-----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, TC3mdfOpqlmqSg4nZ/0v2g54TvnZsYHydWr/s3ZBMs4DyIVBfSSJCy2NGccEgy3w DRwcg1xHQwgSBbzcMnvo6Q== 0001016843-99-000407.txt : 19990416 0001016843-99-000407.hdr.sgml : 19990416 ACCESSION NUMBER: 0001016843-99-000407 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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: 99594991 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, 1998 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, PAR VALUE $.01 NASDAQ SMALL CAP MARKET Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Check if 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 $23,478,000. 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, 1999 was $23,037,048. Determination of stock ownership by non-affiliates is made solely for purposes of responding to the requirements of the form and the registrant is not bound by this determination for any other purpose. As of March 16, 1999, there were outstanding 8,824,800 shares, (excluding 375,000 shares held in escrow as security for loans), 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. 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 provided 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"), 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. 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, Distribuidora Vallarta, S.A., a Guatemalan corporation was formed where by NeoMedia employs computer software developers and system integrators. Distribuidora Vallarta, S.A. is 80% owned by NeoMedia Technologies, Inc. and 20% owned by NeoMedia Migration, Inc. 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. Mr. Luntz and Mr. Willis received an aggregate of 1,070,000 shares of 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. Mr. 1 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. During 1998 NeoMedia formed the following wholly-owned subsidiaries: NeoMedia Technologies of Canada, Inc., incorporated in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH, incorporated in Austria; NeoMedia Technologies Holding Company B.V., incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and NeoMedia Technologies UK Limited, incorporated in the United Kingdom. All significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. Unless the context indicates otherwise, all references herein to "NeoMedia" or the "Company" mean and refer to the Registrant and its wholly-owned subsidiaries. As of December 31, 1998 the Company had accumulated losses from operations of $22,000,000, had a working capital deficit of approximately $453,000 and approximately $600,000 in unrestricted cash balances. In order to sustain operations, the Company will need to continue to raise additional capital. As a result of this situation, the Company's Independent Auditors have issued an opinion that states there is substantial doubt about the Company's ability to continue as a going concern. During the first quarter of 1999, the Company has successfully obtained approximately $900,000 of equity financing and approximately $1,000,000 of convertible debt financing. The Company will continue to attempt to obtain additional financing, however, no assurances can be made that additional financing will be obtained. (See Liquidity and Capital Resources Section). 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 MarketSM 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. POST INITIAL PUBLIC OFFERING. As of December 31, 1998 the Company had accumulated losses from operations of approximately $22,000,000, had a working capital deficit of approximately $453,000, and approximately $600,000 in unrestricted cash balances. In order to sustain operations, the Company will need to raise additional capital (see Management's Discussion and Analysis - Liquidity and Capital Resources). BUSINESS OVERVIEW NeoMedia provides the following computer software and consulting services: o INTELLIGENT DOCUMENT(TM) SOLUTIONS ("IDOCS(TM)") which incorporate active data elements into standard printed documents or on physical objects for the purpose of launching computer programs, creating automated links to the World Wide Web, embedding machine readable information and securing print document based transactions. Through December 31, 1998, the Company had not generated any significant revenues through the sale of IDOCs(TM) products. 2 o DOCUMENT SYSTEMS SOLUTIONS which assists clients in optimizing the creation, production and management of printed documents and printed document processes. o MASS CHANGE / MIGRATION SOLUTIONS which enables and assists clients in implementing broad changes in computer software and hardware systems, including (i) identifying, seeking and automatically correcting restrictive source and application fields which store data, including including Year 2000 remediation, and (ii) conversions of legacy computer systems and applications to open system implementations. NeoMedia currently offers its services and products through its two principal business units - NeoMedia Systems Integration (NeoMedia/SI) and NeoMedia Tech which, although separate in name, often function as a team in providing solutions for its customers. NeoMedia/SI focuses on providing project based systems integration solutions for contract customers including Document System Solutions, Mass Change/Migration remediation and custom IDOCs(TM) implementations. The role of NeoMedia Tech is to develop and commercialize proprietary software products and related technology and to promote and enable wide-scale IDOCs(TM) solutions with key strategic partners. 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, Oracle Corporation, Sun Microsystems Computer Company, Symbol Technologies, Inc., Xerox Corporation, and has generated the largest portion of its revenue to date from these activities. INTELLIGENT DOCUMENT(TM) (IDOCS(TM)) SOLUTIONS NEOMEDIA'S IDOCS(TM) TECHNOLOGY LINKS THE WORLDS OF PRINT AND ELECTRONIC MEDIA. The print medium is probably the most pervasive form of written communication in the world. Despite the introduction of electronic storage and information creation, paper will continue to be prominent, because of its convenience, familiarity and universal acceptance. Even as the electronic world expands, the volume of print media also grows. Printed documents are limited though since they only have a finite space for information and support only two-dimensional, static words and images. Electronic information, on the other hand, is up-to-the-minute, interactive, easily linked to other data sources, virtually unlimited in size, capable of audio and video display, and even capable of performing processing tasks for the reader. By developing the innovative Intelligent Documents (IDOCs(TM)) technology, NeoMedia integrates the worlds of print and electronic media, opening up a new world of opportunity. Management believes its Intelligent Documents(TM) technology has the potential to provide the industry standard for linking the worlds of print and electronic media. There are three key proprietary technologies currently in the IDOCs(TM) portfolio or under development: (i) NeoLink(TM) (web threading); (ii) PaperData(TM) (print modulation/demodulation); and (iii) NeoSure(TM) (secure documents). NEOLINK(TM) ("WEB-THREADING") NeoLink(TM) is based on the web threading model, a distinct third model of web information access. In contrast to search engines and push technologies, which are essentially navigation aides to users who are already online, web threading links printed documents and physical objects, such as hard good products, credit cards and ID cards, directly to information through the Internet. The user connects to this information by either scanning a barcode on a document or object, or entering a few digits or a short character string using a keyboard or remote control. A computer or web-enabled television then acts as a conduit to connect the user to related Web information. The "thread" also conveys information identifying the document or object being scanned as well as information regarding the demographics and 3 psychographics of the user making the inquiry. This allows the responding Web site to finely tailor their response for true one-to-one marketing and also opens opportunity for portals to extend the brand of their fullfillment channel to catalogs, print information and consumer goods. NeoLink(TM) has been successfully piloted in several sectors and a pilot is presently underway with a major European technical trade publisher. Commercial roll-out is underway with a major multi-level marketing company, and additional prospects in these and other markets are in various stages of development. PAPERDATA(TM) (PRINT MODULATION/DEMODULATION) Conventional printing and scanning technologies are designed to faithfully represent the aesthetic appearance of documents. During the process of converting a digital file to a print image, valuable information regarding attributes of the data itself are lost, such as font specifications, file identifiers, spreadsheet formulas and database references. Although scanners can be used to capture a digital image of a print document, these tacit attributes cannot be recovered. Essentially, conventional print relegates documents to the role of a display channel for human readable information. In order to access an original digital document, the reader must either copy the original file to digital media and then distribute it, or transfer the file over a data network. NeoMedia has developed proprietary software that allows users to directly embed a digital data file in a conventionally printed document and then recover that file from the document's digitized print image using conventional document scanners. The process is achieved by modulating non-human readable elements of the print image and then demodulating these same elements, thereby turning printers and scanners into literal "modems for print". The PaperData(TM) software that embodies this technology also contains powerful proprietary error correction and compression capabilities that make it suitable for both industrial and consumer applications. In addition to supporting on-document file transfer, PaperData(TM) can also be used to embed HTML and Java applets in printed documents for retrieval and automated activation with desktop scanners. The preproduction design of PaperData(TM) is complete and intellectual property rights have been obtained or are in the process of being obtained. NEOSURE(TM) (SECURE DOCUMENTS) NeoMedia has developed a proprietary system and method for protecting negotiable printed commercial documents, such as checks, money orders, coupons, food stamps and gift certificates, from counterfeit and forgery. This patent-pending technology incorporates NeoMedia's NeoLink(TM) and PaperData(TM) technologies with U.S. Checks' patented UV-Smart(TM) paper stock identification techniques and an on-line registration database. When used concurrently, this system verifies that a document is authentic, has not been modified and that the transaction has not been duplicated. The system can also be used to automate the processing of printed transactional documents, such as checks and gift certificates, as well as link documents to specific individuals for specific transactions in order to prevent unauthorized use. NeoMedia has filed several extensive patent applications on the use of NeoSure(TM) and other related technologies for linking, securing and promoting web-commerce from print media, such as coupons, catalogs and direct mail. Preproduction design of NeoSure(TM) is complete and intellectual property rights have been obtained or are in the process of being obtained. 4 SERVICES AND PRODUCTS. NeoMedia either currently provides or is developing and plans to provide the following Intelligent Document(TM) service and software products: o 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. o 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. In addition to these services, NeoMedia plans to, in the design and development of proprietary applications, 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. o 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, two dimensional symbology print drivers to the high speed printing environment. NeoMedia has provided such services to various customers, such as UPS and Symbol Technologies, Inc. 5 o INTELLIGENT DOCUMENT(TM) APPLICATIONS includes specific applications software which apply Intelligent Document(TM) technology and principles to provide specific commercial solutions, including NeoLink(TM), and other future products in development, including PaperData(TM) and NeoSure(TM) and MedThread(TM). Since the Intelligent Document(TM) Solutions has only been introduced recently, to date NeoMedia/SI and NeoMedia Tech have provided only limited software and consulting services in several pilots. 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 SYSTEM SOLUTIONS Document System Solutions assist 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. In 1997 Document System Solutions was 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. Also included in Document System Solutions is NeoMedia's value added reseller business. NeoMedia is a supplier of proprietary and third-party software and third-party equipment to which NeoMedia helps its customers integrate and install this hardware and software. The companies represented by NeoMedia in the re-marketing of software and equipment include IBM Corporation, Oracle Corporation, Sun Microsystems Computer Company, Symbol Technologies, and Xerox Corporation. NeoMedia's customers currently using their Document Systems Solution services and product include Principal Financial Group, Fidelity Investments, Discover Card Services, Inc., Charles Schwab & Co., Inc. and the State of Wisconsin, where they are used to reduce costs by introducing production efficiencies by generating on demand customized forms from standard stock in lieu of using more expensive pre-printed form stock, and by enabling implementation of automated printing systems using lower-cost distributed client-server platforms. In providing complete document system solutions and IDF's, NeoMedia often "partners" with companies such as Xerox Corporation and IBM Corporation. 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. SERVICES. NeoMedia provides services in this market as both a consultant and systems integrator. These services consist of the following: o 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. o INTEGRATED DOCUMENT FACTORY 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 6 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. o INTELLIGENT DOCUMENT(TM) SOLUTIONS, in the context of the Document Systems Solutions, are the consulting and systems integration of IDOCs(TM) software products and applications as related to the document production process. NeoMedia's proprietary IDOCs(TM) technology can be used to control such processes and facilitate document return processing and archive retrieval, both through conventional and web mediated channels. o MICRO-MAINFRAME PORTS. In 1996, IBM introduced their IBM S390 processors, which allow users to run mainframe applications on downsized air-cooled platforms. 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 host proprietary IBM applications. NeoMedia, as an authorized re-marketer for IBM, offers these new systems and provides migration services in connection with their installation. o 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 two decades. 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: o Implementation of new Internet compatible systems through open systems integration products and services. o Migrations of existing proprietary legacy applications and databases to open system platforms compatible with modernization to the Internet environment. o Porting of IBM mainframe applications to air cooled micro-frames which bridge both legacy and open system environments. SOFTWARE PRODUCTS. NeoMedia offers a variety of third-party and proprietary software products to be used in connection with its document systems solutions, including custom software and proprietary PDF417 and Maxicode encoders which run on multiple platforms. Document System Solutions services represented 80.0% and 87.2% of NeoMedia's total sales for the year ended December 31, 1998 and December 31, 1997, respectively. MASS CHANGE/ MIGRATION SOLUTIONS NeoMedia's Mass Change / Migration Solutions rely on proprietary and third-party software tools and custom services to assist clients in (i) identifying and automatically correcting software programs and/or data with the "Year 2000 problem," and (ii) converting ("migrating") from closed legacy systems to more cost effective and functional open system environments. 7 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 may become invalid on January 1, 2000, as they may read "00" as "1900". As a result, serious errors may occur in calculations dependent upon dates, such as mortgage calculations, in particular, and calculations used throughout financial and industries in general. NeoMedia licenses its proprietary software tools (including "ADAPT/2000") which, unlike many other competitive tools, not only identify occurrences of the date code problem in software programs, but automatically correct ("remediate") potentially 90% of such 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 1998, Adapt-PC/2000 was added to NeoMedia's suite of tools designed to manage and identify Year 2000 problems in PC and distributed client-server networks within the corporate enterprise environment. Adapt-PC/2000 is an easy-to-use program that searches databases, spreadsheets and other file types on PCs across a network, and identifies and catalogs any data that appears to contain dates that are not Year 2000 compliant. 