a share of common stock at an exercise price of $7.375 or to sell the warrant. Any warrants outstanding on December 18, 1997 were redeemed by NeoMedia for $.05 per warrant. Of the 2,700,938 warrants outstanding, 1,662,633 warrants were exercised for total proceeds to NeoMedia of $12.3 million, and 1,038,305 warrants were redeemed by NeoMedia at $.05 per warrant, or a total of $52,000. Set forth below is the range of high and low sales prices for the common stock and warrants for the periods indicated as reported by NASDAQ. The quotations do not include retail markups, markdowns or commissions and may not represent actual transactions. 14 TYPE OF SECURITY PERIOD ENDED HIGH LOW - ---------------- ------------ ---- --- Common Stock December 31, 1996 (1) $ 7.50 $5.13 March 31, 1997 $ 6.31 $4.75 June 30, 1997 $ 9.13 $4.19 September 30, 1997 $11.50 $6.75 December 31, 1997 $11.25 $7.38 March 16, 1998(2) $ 9.19 $5.25 Warrants December 31, 1996 (1) $ 1.50 $0.50 March 31, 1997 $ 1.75 $1.00 June 30, 1997 $ 2.00 $1.00 September 30, 1997 $ 3.94 $1.63 December 18, 1997(3) $ 3.56 $0.03 - ------------------- (1) Includes only the period November 25, 1996 through December 31, 1996. (2) Includes only the period January 1, 1998 through March 16, 1998. (3) Includes only the period October 1, 1997 through December 18, 1997. (b) HOLDERS. As of March 5, 1998, there were 139 holders of record of NeoMedia's common stock. NeoMedia believes that it has a greater number of shareholders because management believes that a substantial number of NeoMedia's common stock are held of record in street name by broker-dealers for their customers. (c) DIVIDENDS. As of March 16, 1998, NeoMedia has not paid any dividends on its common stock and does not expect to pay a cash dividend in the foreseeable future, but intends to devote all funds to the operation of its businesses. As of March 16, 1998, NeoMedia had a letter of credit with First National Bank of Chicago, Chicago, Illinois, the terms of which require First National Bank of Chicago's written permission prior to the declaration of cash dividends. NeoMedia's stock price has been and will continue to be subject to significant volatility. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. If revenues or earnings in any quarter fail to meet expectations of the investment community, there could be an immediate and significant impact on NeoMedia's stock price. In addition, NeoMedia's stock price may be affected by broader market trends that may be unrelated to NeoMedia's performance. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Dev-Tech Associates, Inc., NeoMedia's predecessor, was organized in December, 1989. Through the year ended December 31, 1997, a substantial part of NeoMedia's revenue was derived from resales of software and technology equipment. NeoMedia couples its proprietary software products with independent vendor products it resells, enabling it to provide a complete "turn-key" service for its customers. Currently, NeoMedia's revenue consists of software license fees, resales of software developed by independent vendors ("software resales"), resales of computer equipment manufactured by independent vendors ("equipment resales"), and fees for services, including consulting, education and post contract software support. In addition, NeoMedia formed its Intelligent Document/TM/ Solutions Unit ("IDOCs/TM/") to develop enabling technology and applications which embed active data elements in standard printed documents or on physical objects for the purpose of launching computer programs and creating automated links to the World Wide Web, which NeoMedia believes to be an expanding area in the emerging world of electronic commerce. These "machine readable" documents or physical objects incorporate printed codes which contain thousands of bytes of information, including computer programs rendering them functionally equivalent to a 15 computer floppy disk. With this functionality, a user may access additional information about, assess validity of, or determine authenticity of, such document or object. These codes are referred to in the industry as "high capacity symbologies" and "multi-dimensional" or "two-dimensional" bar codes. NeoMedia's strategy is to increase sales of its proprietary software transition tools and applications as a percentage of total sales. License fees for the year ended December 31, 1997 increased 122.8% from the year ended December 31, 1996, and, as a percentage of total sales, increased to 8.2% of total sales during the year ended December 31, 1997 from 4.9% during the year ended December 31, 1996, while total sales increased to $24.4 million during 1997 as compared to $18.1 million during 1996, or an increase of 35.1%. NeoMedia has built and intends to continue to build an infrastructure that assumes this strategy will succeed. Therefore, the failure to achieve this strategy could have a material adverse effect on NeoMedia's business, financial condition and results of operations. A substantial portion of NeoMedia's operating expense is related to personnel, facilities and amortization. Such operating expenses cannot be adjusted quickly and are therefore fixed in the short term. NeoMedia's expense levels for these items are based, in significant part, on NeoMedia's expectations of future sales. If actual sales levels are below management's expectations, results of operations are likely to be adversely affected by a similar amount because a relatively small amount of NeoMedia's expense varies with its sales in the short term. In general, NeoMedia's sales are difficult to forecast as the market for client/server equipment and software is rapidly evolving and NeoMedia's sales cycle, from the initial proposal to the customer through the purchase of product and related services varies substantially from customer to customer and from product to product. Also, NeoMedia's operating results may fluctuate significantly from period to period as a result of a variety of factors, including changes in the composition of NeoMedia's revenue, the timing of new product introductions and NeoMedia's expenditures on research and development and promotional programs, as well as the general state of the national and global economies. Demand for the products sold by NeoMedia may increase or decrease as a result of a number of factors, such as client preferences and product announcements by competitors. In the past, NeoMedia has realized a substantial portion of its sales in the last quarter of the year. It is not uncommon for equipment resellers and software companies to experience strong fourth quarters followed by weak first quarters. Such seasonality arises from many factors, such as the timing of product introductions and business cycles of NeoMedia's customers, and could be material to NeoMedia's interim results. Such cycles vary from customer to customer, and the overall impact on NeoMedia's results of operations cannot be predicted. There can be no assurances that NeoMedia will not display this pattern in future years. In addition, its business and results of operations could be affected by the overall seasonality of the industry. NeoMedia's quarterly operating results have been subject to variation and will continue to be subject to variation, depending upon factors, such as the mix of business among NeoMedia's services and products, the cost of material, labor and technology, particularly in connection with the delivery of business services, the costs associated with initiating new contracts or opening new offices, the economic condition of NeoMedia's target markets, and the cost of acquiring and integrating new businesses. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 GENERAL. Total net sales for the year ended December 31, 1997 were $24.4 million, which represented a $6.3 million, or 35.1%, increase from $18.1 million for the year ended December 31, 1996. This increase primarily resulted from (i) a $4.1 million increase in equipment resales of Sun Microsystems workstations and servers and IBM Corporation equipment (including the $2.5 million increase in equipment resales to NeoMedia's largest customer), (ii) a $1.7 million increase in resales of the IBM 390 series of micro-mainframe computers, and (iii) a $1.3 million increase in sales of Year 2000 products including licenses and services, partially offset by a $1.1 million decrease in sales in the document and migration business units as NeoMedia refocused from resales to licensing. 16 The net loss for the year ended December 31, 1997 was $6.0 million, which represented a $2.9 million, or 94.2%, increase from a $3.1 million loss for the year ended December 31, 1996. The increase in the net loss primarily resulted from NeoMedia's continuing to invest in the infrastructure needed to manage current and expected future growth and $461,000 of expense for the fair value of common stock purchase warrants granted to consultants, reduced by the increased income from the net sales increase. The increase in resales of the IBM 390 series and resales of software and equipment to NeoMedia's largest customer reduced losses by $300,000 during 1997 as compared to 1996, while the increase in sales of the Year 2000 products reduced losses by $1.1 million. These improvements were partially offset by the $800,000 incremental loss resulting from the lower sales in the Document Solutions and Migration Solutions business units. The total of general, administrative, sales, marketing, research and development expenses increased $5.1 million to $10.3 million for the year ended December 31, 1997 from $5.2 million during the year ended December 31, 1996. This increase primarily resulted from NeoMedia investing in the expansion of its infra-structure by hiring management, sales and other personnel to develop, market and sell new products and $461,000 of expense for the fair value of common stock purchase warrants granted to consultants. NeoMedia intends to continue to expand its development, sales and marketing positions to increase revenue in each of its three business units: Document Systems Solutions Unit, Year 2000 / Migration Solutions Unit and Intelligent Document Solutions Unit. LICENSE FEES. License fees for the year ended December 31, 1997 were $2.0 million compared to $895,000 for the year ended December 31, 1996, an increase of $1.1 million or 122.8%. This increase resulted primarily from the increase in sales of licenses of NeoMedia's Year 2000 proprietary software. Cost of sales for license fees consisted primarily of fees paid to an independent software developer for one of the existing software transition tools. Cost of sales as a percentage of related sales was 16.2% during 1997 compared to 38.9% during 1996. This decrease in the cost of sales as a percentage of related sales was primarily due to the increased sales of ADAPT/2000, which is proprietary software. RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT. Resales of software and technology equipment increased by $4.2 million, or 27.9%, to $19.2 million for the year ended December 31, 1997, as compared to $15.0 million for the year ended December 31, 1996. This increase primarily resulted from equipment resales related to Sun Microsystems workstations and servers which increased $3.9 million (primarily due to increased resales to NeoMedia's largest customer - see Note 2 of Notes to Consolidated Financial Statements -- Concentrations of Credit Risk) and IBM Corporation equipment which increased $1.1 million (primarily due to IBM enhancing its line of 390 micro-mainframe computers to include the S390). These increases were partially offset with a $500,000 one-time shipment of desktop printers to a major customer in 1996. Cost of sales as a percentage of related sales was 89.5% during 1997, compared to 81.9% during 1996. This increase in the cost of sales as a percentage of related sales was primarily due to the discontinuation of PRS software sales with its lower cost as a percentage of sales and the increase in resales of software for micro- mainframe with its higher cost as a percentage of sales. SERVICE FEES. NeoMedia's service fees increased by $1.0 million, or 48.5%, to $3.2 million for the year ended December 31, 1997, compared to $2.2 million for the year ended December 31, 1996. This increase was primarily due to a $504,000 increase in the Year 2000 services and a $889,000 increase in consulting fees for assisting companies to integrate printers, partially offset with a $369,000 decrease in services supplied in conjunction with the sales of existing software transition tools. Cost of service fees as a percentage of related sales decreased to 61.1% during 1997 from 89.5% during 1996 primarily due to higher margin on Year 2000 services. AMORTIZATION OF SOFTWARE. Amortization of software for the year ended December 31, 1997, as compared to the year ended December 31, 1996, decreased $61,000 as a result of certain migration software costs becoming fully amortized during 1997, and, as a percentage of total net sales, decreased to 2.4% during 1997 from 3.6% during 1996 due to the increase in net sales. 17 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 is directly related to sales volume. Sales and marketing expenses increased $2.6 million, or 107.0%, to $5.0 million for the year ended December 31, 1997 from $2.4 million for the year ended December 31, 1996, as a result primarily of hiring managers to direct current and expected future growth and increased commissions resulting from the increase in sales. NeoMedia anticipates that sales and marketing costs will increase as NeoMedia grows. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $1.6 million, or 65.5%, to $4.1 million for the year ended December 31, 1997, from $2.5 million for the year ended December 31, 1996. This increase was due mainly to NeoMedia building its administrative infra-structure, including compensation and related expenses and legal and professional fees, to manage current and expected future growth. RESEARCH AND DEVELOPMENT. During the year ended December 31, 1997, NeoMedia charged to expense 3.1% of total net sales in research and development expenses as compared to 1.9% during the year ended December 31, 1996. This percentage increase was due to an increase in the number of software developers employed by NeoMedia to expand its product lines. NeoMedia currently intends to continue to make significant investments in research and development. FAIR VALUE OF WARRANTS GRANTED TO CONSULTANTS. During the year ended December 31, 1997, NeoMedia issued common stock purchase warrants to five different consultants to purchase an aggregate of 848,332 shares of NeoMedia common stock. Using the Black-Scholes model, the fair value of these warrants was computed to be $716,000, of which $461,000 was charged to expense and $255,000 was charged to the proceeds of the publicly traded warrants called on December 18, 1997. INTEREST EXPENSE, NET. Interest expense consists primarily of interest paid to creditors as part of financed purchases, capitalized leases and NeoMedia's asset-based collateralized line of credit. Interest expense decreased by $392,000, or 72.7%, to $147,000 for the year ended December 31, 1997 from $539,000 for the year ended December 31, 1996, due to the repayment of debt in the fourth quarter of 1996 and interest income earned on the proceeds from the IPO and the warrants exercised. INCOME TAX EXPENSE (BENEFIT). The $78,000 benefit for income taxes recorded during the year ended December 31, 1997 represented the recovery of income taxes paid in prior years from the carry back of operating losses. During the year ended December 31, 1996, NeoMedia established in its provision for income taxes a valuation allowance for all of the net deferred income tax assets. As of December 31, 1997, NeoMedia had a $7.5 million net operating loss carryforward which does not include the net operating losses of DTM prior to the Migration Merger on November 20, 1996. Until the Migration Merger and Allegiant Merger, DTM and Allegiant were treated as S Corporations for federal and state income tax purposes. Accordingly, federal income taxes on any earnings of DTM and Allegiant were payable by DTM's and Allegiant's shareholders rather than by NeoMedia. With the Migration Merger and Allegiant Merger, the S Corporation status of Migration and Allegiant was terminated and Migration and Allegiant became subject to statutory corporate income taxes. Consequently, the benefit for income taxes differs from the amount computed by applying the statutory federal rate of 34% primarily because of the net losses incurred by Migration and Allegiant. The Internal Revenue Service examined NeoMedia's Federal income tax return for the year ended December 31, 1994. As a result of this examination, there were no significant adjustments to NeoMedia's 1994 Federal income tax return. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, NeoMedia's working capital was $12.1 million which represented a $7.1 million increase from December 31, 1996. Net cash used in operating activities for the year ended December 31, 1997 and 1996, was $6.2 million and $1.8 million, respectively. During 1997, trade accounts receivable increased $1.7 million, 18 while accounts payable and accrued expenses increased $359,000. During 1996, trade accounts receivables increased $2.0 million, while accounts payable and accrued expenses increased $1.8 million. NeoMedia's net cash flow used in investing activities for the year ended December 31, 1997 and 1996, was $1.7 million and $451,000, respectively. This increase resulted from the increased acquisition of property and equipment, as well as the increase in purchases of software and the increase in capitalized software development costs. Net cash provided by financing activities for the year ended December 31, 1997 and 1996, was $14.0 million and $6.5 million, respectively. In November, 1996, NeoMedia completed its IPO receiving net proceeds of $5.7 million. In January, 1997, NeoMedia consummated the IPO's over-allotment and received net proceeds of $1.3 million. In September, 1997, Charles W. Fritz, NeoMedia's President and Chief Executive Officer and a principal shareholder, exercised warrants to purchase 146,000 shares of common stock for $1.3 million. On November 10, 1997, NeoMedia announced the redemption of all of its outstanding publicly-traded warrants. The warrant holders had until December 18, 1997 to convert each warrant to a share of common stock at an exercise price of $7.375 or to sell the warrant. Any warrants outstanding on December 18, 1997 were redeemed by NeoMedia at $.05 per warrant. Of the 2,700,938 warrants outstanding, 1,662,633 warrants were exercised for net proceeds to NeoMedia of $11.6 million, and 1,038,305 warrants were redeemed by NeoMedia at $.05 per warrant, or a total of $52,000. NeoMedia believes that its existing cash balances, funds expected to be generated from operations and available borrowings under its existing financing agreement, will be sufficient to finance NeoMedia's operations for the next twelve months. Thereafter, if NeoMedia has insufficient funds for its needs, there can be no assurance that additional funds can be obtained on acceptable terms, if at all. If necessary funds are not available, NeoMedia's business and operations would be materially adversely affected and in such event NeoMedia would reduce costs and adjust its business plan. YEAR 2000 ISSUES In the next two years, many companies, including NeoMedia, will face potentially serious issues associated with the inability of existing data processing hardware and software to appropriately recognize calendar dates beginning in the year 2000. Many computer programs that can only distinguish the final two digits of the year entered may read entries for the year 2000 as the year 1900. In 1996, NeoMedia began the process of identifying the many software applications used internally and hardware devices expected to be impacted by this issue. The software programs used internally by NeoMedia (primarily its general ledger accounting package which is not year 2000 compliant) were purchased from third party vendors. NeoMedia believes that the hardware devices which were not year 2000 compliant have been replaced with those which are year 2000 compliant. NeoMedia is currently evaluating the purchase for approximately $400,000 of a new general ledger accounting package which is year 2000 compliant and which is anticipated to be installed during 1998. However, there can be no assurance that NeoMedia will not be adversely affected by the failure of the existing general ledger accounting package if the new package is not installed timely or by the failure of the new package to be fully year 2000 compliant as represented by the vendor. NeoMedia believes that its proprietary software, for which it is currently selling licenses, is year 2000 compliant. ITEM 7. FINANCIAL STATEMENTS The Financial Statements to this Form 10-KSB are attached commencing on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES In February, 1998, NeoMedia voluntarily changed its independent accountants for the year ended December 31, 1997 from Coopers & Lybrand L.L.P. to KPMG Peat Marwick LLP. This change was approved by NeoMedia's Board of Directors. The financial statements for each of the two years in the two-year period ending December 31, 1996, were audited by Coopers & Lybrand L.L.P. NeoMedia did not have any disagreements on accounting and financial disclosures with its accountants in the years ending December 31, 1997 or 1996. 19 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS As of March 16, 1998, NeoMedia's directors and executive officers(*) were: NAME AGE POSITION HELD Charles W. Fritz 41 President, Chief Executive Officer, Director and Chairman of the Board William E. Fritz 67 Secretary and Director Charles T. Jensen 54 Chief Financial Officer, Vice- President and Treasurer and Director Robert T. Durst, Jr. 45 Chief Technical Officer, Executive Vice-President and Director James M. Marshall 45 Executive Vice President of Sales and Business Development A. Hayes Barclay 67 Director James J. Keil 70 Director Paul Reece 61 Director - ----------------------- (*) In January, 1998, Dan Trampel resigned employment with NeoMedia as Senior Vice President of Sales. CHARLES W. FRITZ is a founder of NeoMedia and has served as its President and a Director since its inception, and as Chief Executive Officer and the Chairman of the Board of Directors since August 6, 1996. Prior to founding NeoMedia, Mr. Fritz was an Account Executive with IBM Corporation from 1986 to 1988, Director of Marketing and Strategic Alliances for the Information Consulting Group from 1988-1989, and a Consultant for McKinsey & Company. Mr. Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the University of Florida. Mr. Fritz is the son of William E. Fritz, a Director of NeoMedia and its Secretary. WILLIAM E. FRITZ is a founder of NeoMedia and has served as Secretary and a Director since its inception. He also served as Treasurer of NeoMedia from its inception until May 1, 1996. Mr. Fritz, who has over thirty-two years in establishing and operating privately owned companies, currently is, and for at least the past ten years has been, an officer and either the sole stockholder or a majority stockholder, of G. T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D. M., Inc. (formerly Dev-Mark, Inc.) and EDSCO, three railroad freight car equipment manufacturing companies. Mr. Fritz also has ownership interests and executive positions in several other 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 President, Chief Executive Officer and Chairman of the Board. CHARLES T. JENSEN has been Chief Financial Officer, Treasurer and Vice President of NeoMedia since May 1, 1996. He has been a Director since August 6, 1996. Prior to joining NeoMedia in November, 1995, Mr. Jensen, who has over 27 years of audit, finance and business experience, including audit experience with Price Waterhouse & Co., was Chief Financial Officer of Jack M. Berry, Inc., a Florida corporation which grows and processes citrus 20 products from December, 1994 to October, 1995, and at Viking Range Corporation, a Mississippi corporation, a manufacturer of 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. ROBERT T. DURST, JR. has been Chief Technical Officer and Executive Vice President since April 1, 1996. He has been a Director since August 6, 1996. Prior to joining NeoMedia, Mr. Durst held management positions with Symbol Technologies, Inc., Bohemia, New York, from February, 1992 to March, 1995 where, among other things, he worked extensively on two dimensional bar code technology. From March, 1986 to February, 1992, Mr. Durst was employed as a Technical Director by Pitney Bowes, Inc., Stamford, Connecticut. Mr. Durst holds a M.A. in Cognitive Psychology from the University of Illinois and a B.A. from Allegheny College. JAMES M. MARSHALL became Executive Vice-President of Sales and Business Development effective January 26, 1998. Mr. Marshall has approximately twenty years of experience in sales, marketing, sales management and general management. Prior to joining NeoMedia, Mr. Marshall held various management positions with Oracle Corporation, including most recently Senior Director of Marketing and Business Development for Americas, from 1995 to January, 1998. Prior to joining Oracle Corporation, Mr. Marshall was Director of Operations - Americas International Group for Tandem Computers, where he worked from 1986 to 1995. Mr. Marshall holds a Bachelor of Business Administration, Management and a Bachelor of Science, General Sciences, both of which are from the University of South Florida. A. HAYES BARCLAY has been a Director of NeoMedia since August 6, 1996. Mr. Barclay has practiced law for approximately 33 years and since 1985, has been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd. and its predecessor, with offices in Chicago, Wheaton, and Arlington Heights, Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the University of Illinois and a J.D. from the Illinois Institute of Technology - Chicago Kent College of Law. JAMES J. KEIL has been a Director of NeoMedia since August 6, 1996. He is founder and president of Keil & Keil Associates, a business and marketing consulting firm located in Washington, D.C., specializing in marketing, sales and document technology projects. Prior to forming Keil & Keil Associates in 1990, Mr. Keil worked for approximately thirty-eight years at IBM Corporation and Xerox Corporation in various marketing and sales 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. PAUL REECE has been a Director of NeoMedia since August 6, 1996. From 1987 until 1994, when he retired from Pitney Bowes, Inc., Stamford, Connecticut, Mr. Reece served at various times as its Vice-President of Operations and Technology Division, Vice-President of Technical Systems and Advanced Products and Vice-President of Corporate Engineering and Technology. Prior to joining Pitney Bowes, Inc., Mr. Reece worked for nineteen years at General Electric Company in various technical, marketing and engineering positions. Mr. Reece holds a B.S., M.S. and Ph.D. in electronics and engineering from the University of Manchester, England. Directors are elected on an annual basis. Each director of NeoMedia holds office until the next annual meeting of the shareholders or until that director's successor has been elected and qualified. At present, NeoMedia's by-laws provide for not less than one director nor more than ten. Currently, there are seven directors. NeoMedia's by-laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of shareholders or until his successor is elected and qualified. Officers of NeoMedia are elected by the Board of 21 Directors on an annual basis and serve until the next annual meeting of the Board of Directors and until their successors have been duly elected and qualified. NeoMedia has agreed, for a period of four years from November 25, 1996, if so requested by the Joseph Charles & Associates, Inc. ("Joseph Charles") the representative of the several underwriters of NeoMedia's IPO, to nominate a designee of Joseph Charles as a director of NeoMedia. DIRECTOR COMPENSATION Directors are reimbursed for expenses actually incurred in connection with attending meetings of the Board of Directors. Until February 19, 1998, non-employee directors received options to purchase 3,000 shares of NeoMedia's common stock under the 1996 Stock Option Plan upon election as a director and received additional options to purchase 1,000 shares of NeoMedia's common stock under the 1996 Stock Option Plan as of the date of each annual meeting at which such person is re-elected and continues to serve as director. On February 19, 1998, the Board of Directors approved the payment to non-employee directors of director fees of $2,000 per meeting attended and granted options to the non-employee directors to purchase 14,000 shares of NeoMedia's common stock under the 1998 Stock Option Plan, which was submitted to the stockholders for ratification at a Special Meeting to be held on March 27, 1998. See "Executive Compensation - Stock Option Plan". In addition, upon election as a director or re-election, non-employee directors will receive options to purchase 15,000 shares of NeoMedia's common stock under the 1998 Stock Option Plan. NeoMedia anticipates that the Board of Directors will meet at least five times a year. 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 Nominating Committee, and the functions of such committee are performed by the Board of Directors. AUDIT COMMITTEE. Until February 19, 1998, NeoMedia's Board of Directors acted as the Audit Committee, which 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. On February 19, 1998, the Board of Directors elected James J. Keil, A. Hayes Barclay and Charles T. Jensen to be the sole members of the Audit Committee, which now is composed of a majority of non-employee directors. 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 and Paul Reece are the current members of NeoMedia's Compensation Committee. STOCK OPTION COMMITTEE. The Stock Option Committee, which is comprised of non-employee directors, is responsible for administering NeoMedia's Stock Option Plan. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's Stock Option Committee. CERTAIN SIGNIFICANT EMPLOYEES KEVIN E. LEININGER had been in charge of managing NeoMedia's systems transition solutions business from May, 1996 until April, 1997, when he was promoted to Vice-President of Business Development. From 1991 to 1996, he managed NeoMedia's open systems development services, which currently are part of NeoMedia's Document Solutions Services Unit. From 1987 to 1991, prior to joining NeoMedia, Mr. Leininger held a Group Leadership Position with Fermi National Accelerator Laboratories. To date, Mr. Leininger has authored or co-authored six books on UNIX and the Internet, three of which have been McGraw Hill Book of the Month selections. Mr. Leininger holds 22 a M.B.A. from the University of Chicago and a B.S. in Physics and Math from Iowa State University. Mr. Leininger is 33. RICK D. HOLLINGSWORTH has been Vice President of Technical Operations since August 19, 1996. Mr. Hollingsworth has twenty years of experience in software development. Prior to joining NeoMedia, from December 1994 to August 1996, Mr. Hollingsworth served as a consultant for a number of organizations in Southwest Florida. From June 1992 to November 1994, he was with Allen Systems Group as Chief Technical Officer. Prior to serving in this position, he served as its Executive Vice President for product development. From May 1986 to June 1992, he served as Executive Vice President of Master Control Systems where he coordinated the development and marketing of new products. Mr. Hollingsworth holds a Bachelor of Business Administration from Baylor University. Mr. Hollingsworth is 45. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation paid to (i) NeoMedia's Chief Executive Officer and (ii) each of NeoMedia's four other executive officers who received aggregate cash compensation in excess of $100,000 for services rendered to NeoMedia (collectively, "the Named Executive Officers") during the years ended December 31, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION(1) ------------------------------------- SECURITIES UNDER- OTHER LYING ALL OTHER NAME AND ANNUAL COMPEN- WARRANTS/ COMPEN- PRINCIPAL POSITION YEAR SALARY SATION BONUS(2) OPTIONS SATION - ------------------ ---- -------- -------------- ------- ---------- ---------- Charles W. Fritz 1997 $181,333 -- -- 300,000(3) $ 9,010(5) President and Chief 1996 146,666 -- $36,667 260,000(4) 5,486(5) Executive Officer 1995 110,000 -- -- -- -- Charles T. Jensen 1997 $117,333 -- -- -- $21,960(5) Chief Financial Officer 1996 95,000 -- $50,782 90,386(6) 3,780(5) and Vice-President and 1995(7) 10,833 -- -- -- -- Treasurer Robert T. Durst, Jr 1997 $150,500 $25,405(8) -- -- $ 8,432(5) Executive Vice-President 1996 104,994 -- $22,967 153,657(6) 4,704(5) 1995(9) -- -- -- -- -- Dan Trampel (10) 1997 $115,000 -- -- -- $ 7,823(5) Senior Vice-President- 1996(11) 56,689 -- $11,160 90,386(6) 500(5) Sales 1995(9) -- -- -- -- -- Kevin Leininger 1997 $106,667 $13,531(12) -- -- -- Vice-President of 1996 85,955 -- $13,430 94,906(6) -- Business Development 1995 107,068(13) -- -- -- -- - -------------------------------------------------- 23 (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) The 1996 bonuses were paid in February, 1997, except $30,000 of the bonus to Mr. Jensen, which was paid in August, 1996. (3) Represents a warrant, exercisable for a period of five years commencing December 11, 1997, to purchase up to 300,000 shares of Common Stock at an exercise price of $7.875. (4) Represents a warrant, exercisable until November 25, 2001 to purchase up to 260,000 shares of Common Stock at an exercise price of $8.85 per share. In September, 1997, an aggregate of 146,000 shares were purchased upon partial exercise of this warrant. Up to 114,000 shares may still be purchased in accordance with the provisions of this Warrant. (5) Includes life insurance premiums where policy benefits are payable to beneficiary of the Named Executive Officer, and the corresponding income tax effects. (6) Represents options granted under NeoMedia's 1996 Stock Option Plan. (7) Amounts cover the period from date of employment by NeoMedia in November, 1995 until December 31, 1995. (8) Represents relocation and automobile expenses attributable to personal use of $15,713 and $9,692, respectively. (9) Was not employed by NeoMedia during this year. (10) Resigned his employment with NeoMedia in January, 1998. (11) Amounts cover the period from the date of employment by NeoMedia in July, 1996 until December 31, 1996. (12) Represents relocation expenses. (13) Includes sales commissions of $29,568.