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. These "closed" systems and applications are referred to in the industry as "legacy systems." 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. NeoMedia provides consulting and systems integration services to facilitate the migration of business applications running on legacy systems, such as Wang environments, 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. SERVICES. NeoMedia presently offers two Year 2000 / Migration Solutions approaches to assist clients to implement business applications in open computing environments: o 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 broadened to include other platforms, including Windows NT, which NeoMedia believes will be increasingly competitive during the latter half of this decade. o 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 8 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 and products of Informix, Microsoft Corporation, IBM, Hewlett Packard, Oracle Corporation, Sun Microsystems, 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 under the Year 2000 / Migration Solutions group represented 20.0% and 12.8% of NeoMedia's total sales for the year ended December 31, 1998 and December 31, 1997, respectively. 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, 1998 and 1997, one customer, Ameritech Services, Inc. ("Ameritech"), accounted for 24.8% and 38.7%, 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 re-marketed 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 28 personnel as of December 31, 1998. NeoMedia currently maintains domestic sales offices in four states. The Company also has four foreign sales offices. The sales organization is responsible for achieving quarterly and annual sales quotas. 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. Representatives of NeoMedia also attend seminar and trade shows, both as speakers and participants, to help market its products and services. In addition, NeoMedia has an indirect sales channel of agents, value added resellers and independent distributors in the United States and in foreign countries, for its 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. NeoMedia does not sell all its products and services through each distribution channel. 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 9 value added resellers, agents, or distributors, there could be a material adverse effect on NeoMedia's results of operations or financial position. During 1998, NeoMedia acquired a customer list for total consideration of $1,155,000, including 120,000 shares of NeoMedia common stock valued at $827,000 (giving effect to the common stock being unregistered and "restricted" securities as such term is defined in Rule 144 of the rules and regulations promulgated under the Securities Act of 1933, as amended) and cash of $292,000. Additionally, there were legal and other expenses of $36,000 that were related to this transaction. The customer list is intended to be used to develop relationships for the sale of the Company's IDOC's products. The cost of the customer list is being amortized on the straight-line method over its estimated useful life of five years. In February 1999, the Company entered into a binding term sheet with A.T. Cross Company ("Cross"). The term sheet contemplates an agent agreement by and between the Company and Cross related to the distribution of the Company's NeoLink software with Cross' pen/scan device. 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 ability to develop new software products and services related to high capacity symbologies. NeoMedia employed 19 and 15 persons in the area of product development as of December 31, 1998 and December 31, 1997, respectively. During the years ended December 31, 1998 and 1997, NeoMedia incurred total research and development costs of $1,968,000 and $1,180,000, respectively, of which $899,000 and $428,000, respectively, were capitalized as software development costs and $1,069,000 and $752,000, respectively, were expensed as research and development costs. INTELLECTUAL PROPERTY RIGHTS In 1998, NeoMedia was given notification of allowable claims by the U.S. Patent and Trademark Office on a patent filing covering certain of its proprietary technology related to Intelligent Documents(TM). NeoMedia received formal notice of allowance on their first patent in early 1999. Although NeoMedia has a number of patents pending, no assurances can be given that additional 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 10 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 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. During December 1998, the Company acquired the rights to certain patent filings currently pending. The Company paid a total of $125,000 in cash along with a warrant to purchase shares of the Company's common stock at a negligible value (such warrant was valued at approximately $432,000, the trading price of the underlying common stock). The Company is contingently liable to pay the seller of the pending patent applications an additional amount six months from the date that the first U.S. patent application is granted. The contingent purchase price is approximately $1,862,000. This obligation, when and if due, may be settled by the Company either in cash or through the issuance of additional warrants to purchase Company common stock at negligible values. The Company anticipates that the first patent application may be approved during 1999. Based upon currently available working capital, the Company currently anticipates that any obligation would be settled through the issuance of additional warrants. 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 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 financial 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. A large number of companies act as re-marketers of another party's products, and therefore, the competition 11 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. 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. Within the Year 2000 marketplace, it is NeoMedia's aim to distinguish itself from most of the competition by offering quality services at competitive prices. 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 NeoMedia's. 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. 12 EMPLOYEES As of December 31, 1998, NeoMedia employed 123 persons. Of the 123 employees, 44 are located at the Company's headquarters in Fort Myers, FL, 56 at other domestic locations and 23 are located outside the United States. 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 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 1999 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) obtain additional financing on terms acceptable to the Company, or at all, to allow the Company to continue its operations as currently proposed; (ii) develop, market and sell existing and acquired products for the Intelligent Document(TM), Year 2000 and other software markets; (iii) successfully integrate its acquired products, services and businesses and continue its acquisition strategy; (iv) adjust to changes in technology, customer preferences, enhanced competition and new competitors in the Intelligent Document(TM), Year 2000 and other software markets; (v) protect its proprietary software rights from infringement or misappropriation; (vi) maintain or enhance its relationships with business partners and vendors; (vii) attract and retain key employees; and (viii) 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 13 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, development and administrative office is located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. NeoMedia occupies approximately 15,000 square feet under terms of a written lease from an unaffiliated party expiring on January 31, 2000. NeoMedia has a sales facility at 2150 Western Court, Suite 230, Lisle, Illinois 60532, where NeoMedia occupies approximately 6,000 square feet under the 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 9,300 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 maintains a sales office 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. The Company also leases office space in two other domestic locations and four international locations. These offices are primarily used for its sales efforts. NeoMedia 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, 1998, 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, 1998. 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 MarketSM 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 14 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. TYPE OF SECURITY PERIOD ENDED HIGH LOW - ---------------- ------------ ---- --- Common Stock 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 31, 1998 $ 9.13 $6.06 June 30, 1998 $10.13 $4.50 September 30, 1998 $ 6.00 $2.44 December 31, 1998 $ 3.00 $1.50 Warrants March 31, 1997 $ 1.75 $1.00 June 30, 1997 $ 2.00 $1.00 September 30, 1997 $ 3.94 $1.63 December 18, 1997(1) $ 3.56 $0.03 - ----------------------------- (1) Includes only the period October 1, 1997 through December 18, 1997. (b) HOLDERS. As of March 16, 1999, there were 144 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, 1999, 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, 1999, NeoMedia has 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. On May 1, 1997, for services, the Company issued to an investment banking firm a warrant to purchase 375,000 shares of the Company's Common Stock, at an exercise price of $7.375 per share, expiring November 25, 2001. On May 1, 1997, for services, the Company issued to another investment banking firm a warrant to purchase 15 65,000 shares of the Company's Common Stock, at an exercise price of $10.125 per share, expiring November 25, 2001. On December 11, 1997, for services, the Company issued to outside consultants three warrants to purchase 408,332 shares of the Company's Common Stock, at an exercise price of $8.85 for 173,332 shares, $7.50 for 135,000 shares and $10.00 for 100,000 shares, expiring December 11, 2002. In November 1998, the Company obtained a loan of $500,000 from an unrelated party. The note has a term of one year, and is secured by a pledge of 375,000 shares of the Company's Common Stock. In consideration for the loan the Company issued a warrant to purchase 37,500 shares of the Company's Common Stock at an exercise price of $2.00 per share, expiring November 2002. In January, 1999, the Company issued 82,372 shares of the Company's Common Stock to a related party at a price of $3.03 per share. In January, 1999, the Company issued 145,000 shares of the Company's Common Stock at a price of $3.50 per share to unrelated parties. In January, 1999, the Company issued 42,857 shares of the Company's Common Stock at a price of $3.50 per share to a related party. The above issuances of securities were made by the Company in reliance on an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, as offerings not involving a public offering. 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, 1998, 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 (i) software license fees, (ii) resales of software and technology equipment from independent vendors and (iii) service fees, including consulting and post contract software support. As of December 31, 1998 the Company had accumulated losses from operations of $22,000,000, had a working capital deficit of approximately $453,000 and approximately $600,000 in unrestricted cash balances. In order to sustain operations, the Company will need to continue to raise additional capital. NeoMedia's strategy is to increase licenses of its proprietary software transition tools and applications as a percentage of total sales. License fees for the year ended December 31, 1998 increased 18.5% from the year ended December 31, 1997, and, as a percentage of total sales, increased to 10.0% of total sales during the year ended December 31, 1998 from 8.2% during the year ended December 31, 1997. NeoMedia has built and intends to continue to build an infrastructure that assumes this strategy will succeed. NeoMedia's inability to achieve expected revenue growth in license fee revenues in connection with this strategy, contributed significantly to its inability to achieve profitable operations in 1998. Therefore, any continued failure to achieve this strategy will 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 16 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. NeoMedia's inability to achieve revenue growth expectations in 1998 had an adverse effect on its results of operations. 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. NeoMedia's quarterly operating results have been subject to variation and will continue to be subject to variation, depending upon factors, such as the mix of business among NeoMedia's services and products, the cost of material, labor and technology, particularly in connection with the delivery of business services, the costs associated with initiating new contracts, the economic condition of NeoMedia's target markets, and the cost of acquiring and integrating new businesses. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 NET SALES. Total net sales for the year ended December 31, 1998 were $23.5 million, which represented a $.9 million, or 3.9%, decrease from $24.4 million for the year ended December 31, 1997. This decrease primarily resulted from (i) a $3.6 million decrease in equipment resales to a NeoMedia customer in the telecommunications industry, (ii) a $1.2 million decrease in sales of IBM software due to an IBM change of how resellers are compensated on software resales in 1998, and (iii) a $1.2 million increase in sales of Year 2000 services, and (iv) a $1.3 million increase in equipment resales to new customers. LICENSE FEES. License fees for the year ended December 31, 1998 were $2.4 million compared to $2.0 million for the year ended December 31, 1997, an increase of $.4 million or 18.5%. This increase resulted primarily from the increase in sales of licenses of NeoMedia's Year 2000 software. Cost of sales as a percentage of related sales was 11.6% during 1998 compared to 16.2% during 1997. This decrease in the cost of sales as a percentage of related sales was primarily due to the increased sales of software without royalties. RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT. Resales of software and technology equipment decreased by $2.3 million, or 12.1%, to $16.9 million for the year ended December 31, 1998, as compared to $19.2 million for the year ended December 31, 1997. This decrease primarily resulted from equipment resales to Ameritech, NeoMedia's largest customer, which decreased $3.6 million. These decreases were partially offset with a $1.3 million increase in sales to new customers. Cost of sales as a percentage of related sales was 86.6% during 1998, compared to 89.5% during 1997. This decrease in the cost of sales as a percentage of related sales was primarily due to the sales of more IBM S390 computers that have a higher profit margin. SERVICE FEES. NeoMedia's service fees increased by $1.0 million, or 30.4%, to $4.3 million for the year ended December 31, 1998, compared to $3.3 million for the year ended December 31, 1997. This increase was primarily due to a $1.2 million increase in the Year 2000 services and a $500,000 increase in consulting fees for integrated document factory services. This increase was partially offset with a $500,000 decrease in Xerox referral fees. Cost of service fees as a percentage of related sales increased to 86.4% during 1998 from 61.1% during 1997 primarily due to lower margins on Year 2000 services and an under utilization of consultants during the first half of the year. SALES AND MARKETING. A portion of the compensation to the sales and marketing staff constitutes salary and is fixed in nature and the remainder of this compensation, which is paid as a commission, is directly related to sales volume. Sales and marketing expenses increased $5.0 million, or 99.8%, to $10.0 million for the year ended 17 December 31, 1998 from $5.0 million for the year ended December 31, 1997, as a result primarily of hiring additional direct sales personnel intended for future revenue growth. The increase in sales personnel and marketing expenses did not lead to an increase in revenues due in part to a weak market for Year 2000 products. As a result, the Company reduced its sales and marketing personnel in late 1998 and early 1999. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $819,000, or 20.1%, to $4.9 million for the year ended December 31, 1998, from $4.1 million for the year ended December 31, 1997. This increase was due mainly to NeoMedia building its administrative infra-structure to manage current and expected future growth. RESEARCH AND DEVELOPMENT. During the year ended December 31, 1998, NeoMedia charged to expense $1,069,000 of research and development expenses, an increase of $317,000 or 42% compared to $752,000 charged to expense for the year ended December 31, 1997. This increase was due to adding additional employees to further develop the IDOCs(TM) product line. To the extent the Company can obtain additional capital, it will continue to make significant investments in research and development. FAIR VALUE OF OPTIONS AND WARRANTS GRANTED TO CONSULTANTS. During the years ended December 31, 1998 and 1997, NeoMedia issued common stock purchase options and warrants to consultants to purchase an aggregate of 30,000 shares of common stock in 1998 and 848,332 shares of NeoMedia common stock in 1997. Using the Black-Scholes model, the fair value of these warrants was computed to be $25,000 in 1998 and $716,000 in 1997. The $25,000 was charged to expense in 1998, while in 1997, $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 (INCOME), NET. Interest expense consists primarily of interest paid to creditors as part of financed purchases, capitalized leases and NeoMedia's asset-based collateralized line of credit net of interest earned on cash equivalent investments. Interest (income)/expense decreased by $268,000, or 182.3%, to $(121,000) for the year ended December 31, 1998 from $147,000 for the year ended December 31, 1996, due to the interest income earned on the proceeds from common stock purchase warrants exercised in the fourth quarter of 1997. INCOME TAX 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. There were no income tax carrybacks in 1998. NET LOSS. The net loss for the year ended December 31, 1998 was $11.5 million, which represented a $5.5 million, or 92.4% increase from a $6.0 million loss for the year ended December 31, 1997. The increase in the net loss primarily resulted from NeoMedia's failure to generate the revenue growth expected in the Year 2000 market. The Company increased its sales and marketing efforts in anticipation of a strong market for its Year 2000 products that it licenses, however, due to general market conditions, this revenue growth was never achieved. In late 1998 and early 1999, the Company reduced its fixed expenses related to the Year 2000 product line. 18 LIQUIDITY AND CAPITAL RESOURCES During the years ended December 31, 1998 and 1997 the Company's net loss totaled approximately $11,495,000 and $5,973,000, respectively. As of December 31, 1998 the Company had accumulated losses from operations of approximately $21,994,000, had a working capital deficit of approximately $453,000, and approximately $600,000 in unrestricted cash balances. Management believes it will need to raise additional capital as well as reduce expenses, and meet revenue growth targets to sustain the Company's operations in 1999. The failure of management to accomplish these initiatives will adversely effect the Company's business, financial conditions, and results of operations and its ability to continue as a going concern. Subsequent to December 31, 1998, the Company has undertaken the following: o During January 1999, the Company issued approximately 270,000 previously unissued shares of its common stock at a price of between $3.03 and $3.50 per share. Gross proceeds from these transactions were approximately $900,000, approximately $400,000 of which was from related parties. o In February 1999, the Company entered into a binding term sheet with A.T. Cross Company ("Cross"). The term sheet contemplates an agent agreement by and between the Company and Cross related to the distribution of the Company's NeoLink(TM) software with Cross' pen/scan device. During the first quarter of 1999, the Company received from Cross $1,000,000 in the form of a convertible promissory note. This one year note is convertible during its term into shares of the Company's common stock at $4.00 per share, or if unconverted may be repaid by the Company in shares of its common stock at $4.00 per share, assuming certain conditions are met. The note bears interest at a rate of 1% per annum and was accompanied by warrants issued to Cross to acquire 100,000 shares of common stock at $5.00 per share and 100,000 shares of common stock at $7.00 per share. The Company anticipates receiving an additional $1,000,000 from Cross on substantially consistent terms during the second quarter of 1999 upon execution of the agent agreement. o In late 1998 and 1999, the Company reduced its sales and marketing staff and related expenses. The Company will attempt to further adjust its expenses in 1999 as needed. Net cash used in operating activities for the year ended December 31, 1998 and 1997, was $7.0 million and $6.2 million, respectively. During 1998, trade accounts receivable decreased $744,000, while accounts payable and accrued expenses increased $2.1 million. During 1997, trade accounts receivables increased $1.7 million, while accounts payable and accrued expenses increased $359,000. NeoMedia's net cash flow used in investing activities for the year ended December 31, 1998 and 1997, was $2.4 million and $1.7 million, respectively. This increase resulted from the increased acquisition of property and equipment, as well as the increase in purchases of intangible assets. Net cash provided by financing activities for the year ended December 31, 1998 and 1997, was $544,000 and $14.0 million, respectively. 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. In November 1998, NeoMedia borrowed $500,000, in two separate notes from unrelated third parties. These notes are due in November, 1999 and bears an interest rate of 20%. These notes are secured by 375,000 shares of NeoMedia's common stock. As part of obtaining the financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to the lender. The Company has entered into a migration contract (specifically Year 2000 remediation) with a Colombian customer related to the remediation of certain of the customer's computer systems to be Year 2000 compliant. The total contract is approximately $1 million, of which approximately $157,000 has been recognized as revenue by the Company as of December 31, 1998. As an element to the contract the Company has guaranteed its work product and resulting Year 2000 compliance of the customer. To this end, during 1999 the Company established bank guarantees in the form of certificates of deposit totaling approximately $150,000 in favor of the customer. The Company believes that it has the ability and intent to complete such remediation in a satisfactory manner and is accounting for this project on a percentage of completion basis. YEAR 2000 ISSUES In the next year, 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 and hardware devices used internally expected to be impacted by this issue. NeoMedia's analysis encompasses its (i) applications software; (ii) hardware; and (iii) data residing in programs. The software programs used internally by NeoMedia (primarily its general ledger accounting package) were purchased from third party vendors. In assessing its risk of non-compliance, the Company's internal systems department classified vital and non-vital production systems. NeoMedia has completed the analysis of over 70% of all production systems software (representing virtually all of the "vital" systems comprising the corporate backbone), including verification by third party vendors that the programs are Year 2000 compliant, as well as internal testing which confirms readiness of those programs. NeoMedia incurred costs of approximately $1,000 in upgrading the operating system, and about $3,500 in upgrading the application program, for its existing accounting general ledger program. In addition, the Company has purchased a new general ledger accounting package which is Year 2000 compliant according to the vendor. The Company is currently developing the environment for this new system, and plans to begin installation in 1999. The Company expects to maintain the existing accounting package for archival and contingency purposes. As an additional 19 measure of security, routine back-ups of data are performed to preserve information in various vital systems, and manual or paper files are maintained if other measures fail with regard to the most vital accounting functions. The remaining 30% of the application software is considered either non-vital or capable of compliance with a vendor-provided "patch" on an as-needed basis. NeoMedia expects to test virtually all remaining application programs in 1999. NeoMedia believes that the hardware devices supporting production systems which were not year 2000 compliant have been replaced with those which are year 2000 compliant. The few remaining PC's which are not now compliant are scheduled for routine replacement during 1999 with compliant hardware, thereby eliminating the year 2000 concern. Although prudent measures have been taken, there can be no assurance that NeoMedia will not be adversely affected by the failure of the upgraded package to be fully year 2000 compliant as represented by the vendor. With hardware and software matters nearing completion in 1999, NeoMedia plans to utilize its proprietary software tools to analyze vital data residing in application programs, such as accounting spreadsheets, for non-complaint data. Vital data will be remediated. NeoMedia believes that its proprietary software, for which it is currently selling licenses, is year 2000 compliant. Remaining year 2000 remediation costs are anticipated to be insignificant. 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 NeoMedia did not have any disagreements on accounting and financial disclosures with its accountants in the years ended December 31, 1998 or 1997. 20 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, 1999, NeoMedia's directors and executive officers were:
NAME AGE POSITION HELD Charles W. Fritz 42 President, Chief Executive Officer, Director and Chairman of the Board William E. Fritz 68 Secretary and Director Charles T. Jensen 55 Chief Financial Officer, Vice-President and Treasurer and Director Robert T. Durst, Jr. 46 Chief Technical Officer, Executive Vice-President and Director James M. Marshall 46 Executive Vice President of Sales and Marketing A. Hayes Barclay 68 Director James J. Keil 71 Director Paul Reece 62 Director John A. Lopiano 60 Director
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 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, 21 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 Marketing 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. JOHN A. LOPIANO, has been a Director of NeoMedia since July 29, 1998. He recently retired as Senior Vice President of Xerox Corporation and President of its Production Systems Group. Prior to joining Xerox in April, 1990, Mr. Lopiano was employed for approximately 25 years by IBM Corporation serving in various management, marketing and product development positions. Mr. Lopiano holds a B.S. degree from the United States Military Academy and a Master of Business Administration from New York University. Mr. Lopiano is a member of Xerox's Operations Committee, Management Audit Committee, The Xerox Foundation and the Business Development Forum (of which he is a co-chairman). In addition, since July, 1995, Mr. Lopiano has been a trustee of the Rochester Institute of Technology, Rochester, New York, and is currently chairman of its Education Committee. Since March, 1998, he has been a director of Interleaf, Inc., a company listed on the NASDAQ National Market System. 22 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 eight 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 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 each non-employee director to purchase 14,000 shares of NeoMedia's common stock under the 1998 Stock Option Plan. "See "Executive Compensation - Stock Option Plan". In addition, upon election as a director or re-election, each non-employee director 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. Effective October 27, 1998, a resolution was passed to grant 3,000 stock options to each non-employee director in lieu of the $2,000 director fee per meeting. These options are immediately vested. 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. 23 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, 1998, 1997 and 1996: SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION -------------------------------------- SECURITIES OTHER UNDER- ANNUAL LYING ALL OTHER NAME AND COMPEN- WARRANTS/ COMPEN- PRINCIPAL POSITION YEAR SALARY SATION BONUS OPTIONS SATION - ------------------ ---- ------ ------ -------- ------- ------ Charles W. Fritz 1998 $253,131 ----- ----- 400,000(7) $55,659(11) President and Chief 1997 181,333 ----- ----- 300,000(3) 9,010(11) Executive Officer 1996 146,666 ----- $ 36,667(2) 260,000(4) 5,486(5) Charles T. Jensen 1998 $157,648 ----- ----- 180,000(7) $30,965(11) Chief Financial Officer and 1997 117,333 ----- ----- ----- 21,960(11) Vice-President and 1996 95,000 ----- $ 50,782(2) 90,386(6) 3,780(5) Treasurer Robert T. Durst, Jr. 1998 $174,531 ----- ----- 180,000(7) $8,897(11) Executive Vice-President 1997 150,500 $25,405(8) ----- ----- 8,432(11) and Chief Technical Officer 1996 104,994 ----- $ 22,967(2) 153,657(6) 4,704(5) James Marshall 1998 $169,493 ----- $28,960(10) 230,000(7) $2,578(12) Executive Vice-President 1997(9) ----- ----- ----- ----- ----- of Sales and Marketing 1996(9) ----- ----- ----- ----- -----
- -------------------------------------------------- (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. 24 (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) Represents options granted under NeoMedia's 1998 Stock Option Plan. (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) Represents sales bonus paid. (11) Includes life insurance premiums where policy benefits are payable to beneficiary of the Named Executive Officer, automobile expenses attributable to personal use and the corresponding income tax effects. (12) Automobile expenses attributable to personal use and the corresponding income tax effects. 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, the Board of Directors granted to Messrs. Fritz, Durst and Jensen options to purchase 400,000, 180,000 and 180,000, respectively, shares of NeoMedia common stock under the 1998 Stock Option Plan. 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 Plans or otherwise (which 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 25 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 Marketing. 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, upon execution of his employment agreement, the Board of Directors granted to Mr. Marshall options to purchase 70,000 shares of NeoMedia common stock under the 1998 Stock Option Plan. Mr. Marshall also participates in all benefits and plans available to executive employees of NeoMedia. The Board also granted to Mr. Marshall additional options to purchase 90,000 shares under the 1998 Stock Option Plan in 1998. 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. No bonuses were paid to or earned by employees pursuant to the Incentive Plan for Management, for the years ended December 31, 1998 and December 31, 1997. STOCK OPTION PLANS Effective as of February 1, 1996 (and amended and restated effective July 18, 1996 and further amended through November 18, 1996), NeoMedia adopted its 1996 Stock Option Plan ("1996 Stock Option Plan"). The 1996 Stock Option Plan provides for the granting of non-qualified stock options and "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and provides for the issuance of a maximum of 1,500,000 shares of common stock. As of March 16, 1999, options to purchase an aggregate of 702,614 shares of common stock, at an exercise price of $.84, were granted and are outstanding under NeoMedia's 1996 Stock Option Plan, including options to Charles 26 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 446,868 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 1996 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. 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. Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan ("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting of non-qualified stock options and provides for the issuance of a maximum of 8,000,000 shares of common stock. As of March 16, 1999, there are currently options granted to purchase an aggregate of 2,837,000 shares of common stock under this plan. Shares of Common Stock underlying options granted or to be granted under the 1998 Stock Option Plan have not been registered. As a result, shares of Common Stock received upon the exercise of the options will be restricted securities, and will not be able to be sold unless such shares are registered or are sold pursuant to an exemption from registration. Under Rule 144, non-affiliates of the Company may sell restricted shares of Common Stock after a one year holding period, provided the sales are made in accordance with certain restrictions contained in the Rule, and after a two year holding period may sell such shares without restriction. 401(K) PLAN NeoMedia maintains a 401(k) Profit Sharing Plan and Trust (the "401(k) Plan"). All employees of NeoMedia who are 21 years of age and who have completed three months of service are eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each participant may make elective contributions of up to 20% of such participant's pre-tax salary (up to a statutorily prescribed annual limit, which is $10,000 for 1998) to the 401(k) Plan, although the percentage elected by certain highly compensated participants may be required to be lower. All amounts contributed to the 401(k) Plan by employee participants and earnings on these contributions are fully vested at all times. The 401(k) Plan also provides for matching and discretionary contributions by NeoMedia. To date, NeoMedia has not made any such contributions. OPTIONS GRANTED IN THE LAST FISCAL YEAR The following presents certain information on stock options for the Named Executive Officers for the year ended December 31, 1998: 27
NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE EXPIRATION NAME GRANTED(1) EMPLOYEES PRICE DATE - ---- ------- --------- -------- -------- Charles W. Fritz 200,000 8.7% 7.31 3/27/08 100,000 4.3% 2.91 7/31/08 100,000 4.3% 2.63 10/30/08 Charles T. Jensen 90,000 3.9% 7.31 3/27/08 45,000 2.0% 2.91 7/31/08 45,000 2.0% 2.63 10/30/08 Robert T. Durst, Jr. 90,000 3.9% 7.31 3/27/08 45,000 2.0% 2.91 7/31/08 45,000 2.0% 2.63 10/30/08 James Marshall 70,000 3.0% 7.31 3/27/08 35,000 1.5% 3.41 7/30/08 55,000 2.4% 2.63 10/30/08
- ------------------------------ (1) Options granted under the 1998 Stock Option Plan. 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 1998, and the number and value of all unexercised options at fiscal year end.