EMPLOYMENT AGREEMENTS NeoMedia has entered into five year employment agreements ending April 30, 2001, with each of Charles W. Fritz, its President and Chief Executive Officer, and Charles T. Jensen, its Vice President, Chief Financial Officer and Treasurer, and with Robert T. Durst, Jr., its Executive Vice-President and Chief Technical Officer, ending March 31, 2001. The employment agreements for Messrs. Fritz, Durst and Jensen provide for an annual salary of $170,000, $140,000 and $110,000, respectively, subject to annual review by the Board of Directors which may increase but not decrease such salary, and participation in all benefits and plans available to executive employees of NeoMedia. Effective as of May 1, 1997, the Board of Directors increased the annual salary of Messrs. Fritz and Jensen to $187,000 and $121,000, respectively, and increased the annual salary of Mr. Durst to $154,000 effective as of April 1, 1997. Effective as of January 1, 1998, the Board of Directors increased the annual salary of Messrs. Fritz, Durst and Jensen to $250,000, $170,000 and $150,000, respectively. In addition on February 19, 1998, the Board of Directors granted, subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to Messrs. Fritz, Durst and Jensen options to purchase 200,000, 90,000 and 90,000, respectively, shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. Each employment agreement terminates upon the employee's death or retirement, and may be terminated by NeoMedia upon the employee's total disability, as defined in the agreement, or for cause which is defined, among other things, as the willful failure to perform duties, embezzlement, or conviction of a felony. In addition, Messrs. Fritz, Durst and Jensen participate in a special insurance disability plan and receive life insurance benefits not generally offered to other employees and are also entitled to certain severance benefits. These severance benefits vary depending upon the reason for termination and whether there has been a change in control of NeoMedia. If termination occurs by NeoMedia (except for cause or total disability) or by the employee for good reason, as defined in the employment agreement, the agreement provides that NeoMedia will pay to the terminated employee (i) his salary through the date of termination, (ii) any deferred and unpaid amounts due under NeoMedia's Incentive Plan for Management, (iii) any accrued deferred compensation, (iv) an amount equal to two times the sum of his annual base salary plus his highest incentive compensation for the last two years, (v) unpaid incentive compensation including a pro-rata amount of contingent incentive compensation for uncompleted periods, (vi) in lieu of any stock options granted whether under NeoMedia's Stock Option Plan or otherwise (which 24 are canceled upon the following payment), a cash amount equal to the aggregate spread between the exercise prices of all options held at such time by such terminated employee and the higher of the highest bid price of the common stock during the twelve months immediately preceding the date of termination, or the highest price per share of common stock actually paid in connection with any change in control (as defined in the employment agreement) of NeoMedia, provided that such payments do not violate the provisions of any option or the 1996 Stock Option Plan or other plan then in effect, (vii) an amount equal to any taxes payable on these payments, (viii) all relocation expenses if the terminated employee moves his principal residence more than 50 miles within one year from the date of termination, and (ix) all legal fees and expenses incurred as a result of the termination. In addition, unless termination is for cause, NeoMedia must continue to fund through the terminated employee's normal retirement age any key man insurance that is in effect on the date of termination, maintain in effect for the benefit of the terminated employee all employee benefit plans, programs, or arrangements in effect immediately prior to the date of termination. If the terminated employee's continued participation under such plan and programs is not allowable, NeoMedia is obligated to provide him with similar benefits. Each employment agreement provides that services may be performed for companies, other entities, and individuals (whether or not affiliated with NeoMedia) provided that the performance of such service does not prevent the employee from attending to the affairs of NeoMedia, and such companies are not in competition with NeoMedia. The employment agreements of Messrs. Fritz and Durst contain provisions prohibiting their competing with NeoMedia both during and, depending upon the reason for such termination, for one year following the termination of their employment. On January 26, 1998, NeoMedia hired Mr. James M. Marshall as Executive Vice President of Sales and Business Development. Mr. Marshall's annual salary is $163,000 plus a $40,000 annual bonus to be paid in quarterly installments if quarterly sales goals are met. In addition, the Board of Directors granted, subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to Mr. Marshall options to purchase 70,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. Mr. Marshall also participates in all benefits and plans available to executive employees of NeoMedia. INCENTIVE PLAN FOR MANAGEMENT Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan for Management ("Incentive Plan"), which provides for annual cash bonuses to eligible employees based upon the attainment of certain corporate and 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 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. 25 STOCK OPTION PLAN Effective as of February 1, 1996 (and amended and restated effective July 18, 1996 and further amended through November 18, 1996), NeoMedia adopted its 1996 Stock Option Plan ("Stock Option Plan"), the purpose of which is to retain the services of selected employees and attract new employees, consultants and directors by providing them with the opportunity to acquire a proprietary interest in NeoMedia and thus share in its growth and success. The 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. Incentive stock options may be granted only to employees of NeoMedia or its subsidiaries. Stock options, other than incentive stock options, may be granted to any employee, officer, director or consultant. An employee may receive more than one grant of a stock option, including simultaneous grants of different forms of stock options. Options to purchase up to 3,000 shares of common stock are granted to non-employee directors on the date that such person first becomes a member of the Board of Directors. Non-employees currently serving as directors received such options to purchase 3,000 shares as of November 25, 1996. In addition, beginning with NeoMedia's first annual stockholder's meeting options to purchase up to an additional 1,000 shares of common stock will automatically be granted to each non-employee director as of the date of each annual meeting at which such person is re-elected or continues to serve as a director. The Stock Option Plan is currently administered by the Stock Option Committee of the Board of Directors The Stock Option Committee is currently composed of A. Hayes Barclay and James J. Keil and may not include an officer or employee of NeoMedia. No member of the Committee is eligible to receive stock options under the Stock Option Plan while serving on the Committee other than the automatic grant of options to non-employee directors. Subject to the provisions of the Stock Option Plan, the Committee has exclusive authority to interpret and administer the Stock Option Plan, to select the persons to whom stock options are granted, to determine the number of shares to be covered by each stock option and whether the option granted is an incentive stock option or a non-qualified stock option, to determine whether the shares covered by the option are restricted as to transferability and to determine the terms and conditions upon which each stock option may be exercisable. No stock options under the Stock Option Plan can be granted after January 31, 1999, and the maximum term of an option is ten years from the date of its grant. Upon the occurrence of certain transactions, including a sale, transfer or other disposition resulting in Charles W. Fritz, William E. Fritz and their affiliates owning less than a specified percentage of the voting stock of NeoMedia or the execution of a definitive agreement for the sale of all or substantially all of NeoMedia's assets or its consolidation or merger where NeoMedia is not the surviving entity, each then outstanding option immediately becomes exercisable. Under certain circumstances, the shares of common stock issuable upon exercise of the options may be increased or decreased. The exercise price of each option is determined by the Committee and must be either the fair market value of each share subject to the option on the date the option is granted, or at such other price as the Committee determines, but not less than 100% of the fair market value on the date of the grant. In lieu of tendering a cash payment to satisfy the option price, the optionee may, in the Committee's discretion, satisfy all or a portion of such option price by delivering shares of NeoMedia's common stock. Such shares of common stock are valued at their fair market value at the time of exercise. Options under the Stock Option Plan are non-transferable other than by will, the laws of descent or distribution or pursuant to a qualified domestic relations order. Options may be exercised only during the lifetime of the optionee and, except as may otherwise be provided, only by such individual. The Committee, in its discretion, may provide that an option is exercisable in installments and at specified times, and, at any time after the granting of an option, may accelerate the installment exercise dates. Each grant of an option is confirmed by an agreement ("Stock Option Agreement") between NeoMedia and the optionee, which provides, among other things, that shares received upon exercise of the option cannot be sold, transferred or otherwise disposed of for at least six months from the date of the Stock Option Agreement, none of the outstanding options can be exercised by the optionee thereof unless such optionee has been in the continuous employ of NeoMedia to the date of exercise, subject to termination of employment, death 26 and disability and gives NeoMedia the right, under certain circumstances, to suspend an optionee's right to exercise an option. For options granted prior to July 18, 1996, depending upon the circumstances of an optionee's termination of employment, such optionee's stock options may be exercisable following such termination for up to three months, which is extended to twelve months from the date of death if the optionee dies during such three month period. If the termination is due to death, the option is exercisable for twelve months following the date of death. If the optionee's employment with NeoMedia is terminated without the consent of NeoMedia (other than due to the optionee's death) or for cause, as determined by the Committee, then such optionee's right to exercise the then-outstanding stock options terminates immediately. Options granted subsequent to July 18, 1996, terminate on the earlier of an optionee's termination of employment for any reason or the expiration of the term of the option, although the Committee, in its sole discretion, may allow the option to be exercised for any period following such termination but no longer than the expiration of the term. If at any time after termination an optionee engages in "detrimental activity", as defined in the Stock Option Plan, the Committee, in its discretion, may cause the optionee's right to exercise the option to be forfeited. Options then exercisable held by a non-employee director when such person ceases being a director must be exercised within twelve months following the date such person is no longer serving as a director, unless such termination of service as a director is due to such person's death, permanent disability or retirement pursuant to a Company policy, in which case, such options are exercisable during their remaining terms. The employment agreements of Messrs. Fritz, Durst and Jensen each provide that upon termination of employment by NeoMedia, other than for cause, death or retirement, or by the employee for "Good Reason" as defined in the employment agreement, any time following this offering, any options granted to the terminated employee are canceled and, in lieu thereof, such terminated employee is to receive a cash amount equal to the aggregate spread between the exercise prices of all options held at such time by such terminated employee and the higher of the highest bid price of the common stock during the twelve months immediately preceding the date of termination, or the highest price per share of common stock actually paid in connection with any change in control of NeoMedia (as defined), provided that such payments do not violate the provisions of any option or the Stock Option Plan or other plan then in effect. As of March 16, 1998, options to purchase an aggregate of 623,590 shares of common stock, at an exercise price of $.84, were granted and are outstanding under NeoMedia's Stock Option Plan, including options to Charles T. Jensen, its Chief Financial Officer, and to Robert T. Durst, Jr., its Executive Vice-President, to purchase 90,386 and 153,657 shares of common stock, respectively. In addition, options to purchase an aggregate of 457,407 shares of common stock in a range of $4.19 to $10.88 per share have also been granted to employees, directors and consultants and are outstanding. Effective February 1, 1996 (and amended and restated effective July 18, 1996), DTM adopted a 1996 stock option plan providing for the issuance of a maximum of 400,000 shares of DTM common stock and identical in all other material respects to NeoMedia's Stock Option Plan. As a result of the Migration Merger, the DTM stock option plan is no longer in effect, no further options under the DTM stock option plan will be issued and holders of options to purchase shares of DTM common stock will, in lieu thereof, receive shares of NeoMedia's Common stock upon exercise of their options. As of the March 16, 1998, options to purchase 320,872 shares of common stock under the DTM stock option plan, at an exercise price of $.84 per share have been granted and are outstanding. Following the Migration Merger, the aggregate number of shares of common stock issuable under NeoMedia's Stock Option Plan was not increased by the number of shares of stock issuable under the DTM stock option plan but remains at a maximum of 1,500,000 shares, including options granted under the DTM stock option plan. As of March 16, 1998, of the 1,500,000 options issuable under NeoMedia's Stock Option Plan, there are currently options granted to purchase an aggregate of 1,401,869 shares of common stock (including 320,872 options granted under the DTM stock option plan), and 26,348 options reserved for future issuance under the Stock Option Plan. In addition to the Stock Option Plan, the board of directors adopted another stock option plan (the 1998 Stock Option Plan) which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. 27 In addition, grantees of options to purchase common stock who are eligible to resell the common stock issuable upon exercising the option under Rule 701 of the Securities Act have agreed (i) not to sell such common stock until after November 25, 1997 and (ii) following such period, to sell in accordance with the volume limitations of Rule 144(e)(1) of the Securities Act which limits the number of shares that may be sold by such person during any three month period to no more than the greater of (a) one percent of NeoMedia's then outstanding shares of common stock or (b) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of notice of sale with the Commission, or if no notice is required to be filed, the date of receipt by a broker to sell or the date of execution of the sale. In consideration of loans made by him to it, NeoMedia has also granted to Charles W. Fritz a warrant, which contains anti-dilution provisions, to purchase up to 260,000 shares of common stock at an exercise price of $8.85. The Board of Directors approved the acceleration of the exercise date to September 16, 1997 from November 25, 1997, and in September, 1997, Mr. Fritz exercised 146,000 of these warrants. On December 11, 1997, the Board of Directors granted to Mr. Fritz an additional warrant to purchase up to 300,000 shares of common stock at an exercise price of $7.875 in consideration for his accelerated exercise of warrants which provided capital to NeoMedia on a more favorable basis to NeoMedia than obtaining other capital funds. The following presents certain information on stock options and warrants for the Named Executive Officers for the years ended December 31, 1997:
NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS / OPTIONS / WARRANTS WARRANTS GRANTED TO EXERCISE EXPIRATION NAME GRANTED EMPLOYEES PRICE DATE - ---- ---------- ---------- -------- ---------- Charles W. Fritz............ ......300,000 100.0%(1) $7.875 12/11/02 - ---------------------------------------- (1) Represents a warrant to purchase shares of Common Stock exercisable for five years commencing December 11, 1997. Since this was the only warrant granted to any employee of NeoMedia, it represents 100% of all warrants of this kind granted to employees. When combined with all options granted during the year ended December 31, 1997 under NeoMedia's 1996 Stock Option Plan, this warrant represents 50.5% of all options and warrants granted to employees by NeoMedia in fiscal 1997.
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 $9,500 for 1997) 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. 28 AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following table sets forth options exercised by NeoMedia's Named Executive Officers during fiscal 1997, and the number and value of all unexercised options at fiscal year end. The value of "in-the-money" options refers to options having an exercise price which is less than the market price of NeoMedia's stock on December 31, 1997.
VALUE OF NUMBER OF UNEXERCISED IN-THE- UNEXERCISED MONEY SECURITIES OPTIONS AT UNDERLYING OPTIONS DECEMBER 31, 1997 AT DECEMBER 31, (BASED ON $9.094 SHARES 1997 PER SHARE) ACQUIRED VALUE # EXERCISABLE/ # EXERCISABLE/ NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE - ---- ----------- -------- ------------------ ------------------- Charles W. Fritz 146,000 $35,624 414,000 / 0 $ 393,516 / $0 Charles T. Jensen -- -- 90,386 / 0 $ 746,046 / $0 Robert T. Durst, Jr. -- -- 153,657 / 0 $1,268,285 / $0 Dan Trampel (*) -- -- 90,386 / 0 $ 322,136 / $0 Kevin Leininger -- -- 94,906 / 0 $ 783,354 / $0 - ------------------- (*) Resigned his employment with NeoMedia in January, 1998.