NUMBER OF VALUE OF UNEXERCISED UNEXERCISED SECURITIES IN-THE-MONEY SHARES UNDERLYING OPTIONS/SARS OPTIONS/SARS AT ACQUIRED VALUE AT DECEMBER 31, 1998 DECEMBER 31, 1998(1) NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --- ----------- -------- ----------- ------------- ------------ ------------ Charles W. Fritz (2) --- --- 494,000 320,000 $ 5,000 $ 20,000 Charles T. Jensen 1,000 $ 1,940 125,386 144,000 $ 184,597 $ 9,000 Robert T. Durst, Jr. --- --- 207,657 126,000 $ 315,710 $ 9,000 James Marshall --- --- 32,000 128,000 $ 2,750 $ 11,000
(1) The value of the "in the money" options is calculated by the difference between the market price of the stock at December 31, 1998 and the exercise price of the options. 28 (2) Includes stock options and warrants. For the year ended December 31, 1998, there have not been any long term incentive plan awards made to a Named Executive Officer. 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, 1999, (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) ..................................... 2,151,969 21.6% William E. Fritz/Fritz Family Limited Partnership(2)(4) .... 1,812,438 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) .................................... 162,386 1.6% James Marshall ............................................. 64,000 * John Lopiano ............................................... 37,200 * Robert T. Durst, Jr.(2)(9) ................................. 228,657 2.3% A. Hayes Barclay(10) ....................................... 16,800 * James J. Keil(11) .......................................... 16,800 * Paul Reece(12) ............................................. 16,800 * Gerald L. Willis (13) ...................................... 503,900 5.1% All executive officers and directors as a group (9 persons)(14) ..................... 4,445,513 44.7%
- ------------------------------------------------------------ * 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, 1999 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. 29 (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 (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 1,812,438 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, 1,511,742 shares as a result of being co-general partner of the Fritz Family Partnership and 125,224 shares owned by Mr. Fritz or his spouse). Mr. William E. Fritz may be deemed to be a parent and promoter of NeoMedia, as those terms are defined in the Securities Act. (5) William E. Fritz is the Trustee of this Trust and therefore is deemed to be the beneficial owner of such shares. (6) Chandler T. Fritz, son of William E. Fritz, is 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 and 1998 Stock Option Plans which are currently exercisable. (10) c/o Barclay & Damisch Ltd. 115 West Wesley Street Wheaton, IL 60187 (11) c/o Keil & Keil Associates 733 15th Street, N.W. Washington, DC 20005 (12) c/o 380 Gulf of Mexico Drive Long Boat Key, FL 34228 (13) 11025 Reed Hartman Highway Cincinnati, Ohio 45242 (14) Includes an aggregate of 438,335 currently exercisable options to purchase shares 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 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 30 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. 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 1998, NeoMedia made lease payments in accordance with this lease totaling approximately $65,000. 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. In December 1998, the Company issued 30,000 options to buy shares of the Company's common stock to a director at a price of $2.00 per share for consulting services rendered. In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of the Company's Common Stock from NeoMedia at a price of $3.03 per share. In January 1999, William Fritz purchased 42,857 shares of the Company's Common Stock from NeoMedia at a price of $3.50 per share. 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). 31 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). 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). 4.10 Form of Warrant to Charles W. Fritz (Incorporated by reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.11 Form of Warrant to Dominick & Dominick, Incorporated (Incorporated by reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.12 Form of Warrant to Compass Capital, Inc. (Incorporated by reference to Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.13 Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.14 Form of Warrant to Southeast Research Partners, Inc. (Incorporated by reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 4.15 Form of Warrant to Joseph Charles & Associates, Inc. (Incorporated by reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year ended December 31, 1997) 10.1 Form of Nonsolicitation and Confidentiality Agreement (Incorporated by reference to Exhibit 10.2 to NeoMedia's Registration Statement). 10.2 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles W. Fritz (Incorporated by reference to Exhibit 10.3 to NeoMedia's Registration Statement). 10.3 Employment Agreement dated April 1, 1996 between Dev-Tech Associates, Inc. and Robert T. Durst, Jr. (Incorporated by reference to Exhibit 10.4 to NeoMedia's Registration Statement). 10.4 Employment Agreement dated May 1, 1996 between Dev-Tech Associates, Inc. and Charles T. Jensen (Incorporated by reference to Exhibit 10.5 to NeoMedia's Registration Statement). 10.5 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). 32 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). 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 January 26, 1998 By and Between NeoMedia Technologies, Inc. and James Marshall (Incorporated by reference to Exhibit 10.28 to NeoMedia's Form 10-QSB for the quarter ended June 30, 1998). 21 Subsidiaries (Incorporated by reference to description of Company's subsidiaries contained in Part I, Item I of this form 10-KSB. (2) The following exhibits required by Item 601 of Regulation S-B are hereby filed herewith: 33 10.29 Purchase Agreement dated December 31, 1998, by and between NeoMedia Technologies, Inc. and Solar Communications, Inc. 23.1 Consent of KPMG LLP 27.1 Article 5 Financial Data - -------------------------------------------- (b) Reports on Form 8-K On January 20, 1999, the Company filed a Form 8-K Report, which (1) announced the allowance of the first patent for the Company's Intelligent Documents(TM) (IDOCs(TM)) technology and (2) announced the acquisition of a body of domestic and international patent filings from Solar Communications, of Naperville, Illinois. 34 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 29th day of March, 1999. 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 29, 1999. 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 /s/ JOHN A. LOPIANO Director - ---------------------------- John A. Lopiano 35 INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of NeoMedia Technologies, Inc. We have audited the accompanying consolidated balance sheets of NeoMedia Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, cash flows and shareholders' equity for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a significant accumulated deficit, and a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP - ------------------- KPMG LLP Miami, Florida March 12, 1999 F-1 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1998 1997 -------- -------- (Dollars in thousands except share data) ASSETS Current assets: Cash and cash equivalents, including restricted amounts of $750 in 1998 and 1997 .............................................................................. $ 1,350 $ 10,283 Trade accounts receivable, net of allowance for doubtful accounts of $225 in 1998 and $191 in 1997 ............................................. 5,912 6,656 Amounts due from related parties .......................................................... 4 6 Inventories ............................................................................... -- 363 Prepaid expenses and other current assets ................................................. 849 562 -------- -------- Total current assets .................................................................. 8,115 17,870 -------- -------- Property and equipment, net .................................................................... 786 651 Intangible assets, net ......................................................................... 3,729 1,278 -------- -------- Total assets ................................................................................... $ 12,630 $ 19,799 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................................... $ 5,898 $ 4,320 Accrued expenses .......................................................................... 1,000 522 Current portion of long-term debt ......................................................... 577 201 Sales taxes payable ....................................................................... 430 409 Deferred revenues ......................................................................... 656 117 Other ..................................................................................... 7 189 -------- -------- Total current liabilities ............................................................. 8,568 5,758 -------- -------- Long-term debt, net of current portion ......................................................... 801 915 -------- -------- Total liabilities ..................................................................... 9,369 6,673 -------- -------- Commitments, contingencies, and related party transactions Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding ............................................................ -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 9,074,080 shares issued in 1998 (8,699,080 outstanding) and 8,295,291 shares issued and outstanding in 1997 ....................................... 87 83 Additional paid-in capital ................................................................ 25,168 23,542 Accumulated deficit ....................................................................... (21,994) (10,499) -------- -------- Total shareholders' equity ............................................................ 3,261 13,126 -------- -------- Total liabilities and shareholders' equity ..................................................... $ 12,630 $ 19,799 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1997 ----------- ----------- (Dollars in thousands, except per share data) NET SALES: License fees ......................................................... $ 2,362 $ 1,994 Resales of software and technology equipment ......................... 16,854 19,172 Service fees ......................................................... 4,262 3,268 ----------- ----------- Total net sales .................................................. 23,478 24,434 ----------- ----------- COST OF SALES: License fees ......................................................... 275 324 Resales of software and technology equipment ......................... 14,596 17,154 Service fees ......................................................... 3,682 1,998 Amortization of capitalized software costs ........................... 596 594 ----------- ----------- Total cost of sales .............................................. 19,149 20,070 ----------- ----------- GROSS PROFIT .............................................................. 4,329 4,364 Sales and marketing expenses .............................................. 9,965 4,988 General and administrative expenses ....................................... 4,886 4,067 Research and development costs ............................................ 1,069 752 Fair value of options and warrants granted to consultants ................. 25 461 ----------- ----------- Loss from operations ...................................................... (11,616) (5,904) Interest expense (income), net ............................................ (121) 147 ----------- ----------- LOSS BEFORE INCOME TAXES .................................................. (11,495) (6,051) Income tax benefit ........................................................ -- (78) ----------- ----------- NET LOSS .................................................................. $ (11,495) $ (5,973) =========== =========== NET LOSS PER SHARE - BASIC AND DILUTED .................................... $ (1.34) $ (0.90) =========== =========== Weighted average number of common shares-basic and diluted ................ 8,560,849 6,615,107 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 -------- -------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................................. $(11,495) $ (5,973) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................................................ 1,081 771 Provision for doubtful accounts ...................................................... 547 155 Fair value of stock based compensation granted for professional services ............. 91 461 Changes in operating assets and liabilities Trade accounts receivable ........................................................ 197 (1,770) Other current assets ............................................................. 76 (214) Accounts payable and accrued expenses ............................................ 2,056 359 Other current liabilities ........................................................ 378 41 -------- -------- Net cash used in operating activities ............................................ (7,069) (6,170) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of software development and purchased intangible assets .................... (1,980) (1,155) Acquisition of property and equipment ..................................................... (428) (591) -------- -------- Net cash used in investing activities ............................................ (2,408) (1,746) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of units ....................................................... -- 1,295 Net proceeds from exercise of stock warrants .............................................. -- 12,914 Net proceeds from exercise of stock options ............................................... 280 44 Repayment from shareholder ................................................................ 2 472 Borrowings under notes payable and long-term debt, net of $36 of issue costs .............. 464 -- Repayments on notes payable and long-term debt ............................................ (202) (263) Payments to shareholders .................................................................. -- (472) -------- -------- Net cash provided by financing activities ........................................ 544 13,990 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... (8,933) 6,074 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .............................................. 10,283 4,209 -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR .................................................... $ 1,350 $ 10,283 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Restricted cash balances at December 31 .............................................. $ 750 $ 750 Interest paid during the year ........................................................ 156 196 Non-cash investing and financing activities: Fair value of shares issued to acquire customer list ............................. 827 -- Fair value of warrants granted in conjunction with acquisition of patents ................................................................. 432 --