For the year ended December 31, 1997, there have not been any long term incentive plan awards made to a Named Executive Officer. 29 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of NeoMedia's common stock as of March 16, 1998, (i) by each person or entity known by NeoMedia to own beneficially more than five percent of NeoMedia's Common Stock, (ii) by each of NeoMedia's directors, (iii) by each executive officer of NeoMedia named in the Summary Compensation Table and (iv) by all executive officers and directors of NeoMedia as a group.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(1) - ------------------------ ----------------------- ------------------- Charles W. Fritz(2)(3) ............... 1,992,369 22.8% Fritz Family Limited Partnership(2)(4) 1,511,742 18.2% Chandler T. Fritz 1994 Trust(2)(5)(6). 58,489 * Charles W. Fritz 1994 Trust(2)(5)(7) . 58,489 * Debra F. Schiafone 1994 Trust(2)(5)(8) 58,489 * Charles T. Jensen(2)(9) .............. 90,386 1.1% Robert T. Durst, Jr.(2)(9) ........... 153,657 1.8% A. Hayes Barclay(10) ................. 10,000 * James J. Keil(11) .................... 8,000 * Paul Reece(12) ....................... 5,000 * Dan Trampel (2)(9)(13) ............... 90,386 1.1% Kevin Leininger (2)(9) ............... 94,906 1.1% George G. Luntz (14) ................. 535,000 6.4% Gerald L. Willis (14) ................ 535,000 6.4% All executive officers and directors as a group (9 persons)(15). 4,131,913 45.0% - ------------------------------------------------------------ *less than one percent of issued and outstanding shares of Common Stock of NeoMedia (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes generally voting power and/or investment power with respect to securities. Options to purchase shares of Common Stock currently exercisable or exercisable within sixty days of March 16, 1998 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 the knowledge of NeoMedia, 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. 30 (2) c/o NeoMedia Technologies, Inc. 2201 Second Street, Suite 600 Fort Myers, FL 33901 (3) Mr. Fritz may be deemed to be a parent and promoter of NeoMedia, as those terms are defined in the Securities Act of 1933, as amended. Shares beneficially owned include (i) 400 shares of Common Stock (100 shares owned by each of Mr. Fritz's four minor children for an aggregate of 400 shares) and (ii) 414,000 shares of Common Stock issuable upon exercise of two separate warrants to purchase Common Stock which are currently exercisable. Does not include options, granted on February 19, 1998, by the Board of Directors subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to purchase 200,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. (4) William E. Fritz, Secretary of NeoMedia, and his wife, Edna Fritz, are the general partners of this 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 1,687,209 shares (175,467 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, and 1,511,742 shares as a result of being co-general partner of the Fritz Family Partnership). 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 primary beneficiary of this trust. (7) Charles W. Fritz, son of William E. Fritz and President and Chief Executive Officer of NeoMedia, is primary beneficiary of this trust. (8) Debra F. Schiafone, daughter of William E. Fritz, is primary beneficiary of this trust. (9) Represents options granted under NeoMedia's 1996 Stock Option Plan which are currently exercisable. Does not include options, granted to each of Messrs. Jensen and Durst on February 19, 1998, by the Board of Directors subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to purchase 90,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. (10) c/o Barclay & Damisch Ltd. 115 West Wesley Street Wheaton, IL 60187 Includes 3,000 currently exercisable options to purchase shares of Common Stock granted under NeoMedia's 1996 Stock Option Plan. Does not include (i) 1,000 options which are not currently exercisable or exercisable within sixty days of March 16, 1998 and (ii) 1,000 shares of Common Stock owned by Mr. Barclay's adult child living at Mr. Barclay's home, beneficial ownership of which is disclaimed. Does not include options, granted on February 19, 1998, by the Board of Directors subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to purchase 14,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. 31 (11) c/o Keil & Keil Associates 733 15th Street, N.W. Washington, DC 20005 Includes 3,000 currently exercisable options to purchase shares of Common Stock granted under NeoMedia's 1996 Stock Option Plan. Does not include 1,000 options which are not currently exercisable or exercisable within sixty days of March 16, 1998. Does not include options, granted on February 19, 1998, by the Board of Directors subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to purchase 14,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. (12) c/o 380 Gulf of Mexico Drive Long Boat Key, FL 34228 Includes 3,000 currently exercisable options to purchase shares of Common Stock granted under NeoMedia's 1996 Stock Option Plan. Does not include 1,000 options which are not currently exercisable or exercisable within sixty days of March 16, 1998. Does not include options, granted on February 19, 1998, by the Board of Directors subject to stockholder approval of the 1998 Stock Option Plan and certain other conditions, to purchase 14,000 shares of NeoMedia common stock under the 1998 Stock Option Plan, which has been submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. (13) Resigned his employment with NeoMedia in January, 1998. (14) 11025 Reed Hartman Highway Cincinnati, Ohio 45242 Does not include 15,000 options for Mr. Luntz and 10,000 options for Mr. Willis which are not currently exercisable or exercisable within sixty days of March 16, 1998. (15) Includes an aggregate of 438,335 currently exercisable options to purchase s hares of Common Stock granted under NeoMedia's 1996 Stock Option Plan and 414,000 currently exercisable warrants to purchase shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In December, 1995 and January, 1996, in a series of transactions between affiliates, funds were loaned and borrowed between Charles W. Fritz, William E. Fritz, Gen-Tech, Inc. ("Gen-Tech"), an Illinois corporation, owned by William E. Fritz, Dev-Mark, Inc. ("Dev-Mark"), an Illinois corporation, solely owned by William E. Fritz, DTM and NeoMedia. In the transactions occurring in December, 1995: (1) Charles W. Fritz loaned $450,000 to DTM, which used such funds to pay existing indebtedness of $230,000, $150,000 and $70,000 to NeoMedia, Gen-Tech and William E. Fritz, respectively, and (2) NeoMedia paid $230,000 to William E. Fritz in partial payment of existing indebtedness. In the transactions occurring in January, 1996: (1) Charles W. Fritz loaned $750,000 to DTM, which used such funds to pay existing indebtedness of $20,000 and $370,000 to William E. Fritz and NeoMedia, respectively, (2) DTM loaned $360,000 to NeoMedia, (3) NeoMedia paid $183,000 and $75,000 to William E. Fritz and Dev-Mark, respectively, for existing indebtedness, and (4) NeoMedia loaned William E. Fritz $472,000. The result of such transactions occurring in December, 1995, and January, 1996, with respect to NeoMedia was that (1) NeoMedia and DTM paid in its entirety any indebtedness owed by them to William E. Fritz, (2) NeoMedia loaned to William E. Fritz the principal sum of $472,000, represented by a note payable within 30 days of demand, bearing interest at eight percent per annum, (3) NeoMedia paid in its entirety any indebtedness owed by it to Dev-Mark, (4) Charles W. Fritz loaned to DTM the aggregate principal sum of $1,200,000, represented by notes payable within thirty days of demand, bearing interest at eight percent per annum, (5) DTM paid to William E. Fritz, 32 NeoMedia and Gen-Tech, in their entirety, any indebtedness existing prior to or incurred as a result of such transactions, (6) DTM loaned to NeoMedia the principal sum of $360,000, which is represented by a note payable within 30 days of demand, bearing interest at eight percent per annum. The $472,000 loan receivable from William E. Fritz was repaid in full in February, 1997. Following these series of transactions occurring in December, 1995 and January, 1996, Migration was indebted to Charles W. Fritz in the aggregate principal amount of $1,210,000, which was comprised of the $1,200,000 resulting from these transactions and a $10,000 loan made in 1994. This $1,210,000 principal amount remained unpaid until October 1996, at which time Mr. Fritz contributed $738,000 of such indebtedness to additional paid-in capital of NeoMedia, thus reducing such aggregate principal indebtedness to him from Migration to $472,000. This loan was repaid in full in February, 1997. In March 1996, Dev-Mark loaned to NeoMedia the principal sum of $135,000, represented by a promissory note, payable within thirty days of demand, bearing interest at the rate of eight percent payable on the last day of each calendar month. This loan was repaid in full in December, 1996. In March, 1996, Charles W. Fritz loaned to NeoMedia the principal sum of $35,958.19, represented by a promissory note, payable within thirty days of demand, bearing interest at the rate of eight percent payable on the last day of each calendar month. $6,000 of the principal amount of this loan was repaid in several days from the date of the loan. The remaining principal amount of $29,958.19 was paid in August, 1996. In June, 1996, Charles W. Fritz loaned to NeoMedia the principal sum of $200,000, represented by a promissory note, payable within thirty days of demand, bearing interest at the rate of eight percent payable on the last day of each calendar month. This loan was repaid in full in December, 1996. In June, 1996, in consideration of loans made by Charles W. Fritz to it, NeoMedia granted to him a warrant (the "Principal Stockholder's Warrant") to purchase up to 260,000 shares of common stock at an exercise price $8.85. This warrant is exercisable for a period of four years commencing on November 25, 1997 and contains anti-dilution provisions. In September, 1997, pursuant to a resolution adopted by the board of directors authorizing the acceleration of the exercise date of the warrant to September 16, 1997, Mr. Fritz exercised warrants to purchase 146,000 shares of common stock. In December, 1997, the Board of Directors granted to Mr. Fritz an additional warrant to purchase up to 300,000 shares of common stock at an exercise price of $7.875. This warrant is exercisable over a period of four years commencing on December 11, 1998 and was granted in consideration of the accelerated exercise of the warrant for 260,000 shares which provided capital to NeoMedia on a more favorable basis to NeoMedia than obtaining other capital funds. In connection with the extension of credit facilities by NBD Bank to NeoMedia in 1994, and in connection with the renewal of such credit facility (1) Gen-Tech (with respect to the first renewal in 1995 of the facility) and Dev-Mark (with respect to the initial facility) guaranteed NeoMedia's obligations to the Bank; (2) William E. Fritz pledged to the lender, as collateral for the loan, all shares of Gen-Tech stock owned by him until the second renewal in August, 1996, when such stock was released; (3) NeoMedia assigned to the Bank all of its rights in the demand promissory note for $500,000 from DTM to NeoMedia, and the security agreement between NeoMedia and DTM until the second renewal in August, 1996, when NeoMedia and DTM became co-borrowers; and (4) William E. Fritz (and Dev-Mark and Gen-Tech with respect to the first renewal of the facility) subordinated rights to the Bank. In February, 1997, William E. Fritz, Dev-Mark and Gen-Tech were released from the guarantees on the NBD credit facility, including the letter of credit. In July, 1995, NeoMedia purchased from the estate of a deceased stockholder, 36 shares (506,161 shares on a post-exchange, post reverse stock split basis) of NeoMedia's common stock for $450,000. The purchase price, which was arrived at through negotiations between management and the estate of the deceased stockholder, is evidenced by a non-interest bearing promissory note payable in 36 equal installments of $12,500 each. Such shares were all of the shares of common stock owned by such deceased stockholder and represented 18% of the then issued and outstanding shares of common stock of NeoMedia. 33 NeoMedia leases approximately 2,000 square feet under terms of a written lease from GEDA, Inc. which is a corporation owned by Gerald L. Willis who is a shareholder in and consultant to NeoMedia and a former owner of Allegiant. The lease expires in January, 2000. During 1997, NeoMedia made lease payments in accordance with this lease totaling $36,000. Charles W. Fritz, Gen-Tech and Dev-Mark have each guaranteed NeoMedia's obligations to IBM Credit Corporation ("ICC") under credit and financing accommodations granted by ICC to NeoMedia. In addition, each guarantor subordinated to ICC any liabilities and obligations owed to them by NeoMedia. If any guarantor breaches the guaranty, ICC has the right, among other things, to require immediate payment of all indebtedness of NeoMedia. In February, 1997, Gen-Tech and Dev-Mark were released from the guarantees to ICC. In November, 1996, NeoMedia entered into a lease with a William E. Fritz whereby Mr. Fritz leased to NeoMedia an exhibition booth which cost $85,435. The lease is for 36 months with monthly payments of $2,858. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (1) The following exhibits required by Item 601 of Regulation S-B to be filed herewith are hereby incorporated by reference: 3.1 Articles of Incorporation of Dev-Tech Associates, Inc. and amendment thereto (Incorporated by reference to Exhibit 3.1 to NeoMedia's Registration Statement No. 333-5534 (the"Registration Statement")). 3.2 By-laws of Dev-Tech Associates, Inc. (Incorporated by reference to Exhibit 3.2 to NeoMedia's Registration Statement). 3.3 Restated Certificate of Incorporation of DevSys, Inc. (Incorporated by reference to Exhibit 3.3 to NeoMedia's Registration Statement). 3.4 By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4 to NeoMedia's Registration Statement). 3.5 Articles of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech Associates, Inc. (Incorporated by reference to Exhibit 3.5 to NeoMedia's Registration Statement). 3.6 Certificate of Merger of Dev-Tech Associates, Inc. into DevSys, Inc. (Incorporated by reference to Exhibit 3.6 to NeoMedia's Registration Statement). 3.7 Articles of Incorporation of Dev-Tech Migration, Inc. and amendment thereto (Incorporated by reference to Exhibit 3.7 to NeoMedia's Registration Statement). 3.8 By-laws of Dev-Tech Migration, Inc. (Incorporated by reference to Exhibit 3.8 to NeoMedia's Registration Statement). 3.9 Restated Certificate of Incorporation of DevSys Migration, Inc. (Incorporated by reference to Exhibit 3.9 to NeoMedia's Registration Statement). 3.10 Form of By-laws of DevSys Migration, Inc. (Incorporated by reference to Exhibit 3.10 to NeoMedia's Registration Statement). 3.11 Form of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc. (Incorporated by reference to Exhibit 3.11 to NeoMedia's Registration Statement). 3.12 Form of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc. (Incorporated by reference to Exhibit 3.12 to NeoMedia's Registration Statement). 3.13 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). 3.14 Form of Certificate of Amendment to Certificate of Incorporation of NeoMedia Technologies, Inc. authorizing a reverse stock split (Incorporated by reference to Exhibit 3.14 to NeoMedia's Registration Statement). 4.1 Form of Certificate for Common Stock of DevSys, Inc. (Incorporated by reference to Exhibit 4.1 to NeoMedia's Registration Statement). 4.2 Form of Joseph Charles' Warrant Agreement (Incorporated by reference to Exhibit 4.2 to NeoMedia's Registration Statement). 4.3 Form of Private Placement Financing Converted Securities Registration Rights Agreement (Incorporated by reference to Exhibit 4.4 to NeoMedia's Registration Statement). 34 4.4 Form of 10% Unsecured Subordinated Convertible Promissory Note (Incorporated by reference to Exhibit 4.5 to NeoMedia's Registration Statement). 4.5 Form of Principal Stockholder's Warrant (Incorporated by reference to Exhibit 4.6 to NeoMedia's Registration Statement). 4.6 Form of Placement Agent's Warrant Registration Rights Agreement (Incorporated by reference to Exhibit 4.7 to NeoMedia's Registration Statement). 4.7 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). 4.8 Form of Warrant Agreement and Warrant (Incorporated by reference to Exhibit 4.9 to NeoMedia's Registration Statement). 4.9 NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated by reference to Appendix A to NeoMedia's Form 14A Filed on February 18, 1998). 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 Lease dated August 29, 1995 for premises located at 280 Shuman Boulevard, Naperville, Illinois (Incorporated by reference to Exhibit 10.8 to NeoMedia's Registration Statement). 10.6 Guaranty (By Individual) dated October 20, 1992, to IBM Credit Corporation from Charles W. Fritz, as Guarantor (Incorporated by reference to Exhibit 10.40 to NeoMedia's Registration Statement). 10.7 Dev-Tech Associates, Inc. Annual Incentive Plan for Management (Incorporated by reference to Exhibit 10.43 to NeoMedia's Registration Statement). 10.8 Dev-Tech Associates, Inc. 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.44 to NeoMedia's Registration Statement). 10.9 First Amendment and Restatement of Dev-Tech Associates, Inc. 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.45 to NeoMedia's Registration Statement). 10.10 Form of Stock Option Agreement - Dev-Tech Associates, Inc. (Incorporated by reference to Exhibit 10.46 to NeoMedia's Registration Statement). 10.11 Dev-Tech Migration, Inc. 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.47 to NeoMedia's Registration Statement). 10.12 First Amendment and Restatement of Dev-Tech Migration, Inc. 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.48 to NeoMedia's Registration Statement). 10.13 Form of Stock Option Agreement - Dev-Tech Migration, Inc. (Incorporated by reference to Exhibit 10.49 to NeoMedia's Registration Statement). 10.14 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto (Incorporated by reference to Exhibit 10.50 to NeoMedia's Registration Statement). 10.15 Mutual General Release and Stock Purchase Agreement with the Estate of Thomas Ruberry (Incorporated by reference to Exhibit 10.52 to NeoMedia's Registration Statement). 10.16 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). 10.17 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). 10.18 Sublease Agreement Between NeoMedia Technologies, Inc. and Lancaster Annuity Services Company Dated November 8, 1996 (Incorporated by reference to Exhibit 10.44 to NeoMedia's Form 10-KSB for the year ended December 31, 1996). 35 10.19 Master Lease Between William E. Fritz and NeoMedia Technologies, Inc. Dated November 6, 1996 (Incorporated by reference to Exhibit 10.46 to NeoMedia's Form 10-KSB for the year ended December 31, 1996). 10.20 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). 10.21 Collateralized Guaranty Between IBM Credit Corporation and NeoMedia Migration, Inc. Dated February 20, 1997 (Incorporated by reference to Exhibit 10.48 to NeoMedia's Form 10-KSB for the year ended December 31, 1996). 10.22 Lease By and Between American National Bank and Trust Company of Chicago and NeoMedia Technologies, Inc. Dated February 25, 1997 (Incorporated by reference to Exhibit 10.50 to NeoMedia's Form 10-QSB for the quarter ended March 31, 1997). 10.23 Letter Agreement by and between Dominick & Dominick, Incorporated and NeoMedia Technologies, Inc. Dated March 20, 1997 (Incorporated by reference to Exhibit 10.51 to NeoMedia's Form 10-QSB for the quarter ended June 30, 1997). 10.24 Stock Purchase Agreement Dated August 30, 1997 By and Between NeoMedia Technologies, Inc. and George Luntz and Gerald L. Willis (Incorporated by reference to Exhibit 99.1 to NeoMedia's Form 8-K dated September 25, 1997). 10.25 Registration Rights Agreement Dated September 25, 1997 By and Between NeoMedia Technologies, Inc. and Gerald L. Willis and George G. Luntz (Incorporated by reference to Exhibit 99.2 to NeoMedia's Form 8-K dated September 25, 1997). 10.26 Consulting Agreement Dated August 30, 1997 By and Between NeoMedia Technologies, Inc. and Gerald L. Willis. (Incorporated by reference to Exhibit 99.3 to NeoMedia's Form 8-K dated September 25, 1997). 10.27 Employment Agreement Dated August 30, 1997 By and Between NeoMedia Technologies, Inc. and George Luntz (Incorporated by reference to Exhibit 99.4 to NeoMedia's Form 8-K dated September 25, 1997). (2) The following exhibits required by Item 601 of Regulation S-B are hereby filed herewith: 4.10 Form of Warrant to Charles W. Fritz 4.11 Form of Warrant to Dominick & Dominick, Incorporated 4.12 Form of Warrant to Compass Capital, Inc. 4.13 Form of Warrant to Thornhill Capital, L.L.C. 4.14 Form of Warrant to Southeast Research Partners, Inc. 4.15 Form of Warrant to Joseph Charles & Associates, Inc. 21 Subsidiaries 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of KPMG Peat Marwick LLP 27.1 Article 5 Financial Data - -------------------------------------------- (b) Reports on Form 8-K NeoMedia reported on Form 8-K/A dated September 25, 1997, the audited financial statements of Allegiant as of December 31, 1996 and the pro forma financial information of NeoMedia and Allegiant prepared using the pooling of interests method of accounting. NeoMedia reported on Form 8-K dated November 10, 1997, that BT Alex Brown, Incorporated, a subsidiary of Bankers Trust New York Corporation, was hired as a financial advisor and that NeoMedia announced the redemption of all of its outstanding publicly-traded warrants. NeoMedia reported on Form 8-K dated December 29, 1997, that it raised gross proceeds of $12.3 million through the exercise of outstanding warrants that were exercised in response to NeoMedia's warrant redemption call which ended December 18, 1997. 36 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fort Myers, State of Florida, on the 25th day of March, 1998. NEOMEDIA TECHNOLOGIES, INC. --------------------------- Registrant By:/s/ CHARLES W. FRITZ ------------------------- Charles W. Fritz, President, Chief Executive Officer and Chairman of the Board In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1998. SIGNATURES TITLE - ---------- ----- /s/ CHARLES W. FRITZ President, Chief Executive Officer, - ----------------------- Chairman of the Board and Director Charles W. Fritz /s/ WILLIAM E. FRITZ Secretary and Director - ----------------------- William E. Fritz /s/ CHARLES T. JENSEN Chief Financial Officer, - ----------------------- Treasurer and Director Charles T. Jensen /s/ ROBERT T. DURST, JR. Director - ----------------------- Robert T. Durst, Jr. /s/ A. HAYES BARCLAY Director - ----------------------- A. Hayes Barclay /s/ JAMES J. KEIL Director - ----------------------- James J. Keil /s/ PAUL REECE Director - ----------------------- Paul Reece 37 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of NeoMedia Technologies, Inc. We have audited the accompanying consolidated balance sheet of NeoMedia Technologies, Inc. and subsidiaries ("NeoMedia") as of December 31, 1997, and the related consolidated statements of operations, cash flows and shareholders' equity for the year then ended. These consolidated financial statements are the responsibility of the NeoMedia'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 generally accepted auditing standards. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeoMedia as of December 31, 1997, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Miami, Florida March 18, 1998 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of NeoMedia Technologies, Inc. We have audited the accompanying consolidated balance sheet of NeoMedia Technologies, Inc. and subsidiaries ("NeoMedia") as of December 31, 1996, and the related consolidated statements of operations and shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of NeoMedia's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeoMedia as of December 31, 1996, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Chicago, Illinois October 24, 1997 F-2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, -------------------- ASSETS 1997 1996 -------- -------- (In thousands) Current assets: Cash and cash equivalents ................................. $ 10,283 $ 4,209 Trade accounts receivable, net of allowance for doubtful accounts of $191 and $221 ............................. 6,656 5,041 Amounts due from related parties .......................... 6 496 Inventories ............................................... 363 105 Prepaid expenses and other ................................ 562 588 -------- -------- Total current assets .................................. 17,870 10,439 -------- -------- Property and equipment, net of accumulated depreciation ........ 651 297 Capitalized software costs, net of accumulated amortization .... 1,278 657 -------- -------- Total assets .............................................. $ 19,799 $ 11,393 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................... $ 4,320 $ 3,836 Accrued expenses .......................................... 931 1,056 Current portion of long-term debt ......................... 201 262 Other ..................................................... 306 265 -------- -------- Total current liabilities ............................. 5,758 5,419 -------- -------- Long-term debt, net of current portion ......................... 915 1,589 -------- -------- Total liabilities ..................................... 6,673 7,008 -------- -------- Commitments and contingencies Shareholders' equity: Common stock, $.01 par value, 15,000,000 shares authorized, 8,295,291 and 6,184,316 shares issued and outstanding.... 83 62 Additional paid-in capital ................................ 23,542 8,849 Accumulated deficit ....................................... (10,499) (4,526) -------- -------- Total shareholders' equity ............................ 13,126 4,385 -------- -------- Total liabilities and shareholders' equity ................ $ 19,799 $ 11,393 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (Dollars in thousands, except per share data) NET SALES: License fees ............................... $ 1,994 $ 895 Resales of software and technology equipment 19,172 14,986 Service fees ............................... 3,268 2,200 ----------- ----------- Total net sales ........................ 24,434 18,081 ----------- ----------- COST OF SALES: License fees ............................... 324 349 Resales of software and technology equipment 17,154 12,271 Service fees ............................... 1,998 1,969 Amortization of capitalized software costs.. 594 655 ----------- ----------- Total cost of sales .................... 20,070 15,244 ----------- ----------- GROSS PROFIT .................................... 4,364 2,837 Sales and marketing expenses .................... 4,988 2,409 General and administrative expenses ............. 4,067 2,457 Research and development costs .................. 752 352 Fair value of warrants granted to consultants ... 461 -- ----------- ----------- Loss from operations ............................ (5,904) (2,381) Interest expense, net ........................... 147 539 ----------- ----------- LOSS BEFORE INCOME TAXES ........................ (6,051) (2,920) Income tax expense (benefit) .................... (78) 156 ----------- ----------- NET LOSS ........................................ $ (5,973) $ (3,076) =========== =========== NET LOSS PER SHARE - BASIC ...................... $ (0.90) $ (0.72) =========== =========== Weighted average number of common shares ........ 6,615,107 4,265,008 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 -------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................. $ (5,973) $(3,076) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ....................... 771 799 Provision for doubtful accounts ..................... 155 436 Fair value of warrants granted to consultants ....... 461 -- Deferred income taxes provision ..................... -- 193 Changes in operating assets and liabilities: Trade accounts receivable ....................... (1,770) (2,004) Other current assets ............................ (214) (102) Accounts payable and accrued expenses ........... 359 1,805 Other current liabilities ....................... 41 120 -------- ------- Net cash used in operating activities ........... (6,170) (1,829) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of software development costs and purchased software ..................................... (1,155) (293) Acquisition of property and equipment .................... (591) (158) -------- ------- Net cash used in investing activities ........... (1,746) (451) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of units ...................... 1,295 5,701 Net proceeds from exercise of stock warrants ............. 12,914 -- Net proceeds from exercise of stock options .............. 44 -- Repayment from (advance to) shareholder .................. 472 (472) Borrowings under notes payable and long-term debt ........ -- 3,225 Repayments on notes payable and long-term debt ........... (263) (2,283) Borrowings from shareholders and related parties ......... -- 1,123 Repayments to shareholders and related parties ........... (472) (816) -------- ------- Net cash provided by financing activities ....... 13,990 6,478 -------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 6,074 4,198 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............. 4,209 11 -------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR ................... $ 10,283 $ 4,209 ======== ======= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ....................................... $ 196 $ 566 Income taxes paid ................................... -- 65 Non-cash investing and financing activities: Conversion of bridge loan to common stock ....... -- 2,411 Capital contribution from related party ......... -- 797 Retirement of treasury stock for a note payable.. -- 391
The accompanying notes are an integral part of these consolidated financial statements. F-5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ADDITIONAL ACCUM- NUMBER COMMON PAID-IN ULATED TREASURY OF STOCK CAPITAL DEFICIT STOCK SHARES ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Balance, December 31, 1995 .................. $ 36 $ (34) $ (1,059) $ (391) 3,639,539 Retirement of treasury stock, at cost ....... (5) 5 (391) 391 (506,161) Capital contribution from related party ..... -- 738 -- -- -- Proceeds from issuance of 1,700,000 units, net of $1,756 of issuance costs ......................... 17 5,684 -- -- 1,700,000 Initial capital contribution of Allegiant Legacy Solutions, Inc. ....... 11 48 -- -- 1,070,000 Conversion of bridge loan to common stock ........................... 3 2,408 -- -- 280,938 Net loss .................................... -- -- (3,076) -- -- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 .................. 62 8,849 (4,526) -- 6,184,316 Proceeds from issuance of 255,000 units, net of $235 of issuance costs .......... 3 1,292 -- -- 255,000 Exercise of employee options ................ -- 44 -- -- 47,342 Exercise of public warrants, net of $641 of issuance costs ................. 17 11,605 -- -- 1,662,633 Exercise of Fritz warrants .................. 1 1,291 -- -- 146,000 Fair value of warrants granted to consultants -- 461 -- -- -- Net loss .................................... -- -- (5,973) -- -- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1997 .................. $ 83 $ 23,542 $ (10,499) $ -- 8,295,291 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS BASIS OF PRESENTATION NeoMedia Technologies, Inc. ("Technologies") was incorporated under the laws of the state of Delaware in July, 1996 to acquire by merger Dev-Tech Associates, Inc. ("Dev-Tech"), an Illinois corporation, which was incorporated in December, 1989. On August 5, 1996, Technologies acquired all of the shares of Dev-Tech in exchange for the issuance of shares of Technologies' common stock to the shareholders of Dev-Tech. Dev-Tech Migration, Inc. ("DTM") was incorporated in June, 1994, in Illinois. On November 20, 1996, DTM was merged into NeoMedia Migration, Inc. ("Migration"), a Delaware corporation and a wholly owned subsidiary of Technologies (the "Migration Merger"). Since Migrations's inception, Technologies and Migration shared certain management and were controlled by common shareholders. These transactions were accounted for in a manner similar to the pooling of interests method of accounting using historical book values rather than fair market value as all entities involved were under common control. Distribuidora Vallarta, S.A.("DVSA"), a wholly-owned subsidiary of Migration, was incorporated in Guatemala in August, 1996, to employ computer software developers and system integrators. On September 25, 1997, in accordance with a Stock Purchase Agreement (the "Allegiant Merger") entered into between the parties, NeoMedia acquired all of the stock in Allegiant Legacy Solutions, Inc. ("Allegiant"), which was founded on February 16, 1996. Allegiant primarily sells licenses to proprietary software tools (including "ADAPT/2000") that identify, seek and automatically correct date data that is stored in various formats across both program code and specific data files. The previous shareholders of Allegiant received an aggregate of 1,070,000 shares of authorized, but unissued common stock of NeoMedia. The number of shares of NeoMedia's common stock received by the previous shareholders of Allegiant was determined through arms-length negotiations between the parties. One former shareholder entered into an employment agreement with NeoMedia and the other former shareholder entered into a consulting agreement with NeoMedia. The Allegiant Merger was accounted for as a pooling of interests, and accordingly, all financial information has been restated as if the entities were combined for all prior periods. For the six months ended June 30,1997, total unaudited net sales as historically reported for NeoMedia and Allegiant were $11,825,000 and $710,000, respectively, and unaudited net income (loss) was $(2,499,000) and $248,000, respectively. For the year ended December 31, 1996, total net sales as historically reported for NeoMedia and Allegiant were $17,518,000 and $563,000, respectively, and net loss was $3,075,000 and $1,000, respectively. Technologies, Migration, Allegiant and DVSA are collectively referred to as "NeoMedia" or the "Company" and the consolidated financial statements of NeoMedia are presented on a consolidated basis for all periods presented. The financial position and results of NeoMedia as of and for the periods prior to these mergers have been combined in a manner consistent with NeoMedia's consolidation principles as of December 31, 1997. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. In July, 1995, Dev-Tech purchased 36 shares of its common stock in exchange for a non-interest bearing uncollateralized note payable for $450,000. The note payable is due in 36 monthly installments of $12,500 commencing August, 1995. As of December 31, 1995, the acquired shares were recorded in treasury stock in the consolidated balance sheet at cost of $391,000 which equals the carrying value of the note discounted at Dev-Tech's incremental borrowing rate of 10%. The discount is being accreted to interest expense over the term of the note. In May, 1996, Dev-Tech filed an amendment to its Articles of Incorporation to retire these 36 shares (506,161 shares on a post-exchange and reverse stock split basis) of common stock. F-7 NATURE OF BUSINESS OPERATIONS NeoMedia operates in one business segment which is comprised of three principal applications markets: (i) Intelligent Document/TM/ Solutions ("IDOCs/TM/") Unit, (ii) Document Systems Solutions Unit and (iii) Year 2000 / Migration Solutions Unit The IDOCS UNIT was established to assist clients in embedding active data elements in standard printed documents or on physical objects for the purpose of launching computer programs and creating automated links to the World Wide Web. NeoMedia has developed its own technology, and has rights to use the technology of others, to generate printed documents and enhance physical objects which can be automatically "read" by machines, such as computers equipped with scanners and appropriate software. These "machine readable" documents or physical objects incorporate printed codes which contain thousands of bytes of information, including computer programs rendering them functionally equivalent to a computer floppy disk. With this functionality, a user may access additional information about, assess validity of, or determine authenticity of, such document or object. These codes are referred to in the industry as "high capacity symbologies" and "multi-dimensional" or "two dimensional" bar codes and NeoMedia currently provides software and services to support the application of this technology. The DOCUMENTS SYSTEMS SOLUTIONS UNIT was established to assist clients in optimizing the creation, production and management of printed documents and printed document processes. These efforts have historically focused on designing and providing complete, client specific, high speed and high volume document formatting and printing solutions. Recently, services of the Document Systems Solutions Unit have been expanded to include Integrated Document Factories ("IDF's"), a complete, client specific system solution for automating, monitoring and managing print-to-mail processes. IDF's incorporate manufacturing principles and IDOCsTM technology, enabling clients not only to achieve maximum efficiencies in their print processes, but to also ensure document integrity and traceability. The YEAR 2000 / MIGRATION SOLUTIONS UNIT was established to enable and assist clients to implement mass changes in computer software and hardware systems, including (i) identifying, seeking and automatically correcting restrictive source and application fields which store data, including among other items, dates (adding two digits to a two-digit date field when four digits are required to correct the Year 2000 problem), stock prices (converting from a fractional to a decimal measurement system) and European currencies (converting to the new European Monetary Unit of Measure, commonly known as the "Eurodollar"), and (ii) conversions from legacy to open systems. As part of the services provided in connection with the above solutions it offers, NeoMedia often recommends, specifies, supplies and installs equipment and software products from third-party software and hardware vendors, leading consulting firms and major system integrators, many of whom have strategic alliances with NeoMedia. These alliances are integral to NeoMedia's business operations. NeoMedia principally markets and distributes its products through distributors in the United States (although it has distributors in Europe and Latin America which have not generated material sales), and currently has U. S. district offices located in Florida, Illinois, and Ohio. 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 generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date F-8 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 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. Software and technology equipment resales represent revenue from the resale of purchased third party hardware and software products. Service fees represent revenue from consulting, education, and post contract software support services. NeoMedia recognizes software license revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). Software license fees are recognized upon shipment to the customer to the extent that collection is probable and the remaining obligations of NeoMedia are insignificant. NeoMedia recognizes support revenue over the life of the support contract. Software and technology equipment resale revenue is recognized when all of the components necessary to run software or hardware have been shipped and only insignificant post-delivery obligations remain. Historically, product returns and allowances have been insignificant. Service revenues include maintenance fees for providing system updates for software products, user documentation and technical support, and sales of NeoMedia's proprietary software which is not bundled with hardware or software of third parties. Other service revenues, including training and consulting, are recognized as the services are performed. In 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which becomes effective for NeoMedia for the year ended December 31, 1998 and supersedes SOP 91-1. Under SOP 97-2, software revenue is not recognized until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the NeoMedia's fee is fixed or determinable and collectibility is probable. The impact of adopting SOP 97-2 is not deemed to be material to NeoMedia's consolidated financial statements. INVENTORIES Inventories are stated at the lower of cost or market and are 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 allowances 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 up to 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 statement of operations. CAPITALIZED SOFTWARE COSTS Software development costs are accounted for in accordance with Statement of Financial Accounting Standards 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 product development and expensed as incurred. Once F-9 technological feasibility has been determined, additional costs incurred in development, including coding, testing, quality assurance and documentation writing, are capitalized. Amortization of purchased and developed software is provided on a product-by-product basis over the estimated economic life of the software, generally not exceeding three years, using the straight-line method. Amortization commences when a product is available for general release to customers. Unamortized capitalized costs determined to be in excess of the net realizable value of a product are expensed at the date of such determination. INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. DTM, with the consent of its shareholder, and Allegiant, with the consent of its shareholders, elected to be treated as small business corporations (S corporation under the Internal Revenue Code) for income tax purposes. Accordingly, until the Migration Merger and Allegiant Merger, their respective taxable income and related tax credits were reportable by the shareholders on their individual income tax returns. The pro forma benefit for income taxes, net loss and per share information for the years ended December 31, 1997 and 1996, of the combined operations of NeoMedia, Allegiant and DTM calculated using the statutory tax rates in effect during the applicable periods, as if Allegiant and DTM were taxable as a C Corporation, are identical to the historic information presented in NeoMedia's consolidated financial statements. No income tax benefit would have been recognized from the net operating losses of DTM as a 100% valuation allowance would have been recorded against a deferred tax asset as a result of the uncertainty of DTM's ability to generate future taxable income. COMPUTATION OF LOSS PER SHARE Effective December 31, 1997, NeoMedia adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which replaces the presentation of primary earnings per share with basic earnings per share and which requires dual presentation of basic and diluted earnings per share on the Consolidated Statements of Operations. FAS 128 requires restatement of all prior-period earnings per share data presented. Basic net earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, and diluted net earnings per share includes the effect of unexercised stock options and warrants using the treasury stock method. The treasury stock method assumes that common stock was purchased at the average market price during the period. Because the assumed exercise of stock options and warrants would have an antidilutive effect on the net loss per share for the years ended December 31, 1997 and 1996, no exercise of stock options and warrants were assumed and no diluted net loss per share was presented. FINANCIAL INSTRUMENTS The fair value of NeoMedia's debt, current and long-term, is estimated to approximate the carrying value of these liabilities based upon borrowing rates currently available to NeoMedia for borrowings with similar terms. 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 F-10 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 $191,000 and $221,000 in its December 31, 1997 and 1996 consolidated balance sheets, respectively. NeoMedia had net sales to one major customer in the telecommunications industry (Ameritech Services, Inc.) of $9,447,000 and $6,932,000 during the years ended December 31, 1997 and 1996, respectively, resulting in trade accounts receivable of $3,116,000 and $2,507,000 as of December 31, 1997 and 1996, respectively. 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 79% and 83% of NeoMedia's revenue for the years ended December 31, 1997 and 1996, respectively. ACCOUNTING FOR STOCK OPTIONS Effective January 1, 1996, NeoMedia adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") which requires certain disclosures about stock-based employee compensation arrangements, regardless of the method used to account for them, and 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, FAS 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. Under the fair-value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic-value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Because NeoMedia elected to continue using the accounting method in APB 25, no compensation expense was recognized in the consolidated statement of operations for the years ended December 31, 1997 and 1996 for stock-based employee compensation. Had compensation cost for NeoMedia's stock-based compensation plan been determined using the fair-value method of accounting, NeoMedia's net loss and loss per share would have been increased to $6,364,000, or ($.96) per share in 1997, and $3,400,000 or ($.80) per share, in 1996. For grants in 1997 and 1996, the following assumptions were used: (i) no expected dividends; (ii) a risk-free interest rate of 6.00% for both years, except for the options granted in 1996 at $.84 where 5.05% was used; (iii) expected volatility of 37% and 25%, respectively, and (iv) an expected life of 3 years. 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which becomes effective for NeoMedia on January 1, 1998. FAS 130 establishes standards for reporting comprehensive income, which FAS 130 defines as the change in equity of an enterprise except for those changes resulting from shareholder transactions. All components of comprehensive income are required to be reported in a new financial statement that is displayed with equal prominence as existing financial statements. As FAS 130 addresses reporting and presentation issues only, there will be no impact on operations from its adoption. In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information ("FAS 131"), which becomes effective for NeoMedia for the year ending December 31, 1998. FAS 131 establishes standards for disclosures about products F-11 and services, geographic areas and major customers. As FAS 131 addresses reporting and disclosure issues only, there will be no impact on operations from its adoption. 3. PROPERTY AND EQUIPMENT
As of December 31, 1997 and 1996, property and equipment consisted of the following: 1997 1996 ------- ------- (In thousands) Furniture and fixtures ...................................... $ 339 $ 136 Leasehold improvements ...................................... 62 -- Equipment ................................................... 910 663 ------- ------- Total .................................................. 1,311 799 Less accumulated depreciation ............................... (660) (502) ------- ------- Total property and equipment, net of accumulated depreciation $ 651 $ 297 ======= =======
4. CAPITALIZED SOFTWARE COSTS
As of December 31, 1997 and 1996, capitalized software costs consisted of the following: 1997 1996 ------- ------- (In thousands) Purchased software .......................................... $ 2,209 $ 1,495 Internally developed software ............................... 804 459 ------- ------- Total .................................................. 3,013 1,954 Less accumulated amortization ............................... (1,735) (1,297) ------- ------- Total capitalized software costs, net of accumulated amortization ........................ $ 1,278 $ 657 ======= =======
During the years ended December 31, 1997 and 1996, NeoMedia recognized amortization expense applicable to purchased software of $419,000 and $531,000, respectively, and amortization expense applicable to internally developed software of $86,000 and $124,000, respectively. In October 1994, DTM purchased, via seller financing, certain computer software from International Digital Scientific, Inc. ("IDSI"). The aggregate purchase price was $2,000,000 and was funded by an uncollateralized seller payable, without interest, in an amount equal to the greater of : (i) 5% of the collected gross revenues of 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% (DTM's 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 being amortized over its estimated useful life of three years. As of December 31, 1997 and 1996, the balance of the note payable, net of unamortized discount, was $1,020,000 and $1,115,000, respectively. F-12 5. FINANCING AGREEMENTS Technologies entered into 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. Borrowings are collateralized by accounts receivable generated from the sales of merchandise to NeoMedia's customers and are personally guaranteed by certain shareholders of NeoMedia. In addition, as of December 31, 1997, a $750,000 letter of credit was issued to the benefit the commercial finance company. NeoMedia collateralized this letter of credit with a $750,000 certificate of deposit. As of December 31, 1997 and 1996, amounts due under this financing agreement included in accounts payable were $2,651,000 and $2,275,000, respectively. 6. LONG-TERM DEBT
As of December 31, 1997 and 1996, long-term debt consisted of the following: 1997 1996 ------- ------- (In thousands) Note payable to IDSI, non-interest bearing with interest imputed at 9%, due with minimum monthly installments of $16.0 through December 2005 ......................... $ 1,392 $ 1,584 Note payable to former shareholder, non-interest bearing with interest imputed at 10%, due with minimum monthly installments of $12.5 through July 1998 ................ 88 237 Note payable to shareholder, 8%, due December, 2000 ......... -- 472 Capital leases .............................................. 12 44 ------- ------- Subtotal ............................................... 1,492 2,337 Less: unamortized discount ................................. (376) (486) ------- ------- Total long-term debt ................................... 1,116 1,851 Less: current portion ...................................... (201) (262) ------- ------- Long-term debt, net of current portion ...................... $ 915 $ 1,589 ======= =======
In January, 1996, NeoMedia borrowed $750,000 (which bore interest at 8% per annum and was payable on demand) from a principal shareholder, increasing the total notes payable to this shareholder to $1,210,000. In October 1996, this shareholder contributed $738,000 of this note to additional paid-in capital leaving a balance as of December 31, 1996 of $472,000. In February, 1997, NeoMedia repaid the note in full. The long-term debt payments for each of the next five fiscal years ending December 31 are as follows: AMOUNT IN THOUSANDS --------- 1998 .................................. $ 292 1999 .................................. 192 2000 .................................. 192 2001 .................................. 192 2002 .................................. 192 Thereafter ............................ 432 ------ Total ................................. $1,492 ====== F-13 7. INCOME TAXES For the years ended December 31, 1997 and 1996, the components of income tax expense (benefit) were as follows: 1997 1996 ------ ----- (In thousands) Current........................................... $ (78) $ (37) Deferred.......................................... -- 193 ----- ----- Income tax expense (benefit)...................... $ (78) $ 156 ===== =====
For the years ended December 31, 1997 and 1996, the significant components of the deferred tax provision were as follows: 1997 1996 ------- ------- (in thousands) Deferred tax benefit, exclusive of the components listed below .......... $(2,226) $ (826) Tax effect of change in the status of Migration ......................... -- (391) Increase in valuation allowance ......................................... 2,226 1,410 ------- ------- Total .............................................................. $ -- $ 193 ======= =======
As of December 31, 1997 and 1996, 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:
1997 1996 -------------------- ---------------------- TEMPORARY TAX TEMPORARY TAX DIFFERENCE EFFECT DIFFERENCE EFFECT ---------- ------- ---------- ------- (In thousands) Accrued employee benefits ................. $ 57 $ 23 $ 245 $ 98 Bad debts ................................. 191 76 221 86 Accrued interest payable .................. -- -- 265 106 Deferred revenue .......................... 189 76 234 93 Capitalized software development costs .... 1,014 406 815 326 Net operating loss carryforwards .......... 7,462 2,985 1,644 658 Other ..................................... 58 23 (11) (4) Alternative minimum tax credit carryforward 47 47 ------- ------- Total deferred tax assets ................. 3,636 1,410 Valuation allowance ....................... (3,636) (1,410) ------- ------- Net deferred income tax asset ............. $ -- $ -- ======= =======
F-14
For the years ended December 31, 1997 and 1996, income tax expense (benefit) differed from the amount computed by applying the statutory federal rate of 34% as follows: 1997 1996 -------------------- -------------------- AMOUNT % AMOUNT % -------- ------- ------- ------- (Dollars in thousands) Benefit at federal statutory rate ... $(2,057) (34)% $ (992) (34)% S-corporation (income) loss allocated directly to shareholders ....... (45) (1) 321 11 Permanent differences and other, net. (202) (3) 1 -- Change in valuation allowance ....... 2,226 37 826 28 ------- ------- ------- ------- Income tax expense (benefit)......... $ (78) (1)% $ 156 5% ======= ======= ======= =======
As of December 31, 1997, NeoMedia had net operating loss carryforwards for federal tax purposes totaling approximately $7,462,000 which may be used to offset future taxable income, or, if unused $1,644,000 will expire in 2011 and $5,818,000 will expire in 2012. 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 such net operating loss carryforwards may be restricted pursuant to the provisions of Section 382 of the Internal Revenue Code. Because the realization of NeoMedia's net operating losses carryforwards is uncertain, a valuation allowance has been established against it and other deferred income tax assets. 8. TRANSACTIONS WITH RELATED PARTIES NeoMedia made advances to various related parties including companies affiliated through common ownership. These advances arose from expenses paid by NeoMedia on behalf of the affiliated companies and allocations of certain administrative costs for services provided by NeoMedia. No administrative costs were allocated to affiliated companies during the year ended December 31, 1997, and $27,000 was allocated during the year ended December 31, 1996. As of December 31, 1997 and 1996, the amounts due from related parties totalled $6,000 and $24,000, respectively. During the years ended December 31, 1997 and 1996, NeoMedia and certain employees leased office and residential facilities from related parties for rental payments totalling $12,000 and $11,000, respectively. On January 2, 1996, NeoMedia provided to one of its principal shareholders an advance of $472,000 payable within 30 days of demand by NeoMedia. This loan bore interest at 8% payable on a monthly basis. This loan was repaid in full in February, 1997. In March, 1996, NeoMedia borrowed $135,000 from a related entity and $36,000 from a principal shareholder, payable within thirty days of demand, bearing interest at 8% per annum. In June, 1996, NeoMedia borrowed $200,000 from NeoMedia's Chief Executive Officer and a principal shareholder, payable within thirty 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 note, NeoMedia granted a warrant to the shareholder to purchase up to 260,000 shares of NeoMedia's common stock at an exercise price of $8.85. This warrant is exercisable until November 25, 2001. On September 16,1997, the board of directors of NeoMedia approved an acceleration of the date when this warrant could be exercised and the shareholder exercised the warrant to purchase 146,000 shares of common stock. Assuming a risk-free interest rate of 6.25%, an expected life of three years, an expected volatility of 25% and no expected dividends, the effect of using the fair-value method of accounting on net loss for the year ended December 31, 1996 would have increased net loss to $3,115,000, or ($.73) per share. On December 11,1997, the board of directors granted a warrant to purchase up to an additional 300,000 shares of NeoMedia's common stock at an exercise price of $7.875 to NeoMedia's Chief Executive Officer and a principal shareholder. This warrant is exercisable until December 11, 2002 and was granted in consideration of the accelerated F-15 exercise of the warrant for 260,000 shares which provided capital to NeoMedia on a more favorable basis to NeoMedia 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. NeoMedia has entered into various employment and consulting agreements which require an aggregate of approximately $1.1 million in annual payments. These employment and consulting agreements extend to various dates through 2001. 9. LEASES NeoMedia leases certain office equipment, principally telecommunication equipment, under leases which are capital in nature. As of December 31, 1997 and 1996, NeoMedia had net assets of $43,000 and $53,000, respectively, under these capital leases. 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, 1997 and 1996, NeoMedia's rent expense was $628,000 and $353,000, respectively. Beginning December 1, 1996, NeoMedia subleased a portion of its office facilities until the lease expires. The aggregate amount of expected future lease payments and receipts under operating leases for each of the next five years ending December 31 was as follows: PAYMENTS RECEIPTS -------- -------- (In thousands) 1998 ........................... $ 694 $ 173 1999 ........................... 592 179 2000 ........................... 267 183 2001 ........................... 3 -- 2002 ........................... 2 -- -------- -------- Total ......................... $ 1,558 $ 535 ======== ======== In November, 1996, NeoMedia entered into a lease with a principal shareholder whereby the shareholder leased to NeoMedia an exhibition booth which cost $85,435. The lease is for 36 months with monthly payments of $2,858. 10. DEFINED CONTRIBUTION SAVINGS PLAN NeoMedia maintains a defined contribution 401(k) savings plan covering substantially all eligible employees meeting certain minimum age and months of service requirements, as defined. 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. 11. 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. Options granted during 1997 and 1996 F-16 were granted at an exercise price equal to fair market value on the date of grant. Options granted can not be exercised during the year following the date of grant and must be exercised within ten years from the date of grant. A summary of the status of NeoMedia's stock option plan as of and for the years ended December 31, 1997 and 1996 is as follows:
1997 1996 ------------------------- -------------------- WEIGHTED WEIGHTED AVERAGE NUMBER AVERAGE NUMBER EXERCISE OF EXERCISE OF PRICE SHARES PRICE SHARES ---------- ---------- ----- ---------- Outstanding at beginning of year ......... $1.76 1,338,172 Granted .................................. 7.30 293,500 $1.72 1,419,753 Exercised ................................ .95 (47,342) -- -- Forfeited ................................ 4.15 (179,520) 1.34 (81,581) ---------- ---------- ----- ---------- Outstanding at end of year ............... $2.64 1,404,810 $1.76 1,338,172 ========== ========== ===== ========== Options exercisable at year-end .......... 1,133,810 -- ========== ========== Weighted-average fair value of options granted during the year ............. $2.35 $0.43 ========== ===== Available for grant at the end of the year 47,848 161,828 ========== ==========
The following table summarizes information about NeoMedia's stock options outstanding as of December 31, 1997: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ------------------------------ WEIGHTED-AVERAGE WEIGHTED RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- $0.84 968,903 8.1 years $ .84 968,903 $ .84 $4.19 to $7.25 306,907 9.2 years 5.44 164,907 5.69 $7.56 to $10.88 129,000 9.7 years 9.46 -- --- ----------- ---------------- -------------- ----------- -------------- $0.84 to $10.88 1,404,810 8.5 years $2.64 1,133,810 $1.55 =========== ================ ============== =========== ==============
12. PUBLIC OFFERING OF COMMON STOCK AND WARRANTS On November 25, 1996, NeoMedia completed an initial public offering ("IPO") of 1,235,000 shares of common stock at $5.90 per share and 1,700,000 redeemable warrants, at $.10 per warrant, to purchase shares of common stock, and an offering by certain selling security holders of an additional 465,000 shares of NeoMedia's common stock. The selling security holders also were issued 745,938 warrants upon conversion of convertible notes from NeoMedia. In addition, on January 16, 1997, NeoMedia completed the sale of an over-allotment of 255,000 shares of common stock and 255,000 redeemable warrants. On November 10, 1997, NeoMedia announced the redemption of all its outstanding publicly-traded warrants. The warrant holders had until December 18, 1997 to convert each warrant to a share of common stock at an exercise price of $7.375 or to sell the warrant. Any warrants outstanding F-17 as of December 31, 1997 were redeemed by NeoMedia for $.05 per warrant. Of the 2,700,938 warrants outstanding, 1,662,633 were exercised for gross proceeds of $12.3 million and 1,038,305 were redeemed at $.05 per warrant, or a total of $52,000. In connection with the IPO, NeoMedia agreed to sell to the underwriters, for nominal consideration, warrants to purchase up to 170,000 shares of common stock and 170,000 warrants (collectively, the "Underwriters Warrants"). The Underwriters Warrants are exercisable at a price of $8.85 per share of common stock and warrant until November 25, 2001. On May 1, 1997, NeoMedia issued, to an investment banking firm, a warrant at an exercise price of $7.375 per share to purchase 375,000 shares of common stock until November 25, 2001 and to another investment banking firm a warrant at an exercise price of $10.125 per share to purchase 65,000 shares of common stock until November 25, 2001. On December 11, 1997, NeoMedia issued to outside consultants three warrants to purchase 408,332 shares of NeoMedia common stock until December 11, 2002. Of these 408,332 warrants, 173,332 were issued at an exercise price of $8.85 per share, 135,000 were issued at an exercise price of $7.50 per share, and 100,000 were issued at an exercise price of $10.00 per share. Assuming an expected life of 1.5 years, expected volatilities of 37%, a risk-free interest rate of 6.0%, and no expected dividends, the fair-values of these five warrants were calculated using the Black-Scholes model to be $716,000 of which $461,000 was charged to expense and $255,000 was charged to the proceeds of the publicly-traded warrants called on December 18, 1997. 13. BRIDGE FINANCING During July and August 1996, NeoMedia issued, in a private placement, convertible promissory notes due in September 1997. Each unit consisted of a $50,000 10% promissory note convertible into 13,750 shares and 13,750 warrants of NeoMedia's common stock upon consummation of the IPO valued at an average of $3.64 per share. NeoMedia received $2,697,000 in cash proceeds from this private placement, net of $278,000 in expenses. These expenses were amortized to interest expense over the life of the notes. NeoMedia retired $262,500 of these notes on November 23, 1996. Of the remaining 745,938 shares available for conversion, 465,000 were sold by the note holders in the IPO. 14. SUBSEQUENT EVENT On December 11, 1997, NeoMedia's board of directors recommended to NeoMedia stockholders an amendment to NeoMedia's Certificate of Incorporation to increase the number of shares of authorized common stock to 50,000,000 shares and to authorize the creation of 10,000,000 shares of preferred stock, $.01 par value. These additional shares may be issued at the discretion of the board of directors and will be used, among other purposes, for future financing and acquisition transactions, common stock dividends or splits, and the exercise of stock options issued pursuant to the terms of the 1996 and 1998 Stock Option Plans. On December 11,1997, the board of directors also recommended the adoption of the 1998 Stock Option Plan which authorizes the grant of non-qualified options to purchase up to an aggregate of 8,000,000 shares of NeoMedia's common stock to officers and full-time salaried employees of NeoMedia with managerial, professional, or supervisory responsibilities, consultants and other advisors who render bona fide services to NeoMedia and to NeoMedia's directors. The above recommendations of the board of directors were submitted to the stockholders for approval at a special meeting of stockholders on March 27, 1998. F-18 EXHIBIT INDEX SEQUENTIAL EXHIBIT PAGE NUMBER NUMBER DOCUMENT - ----------- -------- -------- 57 4.10 Form of Warrant to Charles W. Fritz 71 4.11 Form of Warrant to Dominick & Dominick, Incorporated 82 4.12 Form of Warrant to Compass Capital, Inc. 92 4.13 Form of Warrant to Thornhill Capital, L.L.C. 102 4.14 Form of Warrant to Southeast Research Partners, Inc. 112 4.15 Form of Warrant to Joseph Charles & Associates, Inc. 123 21 Subsidiaries 125 23.1 Consent of Coopers & Lybrand L.L.P. 127 23.2 Consent of KPMG Peat Marwick LLP 129 27.1 Article 5 Financial Data Schedule for December 31, 1997 56 EX-4.10 2 EXHIBIT 4.10 NeoMedia Technologies, Inc. Exhibit 4.10 Form of Warrant to Charles W. Fritz 57 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. Warrant to Purchase 300,000 Shares (subject to adjustment as set forth herein) Exercise Price $7.875 Per Share (subject to adjustment as set forth herein) VOID AFTER 11:59 P.M., EASTERN, FLORIDA TIME, DECEMBER 11, 2002 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (the "Act") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT. NeoMedia Technologies, Inc. (the "Company") hereby certifies that, for value received, Charles W. Fritz, 18151 Old Dominion, Ft. Myers, Florida 33908 (the "Holder"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company at any time on or after December 11, 1997, but before 11:59 p.m., Eastern time, on December 11, 2002, up to 300,000 Shares ("Share" in the singular and "Shares" in the plural) of the Company's $.01 par value Common Stock at a purchase price of $7.875 per Share (the "Exercise Price"). The number and character of the securities purchasable upon exercise of this Warrant and the Exercise Price are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any Warrants issued in substitution for or replacement of this Warrant, or any Warrants into which this Warrant may be divided or exchanged. The Shares purchasable upon the exercise of this Warrant are hereinafter referred to as "Warrant Securities". This Warrant may be assigned, transferred, sold, offered for sale, or exercised by the Holder upon compliance with all the pertinent provisions hereof. 1. EXERCISE OF WARRANT. (a) Subject to the other terms and conditions of this Warrant, the purchase rights evidenced by this Warrant may be exercised in whole or in part at any time, and from time to time, on or after December 11, 1997, but before 11:59 p.m., Eastern time, on December 11, 2002, by the Holder's presentation and surrender of this Warrant to the Company at its principal office or at the office of the Company's stock transfer agent, if any, accompanied by a duly executed Notice of Exercise, in the form attached to and by this reference incorporated in this Warrant as Exhibit A, and by payment of the aggregate Exercise Price, in certified funds or a bank cashier's check. 58 In the event this Warrant is exercised in part only, as soon as is practicable after the presentation and surrender of this Warrant to the Company for exercise, the Company shall execute and deliver to the Holder a new Warrant, containing the same terms and conditions as this Warrant, evidencing the right of the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) Upon receipt of this Warrant by the Company as described in subsection (a) above, the Holder shall be deemed to be the holder of record of the Warrant Securities issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Warrant Securities may not have been prepared or actually delivered to the Holder. 2. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. (a) This Warrant may be sold, transferred, assigned, pledged or hypothecated immediately. All sales, transfers, assignments or hypothecations of this Warrant must be in compliance with Section 8 hereof. Any assignment or transfer of this Warrant shall be made by the presentation and surrender of this Warrant to the Company at its principal office or the office of its transfer agent, if any, accompanied by a duly executed Assignment Form, in the form attached to and by this reference incorporated in this Warrant as Exhibit B. Upon the presentation and surrender of these items to the Company, the Company, at its sole expense, shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, containing the same terms and conditions as this Warrant, in the name of the new Holder or Holders as named in the Assignment Form, and this Warrant shall at that time be cancelled. (b) This Warrant, alone or with other Warrants containing substantially the same terms and conditions and owned by the same Holder, is exchangeable at the option of the Holder but at the Company's sole expense, at any time prior to its expiration either by its terms or by its exercise in full upon presentation and surrender to the Company at its principal office or at the office of its transfer agent, if any, for another Warrant or other Warrants, of different denominations but containing the same terms and conditions as this Warrant, entitling the Holder to purchase the same aggregate number of Warrant Securities that were purchasable pursuant to the Warrant or Warrants presented and surrendered. At the time of presentation and surrender by the Holder to the Company, the Holder also shall deliver to the Company a written notice, signed by the Holder, specifying the denominations in which new Warrants are to be issued to the Holder. (c) The Company will execute and deliver to the Holder a new Warrant containing the same terms and conditions as this Warrant upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, provided that (i) in the case of loss, theft, or destruction, the Company receives from the Holder a reasonably satisfactory indemnification, and (ii) in the case of mutilation, the Holder presents and surrenders this Warrant to the Company for cancellation. Any new Warrant executed and delivered shall 59 constitute an additional contractual obligation on the part of the Company regardless of whether the Warrant that was lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any time. 3. ADJUSTMENTS: STOCK DIVIDENDS, RECLASSIFICATION, REORGANIZATION, MERGER AND ANTI-DILUTION PROVISIONS. (a) If the Company increases or decreases the number of its issued and outstanding shares of Common Stock, or changes in any way the rights and privileges of such shares, by means of (i) the payment of a stock dividend or the making of any other distribution on such shares payable in its Common Stock, (ii) a forward or reverse stock split or other subdivision of shares, (iii) a consolidation or combination involving its Common Stock, or (iv) a reclassification or recapitalization involving its Common Stock, then the Exercise Price in effect at the time of such action and the number of Warrant Securities purchasable pursuant to this Warrant at that time shall be proportionately adjusted so that the numbers, rights, and privileges relating to the Warrant Securities then purchasable pursuant to this Warrant shall be increased, decreased or changed in like manner, for the same aggregate purchase price as set forth in this Warrant, as if the Warrant Securities purchasable pursuant to this Warrant immediately prior to the event at issue had been issued, outstanding, fully paid and nonassessable at the time of that event. As an example, if the Company were to declare a two-for-one forward stock split or a 100 percent stock dividend, then the unpurchased number of Warrant Securities subject to this Warrant would be doubled and the Exercise Price for all unpurchased Warrant Securities would be reduced by 50 percent. These adjustments would result in the Holder's rights under this Warrant not being diluted by the stock split or stock dividend and the Holder paying the same aggregate exercise price. If the Company shall declare a dividend payable in money on its Common Stock and at substantially the same time shall offer to its shareholders a right to purchase new shares of Common Stock from the proceeds of such dividend or for an amount substantially equal to the dividend, all shares of Common Stock so issued shall, for purposes of this Warrant, be deemed to have been issued as a stock dividend. (b) If the Company pays or makes any dividend or other distribution upon its Common Stock payable in securities or other property, excluding money or the Company's Common Stock but including (without limitation) shares of any other class of the Company's stock or stock or other securities convertible into or exchangeable for shares of Common Stock or any other class of the Company's stock or other interests in the Company or its assets ("Convertible Securities"), a proportionate part of those securities or that other property shall be set aside by the Company and delivered to the Holder in the event that the Holder exercises this Warrant. The securities and other property then deliverable to the Holder upon the exercise of this Warrant shall be in the same ratio to the total securities and property set aside for the Holder as the number of Warrant Securities with respect to which the Warrant is then exercised is to the total Warrant Securities purchasable pursuant to this Warrant at the time the securities or property were set aside for the Holder. If the Company shall declare a dividend payable in money on its Common Stock and at substantially the same time shall offer to its shareholders a right to purchase new shares of a class of stock (other than Common Stock), Convertible Securities, property or other interests from the proceeds of such dividend or for an amount substantially equal to the dividend, all shares of stock, Convertible Securities, property or other interests so issued or transferred shall, for purposes of this Warrant, be deemed to have been issued as a dividend or other distribution subject to this subsection (b). (c) If at any time the Company grants to its shareholders rights to subscribe pro rata for additional securities of the Company, whether Common Stock, Convertible Securities, or other classifications, or for any other securities, property or interests that the Holder would have been entitled to subscribe for if, immediately prior to such grant, the Holder had exercised this Warrant, then the Company shall also grant to the Holder the same subscription rights that the Holder would be entitled to if the Holder had exercised this Warrant in full immediately prior to such grant. (d) The Company shall cause effective provision to be made so that the Holder shall have the right thereafter, by the exercise of this Warrant, to purchase for the aggregate Exercise Price described in this Warrant the kind and amount of shares of stock and other securities, and property and interests, as would be issued or payable with respect 60 to or in exchange for the number of Warrant Securities of the Company that are then purchasable pursuant to this Warrant as if such Warrant Securities had been issued to the Holder immediately before the occurrence of any of the following events: (i) the reclassification, capital reorganization, or other similar change of outstanding shares of Common Stock of the Company, other than as described and provided for in subsection (a) above; (ii) the merger or consolidation of the Company with one or more other corporations or other entities, other than a merger with a subsidiary or affiliate pursuant to which the Company is the continuing entity and the outstanding shares of Common Stock, including the Warrant Securities purchasable pursuant to this Warrant, are not affected; or (iii) the spin-off of assets to a subsidiary or an affiliated entity, or the sale, lease, or exchange of a significant portion of the Company's assets, in a transaction pursuant to which the Company's shareholders of record are to receive securities or other interests in another entity. Any such provision made by the Company for adjustments with respect to this Warrant shall be as nearly equivalent to the adjustments otherwise provided for in this Warrant as is reasonably practicable. The foregoing provisions of this subsection (d) shall similarly apply to successive reclassifications, capital reorganizations and similar changes of shares of Common Stock and to successive consolidations, mergers, spin-offs, sales, leases or exchanges. In the event that in any such reclassification, capital reorganization, change, consolidation, merger, spin-off, sale, lease or exchange additional shares of Common Stock are issued in exchange, conversion, substitution or payment, in whole or in part, for securities of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of subsection (f) below, with the amount of the consideration received upon the issue to be determined in accordance with subsection (g) below. (e) If any sale, lease or exchange of all, or substantially all, of the Company's assets or business or any dissolution, liquidation or winding up of the Company (a "Termination of Business") shall be proposed, the Company shall deliver written notice to the Holder or Holders of this Warrant in accordance with Section 4 below as a condition precedent to the consummation of that Termination of Business. If the result of the Termination of Business is that shareholders of the Company are to receive securities or other interests of another entity, the provisions of subsection (d) above shall apply. However, if the result of the Termination of Business is that shareholders of the Company are to receive money or property other than securities or other interests in another entity, the Holder or Holders of this Warrant shall be entitled to exercise this Warrant prior to the consummation of the event at issue and, with respect to any Warrant Securities so purchased, shall be entitled to all of the rights of the other shareholders of Common Stock with respect to any distribution by the Company in connection with the Termination of Business. In the event no other entity is involved and subsection (d) does not apply, all purchase rights under this Warrant shall terminate at the close of business on the date as of which shareholders of record of the Common Stock shall be entitled to participate in a distribution of the assets of the Company in connection with the Termination of Business; provided, that in no event shall that date be less than 30 days after delivery to the Holder or Holders of this Warrant of the written notice described above and in Section 4. If the termination of purchase rights under this Warrant is to occur as a result of the event at issue, a statement to that effect shall be included in that written notice. Notwithstanding anything herein to the contrary, in the event that Termination of Business is to occur prior to December 11, 2002, then provisions shall be made by the Company, by setting aside money or other assets to be distributed to shareholders in an amount sufficient for distribution to Holder or Holders of this Warrant as if the Warrant had been previously exercised, to ensure that the Holder or Holders of this Warrant will have an opportunity to participate in such distribution by exercising the Warrant within 90 days after its earliest exercise date. The Company will take no steps to dissolve the Company prior to such date. (f) No adjustment of the Exercise Price or the Warrant Securities purchasable pursuant to this Warrant shall be made in connection with the issuance or sale of Common Stock upon the exercise of options, rights or warrants, or upon the conversion of Convertible Securities. (g) Except as otherwise provided in this Section 3, upon any adjustment of the Exercise Price, the Holder shall be entitled to purchase, at the new Exercise Price, the number of shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of Warrant Securities purchasable pursuant to this Warrant immediately prior to the adjustment of the Exercise Price by the Exercise Price in effect immediately prior to its adjustment and dividing the product so obtained by the new Exercise Price. 61 (h) If consideration other than money is received by the Company upon the issuance or sale of Common Stock, Convertible Securities, or other securities or interests, the fair market value of such consideration, as reasonably determined by the Board of Directors of the Company, shall be used for purposes of any adjustment required by this Section 3. The fair market value of such consideration shall be determined as of the date of the adoption of the resolution of the Board of Directors of the Company that authorizes the transaction giving rise to the adjustment. In case of the issuance or sale of Common Stock, Convertible Securities, or other securities or interests in conjunction with the issuance or sale of other securities or property without a separate allocation of the purchase price, the Board of Directors of the Company shall reasonably determine an allocation of the consideration among the items being issued or sold. The reclassification of securities other than Common Stock into securities including Common Stock shall be deemed to involve the issuance of that Common Stock for a consideration other than money immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive that Common Stock. The Company shall promptly deliver written notice of all such determinations by its Board of Directors to the Holder or Holders of this Warrant, and those determinations shall be final and binding on the Holder or Holders if, and only if, no Holder of this Warrant delivers written notice to the Company of an objection to a determination within 30 days after written notice of that determination is delivered to the Holder. If written notice of an objection is delivered to the Company and the parties cannot reconcile their dispute, the dispute shall be arbitrated pursuant to Section 15 below. (i) The provisions of this Section 3 shall apply to successive events that may occur from time to time but shall only apply to a particular event if it occurs prior to the expiration of this Warrant either by its terms or by its exercise in full. (j) Unless the context requires otherwise, whenever reference is made in this Section 3 to the issue or sale of shares of Common Stock, the term "Common Stock" shall mean (i) the $0.01 par value common stock of the Company, (ii) any other class of stock ranking on a parity with, and having substantially similar rights and privileges as the Company's $0.01 par value common stock, and (iii) any Convertible Security convertible into either (i) or (ii). However, subject to the provisions of subsection (d) above, Warrant Securities issuable upon exercise of this Warrant shall include only shares of the common stock designated as $0.01 par value common stock of the Company as of the date of this Warrant and warrants to purchase such common stock. (k) For purposes of subsections (a) and (b) above, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments described. 4. NOTICE TO HOLDERS. If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur: (i) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or (ii) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or (iii) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or (iv) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (v) any purchase, retirement or redemption by the Company of its Common Stock; 62 then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following: (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined; (ii) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and (iii) if any matters referred to in the foregoing clauses (i) and (ii) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined. 5. OFFICERS' CERTIFICATE. Whenever the Exercise Price or the aggregate number of Warrant Securities purchasable pursuant to this Warrant shall be adjusted as required by the provisions of Section 3 above, the Company shall promptly file with its Secretary or an Assistant Secretary at its principal office, and with its transfer agent, if any, an officers' certificate executed by the Company's President and Secretary or Assistant Secretary, describing the adjustment and setting forth, in reasonable detail, the facts requiring such adjustment and the basis for and calculation of such adjustment in accordance with the provisions of this Warrant. Each such officers' certificate shall be made available to the Holder or Holders of this Warrant for inspection at all reasonable times, and the Company, after each such adjustment, shall promptly deliver a copy of the officers' certificate relating to that adjustment to the Holder or Holders of this Warrant. The officers' certificate described in this Section 5 shall be deemed to be conclusive as to the correctness of the adjustment reflected therein if, and only if, no Holder of this Warrant delivers written notice to the Company of an objection to the adjustment within 30 days after the officers' certificate is delivered to the Holder or Holders of this Warrant. The Company will make its books and records available for inspection and copying during normal business hours by the Holder so as to permit a determination as to the correctness of the adjustment. If written notice of an objection is delivered by a Holder to the Company and the parties cannot reconcile the dispute, the Holder and the Company shall submit the dispute to arbitration pursuant to the provisions of Section 15 below. Failure to prepare or provide the officers' certificate shall not modify the parties' rights hereunder. 6. RESERVATION OF WARRANT SECURITIES. The Company hereby agrees that at all times prior to December 11, 2002, it will have authorized and will reserve and keep available for issuance and delivery to the Holder that number of shares of its Common Stock that may be required from time to time for issuance and delivery upon the exercise of the then unexercised portion of this Warrant and all other similar Warrants then outstanding and unexercised and upon the exercise of any Warrant Securities. 7. REGISTRATION UNDER THE SECURITIES ACT OF 1933. (a) If at any time prior to December 11, 2002, (five years from the Effective Date), the Company files a registration statement with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), or pursuant to any other act passed after the date of this Agreement, which filing provides for the sale of securities by the Company to the public, or files a Regulation A Offering Statement under the Act, the Company shall offer to the Holder or Holders of this Warrant and the holders of any Warrant Securities the opportunity to register or qualify the Warrant (if prior to its expiration), Warrant Securities and any Warrant Securities underlying the unexercised portion of this Warrant, if any, at the Company's sole expense, regardless of whether the Holder or Holders of this Warrant or the holders of Warrant Securities or both may have previously availed 63 themselves of any of the registration rights described in this Section 7; provided, however, that in the case of a Regulation A offering, the opportunity to qualify shall be limited to the amount of the available exemption after taking into account the securities that the Company wishes to qualify. Notwithstanding anything to the contrary, this subsection (a) shall not be applicable to a registration statement on Forms S-4, S-8 or their successors or any other inappropriate forms filed by the Company with the United States Securities and Exchange Commission. If in the written opinion of the Company's managing underwriter or underwriters, if any, for such offering, the inclusion of the Holder's Warrant Securities, when added to the other selling stockholders, if any, will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without materially and adversely affecting the entire offering, the number of Warrant Securities included in such registration or offering statement shall be reduced to such amount as the managing underwriter(s), in its or their sole discretion, determines. Such reduction includes reducing the number of Warrant Securities to be registered or offered to zero and not registering any of the Warrant Securities in such registration or offering. The Company shall deliver written notice to the Holder or Holders of this Warrant and to any holders of the Warrant Securities of its intention to file a registration statement or Regulation A Offering Statement under the Act at least 60 days prior to the filing of such registration statement or offering statement, and the Holder or Holders and holders of Warrant Securities shall have 30 days thereafter to request in writing that the Company register or qualify the Warrant, Warrant Securities, or the Warrant Securities underlying the unexercised portion of this Warrant in accordance with this subsection (a). Upon the delivery of such a written request within the specified time, the Company shall be obligated to include in its contemplated registration statement or offering statement all information necessary or advisable to register or qualify the Warrant, Warrant Securities or Warrant Securities underlying the unexercised portion of this Warrant for a public offering, if the Company does file the contemplated registration statement or offering statement; provided, however, that neither the delivery of the notice by the Company nor the delivery of a request by a Holder or by a holder of Warrant Securities shall in any way obligate the Company to file a registration statement or offering statement. Furthermore, notwithstanding the filing of a registration statement or offering statement, the Company may, at any time prior to the effective date thereof, determine not to offer the securities to which the registration statement or offering statement relates, other than the Warrant, Warrant Securities and Warrant Securities underlying the unexercised portion of this Warrant. The Company shall comply with the requirements of this subsection (a) and the related requirements of subsection (f) at its own expense. That expense shall include, but not be limited to, legal, accounting, consulting, printing, federal and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel, accountants and consultants retained by the Company, and miscellaneous expenses directly related to the registration statement or offering statement and the offering. However, this expense shall not include the portion of any underwriting commissions, transfer taxes and the underwriter's accountable and nonaccountable expense allowances attributable to the offer and sale of the Warrant, Warrant Securities and the Warrant Securities underlying the unexercised portion of this Warrant, all of which expenses shall be borne by the Holder or Holders of this Warrant and the holders of the Warrant Securities registered or qualified. (b) In the event that the Company registers or qualifies the Warrant, Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant pursuant to subsection (a) above, the Company shall include in the registration statement or qualification, and the prospectus included therein, all information and materials necessary or advisable to comply with the applicable statutes and regulations so as to permit the public sale of the Warrant, Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant. As used in subsection (a) of this Section 7, reference to the Company's securities shall include, but not be limited to, any class or type of the Company's securities or the securities of any of the Company's subsidiaries or affiliates. (c) As to each registration statement or offering statement, the Company's obligations contained in this Section 7 shall be conditioned upon a timely receipt by the Company in writing of the following: 64 (i) Information as to the terms of the contemplated public offering furnished by and on behalf of each Holder or holder intending to make a public distribution of the Warrant, Warrant Securities or Warrant Securities underlying the unexercised portion of the Warrant; and (ii) Such other information as the Company may reasonably require from such Holders or holders, or any underwriter for any of them, for inclusion in the registration statement or offering statement. (d) In each instance in which the Company shall take any action to register or qualify the Warrant, Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant, if any, pursuant to this Section 7, the Company shall do the following: (i) supply to the Holder of the Warrant and the holders of Warrant Securities whose Warrant and Warrant Securities are being registered or qualified, two manually signed copies of each registration statement or offering statement, and all amendments thereto, and a reasonable number of copies of the preliminary, final or other prospectus or offering circular, all prepared in conformity with the requirements of the Act and the rules and regulations promulgated thereunder, and such other documents as shall reasonably be requested; (ii) cooperate with respect to (A) all necessary or advisable actions relating to the preparation and the filing of any registration statements or offering statements, and all amendments thereto, arising from the provisions of this Section 7, (B) all reasonable efforts to establish an exemption from the provisions of the Act or any other federal or state securities statutes, (C) all necessary or advisable actions to register or qualify the public offering at issue pursuant to federal securities statutes and the state "blue sky" securities statutes of each jurisdiction that the Holders of the Warrant or holders of Warrant Securities shall reasonably request, and (D) all other necessary or advisable actions to enable the Holders of the Warrant and holders of the Warrant Securities to complete the contemplated disposition of their securities in each reasonably requested jurisdiction; (iii) keep all registration statements or offering statements to which this Section 7 applies, and all amendments thereto, effective under the Act for a period of at least 9 months after their initial effective date and cooperate with respect to all necessary or advisable actions to permit the completion of the public sale or other disposition of the securities subject to a registration statement or offering statement; and (iv) indemnify and hold harmless each Holder of the Warrant, each holder of Warrant Securities, and each underwriter within the meaning of the Act for each such Holder or holder, from and against all losses, claims, damages, and liabilities, including, but not limited to, any and all expenses reasonably incurred in investigating, preparing, defending or settling any claim, arising from or relating to (A) any untrue or alleged untrue statement of a material fact contained in any registration statement or offering statement to which this Section 7 applies, or (B) any omission or alleged omission to state a material fact necessary to make the statements contained in a registration statement or offering statement to which this Section 7 applies not misleading; provided, however, that the indemnification contained in this provision (iv) shall not apply if the untrue statement or omission, or alleged untrue statement or omission, was the result of information furnished in writing to the Company by the Holder, holder or underwriter seeking indemnification expressly for use in the registration statement or offering statement at issue. To the extent that the indemnification contained in this provision applies, the Company also shall indemnify and hold harmless each officer, director, employee, controlling person or agent of an indemnified Holder, holder or underwriter. (e) In each instance in which pursuant to this Section 7 the Company shall take any action to register or qualify the Warrant, Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant, prior to the effective date of any registration statement or offering statement, the Company and each Holder or holder 65 of Warrants or Warrant Securities being registered or qualified shall enter into reciprocal indemnification agreements, in the form customarily used by reputable investment bankers with respect to public offerings of securities, containing substantially the same terms as described in subsection (d)(iv) above. These indemnification agreements also shall contain an agreement by the Holder or shareholder at issue to indemnify and hold harmless the Company, its officers, directors from and against any and all losses, claims, damages and liabilities, including, but not limited to, all expenses reasonably incurred in investigating, preparing, defending or settling any claim, directly resulting from any untrue statements of material facts, or omissions to state a material fact necessary to make a statement not misleading, contained in a registration statement or offering statement to which this Section 7 applies, if, and only if, the untrue statement or omission directly resulted from information provided in writing to the Company by the indemnifying Holder or shareholder expressly for use in the registration statement or offering statement at issue. (f) The Company's obligations described in this Section 7 shall continue in full force and effect regardless of the exercise, surrender, cancellation or expiration of this Warrant. 8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. (a) This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Securities Act of 1933, as amended (the "Act"), and except in compliance with all applicable state securities statutes. (b) The Company may cause the following legend, or its equivalent, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defined by the Act, for distribution to the public pursuant to Section 7 above: "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are 'restricted securities' as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 9. FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of all or any part of this Warrant. With respect to any fraction of a share of any security called for upon any exercise of this Warrant, the Company shall pay to the Holder an amount in money equal to that fraction multiplied by the current market value of that share. The current market value shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or listed on the National Association of Securities Dealers National Market System, the current value shall be the last reported sale price of that security on such exchange or system on the last business day prior to the date of the applicable exercise of this Warrant or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or admitted to unlisted trading privileges, the current market value shall be the average of the last reported highest bid and lowest asked prices quoted on the National Association of Securities Dealers Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day of the applicable exercise of this Warrant; or (c) if the security at issue is not so listed or admitted to unlisted trading privileges and bid and asked prices are not reported, the current market value shall be determined in such reasonable manner as may be 66 prescribed from time to time by the Board of Directors of the Company, subject to the objection and arbitration procedure as described in Section 5 above. 10. RIGHTS OF THE HOLDER. The Holder shall not be entitled to any rights as a shareholder in the Company by reason of this Warrant, either at law or equity, except as specifically provided for herein. The Company covenants, however, that for so long as this Warrant is at least partially unexercised, it will furnish any Holder of this Warrant with copies of all reports and communications furnished to the shareholders of the Company. 11. CHARGES DUE UPON EXERCISE. The Company shall pay any and all issue or transfer taxes, including, but not limited to, all federal or state taxes, that may be payable with respect to the transfer of this Warrant or the issue or delivery of Warrant Securities upon the exercise of this Warrant. 12. WARRANT SECURITIES TO BE FULLY PAID. The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant will be, upon such delivery, validly and duly issued, fully paid and nonassessable. 13. NOTICES. All notices, certificates, requests, or other similar items provided for in this Warrant shall be in writing and shall be personally delivered or deposited in the United States mail, postage prepaid, addressed to the respective party as indicated in the portions of this Warrant preceding Section 1. All notices shall be deemed to be delivered upon personal delivery or upon the expiration of 3 business days following deposit in the United States mail, postage prepaid. The addresses of the parties may be changed, and addresses of other Holders and holders of Warrant Securities may be specified, by written notice delivered pursuant to this Section 13. The Company's principal office shall be deemed to be the address provided pursuant to this Section for the delivery of notices to the Company. 14. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Florida, without reference to its conflict of laws rules and principles, and courts located in or near Fort Myers, Florida shall have exclusive jurisdiction over all disputes arising hereunder. 15. ARBITRATION. The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 15 to arbitration in Fort Myers, Florida, according to the rules and practices of the American Arbitration Association from time to time in force and, if such arbitration can not be held in Fort Myers, Florida, then it shall be held in the location nearest to Fort Myers, Florida, where such arbitration may be maintained; provided, however, that if such rules and practices conflict with the applicable procedures of Florida courts of general jurisdiction or any other provisions of Florida law then in force, those Florida rules and provisions shall govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Florida. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default. 16. MISCELLANEOUS PROVISIONS. (a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities. 67 (b) If the Company fails to perform any of its obligations hereunder, it shall be liable to the Holder for all damages, costs and expenses resulting from the failure, including, but not limited to, all reasonable attorney's fees and disbursements. (c) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought. (d) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant. (e) The Company agrees to execute such further agreements, conveyances, certificates and other documents as may be reasonably requested by the Holder to effectuate the intent and provisions of this Warrant. (f) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders. NEOMEDIA TECHNOLOGIES, INC. ATTEST: By_____________________________ By_______________________________ , Secretary Charles T. Jensen, Chief Financial Officer and Vice President 68 EXHIBIT A NOTICE OF EXERCISE (To be executed by a Holder desiring to exercise the right to purchase Shares pursuant to a Warrant.) The undersigned Holder of a Warrant hereby (a) irrevocably elects to exercise the Warrant to the extent of purchasing _______________ Shares; (b) makes payment in full of the aggregate Exercise Price for those Shares in the amount of $_________________ by the delivery of certified funds or a bank cashier's check in the amount of $_________________ ; (c) requests that certificates evidencing the securities underlying such Shares be issued in the name of the undersigned, or, if the name and address of some other person is specified below, in the name of such other person: _______________________________________________________ _______________________________________________________ _______________________________________________________ (Name and address of person OTHER than the undersigned in whose name Shares are to be registered) (d) requests, if the number of Shares purchased are not all the Shares purchasable pursuant to the unexercised portion of the Warrant, that a new Warrant of like tenor for the remaining Shares purchasable pursuant to the Warrant be issued and delivered to the undersigned at the address stated below. Dated: ___________________ _______________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) __________________________ Social Security Number _______________________________________ or Employer ID Number Printed Name Address: _____________________________ _____________________________________ 69 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, __________________________________, hereby sells, assigns and transfers unto: Name: _________________________________________________ (Please type or print in block letters) Address: ______________________________________________ ______________________________________________ the right to purchase _________________ Shares of NeoMedia Technologies, Inc. (the "Company") pursuant to the terms and conditions of the Warrant held by the undersigned. The undersigned hereby authorizes and directs the Company (i) to issue and deliver to the above-named assignee at the above address a new Warrant pursuant to which the rights to purchase being assigned may be exercised, and (ii) if there are rights to purchase Shares remaining pursuant to the undersigned's Warrant after the assignment contemplated herein, to issue and deliver to the undersigned at the address stated below a new Warrant evidencing the right to purchase the number of Shares remaining after issuance and delivery of the Warrant to the above-named assignee. Except for the number of Shares purchasable, the new Warrants to be issued and delivered by the Company are to contain the same terms and conditions as the undersigned's Warrant. To complete the assignment contemplated by this Assignment Form, the undersigned hereby irrevocably constitutes and appoints as the undersigned's attorney-in-fact to transfer the Warrants and the rights thereunder on the books of the Company with full power of substitution for these purposes. Dated: ____________________ _____________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) ________________________________ Printed Name ________________________________ Address: ______________________________ 70 EX-4.11 3 EXHIBIT 4.11 NeoMedia Technologies, Inc. Exhibit 4.11 Form of Warrant to Dominick & Dominick, Incorporated 71 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. Warrant to Purchase 375,000 Shares (subject to adjustment as set forth herein) Exercise Price $7.375 Per Share (subject to adjustment as set forth herein) VOID AFTER 5:00 P.M., CENTRAL TIME, NOVEMBER 25, 2001 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (the "Act") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT. NeoMedia Technologies, Inc. (the "Company") hereby certifies that, for value received, Dominick & Dominick, Incorporated, New York, New York (the "Holder"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company at any time at or before 5:00 p.m., Central time, on November 25, 2001, up to 375,000 Shares ("Share" in the singular and "Shares" in the plural) of the Company's $.01 par value common stock ("Common Stock") at a purchase price of $7.375 per Share (the "Exercise Price"). Neither this Warrant nor the Shares issuable upon exercise of this Warrant have been registered under the Act nor have they been registered or qualified under any other applicable federal or state securities laws. Accordingly, neither this Warrant nor the Shares issuable upon exercise of this Warrant may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement or qualification filed in accordance with the Act and applicable state securities laws or pursuant to an exemption from registration under the Act and applicable state securities laws. The number of the securities purchasable upon exercise of this Warrant and the Exercise Price are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any warrants issued in substitution for or replacement of this Warrant, or any warrants into which this Warrant may be divided or exchanged. The Shares purchasable upon the exercise of this Warrant are hereinafter referred to as "Warrant Securities." This Warrant may not be assigned, transferred, sold or offered for sale by the Holder without the express written approval of the Company. 