The accompanying notes are an integral part of these consolidated financial statements. F-4 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ACCUM- TOTAL ----------------------- PAID-IN MULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY --------- --------- --------- --------- --------- (Dollars in thousands) BALANCE, DECEMBER 31, 1996 ................................ 6,184,316 $ 62 $ 8,849 $ (4,526) $ 4,385 Proceeds from issuance of 255,000 units, net of $235 of issuance costs ........................ 255,000 3 1,292 -- 1,295 Exercise of employee options .............................. 47,342 -- 44 -- 44 Exercise of public warrants, net of $641 of issuance costs ............................... 1,662,633 17 11,605 -- 11,622 Exercise of Fritz warrants ................................ 146,000 1 1,291 -- 1,292 Fair value of warrants granted for professional services rendered .................................... -- -- 461 -- 461 Net loss .................................................. -- -- -- (5,973) (5,973) --------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 1997 ................................ 8,295,291 83 23,542 (10,499) 13,126 Exercise of employee options .............................. 273,789 3 277 -- 280 Fair value of shares issued in conjunction with the acquisition of a customer list ................... 120,000 1 826 -- 827 Fair value of shares and options issued for professional services rendered ....................... 10,000 -- 54 -- 54 Fair value of warrants granted in conjunction with the acquisition of patents ...................... -- -- 432 -- 432 Fair value of warrants granted in conjunction with financing, net of $47 of issuance costs ......... -- -- 37 -- 37 Net loss .................................................. -- -- -- (11,495) (11,495) --------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 1998 ................................ 8,699,080 $ 87 $ 25,168 $ (21,994) $ 3,261 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS BASIS OF PRESENTATION The consolidated financial statements include the financial statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A. incorporated in Guatemala; Allegiant Legacy Solutions, Inc. ("Allegiant")(which was merged into NeoMedia Technologies, Inc. in December 1997); NeoMedia Technologies of Canada, Inc. incorporated in Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Technologies do Brasil Ltd. incorporated in Brazil and NeoMedia Technologies UK Limited incorporated in the United Kingdom, and are collectively referred to as "NeoMedia" or the "Company". The consolidated financial statements of NeoMedia are presented on a consolidated basis for all periods presented. The merger with Allegiant on September 25, 1997 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. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. 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. NATURE OF BUSINESS OPERATIONS NeoMedia provides the following computer software and consulting services: o INTELLIGENT DOCUMENT(TM) SOLUTIONS ("IDOCS(TM)") which incorporate active data elements into standard printed documents or on physical objects for the purpose of launching computer programs, creating automated links to the World Wide Web, embedding machine readable information and securing print document based transactions. To date, the Company has not generated any significant revenue from the sale of it's IDOCs(TM) products. o DOCUMENT SYSTEMS SOLUTIONS which assists clients in optimizing the creation, production and management of printed documents and printed document processes o MASS CHANGE / MIGRATION SOLUTIONS which enables and assists clients in implementing broad changes in computer software and hardware systems, including (i) identifying, seeking and automatically correcting restrictive source and application fields which store data, including including year 2000 remediation, and (ii) conversions of legacy computer systems and applications to open system implementations. NeoMedia currently offers its services and products through its two principal business units - NeoMedia Systems Integration (NeoMedia/SI) and NeoMedia Tech which, although separate in name, often function as a team in providing solutions for its customers. NeoMedia/SI focuses on providing project based systems integration solutions for contract customers including Document System Solutions, Mass Change/Migration remediation and custom F-6 IDOCs(TM) implementations. The role of NeoMedia Tech is to develop and commercialize proprietary software products and related technology and to promote and enable wide-scale IDOCs(TM) solutions with key strategic partners. 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, California, Illinois, New York and Ohio. 2. LIQUIDITY AND SUBSEQUENT EVENTS During the years ended December 31, 1998 and 1997 the Company's net loss totaled approximately $11,495,000 and $5,973,000, respectively. As of December 31, 1998 the Company had accumulated losses from operations of approximately $21,994,000, had a working capital deficit of approximately $453,000, and approximately $600,000 in unrestricted cash balances. Management believes it will need to raise additional capital as well as reduce expenses and meet revenue growth targets to sustain the Company's operations in 1999. The failure of management to accomplish these initiatives will adversely effect the Company's business, financial conditions, and results of operations and its ability to continue as a going concern. Subsequent to December 31, 1998, the Company has undertaken the following: o During January 1999, the Company issued approximately 270,000 previously unissued shares of its common stock at a price of between $3.03 and $3.50 per share. Gross proceeds from these transactions were approximately $900,000, approximately $400,000 of which was from related parties. o In February 1999, the Company entered into a binding term sheet with A.T. Cross Company ("Cross"). The term sheet contemplates an agent agreement by and between the Company and Cross related to the distribution of the Company's NeoLink(TM) software with Cross' pen/scan device. During the first quarter of 1999, the Company received from Cross $1,000,000 in the form of a convertible promissory note. This one year note is convertible during its term into shares of the Company's common stock at $4.00 per share, or if unconverted may be repaid by the Company in shares of its common stock at $4.00 per share, assuming certain conditions are met. The note bears interest at a rate of 1% per annum and was accompanied by warrants issued to Cross to acquire 100,000 shares of common stock at $5.00 per share and 100,000 shares of common stock at $7.00 per share. The Company anticipates receiving an additional $1,000,000 from Cross on substantially consistent terms during the second quarter of 1999 upon execution of the agent agreement. o In late 1998 and 1999, the Company reduced its sales and marketing staff and related expenses. The Company will attempt to further adjust its expenses in 1999 as needed. 3. 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. Included in cash equivalents as of December 31, 1998 and 1997 are approximately $750,000 in restricted amounts (Note 6). 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 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 revenues 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 customer support services. Effective January 1, 1998, NeoMedia adopted the software license revenue recognition provisions of the American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended. Specifically, license revenue is recognized if persuasive evidence of an agreement exists, delivery has occurred, pricing is fixed and determinable, and collectibility is probable. The impact of the adoption of SOP 97-2 was not material to NeoMedia's consolidated financial statements. The substantial majority of software license revenue from the Company's Year 2000 remediation business has been recognized on a percentage of completion basis, along with the associated services being provided. 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 are recognized over the life of the contract. Other service revenues, including training and consulting, are recognized as the services are performed. COMPREHENSIVE INCOME NeoMedia adopted the provisions of Financial Accounting Standards Board ("FASB") Statement of Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130") effective January 1, 1998. FAS 130 requires companies to report comprehensive income. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from nonowner sources. For the years ended December 31,1998 and 1997, changes in NeoMedia's shareholders' equity consisted of its net loss, stock based compensation, certain equity offerings, along with the exercise of stock options. Accordingly, comprehensive income (loss) as defined by FAS 130 was the net loss in the accompanying consolidated statement of operations. F-7 INVENTORIES Inventories are stated at the lower of cost or market and in 1997 were 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. INTANGIBLE ASSETS Intangible assets consist of capitalized software costs, patents, and an acquired customer list. Software development costs are accounted for in accordance with FASB 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 technological feasibility has been determined, additional costs incurred in development, including coding, testing, quality assurance and documentation writing, are capitalized. Once a product is made available for sale, capitalization is stopped unless the related costs are associated with a technologically feasible enhancement to the product. Amortization of purchased and developed software is provided on a product-by-product basis over the estimated economic life of the software, generally not exceeding three years, using the straight-line method. Patents (including patents pending and intellectual property) and acquired customer lists are stated at cost, less accumulated amortization. The acquired customer list is being amortized over a five year period. Patents are generally amortized over periods ranging from five to seven years. The Company periodically performs an evaluation of the carrying value of its intangible assets. This evaluation consists primarily of a comparison to the future undiscounted net cash flows from the associated assets in comparison to the carrying value of the assets. As of December 31, 1998, the Company is of the opinion that no impairment of the intangible assets exists. 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. The Company is currently in a loss position for income taxes, and accordingly, no such amounts were paid during the years ended December 31, 1998 and 1997. F-8 COMPUTATION OF LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. As a result of the net loss reported by the Company, no exercise of stock options and warrants were assumed and basic and diluted loss per share amounts are identical. FINANCIAL INSTRUMENTS The Company believes that the fair value of its current assets and current liabilities approximate carrying value. Certain of the Company's long-term obligations are non-interest bearing and were discounted at an assumed interest rate of approximately 9% when the obligation was entered into during 1994 (see note 5). As a result of the Company's losses from operations and current financial position, the terms and assumed discount rates of this obligation may not be indicative of terms and rates currently available to the Company. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject NeoMedia to concentrations of credit risk consist primarily of trade accounts receivable with customers. Credit risk is generally minimized as a result of the large number and diverse nature of NeoMedia's customers, which are located throughout the United States. NeoMedia extends credit to its customers as determined on an individual basis and has included an allowance for doubtful accounts of $225,000 and $191,000 in its December 31, 1998 and 1997 consolidated balance sheets, respectively. NeoMedia had net sales to one major customer in the telecommunications industry (Ameritech Services, Inc.) of $5,825,000 and $9,447,000 during the years ended December 31, 1998 and 1997, respectively, resulting in trade accounts receivable of $1,352,000 and $3,116,000 as of December 31, 1998 and 1997, 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 72% and 79% of NeoMedia's revenue for the years ended December 31, 1998 and 1997, 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, 1998 and 1997 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 $13,070,000, or $(1.53) per share in 1998, and $6,364,000 or ($.96) per share, in 1997. For grants in 1998 and 1997, the following assumptions were used: (i) no expected dividends; (ii) a risk-free interest rate of 5% for 1998 and 6% for 1997; (iii) expected volatility of 50% for 1998 and 37% for 1997 and (iv) an expected life of 4 years for options granted in 1998 and 3 years for options granted in 1997. The fair-value was determined using the Black-Scholes option-pricing model. The volatility percentages used by the Company represent management's estimate of reasonable volatility based primarily upon an average of select industry competitors. The Company's actual stock price volatility was approximately 111% and 59% during the years ended December 31, 1998 and 1997, respectively. Management believes that the average volatility percentages are more appropriate given the relatively short trading history of the Company's common stock. F-9 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. 4. PROPERTY AND EQUIPMENT As of December 31, 1998 and 1997, property and equipment consisted of the following: 1998 1997 ------- ------- (In thousands) Furniture and fixtures ............................. $ 451 $ 339 Leasehold improvements ............................. 124 62 Equipment .......................................... 1,164 910 ------- ------- Total ......................................... 1,739 1,311 Less accumulated depreciation ...................... (953) (660) ------- ------- Total property and equipment, net .................. $ 786 $ 651 ======= ======= 5. INTANGIBLE ASSETS As of December 31, 1998 and 1997, intangible assets consisted of the following: 1998 1997 ------- ------- (In thousands) Capitalized and purchased software costs ........... $ 4,482 $ 3,013 Customer list ...................................... 1,155 -- Patents (including patents pending and intellectual property) and related costs ......... 615 -- ------- ------- Total ......................................... 6,252 3,013 Less accumulated amortization ...................... (2,523) (1,735) ------- ------- Total intangible assets, net ....................... $ 3,729 $ 1,278 ======= ======= In October 1994, the Company 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 NeoMedia Migration for the preceding month; or (ii) the minimum installment payment as defined, until paid in full. The minimum installment payment is the amount necessary to provide an average monthly payment for the most recent twelve month period of $16,000 per month. The present value of $2,000,000 discounted at 9% (the Company's then incremental borrowing rate) for 125 months was approximately $1,295,000, the capitalized cost of the assets acquired. The discount is being accreted to interest expense over the term of the note. The software acquired was amortized over its estimated useful life of three years. As of December 31, 1998 and 1997, the balance of the note payable, net of unamortized discount, was $931,000 and $1,016,000, respectively. During 1998, NeoMedia acquired a customer list for total consideration of $1,155,000, including 120,000 shares of NeoMedia common stock valued at $827,000 (giving effect to the common stock being unregistered and "restricted" securities as such term is defined in Rule 144 of the rules and regulations promulgated under the Securities Act of 1933, as amended) and cash of $292,000. Additionally, there were legal and other expenses of $36,000 that were related to this transaction. The customer list is intended to be used to develop relationships for the sale of the Company's IDOC's products. The cost of the customer list is being amortized on the straight-line method over its estimated useful life of five years. F-10 During December 1998, the Company acquired the rights to certain patent filings currently pending. The Company paid a total of $125,000 in cash along with a warrant to purchase shares of the Company's common stock at a negligible value (such warrant was valued at approximately $432,000, the trading price of the underlying common stock). The Company is contingently liable to pay the seller of the pending patent applications an additional amount six months from the date that the first patent application is granted. The contingent purchase price is approximately $1,862,500. This obligation, when and if due, may be settled by the Company either in cash or through the issuance of additional warrants to purchase Company common stock at negligible values. The Company anticipates that the first patent application may be approved during early 1999. Based upon currently available working capital, the Company currently anticipates that any obligation would be settled through the issuance of additional warrants. 6. FINANCING AGREEMENTS The Company has an agreement with a commercial finance company that provides short-term financing for certain computer hardware and software purchases. Under the agreement, there are generally no financing charges for amounts paid within 30 or 45 days, depending on the vendor used to source the product. Borrowings are collateralized by accounts receivable generated from the sales of merchandise to NeoMedia's customers. In addition, as of December 31, 1998, 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, 1998 and 1997, amounts due under this financing agreement included in accounts payable were $2,835,000 and $2,651,000, respectively. 7. LONG-TERM DEBT As of December 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997 ------- ------- (In thousands) Note payable to IDSI, non-interest bearing with interest imputed at 9%, due with minimum monthly installments of $16,000 through December 2005 .......................................... $ 1,216 $ 1,392 Note payable, interest bearing at 20% per annum, due November 1999. Secured by 375,000 shares of previously unissued Company common stock placed in escrow ............................................. 500 -- Other amounts, repaid during 1998 .............................................. -- 100 ------- ------- Subtotal .................................................................. 1,716 1,492 Less: unamortized discount .................................................... (338) (376) ------- ------- Total long-term debt ...................................................... 1,378 1,116 Less: current portion ......................................................... (577) (201) ------- ------- Long-term debt, net of current portion ......................................... $ 801 $ 915 ======= =======
The long-term debt repayments for each of the next five fiscal years ending December 31 are as follows: (IN THOUSANDS) 1999 ..................................... $ 708 2000 ..................................... 192 2001 ..................................... 192 2002 ..................................... 192 2003 ..................................... 192 Thereafter ............................... 240 ------ Total .................................... $1,716 ====== F-11 8. INCOME TAXES For the years ended December 31, 1998 and 1997, the components of income tax expense (benefit) were as follows: 1998 1997 ------- ------- (In thousands) Current ................................................ $ -- $ (78) Deferred ............................................... -- -- ------- ------- Income tax expense (benefit) ........................... $ -- $ (78) ======= ======= For the years ended December 31, 1998 and 1997, the significant components of the deferred tax provision were as follows: 1998 1997 ------- ------- (in thousands) Deferred tax benefit, exclusive of the components listed below ......................................... $(3,983) $(2,226) Increase in valuation allowance ........................ 3,983 2,226 ------- ------- Total ............................................. $ -- $ -- ======= ======= As of December 31, 1998 and 1997, 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: 1998 1997 ------- ------- (In thousands) Accrued employee benefits ............................ $ 30 $ 23 Provisions for uncollectible accounts ................ 90 76 Deferred revenue ..................................... 386 76 Capitalized software development costs ............... 600 406 Net operating loss carryforwards ..................... 6,466 2,985 Other ................................................ -- 23 Alternative minimum tax credit carryforward .......... 47 47 ------- ------- Total deferred tax assets ............................ 7,619 3,636 Valuation allowance .................................. (7,619) (3,636) ------- ------- Net deferred income tax asset ........................ $ -- $ -- ======= ======= For the years ended December 31, 1998 and 1997, income tax expense (benefit) differed from the amount computed by applying the statutory federal rate of 34% as follows:
1998 1997 ------------------------ ------------------------ AMOUNT % AMOUNT % ------- ------- ------- ------- (Dollars in thousands) Benefit at federal statutory rate ....................... $(3,908) (34)% $(2,057) (34)% S-corporation income of Allegiant allocated directly to shareholders ........................... -- -- (45) (1) Permanent and other, net ................................ (75) (1) (202) (3) Change in valuation allowance ........................... 3,983 35% 2,226 37 ------- ------- ------- ------- Income tax expense (benefit) ............................ $ -- ---% $ (78) (1)% ======= ======= ======= =======
F-12 As of December 31, 1998, NeoMedia had net operating loss carryforwards for federal tax purposes totaling approximately $16.2 million which may be used to offset future taxable income, or, if unused approximately $1.6 million will expire in 2011, approximately $5.5 million will expire in 2012, and approximately $9.1 million will expire in 2018. As a result of certain of NeoMedia's equity activities occurring during the year ended December 31, 1997, NeoMedia anticipates that the annual usage of its pre 1998 net operating loss carryforwards may be further restricted pursuant to the provisions of Section 382 of the Internal Revenue Code. 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. 9. TRANSACTIONS WITH RELATED PARTIES During the years ended December 31, 1998 and 1997, NeoMedia leased office and residential facilities from related parties for rental payments totaling $13,000 and $12,000, 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. 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 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. In January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of the Company's common stock from NeoMedia at a price of $3.03 per share. In January 1999, William Fritz purchased 42,857 shares of the Company's common stock from NeoMedia at a price of $3.50 per share. 10. COMMITMENTS AND CONTINGENCIES NeoMedia leases its office facilities and certain office and computer equipment under various operating leases. These leases provide for minimum rents and generally include options to renew for additional periods. For the years ended December 31, 1998 and 1997, NeoMedia's rent expense was $1,057,000 and $628,000, respectively. Beginning December 1, 1996, NeoMedia subleased a portion of its office facilities until the lease expires. The following is a schedule of the future minimum lease payments and receipts under noncancelable operating leases as of December 31, 1998: PAYMENTS RECEIPTS ------ ------ (In thousands) 1999 ................................... $ 964 $ 179 2000 ................................... 391 183 2001 ................................... 30 -- 2002 ................................... 23 -- 2003 ................................... 4 -- Thereafter ............................. 1 -- ------ ------ Total .................................. $1,413 $ 362 ====== ====== The Company has entered into a migration contract (specifically Year 2000 remediation) with a Colombian customer related to the remediation of certain of the customer's computer systems to be Year 2000 compliant. The total contract is approximately $1 million, of which approximately $157,000 has been recognized as revenue by the F-13 Company as of December 31, 1998. As an element to the contract the Company has guaranteed its work product and resulting Year 2000 compliance of the customer. To this end, during 1999 the Company established bank guarantees in the form of certificates of deposit totaling approximately $150,000 in favor of the customer. The Company believes that it has the ability and intent to complete such remediation in a satisfactory manner and is accounting for this project on a percentage of completion basis. The Company is party to certain litigation in the normal course of business. Management of the Company, after consultation with legal counsel, is of the opinion that the ultimate resolution of these matters will have no material adverse impact on the Company's consolidated financial statements. NeoMedia has entered into various employment and consulting agreements which require an aggregate of approximately $2.2 million in annual payments. These employment and consulting agreements extend to various dates through 2001. These agreements also provide for the payment of severance and other benefits under certain conditions. 11. 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. 12. 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 1998 and 1997 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. Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 8,000,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant. Options granted during 1998 were granted at an exercise price equal to fair market value on the date of grant. Options generally vest 20% upon grant and 20% per year thereafter. The options expire ten years from the date of grant. F-14 A summary of the status of NeoMedia's 1996 and 1998 stock option plans as of and for the years ended December 31, 1998 and 1997 is as follows:
1998 1997 -------------------------- -------------------------- WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE (000) EXERCISE (000) EXERCISE PRICE PRICE ------ --------- ------ --------- Outstanding at beginning of year ........................... 1,405 $ 2.64 1,338 $ 1.76 Granted .................................................... 2,281 5.26 294 7.30 Exercised .................................................. (274) 1.02 (47) .95 Forfeited .................................................. (248) 6.02 (180) 4.15 ------ --------- ------ --------- Outstanding at end of year ................................. 3,164 $ 4.40 1,405 $ 2.64 ====== ========= ====== ========= Options exercisable at year-end ............................ 1,483 1,134 Weighted-average fair value of options granted during the year ....................... $ 2.33 $ 2.35 Available for grant at the end of the year ................. 6,015 48
The following table summarizes information about NeoMedia's stock options outstanding as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- ------------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES (000) CONTRACTUAL LIFE PRICE (000) PRICE - -------------------- ------------- ------------------ ----------------- ----------- ----------------- $ --- to $ .84 703 7.1 years $ .84 703 $ .84 1.88 to 2.91 497 9.7 years 2.71 99 2.71 3.00 to 4.88 780 9.5 years 3.55 206 3.91 5.00 to 7.88 772 8.8 years 6.91 330 6.37 8.00 to 10.88 412 9.2 years 9.39 145 9.67 - ------------------ ----- --------- -------- ------ ------- $ .84 to $10.88 3,164 8.8 years $ 4.40 1,483 $ 3.48 ================== ===== ========= ======== ====== =======
13. 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 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"). F-15 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 in 1997 and $255,000 was charged to the proceeds of the publicly-traded warrants called on December 18, 1997. In December 1998, the Company issued 30,000 options to buy shares of the Company's common stock to a director at a price of $2.00 per share for consulting services rendered, and recognized $25,000 in expense in its 1998 consolidated financial statements. F-16 EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT - ------- -------- 10.30 Purchase Agreement dated December 31, 1998, by and between NeoMedia Technologies, Inc. and Solar Communications, Inc. 23.1 Independent Auditors' Consent 27.1 Article 5 Financial Data Schedule for December 31, 1998 EX-10.30 2 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT ("AGREEMENT") is entered into as of December 31, 1998 ("EFFECTIVE DATE") between Solar Communications, Inc., an Illinois corporation ("SOLAR"), and NeoMedia Technologies, Inc., a Delaware corporation ("NEOMEDIA"). Solar and NeoMedia are sometimes referred to as the ("PARTIES") and individually as a ("PARTY"). RECITALS: WHEREAS, Solar is the owner of certain patent applications in the United States and elsewhere relating to the encoding of network address information in a bar-code or other machine-readable format and to the use of standard product identifiers such as UPCs to access network resources such as offerings on the World Wide Web. WHEREAS, Solar desires to sell and NeoMedia desires to purchase such patent applications at a closing to be held on the same date as the Effective Date of this Agreement. WHEREAS, the parties desire that the purchase price paid by NeoMedia include consideration payable at the closing and additional consideration payable upon issuance of at least one of the patent applications as a patent in the United States. WHEREAS, the parties intend that the consideration payable at closing shall consist of cash and warrants to purchase NeoMedia common stock, and that the consideration payable upon the issuance of a patent in the United States shall consist of a second installment of cash and/or warrants to purchase stock. WHEREAS, the parties intend that NeoMedia's obligation to pay the second installment of consideration shall be the subject of a security interest granted by NeoMedia to Solar pursuant to a separate security agreement having date even herewith. Pursuant to the security agreement, NeoMedia shall grant Solar an exclusive, world-wide, royalty-free license under the patents issuing on the patent applications, which license shall be contingent upon NeoMedia defaulting on its second installment payment obligations under this Agreement and which license agreement shall automatically terminate when NeoMedia pays the second installment of the consideration. WHEREAS, to protect Solar's collateral under the security agreement and its interest under this Agreement in having the patent applications issue as patents, the parties desire that Solar should have rights to monitor the prosecution of the patent applications and, in certain specified circumstances, to assume control over such prosecution for NeoMedia's benefit at Solar's expense. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and promises herein contained and other good and valuable consideration the receipt and legal sufficiency of which are hereby acknowledged, the parties have agreed as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. When used in this Agreement, capitalized terms shall either be defined in EXHIBIT A or as otherwise set forth herein. 1 ARTICLE II ASSIGNMENT OF INTELLECTUAL PROPERTY 2.1 AGREEMENT TO ASSIGN. Subject to the terms and conditions of this Agreement, Solar agrees to execute and deliver to NeoMedia at the Closing the form of assignment attached as EXHIBIT B conveying to NeoMedia all right, title and interest in and to the Intellectual Property, including but not limited to the right to sue for past infringement. 