1. EXERCISE OF WARRANT. (a) Subject to the other terms and conditions of this Warrant, the purchase rights evidenced by this Warrant may be exercised in whole or in part at any time, and from time to time, prior to 5:00 p.m., Central time, on November 25, 2001, by the Holder's presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Notice of Exercise, in the form attached to and by this reference incorporated in this Warrant as Exhibit A, and by payment of the aggregate Exercise Price, in certified funds or a bank cashier's check, for the number of Shares specified in the Notice of Exercise. This Warrant may only be exercised for the purchase of whole Shares. In the event this Warrant is exercised in part only, as soon as is practicable after the presentation and surrender of this Warrant to the Company for exercise, the Company shall execute and deliver to the Holder a 72 new Warrant, containing the same terms and conditions as this Warrant, evidencing the right of the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) Upon receipt of this Warrant by the Company as described in subsection (a) above, the Holder shall be deemed to be the holder of record of the Warrant Securities issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Warrant Securities may not have been prepared or actually delivered to the Holder. 2. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. (a) This Warrant may not be sold, transferred, assigned, pledged or hypothecated without the express written consent of the Company. In addition, all sales, transfers, assignments or hypothecations of this Warrant must be in compliance with Section 7 hereof. Any assignment or transfer of this Warrant shall be made by the presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Assignment Form, in the form attached to and by this reference incorporated in this Warrant as Exhibit B. Upon the presentation and surrender of these items to the Company, the Company shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, containing the same terms and conditions as this Warrant, in the name of the new Holder or Holders as named in the Assignment Form, and this Warrant shall at that time be canceled. (b) This Warrant, alone or with other Warrants containing substantially the same terms and conditions and owned by the same Holder, is exchangeable at the option of the Holder at any time prior to its expiration either by its terms or by its exercise in full upon presentation and surrender to the Company at its principal office for another Warrant or other Warrants, of different denominations but containing the same terms and conditions as this Warrant, entitling the Holder to purchase the same aggregate number of Warrant Securities that were purchasable pursuant to the Warrant or Warrants presented and surrendered. At the time of presentation and surrender by the Holder to the Company, the Holder also shall deliver to the Company a written notice, signed by the Holder, specifying the denominations in which new Warrants are to be issued to the Holder. (c) The Company will execute and deliver to the Holder a new Warrant containing the same terms and conditions as this Warrant upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, provided that (i) in the case of loss, theft, or destruction, the Company receives from the Holder an indemnification satisfactory to it, and (ii) in the case of mutilation, the Holder presents and surrenders this Warrant to the Company for cancellation. Any new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company regardless of whether the Warrant that was lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any time. 3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SECURITIES. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Securities shall be subject to adjustment from time to time upon the happening of certain events, as hereinafter defined. (a) The number of Warrant Securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (i) In case the Company shall (A) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (B) subdivide or split its outstanding shares of Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (D) issue by reorganization, reclassification or recapitalization of its shares of Common Stock other securities of the Company, the number of Warrant Securities purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Securities or other securities of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above, 73 had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Company shall distribute to all holders of its shares of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and dividends or distributions referred to in paragraph (i) above) or rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Securities thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Securities theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the then current market price per share of Common Stock (as defined in Section 3(a)(iii) hereof) on the date of such distribution, and of which the denominator shall be the then current market price per share of Common Stock, less the then fair value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iii) For the purpose of any computation under Section 3(a)(iii) and Section 9 hereof, the current market price per share of Common Stock at any date shall be the average closing price of the Common Stock (if then traded in the over-the-counter market) or the average closing price of the Common Stock (if then traded on NASDAQ's National Market System or on a national securities exchange) for the five consecutive trading days ending the day prior to the date as of which such computation is made. If the Common Stock is not so listed or admitted to unlisted trading privileges and closing prices are not so reported, the current market price per share shall be determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (iv) No adjustment in the number of Warrant Securities purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Securities purchasable upon the exercise of this Warrant; provided, however, that any adjustments which by reason of this Section 3(a)(iv) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (v) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of this Warrant in effect immediately prior to such adjustment, shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Securities purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number or Warrant Securities so purchasable immediately thereafter. (vi) For the purpose of this Section 3(a), the term "shares of Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Warrant, or (ii) any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 3(a)(i) above, the Holders shall become entitled to purchase any shares of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of this Warrant and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms 74 as nearly equivalent as practicable to the provisions with respect to the Warrant Securities contained in Section 3(a)(i) through Section 3(a)(v) inclusive, above, and the provisions of Sections 3(b) and 3(c) hereof, with respect to the Warrant Securities, shall apply on like terms to any such other shares. (b) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant or the Exercise Price of such Warrant Securities is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Securities purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Securities after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive of the correctness of such adjustment. (c) Except as provided in subsection (a), no adjustment in respect of any cash dividend shall be made during the term of this Warrant or upon its exercise. (d) In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall agree that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of this Warrant the kind and amount of shares and other securities and property which such Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Warrant been exercised immediately prior to such action. The Company shall mail by first class mail, postage prepaid, to each Holder, notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 3(d) shall similarly apply to successive consolidations, mergers, sales or conveyances. (e) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrant, any certificate theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant. 4. NOTICE TO HOLDERS. If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur: (a) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or (b) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or (c) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or (d ) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) any purchase, retirement or redemption by the Company of its Common Stock; then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following: 75 (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined; (ii) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and (iii) if any matters referred to in the foregoing clauses (i) and (ii) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined. 5. RESERVATION OF WARRANT SECURITIES. The Company hereby agrees that at all times prior to November 25, 2001, it will have authorized and will reserve and keep available for issuance and delivery to the Holder that number of shares of its Common Stock that may be required from time to time for issuance and delivery upon the exercise of the then unexercised portion of this Warrant. 6. REGISTRATION UNDER THE SECURITIES ACT OF 1933. (a) If at any time subsequent to the date hereof and prior to November 25, 2001, the Company files a registration statement with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), or pursuant to any other act passed after the date of this Agreement, which filing provides for the sale of securities by the Company to the public, the Company shall offer to the Holder or Holders of this Warrant and the holders of any Warrant Securities the opportunity to register or qualify solely in such registration any Warrant Securities and any Warrant Securities underlying the unexercised portion of this Warrant, if any, at the Company's sole expense, regardless of whether the Holder or Holders of this Warrant or the holders of Warrant Securities or both may have previously availed themselves of any of the registration rights described in this Section 6. Notwithstanding anything to the contrary, this subsection (a) shall not be applicable to a registration statement on Forms S-4, S-8 or their successors or any other inappropriate forms filed by the Company with the United States Securities and Exchange Commission. The Company shall deliver written notice to the Holder or Holders of this Warrant and to any holders of the Warrant Securities of its intention to file a registration statement under the Act at least 60 days prior to the filing of such registration statement or offering statement, and the Holder or Holders and holders of Warrant Securities shall have 30 days thereafter to request in writing that the Company register or qualify the Warrant Securities in accordance with this subsection (a). Upon the delivery of such a written request within the specified time, the Company shall be obligated to include in its contemplated registration statement all information necessary or advisable to register or qualify the Warrant Securities or Warrant Securities underlying the unexercised portion of this Warrant in such registration statement for a public offering, if the Company does file the contemplated registration statement; provided, however, that neither the delivery of the notice by the Company nor the delivery of a request by a Holder or by a holder of Warrant Securities shall in any way obligate the Company to file a registration statement and notwithstanding the filing of a registration statement, the Company may, at any time prior to the effective date thereof and without any obligation to the Holder of this Warrant or to a holder of Warrant Securities, determine not to offer the securities (including the Warrant Securities) to which the registration statement relates; provided, however, in the event such registration statement is underwritten by a broker-dealer, then the right to register the Warrant Securities or Warrant Securities underlying the unexercised portion of this Warrant in such registration shall be subject to the approval of such underwriter and if such underwriter determines that the Warrant Securities, or Warrant Securities underlying the unexercised portion of this Warrant, or any part thereof, is not to be registered in such registration, 76 the Company shall not have any obligation hereunder to file a registration statement and shall not be deemed to be in breach of the provisions hereof. The Company shall comply with the requirements of this subsection (a) and the related requirements of subsection (d) at its own expense. That expense shall include, but not be limited to, legal, accounting, consulting, printing, federal and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel, accountants and consultants retained by the Company, and miscellaneous expenses directly related to the registration statement and the offering. However, this expense shall not include the portion of any underwriting commissions, transfer taxes and the underwriter's accountable and nonaccountable expense allowances attributable to the offer and sale of the Warrant Securities and Warrant Securities underlying the unexercised portion of this Warrant, all of which expenses shall be borne by the Holder or Holders of this Warrant and the holders of the Warrant Securities registered or qualified. (b) In the event that the Company registers the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant pursuant to subsection (a) above, the Company shall include in the registration statement, and the prospectus included therein, all information and materials necessary or advisable to comply with the applicable statutes and regulations so as to permit the public sale of the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant. (c) As to each registration statement, the Company's obligations contained in this Section 6 shall be conditioned upon a timely receipt by the Company in writing of the following: (i) Information as to the terms of the contemplated public offering furnished by and on behalf of each Holder or holder intending to make a public distribution of the Warrant Securities or Warrant Securities underlying the unexercised portion of the Warrant; and (ii) Such other information as the Company may reasonably require from such Holders or holders, or any underwriter for any of them, for inclusion in the registration statement. (d) In each instance in which pursuant to this Section 6 the Company shall take any action to register the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant, prior to the effective date of any registration statement or offering statement, the Company and each Holder or holder of Warrant Securities being registered shall enter into reciprocal indemnification agreements, in the form customarily used by reputable investment bankers with respect to public offerings of securities. These indemnification agreements also shall contain an agreement by the Holder or shareholder at issue to indemnify and hold harmless the Company, its officers, directors from and against any and all losses, claims, damages and liabilities, including, but not limited to, all expenses reasonably incurred in investigating, preparing, defending or settling any claim, directly resulting from any untrue statements of material facts, or omissions to state a material fact necessary to make a statement not misleading, contained in a registration statement to which this Section 6 applies, if, and only if, the untrue statement or omission directly resulted from information provided in writing to the Company by the indemnifying Holder or shareholder expressly for use in the registration statement or offering statement at issue. 7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. (a) This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Act, and except with the express written approval of the Company and in compliance with all applicable state securities statutes. (b) The Company may cause the following legend, or its equivalent, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defined by the Act, for distribution to the public: 77 "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are 'restricted securities' as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 8. REDEMPTION. Any time after November 25, 1997, or such earlier date as may be determined by Joseph Charles & Associates, Inc., the representative of the underwriters of the Company's initial public offering in November, 1996, upon notice of redemption properly given, and if and only if the closing average price of the Common Stock has been at least $8.85 on each of the 20 consecutive trading days within the thirty day period prior to the day on which notice of redemption is given, and at such time there is a current effective registration statement covering the shares of Common Stock underlying the Warrants, then each Warrant represented by this Warrant Certificate may be redeemed at the option of the Company, at any time, at a redemption price of $.05 per Warrant. Notice of redemption shall be mailed not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Holder shall have no rights with respect to this Warrant except to receive the $.05 per Warrant upon surrender of this Certificate. 9. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Securities on any exercise of this Warrant. The number of full Warrant Securities which shall be issuable upon the exercise of Warrants shall be computed on the basis of the aggregate number of Warrant Securities purchasable on exercise of the Warrant so presented. If any fraction of Warrant Securities would, except for the provisions of this Section 9, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the then current market price per Common Share (as defined in Section 3(a)(iii) above) multiplied by such fraction. 10. RIGHTS OF THE HOLDER. The Holder shall not be entitled to any rights as a shareholder in the Company by reason of this Warrant, either at law or equity, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceeding of the Company, except as specifically provided for herein. 11. WARRANT SECURITIES TO BE FULLY PAID. The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant and payment in full of the Exercise Price will be, upon such delivery, validly and duly issued, fully paid and nonassessable. 12. NOTICES. All notices, certificates, requests, or other similar items provided for in this Warrant shall be in writing and shall be personally delivered or deposited in the United States mail, postage prepaid, addressed to the respective party as indicated in the portions of this Warrant preceding Section 1. All notices shall be deemed to be delivered upon personal delivery or upon the expiration of three business days following deposit in the United States mail, postage prepaid. The addresses of the parties may be changed, and addresses of other Holders and holders of Warrant Securities may be specified, by written notice delivered pursuant to this Section 12. The Company's principal office shall be deemed to be the address provided pursuant to this Section for the delivery of notices to the Company. 13. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to its conflict of laws rules and principles, and courts and arbitration tribunals located in Illinois shall have exclusive jurisdiction over all disputes arising hereunder. 14. ARBITRATION. The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 14 to arbitration in Chicago, Illinois, according to the rules and practices of the American Arbitration Association from time to time in force; provided, however, that if such rules and practices conflict with the applicable procedures of Illinois courts of general jurisdiction or any other provisions of Illinois law then in force, those Illinois rules and provisions shall 78 govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Illinois. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default. 15. MISCELLANEOUS PROVISIONS. (a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities. (b) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought. (c) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant. (d) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders. Dated as of May 1, 1997. NEOMEDIA TECHNOLOGIES, INC. ATTEST: By By William E. Fritz, Charles W. Fritz, President and Secretary Chief Executive Officer 79 EXHIBIT A NOTICE OF EXERCISE (To be executed by a Holder desiring to exercise the right to purchase Shares pursuant to the Warrant.) The undersigned Holder of the Warrant hereby (a) irrevocably elects to exercise the Warrant to the extent of purchasing _______________ Shares; (b) makes payment in full of the aggregate Exercise Price for those Shares in the amount of $_________________ by the delivery of certified funds or a bank cashier's check in the amount of $_________________; (c) requests that certificates evidencing the securities underlying such Shares be issued in the name of the undersigned, or, if the name and address of some other person is specified below, in the name of such other person: ______________________________________________________ ______________________________________________________ ______________________________________________________ (Name and address of person OTHER than the undersigned in whose name Shares are to be registered) (d) requests, if the number of Shares purchased are not all the Shares purchasable pursuant to the unexercised portion of the Warrant, that a new Warrant of like tenor for the remaining Shares purchasable pursuant to the Warrant be issued and delivered to the undersigned at the address stated below. Dated: ________________________ ____________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) _______________________________ _______________________________ Social Security Number Printed Name or Employer ID Number Address: _______________________________ _______________________________ 80 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, __________________________________, hereby sells, assigns and transfers unto: Name: _____________________________________________________ (Please type or print in block letters) Address: _______________________________________________ _______________________________________________ the right to purchase _________________ Shares of NeoMedia Technologies, Inc. (the "Company") pursuant to the terms and conditions of the Warrant held by the undersigned. The undersigned hereby authorizes and directs the Company (i) to issue and deliver to the above-named assignee at the above address a new Warrant pursuant to which the rights to purchase being assigned may be exercised, and (ii) if there are rights to purchase Shares remaining pursuant to the undersigned's Warrant after the assignment contemplated herein, to issue and deliver to the undersigned at the address stated below a new Warrant evidencing the right to purchase the number of Shares remaining after issuance and delivery of the Warrant to the above-named assignee. Except for the number of Shares purchasable, the new Warrants to be issued and delivered by the Company are to contain the same terms and conditions as the undersigned's Warrant. To complete the assignment contemplated by this Assignment Form, the undersigned hereby irrevocably constitutes and appoints as the undersigned's attorney-in-fact to transfer the Warrants and the rights thereunder on the books of the Company with full power of substitution for these purposes. Dated: ________________________ ____________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) ________________________________ _______________________________ Social Security Number Printed Name or Employer ID Number Address: _______________________________ _______________________________ 81 EX-4.12 4 EXHIBIT 4.12 NeoMedia Technologies, Inc. Exhibit 4.12 Form of Warrant to Compass Capital, Inc. 82 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. Warrant to Purchase 173,332 Shares (subject to adjustment as set forth herein) Exercise Price $8.85 Per Share (subject to adjustment as set forth herein) VOID AFTER 11:59 P.M., EASTERN TIME, DECEMBER 11, 2002 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (the "Act") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT. NeoMedia Technologies, Inc. (the "Company") hereby certifies that, for value received, Compass Capital, Inc., Island Corporate Center, Suite 450, 7525 Southeast 24th Street, Mercer Island, Washington, 98119-4122 (the "Holder"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company at any time at or before 11:59 p.m., Eastern time, on December 11, 2002, up to 173,332 Shares ("Share" in the singular and "Shares" in the plural) of the Company's $.01 par value common stock ("Common Stock") at a purchase price of $8.85 per Share (the "Exercise Price"). Neither this Warrant nor the Shares issuable upon exercise of this Warrant have been registered under the Act nor have they been registered or qualified under any other applicable federal or state securities laws. Accordingly, neither this Warrant nor the Shares issuable upon exercise of this Warrant may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement or qualification filed in accordance with the Act and applicable state securities laws or pursuant to an exemption from registration under the Act and applicable state securities laws. The number of the securities purchasable upon exercise of this Warrant and the Exercise Price are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any warrants issued in substitution for or replacement of this Warrant, or any warrants into which this Warrant may be divided or exchanged. The Shares purchasable upon the exercise of this Warrant are hereinafter referred to as "Warrant Securities." This Warrant may be assigned, transferred, sold or offered for sale by the Holder upon compliance with all the pertinent provisions hereof. 1. EXERCISE OF WARRANT. (a) Subject to the other terms and conditions of this Warrant, the purchase rights evidenced by this Warrant may be exercised in whole or in part at any time, and from time to time, prior to 11:59 p.m., Eastern time, on December 11, 2002, by the Holder's presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Notice of Exercise, in the form attached to and by this reference incorporated in this Warrant as Exhibit A, and by payment of the aggregate Exercise Price, in certified funds or a bank cashier's check. 83 This Warrant may only be exercised for the purchase of whole Shares. In the event this Warrant is exercised in part only, as soon as is practicable after the presentation and surrender of this Warrant to the Company for exercise, the Company shall execute and deliver to the Holder a new Warrant, containing the same terms and conditions as this Warrant, evidencing the right of the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) Upon receipt of this Warrant by the Company as described in subsection (a) above, the Holder shall be deemed to be the holder of record of the Warrant Securities issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Warrant Securities may not have been prepared or actually delivered to the Holder. 2. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. (a) This Warrant may be sold, transferred, assigned, pledged or hypothecated immediately in accordance with the provisions hereof. In addition, all sales, transfers, assignments or hypothecations of this Warrant must be in compliance with Section 6 hereof. Any assignment or transfer of this Warrant shall be made by the presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Assignment Form, in the form attached to and by this reference incorporated in this Warrant as Exhibit B. Upon the presentation and surrender of these items to the Company, the Company shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, containing the same terms and conditions as this Warrant, in the name of the new Holder or Holders as named in the Assignment Form, and this Warrant shall at that time be canceled. (b) This Warrant, alone or with other Warrants containing substantially the same terms and conditions and owned by the same Holder, is exchangeable at the option of the Holder at any time prior to its expiration either by its terms or by its exercise in full upon presentation and surrender to the Company at its principal office for another Warrant or other Warrants, of different denominations but containing the same terms and conditions as this Warrant, entitling the Holder to purchase the same aggregate number of Warrant Securities that were purchasable pursuant to the Warrant or Warrants presented and surrendered. At the time of presentation and surrender by the Holder to the Company, the Holder also shall deliver to the Company a written notice, signed by the Holder, specifying the denominations in which new Warrants are to be issued to the Holder. (c) The Company will execute and deliver to the Holder a new Warrant containing the same terms and conditions as this Warrant upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, provided that (i) in the case of loss, theft, or destruction, the Company receives from the Holder an indemnification satisfactory to it, and (ii) in the case of mutilation, the Holder presents and surrenders this Warrant to the Company for cancellation. Any new Warrant executed and delivered shall 84 constitute an additional contractual obligation on the part of the Company regardless of whether the Warrant that was lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any time. 3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SECURITIES. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Securities shall be subject to adjustment from time to time upon the happening of certain events, as hereinafter defined. (a) The number of Warrant Securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (i) In case the Company shall (A) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (B) subdivide or split its outstanding shares of Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (D) issue by reorganization, reclassification or recapitalization of its shares of Common Stock other securities of the Company, the number of Warrant Securities purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Securities or other securities of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Company shall distribute to all holders of its shares of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and dividends or distributions referred to in paragraph (i) above) or rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Securities thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Securities theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the then current market price per share of Common Stock (as defined in Section 3(a)(iii) hereof) on the date of such distribution, and of which the denominator shall be the then current market price per share of Common Stock, less the then fair value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iii) For the purpose of any computation under Section 3(a)(iii) and Section 7 hereof, the current market price per share of Common Stock at any date shall be the average closing price of the Common Stock (if then traded in the over-the-counter market) or the average closing price of the Common Stock (if then traded on NASDAQ's National Market System or on a national securities exchange) for the five consecutive trading days ending the day prior to the date as of which such computation is made. If the Common Stock is not so listed or admitted to unlisted trading privileges and closing prices are not so reported, the current market price per share shall be determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (iv) No adjustment in the number of Warrant Securities purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Securities purchasable upon the exercise of this Warrant; provided, however, that any adjustments which by reason of this Section 3(a)(iv) are not required to be made shall be carried 85 forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (v) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of this Warrant in effect immediately prior to such adjustment, shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Securities purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number or Warrant Securities so purchasable immediately thereafter. (vi) For the purpose of this Section 3(a), the term "shares of Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Warrant, or (ii) any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 3(a)(i) above, the Holders shall become entitled to purchase any shares of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of this Warrant and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Securities contained in Section 3(a)(i) through Section 3(a)(v) inclusive, above, and the provisions of Sections 3(b) and 3(c) hereof, with respect to the Warrant Securities, shall apply on like terms to any such other shares. (b) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant or the Exercise Price of such Warrant Securities is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Securities purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Securities after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive of the correctness of such adjustment. (c) Except as provided in subsection (a), no adjustment in respect of any cash dividend shall be made during the term of this Warrant or upon its exercise. (d) In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall agree that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of this Warrant the kind and amount of shares and other securities and property which such Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Warrant been exercised immediately prior to such action. The Company shall mail by first class mail, postage prepaid, to each Holder, notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 3(d) shall similarly apply to successive consolidations, mergers, sales or conveyances. (e) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrant, any certificate theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant. 86 4. NOTICE TO HOLDERS. If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur: (a) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or (b) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or (c) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or (d ) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) any purchase, retirement or redemption by the Company of its Common Stock; then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following: (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined; (ii) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and (iii) if any matters referred to in the foregoing clauses (i) and (ii) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined. 5. RESERVATION OF WARRANT SECURITIES. The Company hereby agrees that at all times prior to December 11, 2002, it will have authorized and will reserve and keep available for issuance and delivery to the Holder that number of shares of its Common Stock that may be required from time to time for issuance and delivery upon the exercise of the then unexercised portion of this Warrant. 6. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. (a) This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Act, and except with the express written approval of the Company and in compliance with all applicable state securities statutes. (b) The Company may cause the following legend, or its equivalent, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defined by the Act, for distribution to the public: 87 "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are 'restricted securities' as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 7. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Securities on any exercise of this Warrant. The number of full Warrant Securities which shall be issuable upon the exercise of Warrants shall be computed on the basis of the aggregate number of Warrant Securities purchasable on exercise of the Warrant so presented. If any fraction of Warrant Securities would, except for the provisions of this Section 7, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the then current market price per Common Share (as defined in Section 3(a)(iii) above) multiplied by such fraction. 8. RIGHTS OF THE HOLDER. The Holder shall not be entitled to any rights as a shareholder in the Company by reason of this Warrant, either at law or equity, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceeding of the Company, except as specifically provided for herein. 9. WARRANT SECURITIES TO BE FULLY PAID. The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant and payment in full of the Exercise Price will be, upon such delivery, validly and duly issued, fully paid and nonassessable. 10. NOTICES. All notices, certificates, requests, or other similar items provided for in this Warrant shall be in writing and shall be personally delivered or deposited in the United States mail, postage prepaid, addressed to the respective party as indicated in the portions of this Warrant preceding Section 1. All notices shall be deemed to be delivered upon personal delivery or upon the expiration of three business days following deposit in the United States mail, postage prepaid. The addresses of the parties may be changed, and addresses of other Holders and holders of Warrant Securities may be specified, by written notice delivered pursuant to this Section 10. The Company's principal office shall be deemed to be the address provided pursuant to this Section for the delivery of notices to the Company. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Florida, without reference to its conflict of laws rules and principles, and courts and arbitration tribunals located in or near Fort Myers, Florida shall have exclusive jurisdiction over all disputes arising hereunder. 12. ARBITRATION. The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 12 to arbitration in Fort Myers, Florida, according to the rules and practices of the American Arbitration Association from time to time in force and if such arbitration can not be held in Fort Myers, Florida, then it shall be held in the location nearest to Fort Myers, Florida, where such arbitration may be maintained; provided, however, that if such rules and practices conflict with the applicable procedures of Florida courts of general jurisdiction or any other provisions of Florida law then in force, those Florida rules and provisions shall govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Florida. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default. 13. MISCELLANEOUS PROVISIONS. 88 (a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities. (b) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought. (c) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant. (d) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders. Dated as of December 11, 1997. NEOMEDIA TECHNOLOGIES, INC. ATTEST: By ________________________ By ________________________________ William E. Fritz, Charles W. Fritz, President and Secretary Chief Executive Officer 89 EXHIBIT A NOTICE OF EXERCISE (To be executed by a Holder desiring to exercise the right to purchase Shares pursuant to the Warrant.) The undersigned Holder of the Warrant hereby (a) irrevocably elects to exercise the Warrant to the extent of purchasing _______________ Shares; (b) makes payment in full of the aggregate Exercise Price for those Shares in the amount of $_________________ by the delivery of certified funds or a bank cashier's check in the amount of $_________________; (c) requests that certificates evidencing the securities underlying such Shares be issued in the name of the undersigned, or, if the name and address of some other person is specified below, in the name of such other person: _____________________________________________________ _____________________________________________________ _____________________________________________________ Name and address of person OTHER than the undersigned in whose name Shares are to be registered) (d) requests, if the number of Shares purchased are not all the Shares purchasable pursuant to the unexercised portion of the Warrant, that a new Warrant of like tenor for the remaining Shares purchasable pursuant to the Warrant be issued and delivered to the undersigned at the address stated below. Dated: ________________________ _________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) __________________________ _____________________________________ Social Security Number Printed Name or Employer ID Number Address: _____________________________________ _____________________________________ 90 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, __________________________________, hereby sells, assigns and transfers unto: Name: _____________________________________________________ (Please type or print in block letters) Address: _______________________________________________ _______________________________________________ the right to purchase _________________ Shares of NeoMedia Technologies, Inc. (the "Company") pursuant to the terms and conditions of the Warrant held by the undersigned. The undersigned hereby authorizes and directs the Company (i) to issue and deliver to the above-named assignee at the above address a new Warrant pursuant to which the rights to purchase being assigned may be exercised, and (ii) if there are rights to purchase Shares remaining pursuant to the undersigned's Warrant after the assignment contemplated herein, to issue and deliver to the undersigned at the address stated below a new Warrant evidencing the right to purchase the number of Shares remaining after issuance and delivery of the Warrant to the above-named assignee. Except for the number of Shares purchasable, the new Warrants to be issued and delivered by the Company are to contain the same terms and conditions as the undersigned's Warrant. To complete the assignment contemplated by this Assignment Form, the undersigned hereby irrevocably constitutes and appoints as the undersigned's attorney-in-fact to transfer the Warrants and the rights thereunder on the books of the Company with full power of substitution for these purposes. Dated: ________________________ __________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) _______________________________ ______________________________________ Social Security Number Printed Name or Employer ID Number Address: ______________________________________ ______________________________________ 91 EX-4.13 5 NeoMedia Technologies, Inc. Exhibit 4.13 Form of Warrant to Thornhill Capital, L.L.C. 92 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. Warrant to Purchase 135,000 Shares (subject to adjustment as set forth herein) Exercise Price $7.50 Per Share (subject to adjustment as set forth herein) VOID AFTER 11:59 P.M., EASTERN TIME, DECEMBER 11, 2002 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (the "Act") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT. NeoMedia Technologies, Inc. (the "Company") hereby certifies that, for value received, Thornhill Capital, L.L.C., 1616 Thornhill Drive, Springfield, Illinois, 62707 (the "Holder"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company at any time at or before 11:59 p.m., Eastern time, on December 11, 2002, up to 135,000 Shares ("Share" in the singular and "Shares" in the plural) of the Company's $.01 par value common stock ("Common Stock") at a purchase price of $7.50 per Share (the "Exercise Price"). Neither this Warrant nor the Shares issuable upon exercise of this Warrant have been registered under the Act nor have they been registered or qualified under any other applicable federal or state securities laws. Accordingly, neither this Warrant nor the Shares issuable upon exercise of this Warrant may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement or qualification filed in accordance with the Act and applicable state securities laws or pursuant to an exemption from registration under the Act and applicable state securities laws. The number of the securities purchasable upon exercise of this Warrant and the Exercise Price are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any warrants issued in substitution for or replacement of this Warrant, or any warrants into which this Warrant may be divided or exchanged. The Shares purchasable upon the exercise of this Warrant are hereinafter referred to as "Warrant Securities." This Warrant may be assigned, transferred, sold or offered for sale by the Holder upon compliance with all the pertinent provisions hereof. 1. EXERCISE OF WARRANT. (a) Subject to the other terms and conditions of this Warrant, the purchase rights evidenced by this Warrant may be exercised in whole or in part at any time, and from time to time, prior to 11:59 p.m., Eastern time, on December 11, 2002, by the Holder's presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Notice of Exercise, in the form attached to and by this reference incorporated in this Warrant as Exhibit A, and by payment of the aggregate Exercise Price, in certified funds or a bank cashier's check. 93 This Warrant may only be exercised for the purchase of whole Shares. In the event this Warrant is exercised in part only, as soon as is practicable after the presentation and surrender of this Warrant to the Company for exercise, the Company shall execute and deliver to the Holder a new Warrant, containing the same terms and conditions as this Warrant, evidencing the right of the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) Upon receipt of this Warrant by the Company as described in subsection (a) above, the Holder shall be deemed to be the holder of record of the Warrant Securities issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Warrant Securities may not have been prepared or actually delivered to the Holder. 2. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. (a) This Warrant may be sold, transferred, assigned, pledged or hypothecated immediately in accordance with the provisions hereof. In addition, all sales, transfers, assignments or hypothecations of this Warrant must be in compliance with Section 6 hereof. Any assignment or transfer of this Warrant shall be made by the presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Assignment Form, in the form attached to and by this reference incorporated in this Warrant as Exhibit B. Upon the presentation and surrender of these items to the Company, the Company shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, containing the same terms and conditions as this Warrant, in the name of the new Holder or Holders as named in the Assignment Form, and this Warrant shall at that time be canceled. (b) This Warrant, alone or with other Warrants containing substantially the same terms and conditions and owned by the same Holder, is exchangeable at the option of the Holder at any time prior to its expiration either by its terms or by its exercise in full upon presentation and surrender to the Company at its principal office for another Warrant or other Warrants, of different denominations but containing the same terms and conditions as this Warrant, entitling the Holder to purchase the same aggregate number of Warrant Securities that were purchasable pursuant to the Warrant or Warrants presented and surrendered. At the time of presentation and surrender by the Holder to the Company, the Holder also shall deliver to the Company a written notice, signed by the Holder, specifying the denominations in which new Warrants are to be issued to the Holder. (c) The Company will execute and deliver to the Holder a new Warrant containing the same terms and conditions as this Warrant upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, provided that (i) in the case of loss, theft, or destruction, the Company receives from the Holder an indemnification satisfactory to it, and (ii) in the case of mutilation, the Holder presents and surrenders this Warrant to the Company for cancellation. Any new Warrant executed and delivered shall 94 constitute an additional contractual obligation on the part of the Company regardless of whether the Warrant that was lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any time. 3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SECURITIES. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Securities shall be subject to adjustment from time to time upon the happening of certain events, as hereinafter defined. (a) The number of Warrant Securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (i) In case the Company shall (A) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (B) subdivide or split its outstanding shares of Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (D) issue by reorganization, reclassification or recapitalization of its shares of Common Stock other securities of the Company, the number of Warrant Securities purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Securities or other securities of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Company shall distribute to all holders of its shares of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and dividends or distributions referred to in paragraph (i) above) or rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Securities thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Securities theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the then current market price per share of Common Stock (as defined in Section 3(a)(iii) hereof) on the date of such distribution, and of which the denominator shall be the then current market price per share of Common Stock, less the then fair value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iii) For the purpose of any computation under Section 3(a)(iii) and Section 7 hereof, the current market price per share of Common Stock at any date shall be the average closing price of the Common Stock (if then traded in the over-the-counter market) or the average closing price of the Common Stock (if then traded on NASDAQ's National Market System or on a national securities exchange) for the five consecutive trading days ending the day prior to the date as of which such computation is made. If the Common Stock is not so listed or admitted to unlisted trading privileges and closing prices are not so reported, the current market price per share shall be determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (iv) No adjustment in the number of Warrant Securities purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Securities purchasable upon the exercise of this Warrant; provided, however, that any adjustments which by reason of this Section 3(a)(iv) are not required to be made shall be carried 95 forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (v) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of this Warrant in effect immediately prior to such adjustment, shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Securities purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number or Warrant Securities so purchasable immediately thereafter. (vi) For the purpose of this Section 3(a), the term "shares of Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Warrant, or (ii) any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 3(a)(i) above, the Holders shall become entitled to purchase any shares of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of this Warrant and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Securities contained in Section 3(a)(i) through Section 3(a)(v) inclusive, above, and the provisions of Sections 3(b) and 3(c) hereof, with respect to the Warrant Securities, shall apply on like terms to any such other shares. (b) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant or the Exercise Price of such Warrant Securities is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Securities purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Securities after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive of the correctness of such adjustment. (c) Except as provided in subsection (a), no adjustment in respect of any cash dividend shall be made during the term of this Warrant or upon its exercise. (d) In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall agree that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of this Warrant the kind and amount of shares and other securities and property which such Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Warrant been exercised immediately prior to such action. The Company shall mail by first class mail, postage prepaid, to each Holder, notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 3(d) shall similarly apply to successive consolidations, mergers, sales or conveyances. (e) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrant, any certificate theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant. 96 4. NOTICE TO HOLDERS. If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur: (a) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or (b) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or (c) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or (d) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) any purchase, retirement or redemption by the Company of its Common Stock; then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following: (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined; (ii) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and (iii) if any matters referred to in the foregoing clauses (i) and (ii) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined. 5. RESERVATION OF WARRANT SECURITIES. The Company hereby agrees that at all times prior to December 11, 2002, it will have authorized and will reserve and keep available for issuance and delivery to the Holder that number of shares of its Common Stock that may be required from time to time for issuance and delivery upon the exercise of the then unexercised portion of this Warrant. 6. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. (a) This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Act, and except with the express written approval of the Company and in compliance with all applicable state securities statutes. (b) The Company may cause the following legend, or its equivalent, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defined by the Act, for distribution to the public: 97 "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are 'restricted securities' as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 7. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Securities on any exercise of this Warrant. The number of full Warrant Securities which shall be issuable upon the exercise of Warrants shall be computed on the basis of the aggregate number of Warrant Securities purchasable on exercise of the Warrant so presented. If any fraction of Warrant Securities would, except for the provisions of this Section 7, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the then current market price per Common Share (as defined in Section 3(a)(iii) above) multiplied by such fraction. 8. RIGHTS OF THE HOLDER. The Holder shall not be entitled to any rights as a shareholder in the Company by reason of this Warrant, either at law or equity, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceeding of the Company, except as specifically provided for herein. 9. WARRANT SECURITIES TO BE FULLY PAID. The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant and payment in full of the Exercise Price will be, upon such delivery, validly and duly issued, fully paid and nonassessable. 10. NOTICES. All notices, certificates, requests, or other similar items provided for in this Warrant shall be in writing and shall be personally delivered or deposited in the United States mail, postage prepaid, addressed to the respective party as indicated in the portions of this Warrant preceding Section 1. All notices shall be deemed to be delivered upon personal delivery or upon the expiration of three business days following deposit in the United States mail, postage prepaid. The addresses of the parties may be changed, and addresses of other Holders and holders of Warrant Securities may be specified, by written notice delivered pursuant to this Section 10. The Company's principal office shall be deemed to be the address provided pursuant to this Section for the delivery of notices to the Company. 11. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Florida, without reference to its conflict of laws rules and principles, and courts and arbitration tribunals located in or near Fort Myers, Florida shall have exclusive jurisdiction over all disputes arising hereunder. 12. ARBITRATION. The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 12 to arbitration in Fort Myers, Florida, according to the rules and practices of the American Arbitration Association from time to time in force and if such arbitration can not be held in Fort Myers, Florida, then it shall be held in the location nearest to Fort Myers, Florida, where such arbitration may be maintained; provided, however, that if such rules and practices conflict with the applicable procedures of Florida courts of general jurisdiction or any other provisions of Florida law then in force, those Florida rules and provisions shall govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Florida. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default. 13. MISCELLANEOUS PROVISIONS. 98 (a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities. (b) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought. (c) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant. (d) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders. Dated as of December 11, 1997. NEOMEDIA TECHNOLOGIES, INC. ATTEST: By By ------------------------------ ----------------------------------- William E. Fritz, Charles W. Fritz, President and Secretary Chief Executive Officer 99 EXHIBIT A NOTICE OF EXERCISE (To be executed by a Holder desiring to exercise the right to purchase Shares pursuant to the Warrant.) The undersigned Holder of the Warrant hereby (a) irrevocably elects to exercise the Warrant to the extent of purchasing _______________ Shares; (b) makes payment in full of the aggregate Exercise Price for those Shares in the amount of $_________________ by the delivery of certified funds or a bank cashier's check in the amount of $_________________; (c) requests that certificates evidencing the securities underlying such Shares be issued in the name of the undersigned, or, if the name and address of some other person is specified below, in the name of such other person: ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ (Name and address of person OTHER than the undersigned in whose name Shares are to be registered) (d) requests, if the number of Shares purchased are not all the Shares purchasable pursuant to the unexercised portion of the Warrant, that a new Warrant of like tenor for the remaining Shares purchasable pursuant to the Warrant be issued and delivered to the undersigned at the address stated below. Dated: ________________________ ________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) - ----------------------------- ---------------------------------------- Social Security Number Printed Name or Employer ID Number Address: ---------------------------------------- ---------------------------------------- 100 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, __________________________________, hereby sells, assigns and transfers unto: Name: _________________________________________________________________ (Please type or print in block letters) Address: _______________________________________________ _______________________________________________ the right to purchase _________________ Shares of NeoMedia Technologies, Inc. (the "Company") pursuant to the terms and conditions of the Warrant held by the undersigned. The undersigned hereby authorizes and directs the Company (i) to issue and deliver to the above-named assignee at the above address a new Warrant pursuant to which the rights to purchase being assigned may be exercised, and (ii) if there are rights to purchase Shares remaining pursuant to the undersigned's Warrant after the assignment contemplated herein, to issue and deliver to the undersigned at the address stated below a new Warrant evidencing the right to purchase the number of Shares remaining after issuance and delivery of the Warrant to the above-named assignee. Except for the number of Shares purchasable, the new Warrants to be issued and delivered by the Company are to contain the same terms and conditions as the undersigned's Warrant. To complete the assignment contemplated by this Assignment Form, the undersigned hereby irrevocably constitutes and appoints as the undersigned's attorney-in-fact to transfer the Warrants and the rights thereunder on the books of the Company with full power of substitution for these purposes. Dated: ________________________ ________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) - ----------------------------- ---------------------------------------- Social Security Number Printed Name or Employer ID Number Address: ---------------------------------------- ---------------------------------------- 101 EX-4.14 6 EXHIBIT 4.14 NeoMedia Technologies, Inc. Exhibit 4.14 Form of Warrant to Southeast Research Partners, Inc. 102 THE REGISTERED HOLDER OF THIS WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED. VOID AFTER 5:00 P.M. EASTERN TIME, ____________ ____, 19___ WARRANT FOR THE PURCHASE OF 100,000 SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. 1. WARRANT. THIS CERTIFIES THAT, in consideration of $10.00 and other good and valuable consideration, duly paid by or on behalf of Southeast Research Partners, Inc. ("Holder"), as registered owner of this Warrant, to NeoMedia Technologies, Inc., a Delaware corporation ("Company"), Holder is entitled, at any time or from time to time at or after December __, 1998 ("Commencement Date"), and at or before 5:00 p.m., Eastern Time on December __, 2002 ("Expiration Date"), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to One Hundred Thousand (100,000) shares of Common Stock of the Company, $.01 par value ("Common Stock"). If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate the Warrant. This Warrant is initially exercisable at $10 per share of Common Stock purchased; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Warrant, including the exercise price and the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. The term "Exercise Price" shall mean the initial exercise price or the adjusted exercise price, depending on the context, of a share of Common Stock. The term "Securities" shall mean the shares of Common Stock issuable upon exercise of this Warrant. 2. EXERCISE. 2.1 EXERCISE FORM. In order to exercise this Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Warrant and payment of the Exercise Price for the Securities being purchased. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire. 2.2 LEGEND. Each certificate for Securities purchased under this Warrant shall bear a legend as follows, unless such Securities have been registered under the Securities Act of 1933, as amended ("Act"): "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act") or applicable state law. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law." 103 3. TRANSFER. 3.1 GENERAL RESTRICTIONS. The registered Holder of this Warrant, by its acceptance hereof, agrees that until __________, 1998, it will not sell, transfer, assign or hypothecate this Warrant in whole or in part, and thereafter, it will not sell, transfer, assign or hypothecate this Warrant, in whole or in part, to anyone except upon compliance with, or pursuant to exemptions from, applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with this Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer this Warrant on the books of the Company and shall execute and deliver a new Warrant or Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of shares of Common Stock purchasable hereunder or such portion of such number as shall be contemplated by any such assignment. 3.2 RESTRICTIONS IMPOSED BY THE SECURITIES ACT. This Warrant and the Securities underlying this Warrant shall not be transferred unless and until (i) the Company has received the opinion of counsel for the Holder, acceptable to the Company (it being expressly agreed that David Alan Miller or Graubard Mollen of Graubard Mollen & Miller are acceptable counsel), that such securities may be sold pursuant to an exemption from registration under the Act, and applicable state law, the availability of which is established to the reasonable satisfaction of the Company, or (ii) 104 a registration statement relating to such Securities has been filed by the Company and declared effective by the Securities and Exchange Commission and compliance with applicable state law. 4. NEW WARRANTS TO BE ISSUED. 4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in Section 3 hereof, this Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Warrant for cancellation, together with the duly executed exercise or assignment form and funds (or conversion equivalent) sufficient to pay any Exercise Price and/or transfer tax, the Company shall cause to be delivered to the Holder without charge a new Warrant of like tenor to this Warrant in the name of the Holder evidencing the right of the Holder to purchase the aggregate number of shares of Common Stock purchasable hereunder as to which this Warrant has not been exercised or assigned. 4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and of an indemnification agreement reasonably satisfactory to the Company, the Company shall execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company. 5. REGISTRATION RIGHTS. 5.1 "PIGGY-BACK" REGISTRATION. 5.1.1 GRANT OF RIGHT. The Holders of this Warrant shall have the right for a period of four years from the Commencement Date to include all or any part of this Warrant and the shares of Common Stock underlying this Warrant (collectively, the "Registrable Securities") as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form) ("Registration Statement"); provided, however, that if, in the written opinion of the Company's managing underwriter or underwriters, if any, for such offering (the "Underwriter") the inclusion of the Registrable Securities, when added to the securities being registered by the Company or the selling stockholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without materially and adversely affecting the entire offering, the Registrable Securities included in the Registration Statement shall be reduced to such amount as the Underwriter, in its sole discretion, determines. Such reduction includes reducing the number of Registrable Securities to be registered in the Registration Statement for such offering to zero and not registering any of the Registrable Securities in such offering. If the Company intends to file a Registration Statement under the Act, the Company shall deliver written notice to the Holder of its intention to file a Registration Statement at least sixty days prior to such filing, and the Holder shall have thirty days thereafter to request in writing that the Company register or qualify the Registrable Securities, subject, however, to the foregoing provisions of the prior paragraph of this Section 5.1.1. Upon the delivery of such written request within the specified time, the Company, subject to the foregoing provisions of the prior paragraph of this Section 5.1.1, shall include in its contemplated Registration Statement all information necessary or advisable to register or qualify the Registrable Securities for offer and sale to the public, in the event the Company does file the contemplated Registration Statement; provided, however, that neither the delivery of the notice by the Company nor the delivery of a request by a Holder shall in any way obligate the Company to file a Registration Statement. Furthermore, notwithstanding the filing of a Registration Statement, the Company may, in its sole discretion, at any time prior to the Effective Date thereof, determine not to offer the securities to which the Registration Statement relates, regardless whether Registrable Securities have been included in such Registration Statement. As to each Registration Statement, the Company's obligations contained in this Section 5 shall be conditioned upon a timely receipt by the Company in writing of the following: 105 (a) information as to the terms of the contemplated public offering furnished by and on behalf of each Holder intending to make a public distribution of the Registrable Securities; and (b) such other information as the Company may reasonably require from such Holders for inclusion in the Registration Statement. 5.1.2 TERMS. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, including any filing fees payable to the National Association of Securities Dealers, Inc., but the Holders shall pay any and all underwriting commissions, transfer taxes and the underwriters' accountable and non-accountable expense allowances, if any, directly attributable to the offer and sale of the Registrable Securities and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. 5.2 GENERAL TERMS 5.2.1 INDEMNIFICATION. (a) The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or otherwise, arising from such registration statement, except for information furnished by or on behalf of such Holders, in writing, for specific inclusion in the registration statement. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which it may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, in writing, for specific inclusion in such registration statement. (b) If any action is brought against a party hereto, ("Indemnified Party") in respect of which indemnity may be sought against the other party ("Indemnifying Party"), such Indemnified Party shall promptly notify Indemnifying Party in writing of the institution of such action and Indemnifying Party shall assume the defense of such action, including the employment and fees of counsel reasonably satisfactory to the Indemnified Party. Such Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the employment of such counsel shall have been authorized in advance writing by Indemnifying Party in connection with the defense of such action, or (ii) Indemnifying Party shall not have employed counsel to defend such action, or (iii) such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which may result in a conflict between the Indemnified Party and Indemnifying Party (in which case Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), in any of which events, the reasonable fees and expenses of not more than one additional firm of attorneys designated in writing by the Indemnified Party shall be borne by Indemnifying Party. Notwithstanding anything to the contrary contained herein, if Indemnified Party shall assume the defense of such action as provided above, Indemnifying Party shall not be liable for any settlement of any such action effected without its written consent. (c) If the indemnification or reimbursement provided for hereunder is finally judicially determined by a court of competent jurisdiction to be unavailable to an Indemnified Party (other than as a consequence of a final judicial determination of willful misconduct, bad faith or gross negligence of such Indemnified Party), then Indemnifying Party agrees, in lieu of indemnifying such Indemnified Party, to contribute to the amount paid or payable by such Indemnified Party (i) in such proportion as is appropriate to reflect the relative benefits received, or sought to be received, by Indemnifying Party on the one hand and by such Indemnified Party on the other or (ii) if (but only if) the allocation provided in clause (i) of this sentence is not permitted by applicable law, in such proportion as is 106 appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of Indemnifying Party and of such Indemnified Party; provided, however, that in no event shall the aggregate amount contributed by a Holder exceed the profit, if any, earned by such Holder as a result of the exercise by him of the Warrants and the sale by him of the underlying shares of Common Stock. (d) The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise. 5.2.2 EXERCISE OF WARRANTS. Nothing contained in this Warrant shall be construed as requiring the Holder(s) to exercise their Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof. 6. ADJUSTMENTS 6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The Exercise Price and the number of shares of Common Stock underlying this Warrant shall be subject to adjustment from time to time as hereinafter set forth: 6.1.1 STOCK DIVIDENDS - RECAPITALIZATION, RECLASSIFICATION, SPLIT-UPS. If, after the date hereof, and subject to the provisions of Section 6.2 below, the number of outstanding shares of Common Stock is increased by a stock dividend on the Common Stock payable in shares of Common Stock or by a split-up, recapitalization or reclassification of shares of Common Stock or other similar event, then, on the effective date thereof, the number of shares of Common Stock issuable on exercise of this Warrant shall be increased in proportion to such increase in outstanding shares. 