2.2 PURCHASE PRICE. In consideration of the Assignment of Section 2.1, NeoMedia shall tender to Solar cash and/or Warrants in accordance with the terms and conditions of Article IV. 2.3 SUBSEQUENT TRANSACTIONS. Any subsequent assignments, licenses, transfers and other transactions in which either party grants or conveys any right, lien, license or other interest in or to the Intellectual Property ("SUBSEQUENT TRANSACTION") shall be subject to and made in accordance with the terms and conditions of this Agreement, and no instrument executed by either party in connection with a Subsequent Transaction shall be inconsistent with the foregoing. Neither party shall assign or otherwise transfer its interest in the Intellectual Property, either in whole or in part, to any Person (including a transfer to any Affiliate but excluding a transfer from one party to the other party) unless such other Person agrees to assume the obligations of the assignor under this Agreement. For the purposes of the foregoing sentence, an assignment or transfer does not include the grant of licenses, distribution or reseller agreements. A Subsequent Transaction shall not constitute an assignment of this Agreement. Assignments of this Agreement are subject to Section 11.5. ARTICLE III HANDLING OF INTELLECTUAL PROPERTY 3.1 DUTY TO PROSECUTE AND PROTECT PATENTS. From and after the Closing, NeoMedia shall authorize and instruct Anthony R. Barkume of Sayville, New York, or another licensed patent attorney selected by NeoMedia, to vigorously prosecute at NeoMedia's expense the Patent Applications included in the Intellectual Property in accordance with the following: (A) BEST EFFORTS TO PROSECUTE. NeoMedia shall use its best efforts to obtain issued Patents on each Patent Application that include, in NeoMedia's reasonable judgement, the broadest claim of coverage allowable based on the prior art actually known by NeoMedia. (B) NO ABANDONMENT. NeoMedia shall not intentionally allow any pending Patent Application to become abandoned for any reason, including express abandonment or failure to file a timely response, pay an issue or other fee, or take other action, unless with respect to such pending Patent Application NeoMedia first: (i) prior to the Date of Abandonment, files another Patent Application that contains all of the disclosure of the pending Patent Application and that is entitled under applicable law to an effective filing date no later than the earliest effective filing date to which the pending Patent Application is entitled; or (ii) notifies Solar at least one (1) month before the Date of Abandonment of NeoMedia's intention to abandon the pending Patent Application and allows Solar to prosecute the pending Patent Application in accordance with the procedures of Section 3.3. For purposes of this Agreement, "DATE OF ABANDONMENT" means sixty (60) days prior to the last day to respond to an office action, pay an issue fee, or take other action required to keep the Patent Application in force taking into account any possible extensions of time that are available by petition upon payment of any fee. If a Patent Application is abandoned in violation of this Section 3.1(b), it shall be deemed "issued" for all other purposes under this Agreement, including Article IV. Notwithstanding anything contained herein to the contrary, if a Patent Application becomes unintentionally or unavoidably abandoned without NeoMedia having complied with either of Subsection 3.1(b)(i) or (ii), then NeoMedia shall be given reasonable opportunity to petition to revive the abandoned Patent Application under the applicable patent rules of procedure, and such abandoned 2 Patent Application, if successfully revived, will not be considered "issued". (C) PAYMENT OF ISSUE FEES. If a Patent Application is allowed, NeoMedia shall pay the applicable issue fee and use its best efforts to submit any required drawings and comply with all other applicable requirements no later than ten (10) days before the statutory period for response permitted under applicable law or regulations (taking into account any extensions of time that may be available upon petition). 3.2 NOTICE AND ACCESS. (A) NOTICE. NeoMedia shall promptly furnish to Solar copies of the following documents when received by NeoMedia: any notice of abandonment or final rejection issued by the U.S. Patent Trademark Office and notice of the filing by NeoMedia of any patent application that claims priority based on a Patent Application (including filing date and application serial numbers, when available). (B) POWER TO INSPECT. At the Closing, NeoMedia shall execute and deliver to Solar a power to inspect and make copies in the form attached as EXHIBIT C duly authorizing Solar or its representatives to inspect and copy files in the USPTO or any foreign patent office relating to any Patent Application ("POWER TO INSPECT"). At Solar's request, NeoMedia shall promptly execute and deliver additional Powers to Inspect expressly referring by serial number to Patent Applications filed by NeoMedia after the Closing. Any information or copies made under this paragraph shall be considered Confidential Information of NeoMedia under Section 6.1. 3.3 ASSUMPTION OF PROSECUTION BY SOLAR. (A) EVENTS ENTITLING SOLAR TO PROSECUTE. Solar may at its election and expense assume prosecution of any Patent Application under any of the following conditions: (i) NeoMedia has tendered prosecution to Solar pursuant to Section 3.1(b)(ii); or (ii) NeoMedia fails to file a response, file a petition for extension of time, pay an issue fee or take other action due in a Patent Application before the Date of Abandonment. If either conditions of the preceding clauses (i) or (ii) arise, NeoMedia will complete, execute and deliver to Solar within ten (10) days after request by Solar an original power of attorney in the form of EXHIBIT D authorizing Solar's designated patent attorney to commence prosecution of the Patent Application at Solar's expense. (B) CONSTRUCTION. The parties' intention in this Section 3.3 is to ensure that Solar will have a full and fair opportunity to protect the Intellectual Property from abandonment or forfeiture in cases where NeoMedia is unwilling or unable to continue prosecution or pay maintenance or other fees. Accordingly, the parties stipulate that, in any dispute between the parties, the provisions of this Section 3.3 should be construed liberally to effectuate this intention. (C) EMERGENCY RELIEF. Upon demonstration by Solar to a court of competent jurisdiction that either of the conditions of clauses 3.3(a)(i) or 3.3(a)(ii) have been met, the parties agree and stipulate that Solar shall be entitled to emergency and preliminary equitable relief without posting any bond or showing of irreparable harm. Such relief may include but is not limited to an order or decree requiring NeoMedia to divulge serial numbers and filing dates of Patent Applications and authorizing Solar to prosecute such Patent Applications at Solar's expense on behalf of NeoMedia. 3.4 TERMINATION. Notwithstanding anything in this Agreement to the contrary, including survival provisions, the obligations of NeoMedia and the rights of Solar pursuant to this Article III shall terminate upon the issuance of any Patent in the United States. 3 ARTICLE IV CONSIDERATION 4.1 AT CLOSING. At the Closing, NeoMedia shall: (i) pay to Solar one-hundred and fifty thousand dollars ($150,000.00) cash; and (ii) deliver to Solar duly issued Warrants in the form of EXHIBIT E entitling Solar to purchase 150,000 shares of NeoMedia common stock at a price of one cent ($0.01) per share. 4.2 UPON ISSUANCE. Within six (6) months after the date that the first Patent issues in the United States ("DATE OF FIRST ISSUANCE"), NeoMedia shall pay to Solar the amount of one million eight hundred sixty two thousand five hundred dollars ($1,862,500) in cash and/or Warrants in accordance with this Section 4.2: (A) CASH. Within six (6) months after the Date of First Issuance, NeoMedia shall pay to Solar in a single installment of cash in the amount equal to the difference between (i) one million eight hundred sixty two thousand five hundred dollars ($1,862,500), minus the (ii) the Current Warrant Value (as defined below and determined as of the date the cash is paid) of the Warrants actually issued and delivered to Solar pursuant to Section 4.2(b). If, during the six (6) month period after the Date of First Issuance, the Current Warrant Value of such issued Warrants reaches one million eight hundred sixty two thousand five hundred dollars ($1,862,500), then NeoMedia would not be required to make a cash payment under this Section 4.2(a), and its payment obligations under this Section 4.2 would be deemed satisfied. Under no circumstances is Solar required to refund or credit NeoMedia for any amount by which the Current Warrant Value of such Warrants ever exceeds one million eight hundred sixty two thousand five hundred dollars ($1,862,500). (B) WARRANTS. At any time during the six (6) month period following the Date of First Issuance, NeoMedia may, in partial or total satisfaction of its obligation under this Section 4.2, duly issue and deliver to Solar Warrants in the form of EXHIBIT E entitling Solar to purchase a specified number of additional shares ("ADDITIONAL SHARES") of NeoMedia common stock at a price of one cent ($0.01) per share; provided, however, that NeoMedia may only elect to deliver Warrants if, at the time such Warrants are delivered, the common stock of NeoMedia is listed for trading on a Recognized Exchange. If the common stock of NeoMedia is not listed, then NeoMedia shall satisfy its entire obligation under this Section 4.2 in cash. NeoMedia shall have no obligation to register Warrants or the Shares underlying such Warrants issued pursuant to this Article IV. (C) VALUING THE WARRANTS. For purposes of determining the amount of cash that NeoMedia must pay to Solar within six months after the Date of First Issuance, the "CURRENT WARRANT VALUE" as of a specified date means, with respect to the Warrants issued under Section 4.2(b), the Average Market Price of the Shares that may be acquired upon exercise of the Warrants, less the applicable exercise price; provided, however, that in no event shall the Current Warrant Value be less than the Average Market Price of the Shares (less the applicable exercise price) as of the date that the Warrants are issued. To avoid backdating of Warrants, NeoMedia must deliver Warrants to Solar within three (3) days of issuance. (D) ADDITIONAL SHARES. For purposes of Subsection 4.2(b), the maximum number of Additional Shares for which NeoMedia may (or may be required to) issue Warrants shall be equal to the quotient obtained when dividing one million eight hundred sixty two thousand five hundred dollars ($1,862,500) by the greater of: (i) the Average Market Price of NeoMedia common stock as of the date the Warrants are issued; or (ii) four. For example, if the common stock of NeoMedia were listed for trading on the NASDAQ Stock Exchange and its Average Market Price as of the date Warrants were to be issued were $10, then the maximum number of Additional Shares for which NeoMedia could issue Warrants under this Section 4.2 would be equal to 186,250, which is equal to the quotient of (1,862,500) divided by 10, the Average Market Price of the Shares which may be acquired upon exercise of the Warrants. If the Average Market price were $2, then the maximum number of Additional Shares would be equal to 465,625, which is the quotient of (1,862,500) divided by 4, the minimum divisor. 4 (E) EXAMPLES. Suppose that exactly three (3) months after the Date of First Issuance, the Average Market Price of NeoMedia common stock is $5.00. On that date, NeoMedia decides to issue and deliver to Solar Warrants pursuant to Section 4.2(b) to purchase 200,000 issue shares of NeoMedia Common Stock. On that date, the Current Warrant Value is $998,000 (calculated under Section 4.2(c) as the Average Market Price of 200,000 Shares at $5.00 per share less the applicable exercise price of one cent per share). To satisfy its obligations under this Section 4.2, NeoMedia could, on that date, make a payment to Solar of $864,500 (calculated under Section 4.2(a) as the difference between 1,862,500 minus 998,000, the Current Warrant Value. Alternatively, NeoMedia could satisfy its obligations under this Section 4.2 by making a cash payment on a future date that is no later than six (6) months after the Date of First Issuance. Suppose that on any future date prior to the six-month deadline the price of NeoMedia common stock has appreciated so that the Average Market Price is $6.00 per share. At that price, the Current Warrant Value is 1,198,000 (calculated under Section 4.2(c) as the Average Market Price of 200,000 Shares at $6.00 per share less the applicable exercise price of one cent per share). Under Section 4.2(a), NeoMedia could satisfy its obligations under this Section 4.2 on that future date by making a cash payment to Solar in the amount of $664,500 (calculated under Section 4.2(a) as the difference between 1,862,500 minus 1,198,000, the Current Warrant Value. Alternatively, suppose that upon any date after issuance of the Warrants but prior to expiration of the six-month period, the Average Market Price of NeoMedia stock is $9.50 per share. At that price, the Current Warrant Value is $1,898,000 (calculated under Section 4.2(c) as the Average Market Price of 200,000 shares at $9.50 per share less the applicable exercise price of one cent per share), which Current Market Value exceeds $1,862,500 and, therefore, satisfied NeoMedia's obligations under this Section 4.2 without further cash payments. 4.3 PREPAYMENT. At any time and at its sole discretion, NeoMedia may prepay, in part or in its entirety, any consideration due under this Article IV, without penalty; provided, however, that Solar shall have no obligation to refund prepaid consideration. 4.4 TAXES. The party receiving consideration under this Agreement, whether in the form of cash, Warrants or otherwise, shall be responsible for reporting and paying all applicable sales, excise and income taxes relating to the payment and receipt of such consideration. ARTICLE V DEFAULT AND REMEDIES 5.1 NOTICE OF DEFAULT. If either party materially breaches any of its obligations under this Agreement the nonbreaching party may give notice to the breaching party describing in reasonable detail the nature of the alleged breach ("NOTICE OF DEFAULT"). Upon its receipt of a Notice of Default, the alleged breaching party shall have a thirty (30) day grace period ("GRACE PERIOD") to cure the breach described in the Notice of Default. If the breach is not cured within the Grace Period, then the breaching party shall be deemed to be in Default as of the day after the last day of the Grace Period. Notwithstanding the foregoing, the Grace Period for any breach by NeoMedia of its obligations under Article III shall be twenty (20) days. No Default shall be declared or occur unless notice and opportunity to cure has been provided, as set forth in this Section 5.1. Either party's forbearance in giving Notice of Default shall not be a waiver of its right to give such notice at a future date. 5.2 REMEDIES AVAILABLE TO NEOMEDIA. Except as otherwise provided in this Article V, NeoMedia shall have all remedies available to it under this Agreement or at law or in equity in the event of any Default, including: (A) recovery of money damages, subject to the limitations of Section 5.5; 5 (B) equitable relief in accordance with Section 5.6; and (C) recovery of its attorneys fees and other costs in accordance with Section 5.7. 