6.1.2 AGGREGATION OF SHARES. If after the date hereof, and subject to the provisions of Section 6.2, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date thereof, the number of shares of Common Stock issuable on exercise of this Warrant shall be decreased in proportion to such decrease in outstanding shares. 6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted (to the nearest cent) by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the numerator of which shall be the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such adjustment, and (y) the denominator of which shall be the number of shares of Common Stock so purchasable immediately thereafter. 6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. In case of any reclassification or reorganization of the outstanding shares of Common Stock other than a change covered by Section 6.1.1 hereof or which solely affects the par value of such shares of Common Stock, or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or reorganization of the outstanding shares of Common Stock), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Warrant shall have the right thereafter (until the expiration of the right of exercise of this Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or other transfer, by a Holder of the number of shares of Common Stock of the Company obtainable upon exercise of this Warrant immediately prior to such event; and if any reclassification also results in a change in shares of Common Stock covered by Sections 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2, 6.1.3 107 and this Section 6.1.4. The provisions of this Section 6.1.4 shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers. 6.1.5 CHANGES IN FORM OF WARRANT. This form of Warrant need not be changed because of any change pursuant to this Section 6, and Warrants issued after such change may state the same Exercise Price and the same number of shares of Common Stock and Warrants as are stated in the Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Warrants reflecting a required or permissive change shall not be deemed to waive any rights to a prior adjustment or the computation thereof. 6.2 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of this Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 7. RESERVATION AND LISTING. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of this Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges or, if applicable, on Nasdaq, on which the Common Stock of the Company is then listed and/or quoted. 8. CERTAIN NOTICE REQUIREMENTS. 8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company, either in law or in equity. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. 8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution, or (ii) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a merger or reorganization in which the Company is not the surviving party, or (iv) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed. 8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change ("Price Notice"). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company's President and Chief Financial Officer. 108 8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other communications under this Warrant shall be in writing and shall be deemed to have been duly made on the date of delivery if delivered personally or sent by overnight courier, with acknowledgment of receipt by the party to which notice is given, or on the fifth day after mailing if mailed to the party to whom notice is to be given, by registered or certified mail, return receipt requested, postage prepaid and properly addressed as follows: (i) if to the registered Holder of this Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to its principal executive office. 9. MISCELLANEOUS. 9.1 HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Warrant. 9.2 ENTIRE AGREEMENT. This Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 9.3 BINDING EFFECT. This Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Warrant or any provisions herein contained. 9.4 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Warrant shall be governed by and construed and enforced in accordance with the law of the State of Florida, without giving effect to conflict of laws. Any action, proceeding or claim against the Company or any Holder arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of Florida or of the United States of America for the Middle District of Florida, and by accepting this Warrant, the Holder irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company and the Holder, by accepting this Warrant, each hereby waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to the recipient at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding in any action, proceeding or claim. The prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 9.5 WAIVER, ETC. The failure of the Company or the Holder to at any time enforce any of the provisions of this Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer as of the ____ day of___________, 199__. NEOMEDIA TECHNOLOGIES, INC. By:_____________________________ Charles W. Fritz, President 109 Form to be used to exercise Warrant: ____________________________________________ ____________________________________________ ____________________________________________ Date: _____________________ The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase ________ shares of Common Stock of NeoMedia Technologies, Inc. the "Company") and hereby makes payment of $____________ (at the rate of $10.00 per share of Common Stock). Please issue the Common Stock as to which this Warrant is exercised in accordance with the instructions given below. --------------------------------------- Signature - --------------------------------- Signature Guaranteed NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name ________________________________________________________ (Print in Block Letters) Address ________________________________________________________ 110 Form to be used to assign Warrant: ASSIGNMENT (To be executed by the registered Holder to effect a transfer of the within Warrant): FOR VALUE RECEIVED, ________________________________ does hereby sell, assign and transfer unto _________________________________ the right to purchase _________________ shares of Common Stock of NeoMedia Technologies, Inc. ("Company") evidenced by the within Warrant and does hereby authorize the Company to transfer such right on the books of the Company. Dated:____________________, 19___ ------------------------------------ Signature NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. 111 EX-4.15 7 EXHIBIT 4.15 NeoMedia Technologies, Inc. Exhibit 4.15 Form of Warrant to Joseph Charles & Associates, Inc. 112 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF NEOMEDIA TECHNOLOGIES, INC. Warrant to Purchase 65,000 Shares (subject to adjustment as set forth herein) Exercise Price $10.125 Per Share (subject to adjustment as set forth herein) VOID AFTER 5:00 P.M., CENTRAL TIME, NOVEMBER 25, 2001 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (the "Act") OR REGISTERED OR QUALIFIED UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION FILED IN ACCORDANCE WITH THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT. NeoMedia Technologies, Inc. (the "Company") hereby certifies that, for value received, Joseph Charles & Associates, Inc., 525 South Flagler Drive, Suite 400, West Palm Beach, Florida 33401 (the "Holder"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company at any time at or before 5:00 p.m., Central time, on November 25, 2001, up to 65,000 Shares ("Share" in the singular and "Shares" in the plural) of the Company's $.01 par value common stock ("Common Stock") at a purchase price of $10.125 per Share (the "Exercise Price"). Neither this Warrant nor the Shares issuable upon exercise of this Warrant have been registered under the Act nor have they been registered or qualified under any other applicable federal or state securities laws. Accordingly, neither this Warrant nor the Shares issuable upon exercise of this Warrant may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement or qualification filed in accordance with the Act and applicable state securities laws or pursuant to an exemption from registration under the Act and applicable state securities laws. The number of the securities purchasable upon exercise of this Warrant and the Exercise Price are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any warrants issued in substitution for or replacement of this Warrant, or any warrants into which this Warrant may be divided or exchanged. The Shares purchasable upon the exercise of this Warrant are hereinafter referred to as "Warrant Securities." This Warrant may not be assigned, transferred, sold or offered for sale by the Holder without the express written approval of the Company. 1. EXERCISE OF WARRANT. (a) Subject to the other terms and conditions of this Warrant, the purchase rights evidenced by this Warrant may be exercised in whole or in part at any time, and from time to time, prior to 5:00 p.m., Central time, on November 25, 2001, by the Holder's presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Notice of Exercise, in the form attached to and by this reference incorporated in this Warrant as Exhibit A, and by payment of the aggregate Exercise Price, in certified funds or a bank cashier's check, for the number of Shares specified in the Notice of Exercise. This Warrant may only be exercised for the purchase of whole Shares. In the event this Warrant is exercised in part only, as soon as is practicable after the 113 presentation and surrender of this Warrant to the Company for exercise, the Company shall execute and deliver to the Holder a new Warrant, containing the same terms and conditions as this Warrant, evidencing the right of the Holder to purchase the number of Shares as to which this Warrant has not been exercised. (b) Upon receipt of this Warrant by the Company as described in subsection (a) above, the Holder shall be deemed to be the holder of record of the Warrant Securities issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Warrant Securities may not have been prepared or actually delivered to the Holder. 2. EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT. (a) This Warrant may not be sold, transferred, assigned, pledged or hypothecated without the express written consent of the Company. In addition, all sales, transfers, assignments or hypothecations of this Warrant must be in compliance with Section 7 hereof. Any assignment or transfer of this Warrant shall be made by the presentation and surrender of this Warrant to the Company at its principal office accompanied by a duly executed Assignment Form, in the form attached to and by this reference incorporated in this Warrant as Exhibit B. Upon the presentation and surrender of these items to the Company, the Company shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, containing the same terms and conditions as this Warrant, in the name of the new Holder or Holders as named in the Assignment Form, and this Warrant shall at that time be canceled. (b) This Warrant, alone or with other Warrants containing substantially the same terms and conditions and owned by the same Holder, is exchangeable at the option of the Holder at any time prior to its expiration either by its terms or by its exercise in full upon presentation and surrender to the Company at its principal office for another Warrant or other Warrants, of different denominations but containing the same terms and conditions as this Warrant, entitling the Holder to purchase the same aggregate number of Warrant Securities that were purchasable pursuant to the Warrant or Warrants presented and surrendered. At the time of presentation and surrender by the Holder to the Company, the Holder also shall deliver to the Company a written notice, signed by the Holder, specifying the denominations in which new Warrants are to be issued to the Holder. (c) The Company will execute and deliver to the Holder a new Warrant containing the same terms and conditions as this Warrant upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, provided that (i) in the case of loss, theft, or destruction, the Company receives from the Holder an indemnification satisfactory to it, and (ii) in the case of mutilation, the Holder presents and surrenders this Warrant to the Company for cancellation. Any new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company regardless of whether the Warrant that was lost, stolen, destroyed, or mutilated shall be enforceable by anyone at any time. 3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SECURITIES. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Securities shall be subject to adjustment from time to time upon the happening of certain events, as hereinafter defined. (a) The number of Warrant Securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (i) In case the Company shall (A) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (B) subdivide or split its outstanding shares of Common Stock, (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (D) issue by reorganization, reclassification or recapitalization of its shares of Common Stock other securities of the Company, the number of Warrant Securities purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Securities or other securities 114 of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Company shall distribute to all holders of its shares of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and dividends or distributions referred to in paragraph (i) above) or rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Securities thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Securities theretofore purchasable upon the exercise of each Warrant, by a fraction, of which the numerator shall be the then current market price per share of Common Stock (as defined in Section 3(a)(iii) hereof) on the date of such distribution, and of which the denominator shall be the then current market price per share of Common Stock, less the then fair value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iii) For the purpose of any computation under Section 3(a)(iii) and Section 9 hereof, the current market price per share of Common Stock at any date shall be the average closing price of the Common Stock (if then traded in the over-the-counter market) or the average closing price of the Common Stock (if then traded on NASDAQ's National Market System or on a national securities exchange) for the five consecutive trading days ending the day prior to the date as of which such computation is made. If the Common Stock is not so listed or admitted to unlisted trading privileges and closing prices are not so reported, the current market price per share shall be determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (iv) No adjustment in the number of Warrant Securities purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Securities purchasable upon the exercise of this Warrant; provided, however, that any adjustments which by reason of this Section 3(a)(iv) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (v) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of this Warrant in effect immediately prior to such adjustment, shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Securities purchasable upon the exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number or Warrant Securities so purchasable immediately thereafter. (vi) For the purpose of this Section 3(a), the term "shares of Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Warrant, or (ii) any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par 115 value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 3(a)(i) above, the Holders shall become entitled to purchase any shares of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of this Warrant and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Securities contained in Section 3(a)(i) through Section 3(a)(v) inclusive, above, and the provisions of Sections 3(b) and 3(c) hereof, with respect to the Warrant Securities, shall apply on like terms to any such other shares. (b) Whenever the number of Warrant Securities purchasable upon the exercise of this Warrant or the Exercise Price of such Warrant Securities is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Securities purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Securities after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive of the correctness of such adjustment. (c) Except as provided in subsection (a), no adjustment in respect of any cash dividend shall be made during the term of this Warrant or upon its exercise. (d) In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall agree that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of this Warrant the kind and amount of shares and other securities and property which such Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Warrant been exercised immediately prior to such action. The Company shall mail by first class mail, postage prepaid, to each Holder, notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 3(d) shall similarly apply to successive consolidations, mergers, sales or conveyances. (e) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrant, any certificate theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant. 4. NOTICE TO HOLDERS. If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur: (a) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or (b) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or (c) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or (d ) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 116 (e) any purchase, retirement or redemption by the Company of its Common Stock; then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following: (i) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined; (ii) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and (iii) if any matters referred to in the foregoing clauses (i) and (ii) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined. 5. RESERVATION OF WARRANT SECURITIES. The Company hereby agrees that at all times prior to November 25, 2001, it will have authorized and will reserve and keep available for issuance and delivery to the Holder that number of shares of its Common Stock that may be required from time to time for issuance and delivery upon the exercise of the then unexercised portion of this Warrant. 6. REGISTRATION UNDER THE SECURITIES ACT OF 1933. (a) If at any time subsequent to the date hereof and prior to November 25, 2001, the Company files a registration statement with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), or pursuant to any other act passed after the date of this Agreement, which filing provides for the sale of securities by the Company to the public, the Company shall offer to the Holder or Holders of this Warrant and the holders of any Warrant Securities the opportunity to register or qualify solely in such registration any Warrant Securities and any Warrant Securities underlying the unexercised portion of this Warrant, if any, at the Company's sole expense, regardless of whether the Holder or Holders of this Warrant or the holders of Warrant Securities or both may have previously availed themselves of any of the registration rights described in this Section 6. Notwithstanding anything to the contrary, this subsection (a) shall not be applicable to a registration statement on Forms S-4, S-8 or their successors or any other inappropriate forms filed by the Company with the United States Securities and Exchange Commission. The Company shall deliver written notice to the Holder or Holders of this Warrant and to any holders of the Warrant Securities of its intention to file a registration statement under the Act at least 60 days prior to the filing of such registration statement or offering statement, and the Holder or Holders and holders of Warrant Securities shall have 30 days thereafter to request in writing that the Company register or qualify the Warrant Securities in accordance with this subsection (a). Upon the delivery of such a written request within the specified time, the Company shall be obligated to include in its contemplated registration statement all information necessary or advisable to register or qualify the Warrant Securities or Warrant Securities underlying the unexercised portion of this Warrant in such registration statement for a public offering, if the Company does file the contemplated registration statement; provided, however, that neither the delivery of the notice by the Company nor the delivery of a request by a Holder or by a holder of Warrant Securities shall in any way obligate the Company to file a registration statement and notwithstanding the filing of a registration statement, the Company may, at any time prior to the effective date thereof 117 and without any obligation to the Holder of this Warrant or to a holder of Warrant Securities, determine not to offer the securities (including the Warrant Securities) to which the registration statement relates; provided, however, in the event such registration statement is underwritten by a broker-dealer, then the right to register the Warrant Securities or Warrant Securities underlying the unexercised portion of this Warrant in such registration shall be subject to the approval of such underwriter and if such underwriter determines that the Warrant Securities, or Warrant Securities underlying the unexercised portion of this Warrant, or any part thereof, is not to be registered in such registration, the Company shall not have any obligation hereunder to file a registration statement and shall not be deemed to be in breach of the provisions hereof. The Company shall comply with the requirements of this subsection (a) and the related requirements of subsection (d) at its own expense. That expense shall include, but not be limited to, legal, accounting, consulting, printing, federal and state filing fees, NASD fees, out-of-pocket expenses incurred by counsel, accountants and consultants retained by the Company, and miscellaneous expenses directly related to the registration statement and the offering. However, this expense shall not include the portion of any underwriting commissions, transfer taxes and the underwriter's accountable and nonaccountable expense allowances attributable to the offer and sale of the Warrant Securities and Warrant Securities underlying the unexercised portion of this Warrant, all of which expenses shall be borne by the Holder or Holders of this Warrant and the holders of the Warrant Securities registered or qualified. (b) In the event that the Company registers the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant pursuant to subsection (a) above, the Company shall include in the registration statement, and the prospectus included therein, all information and materials necessary or advisable to comply with the applicable statutes and regulations so as to permit the public sale of the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant. (c) As to each registration statement, the Company's obligations contained in this Section 6 shall be conditioned upon a timely receipt by the Company in writing of the following: (i) Information as to the terms of the contemplated public offering furnished by and on behalf of each Holder or holder intending to make a public distribution of the Warrant Securities or Warrant Securities underlying the unexercised portion of the Warrant; and (ii) Such other information as the Company may reasonably require from such Holders or holders, or any underwriter for any of them, for inclusion in the registration statement. (d) In each instance in which pursuant to this Section 6 the Company shall take any action to register the Warrant Securities or the Warrant Securities underlying the unexercised portion of this Warrant, prior to the effective date of any registration statement or offering statement, the Company and each Holder or holder of Warrant Securities being registered shall enter into reciprocal indemnification agreements, in the form customarily used by reputable investment bankers with respect to public offerings of securities. These indemnification agreements also shall contain an agreement by the Holder or shareholder at issue to indemnify and hold harmless the Company, its officers, directors from and against any and all losses, claims, damages and liabilities, including, but not limited to, all expenses reasonably incurred in investigating, preparing, defending or settling any claim, directly resulting from any untrue statements of material facts, or omissions to state a material fact necessary to make a statement not misleading, contained in a registration statement to which this Section 6 applies, if, and only if, the untrue statement or omission directly resulted from information provided in writing to the Company by the indemnifying Holder or shareholder expressly for use in the registration statement or offering statement at issue. 7. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. 118 (a) This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Act, and except with the express written approval of the Company and in compliance with all applicable state securities statutes. (b) The Company may cause the following legend, or its equivalent, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defined by the Act, for distribution to the public: "The shares represented by this Certificate have not been registered under the Securities Act of 1933 ("the Act") and are 'restricted securities' as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 8. REDEMPTION. Any time after November 25, 1997, or such earlier date as may be determined by Joseph Charles & Associates, Inc., the representative of the underwriters of the Company's initial public offering in November, 1996, upon notice of redemption properly given, and if and only if the closing average price of the Common Stock has been at least $8.85 on each of the 20 consecutive trading days within the thirty day period prior to the day on which notice of redemption is given, and at such time there is a current effective registration statement covering the shares of Common Stock underlying the Warrants, then each Warrant represented by this Warrant Certificate may be redeemed at the option of the Company, at any time, at a redemption price of $.05 per Warrant. Notice of redemption shall be mailed not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Holder shall have no rights with respect to this Warrant except to receive the $.05 per Warrant upon surrender of this Certificate. 9. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Securities on any exercise of this Warrant. The number of full Warrant Securities which shall be issuable upon the exercise of Warrants shall be computed on the basis of the aggregate number of Warrant Securities purchasable on exercise of the Warrant so presented. If any fraction of Warrant Securities would, except for the provisions of this Section 9, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the then current market price per Common Share (as defined in Section 3(a)(iii) above) multiplied by such fraction. 10. RIGHTS OF THE HOLDER. The Holder shall not be entitled to any rights as a shareholder in the Company by reason of this Warrant, either at law or equity, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceeding of the Company, except as specifically provided for herein. 11. WARRANT SECURITIES TO BE FULLY PAID. The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant and payment in full of the Exercise Price will be, upon such delivery, validly and duly issued, fully paid and nonassessable. 12. NOTICES. All notices, certificates, requests, or other similar items provided for in this Warrant shall be in writing and shall be personally delivered or deposited in the United States mail, postage prepaid, addressed to the respective party as indicated in the portions of this Warrant preceding Section 1. All notices shall be deemed to be delivered upon personal delivery or upon the expiration of three business days following deposit in the United States mail, postage prepaid. The addresses of the parties may be changed, and addresses of other Holders and holders of Warrant Securities may be specified, by written notice delivered pursuant to this Section 12. The Company's principal office shall be deemed to be the address provided pursuant to this Section for the delivery of notices to the Company. 119 13. APPLICABLE LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to its conflict of laws rules and principles, and courts and arbitration tribunals located in Illinois shall have exclusive jurisdiction over all disputes arising hereunder. 14. ARBITRATION. The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 14 to arbitration in Chicago, Illinois, according to the rules and practices of the American Arbitration Association from time to time in force; provided, however, that if such rules and practices conflict with the applicable procedures of Illinois courts of general jurisdiction or any other provisions of Illinois law then in force, those Illinois rules and provisions shall govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Illinois. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default. 15. MISCELLANEOUS PROVISIONS. (a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities. (b) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought. (c) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant. (d) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders. Dated as of May 1, 1997. NEOMEDIA TECHNOLOGIES, INC. ATTEST: By ______________________ By ____________________________ William E. Fritz, Charles W. Fritz, President and Secretary Chief Executive Officer 120 EXHIBIT A NOTICE OF EXERCISE (To be executed by a Holder desiring to exercise the right to purchase Shares pursuant to the Warrant.) The undersigned Holder of the Warrant hereby (a) irrevocably elects to exercise the Warrant to the extent of purchasing _______________ Shares; (b) makes payment in full of the aggregate Exercise Price for those Shares in the amount of $_________________ by the delivery of certified funds or a bank cashier's check in the amount of $________________; (c) requests that certificates evidencing the securities underlying such Shares be issued in the name of the undersigned, or, if the name and address of some other person is specified below, in the name of such other person: ______________________________________________________ ______________________________________________________ ______________________________________________________ (Name and address of person OTHER than the undersigned in whose name Shares are to be registered) (d) requests, if the number of Shares purchased are not all the Shares purchasable pursuant to the unexercised portion of the Warrant, that a new Warrant of like tenor for the remaining Shares purchasable pursuant to the Warrant be issued and delivered to the undersigned at the address stated below. Dated: ________________________ _________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) __________________________ ____________________________________ Social Security Number Printed Name or Employer ID Number Address: ____________________________________ ____________________________________ 121 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned, __________________________________, hereby sells, assigns and transfers unto: Name: _____________________________________________________ (Please type or print in block letters) Address: _______________________________________________ _______________________________________________ the right to purchase _________________ Shares of NeoMedia Technologies, Inc. (the "Company") pursuant to the terms and conditions of the Warrant held by the undersigned. The undersigned hereby authorizes and directs the Company (i) to issue and deliver to the above-named assignee at the above address a new Warrant pursuant to which the rights to purchase being assigned may be exercised, and (ii) if there are rights to purchase Shares remaining pursuant to the undersigned's Warrant after the assignment contemplated herein, to issue and deliver to the undersigned at the address stated below a new Warrant evidencing the right to purchase the number of Shares remaining after issuance and delivery of the Warrant to the above-named assignee. Except for the number of Shares purchasable, the new Warrants to be issued and delivered by the Company are to contain the same terms and conditions as the undersigned's Warrant. To complete the assignment contemplated by this Assignment Form, the undersigned hereby irrevocably constitutes and appoints as the undersigned's attorney-in-fact to transfer the Warrants and the rights thereunder on the books of the Company with full power of substitution for these purposes. Dated: _____________________ __________________________________________ Signature (This signature must conform in all respects to the name of the Holder as specified on the face of the Warrant.) ____________________________ _____________________________________ Social Security Number Printed Name or Employer ID Number Address: _____________________________________ _____________________________________ 122 EX-21 8 NeoMedia Technologies, Inc. Exhibit 21 Subsidiaries 123 NeoMedia Technologies, Inc. Subsidiaries NeoMedia Technologies, Inc., which is incorporated in the State of Delaware, has one wholly-owned subsidiary, NeoMedia Migration, Inc., which is incorporated in the State of Delaware and which has one wholly-owned subsidiary, Distribuidora Vallarta, S. A., which is incorporated in Guatemala. 124 EX-23.1 9 NEOMEDIA TECHNOLOGIES, INC. EXHIBIT 23.1 CONSENT OF COOPERS & LYBRAND L.L.P. 125 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of NeoMedia Technologies, Inc. (the "Company") on F orm S-8 (File No. 333-42477) of our report dated October 24, 1997, on our audit of the consolidated financial statements of NeoMedia Technologies, Inc. and subsidiaries as of December 31, 1996 and for the year then ended, which is included in Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. /s/ COOPERS & LYBRAND L.L.P. - ----------------------------- COOPERS & LYBRAND L.L.P. Chicago, Illinois March 30, 1998 126 EX-23.2 10 EXHIBIT 23.2 NeoMedia Technologies, Inc. Exhibit 23.2 Consent of KPMG Peat Marwick LLP 127 INDEPENDENT AUDITORS' CONSENT We consent to incorporation by reference in the registration statement (No. 333-42477) on Form S-8 of NeoMedia Technologies, Inc. of our report dated March 18, 1998, relating to the consolidated balance sheet of NeoMedia Technologies, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, cash flows and stockholders' equity for the year then ended, which report appears in the December 31, 1997 annual report on Form 10-KSB of NeoMedia Technologies, Inc. /s/ KPMG Peat Marwick LLP - ------------------------- KPMG Peat Marwick LLP Miami, Florida March 30, 1998 128 EX-27.1 11
5 12-MOS DEC-31-1997 DEC-31-1997 10,283 0 6,656 191 363 17,870 4,324 2,395 19,799 5,758 0 0 0 23,625 (10,499) 19,799 24,434 24,434 20,070 20,070 10,113 155 147 (6,051) (78) (5,793) 0 0 0 (5,973) (0.90) (0.90)
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