5.3 REMEDIES AVAILABLE TO SOLAR. Except as otherwise provided in this Article V, Solar shall have all remedies available to it under this Agreement or at law or in equity in the event of any Default, including: (A) in the event of a Default by NeoMedia to pay amounts owed by it to Solar under this Agreement, foreclosure of Solar's security interest granted under Section 5.4 below; (B) in the event of a Default by NeoMedia of its obligations under Article III, assumption of prosecution by Solar (as set forth in Section 3.3), in which case Section 3.3 sets forth the sole and exclusive remedy; except that Solar shall be entitled to payment under Section 4.2 if a Patent is deemed "issued" pursuant to 3.1(b). (C) recovery of money damages subject to the limitations of Section 5.5; (D) equitable relief in accordance with Section 5.6; (E) recovery of Solar's attorneys fees and other costs in accordance with Section 5.7; and (F) exercise of its rights and powers pursuant to the Escrow Agreement (as defined in Section 5.8). 5.4 SECURITY INTEREST. To secure fulfillment by NeoMedia of its obligations to pay the amounts owed (whether in cash or Warrants) under Article IV (the "INDEBTEDNESS"), NeoMedia shall execute and deliver to Solar at the Closing the form of security agreement (and accompanying financing statements) attached as EXHIBIT F, granting to Solar a security interest in the Intellectual Property (the "SECURITY INTEREST"). Solar's rights under the Security Agreement shall at all times be subject to the conditions set forth in this Agreement and in this Section 5.4 as follows: (A) The Security Interest shall be automatically satisfied and released when NeoMedia pays to Solar the Indebtedness in its entirety, upon which event the Security Agreement shall automatically terminate. Solar shall take any and all action necessary to release the security interest promptly upon satisfaction thereof, but in no event later than ten (10) days after demand by NeoMedia. (B) In accordance with Section 9-504 of the Uniform Commercial Code, if any foreclosure by Solar of its Security Interest results in a surplus, then Solar shall account for same to NeoMedia. (C) Concurrently with the execution of the Security Agreement, NeoMedia shall execute as licensor and deliver to Solar as licensee a contingent license in the form of EXHIBIT G, which license shall be contingent upon NeoMedia's Default on its obligation to pay the second installment of consideration under Section 4.2. 5.5 MONEY DAMAGES. Neither party shall be liable to the other for special, incidental or consequential damages (including lost profits or sales) as a result of any breach under this Agreement. In the case of claims against NeoMedia, Solar's damages shall not exceed $2,500,000. In the case of claims against Solar, NeoMedia's damages shall not exceed $2,500,000. The limitations of this Section 5.5 shall not apply to claims for breach of intellectual property rights, attorney fees under Section 5.7, unauthorized disclosures of Confidential Information under Section 6.1, fraud, or obligations to defend under Article VIII. 5.6 EQUITABLE RELIEF. Except as otherwise provided herein, each party agrees that in the event of its Default 6 or its violation of any of the terms or conditions of this Agreement, the non-Defaulting party shall be entitled, without posting of bond or showing of irreparable harm, to emergency, preliminary and permanent injunctive relief in regard to remedies related to such Default or from further violation of any of the provisions hereof. Application of such injunction will be without prejudice to any other right or action that may accrue to the non-Defaulting party by reason of breach of this Agreement, including the right to recover damages flowing from such breach. To prevent the abandonment or forfeiture of Patent Applications, Solar shall also be entitled to emergency equitable relief in accordance with Section 3.3(c) above. 5.7 ATTORNEY FEES. In the event of litigation, arbitration or another proceeding to enforce or construe this Agreement, the prevailing party shall be entitled to an award of its cost of litigation including reasonable attorney fees upon a showing that the other party has acted in bad faith. 5.8 ESCROW. The parties shall enter into the form of escrow agreement attached hereto as EXHIBIT H ("ESCROW AGREEMENT"), pursuant to which: (a) NeoMedia shall execute and deposit with the escrow agent named therein ("ESCROW AGENT") the following: (i) powers to inspect in the form attached hereto as EXHIBIT C; and (ii) powers of attorney in the form attached as EXHIBIT D (collectively, the "ESCROWED DOCUMENTS"). In accordance with the terms and conditions contained in the Escrow Agreement, an aggrieved party hereunder may present a demand to the Escrow Agent for release of one or more of the Escrowed Documents subject to and in accordance with the terms of the Escrow Agreement in the event that the other party is in Default under this Agreement or when the party making such demand is otherwise entitled to obtain an Escrowed Document under this Agreement. 5.9 INSOLVENCY. In the event an insolvency proceeding is voluntarily or involuntarily commenced by or against either party or its successors (the "INSOLVENT PARTY"), then the Insolvent Party, on behalf of itself and its successors and trustees, hereby waives the protection of Section 362 of the Bankruptcy Code (11 U.S.C. 362) and consents to the remedies available to the other party under this Article V. ARTICLE VI OTHER COVENANTS 6.1 CONFIDENTIALITY (A) CONFIDENTIAL INFORMATION. In the course of negotiating and performing its duties and obligations under this Agreement, including without limitation the due diligence investigations made by the party, a party hereunder ("RECEIVING PARTY") may receive and otherwise have access to the other party's ("DISCLOSING PARTY") confidential information ("CONFIDENTIAL INFORMATION"). Confidential Information that is disclosed visually or orally shall be treated as Confidential Information. (B) EXCLUSIONS. Notwithstanding the foregoing Confidential Information will not include, and no obligation of confidentiality hereunder will attach to, information that: (a) was in the Receiving Party's possession, free of any obligation of confidence, before receipt from the Disclosing Party; provided, however, that it shall be the Receiving Party's burden to prove that such information was in its possession; (b) is already available by publication at the time the Disclosing Party communicates such information to the Receiving Party, or same becomes available to the public through no breach of this Agreement by the Receiving Party; (c) is received independently by the Receiving Party from a third party not under an obligation to the Disclosing Party or others to keep such information confidential; or (d) is independently developed by the Receiving Party's personnel without the benefit of access, directly or indirectly, to Confidential Information of the Disclosing Party; provided, however, that the Receiving Party shall bear the burden of proving that such personnel did not benefit from access to the Confidential Information. 7 (C) NONDISCLOSURE OBLIGATIONS. The Receiving Party shall: (a) not use for any purpose, reproduce in any manner or disclose to any third party Confidential Information of the Disclosing Party except as authorized in this Agreement; and (b) treat such Confidential Information with the same degree of care to avoid disclosure to any third party as is used by the Receiving Party with respect to the Receiving Party's own information of like importance, or, at a minimum, with a reasonable degree of care to avoid any such disclosure. (D) COMPULSORY DISCLOSURES. The restrictions of this Section 6.1 shall not operate to prevent disclosures that are required by any law or regulation, court order or other governmental decree or authority; provided, however, that the Receiving Party, if required by governmental authority to reveal Confidential Information of the other party, will, if allowed by law, notify the Disclosing Party promptly following learning of the government requirement and before making such disclosure, and will provide the Disclosing Party with an opportunity (at Disclosing Party's own expense) to resist such disclosure and/or to seek a protective order or other appropriate procedure so that the disclosure, if required, can be made in a manner that preserves the confidentiality of the Confidential Information. (E) RETURN OF DOCUMENTS. Upon termination of this Agreement for any reason, the Receiving Party shall promptly tender to the Disclosing Party all documents however made that embody, reflect or otherwise disclose Confidential Information of the Disclosing Party; provided, however, that the Receiving Party's legal counsel may keep one (1) file copy of the Disclosing Party's Confidential Information. 6.2 RESTRICTIVE COVENANT. 6.2.1 The parties acknowledge that: (a) The parties are entering into an agreement and arrangement under which they shall have a continuing commercial relationship relating to the development, production, marketing and sale of a variety of services and products; (b) NeoMedia has invested and will invest substantial sums in the development of the rights and interests provided for herein and in the commercial relationship among the parties; (c) The parties have, and contemplate that they will, exchange and provide substantial Confidential Information each to the other in connection with this Agreement, the related agreements and the commercial relationship among them; (d) For Solar to utilize the Confidential Information or engage in competition with NeoMedia, with respect to the matters specified herein would result in the loss or substantial diminution in value of the Confidential Information, other rights and commercial relationships provided for herein; and (e) The restrictions provided for in this paragraph are reasonable in scope and necessary to protect the interests of NeoMedia in Confidential Information and other rights provided for herein and in the commercial relationships provided for herein. 6.2.2 Solar covenants and agrees that, it shall not, without the written consent of NeoMedia or as specifically provided and authorized herein or pursuant to a separate license or distribution agreement with NeoMedia: (a) Develop, manufacture, produce, have manufactured or produced, market or sell any service or product which utilizes or incorporates any Confidential Information; 8 (b) Develop, manufacture, produce, have manufactured or produced, market or sell any service or product which would infringe any Patent issued hereunder or which is similar in functionality of the technology claimed in any Patent; except that the restriction in this paragraph 6.2.2(b) shall not apply once and if the contingent patent license granted under Section 5.4 becomes effective as a result of NeoMedia's Default. (c) Develop, manufacture, produce, have manufactured or produced, market or sell any Competing Product. 6.3 PRESS RELEASES. NeoMedia shall use its best efforts to mention Solar in NeoMedia press releases that publicize acquisition of the Patent Applications or grant of the Patents, but NeoMedia shall not be so obligated regarding releases that publicize products that use the technology represented in the Patent Applications. Notwithstanding the foregoing, however, unless otherwise agreed by both parties in a duly executed writing, the terms of this Agreement and this transaction shall be kept confidential by the parties and their respective attorneys, accountants and bankers. 6.4 PRINTING SERVICES. NeoMedia shall use reasonable efforts to include Solar in its bid process for services to print, package and/or mail print media materials, including direct mail, periodical inserts and diskette giveaways. 6.5 DELIVERY OF STOCKHOLDER MATERIALS. Until the Warrants have been exercised or expire, NeoMedia will provide Solar with copies of all materials it distributes to its stockholders. 6.6 TRADEMARK LICENSE. Solar shall execute as licensor and deliver to NeoMedia at closing as licensee the form of trademark license attached hereto as EXHIBIT I. 6.7 SOFTWARE LICENSE AGREEMENT. NeoMedia shall execute and deliver to Solar at closing the form of option agreement attached hereto as EXHIBIT J, pursuant to which Solar shall have the option to enter into certain software license agreements with NeoMedia. 6.8 VALUE-ADDED RESELLER AGREEMENT. NeoMedia shall execute and deliver to Solar at closing the form of option agreement attached hereto as EXHIBIT K, pursuant to which Solar shall have the option to enter into certain value added reseller and distribution agreements with NeoMedia. 6.9 SOLAR'S COVENANT NOT TO CONTEST VALIDITY. Solar covenants that it shall not, in any litigation in which it is a party that is brought by or on behalf of NeoMedia to enforce any of the Intellectual Property, challenge, attack or otherwise contest the validity of any of the Intellectual Property, and it shall not allege as a defense in such litigation the invalidity of any of the Intellectual Property. ARTICLE VII REPRESENTATIONS AND WARRANTIES 7.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each party represents and warrants to the other that as of the Closing: (A) POWER AND AUTHORITY. It has full power and authority to execute this Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery by it of this Agreement, 9 and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action. It has duly executed and delivered this Agreement and, assuming due execution and delivery by it, this Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or from time to time affecting the enforcement of creditors' rights generally and except that the enforceability of its obligations is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (B) NO CONFLICT. The execution, delivery and performance of this Agreement by it does not and will not violate, conflict with or result in a breach of any term, condition or provision of, or require the consent of any other Person under: (i) any law, ordinance, rule or regulation to which it or its assets are subject; (ii) any judgment, order, writ, injunction, decree or award of any federal, state, local or foreign court, arbitrator or governmental or regulatory official, department, agency, commission or other authority ("GOVERNMENTAL AUTHORITY") that applies to it or its assets; (iii) the charter, by-laws or other governing documents of it; or (iv) any license, contract, agreement, commitment or other instrument or document to which it is a party or by which it or its assets are otherwise bound. No authorization, approval or consent of, and no registration or filing with, any Governmental Authority is required in connection with the execution, delivery or performance of this Agreement by it. (C) ORGANIZATION. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority necessary to enable it to own, lease or otherwise hold its properties and assets and conduct its business. It has the corporate power and authority to execute, deliver and perform this Agreement. 7.2 REPRESENTATIONS AND WARRANTIES OF SOLAR. Solar represents and warrants to NeoMedia that, as of the Closing: (A) TITLE. Solar exclusively owns and controls the Patent Applications totally free, clear and unencumbered by claims, liens, licenses, option rights or other interests of other parties. (B) AUTHORITY. Solar has full right, power and authority to enter into this Agreement and assign the Intellectual Property. (C) ADVERSE CLAIMS. To the best of Solar's knowledge, there is no claim, fact, circumstance, or prior art that would adversely affect the patentability of inventions claimed in the Patent Applications other than those claims, facts, circumstances and prior art identified in the prosecution histories of the Patent Applications. NeoMedia acknowledges that it has been given complete access to the records of the Patent and Trademark Office with respect to the Patent Applications and has had full opportunity to review those records and to make its own assessment as to the patentability of the inventions claimed in the Patent Applications, including the pending final rejection. Solar makes no warranty or representation that any Patent will be issued on the Patent Applications. (D) INFRINGEMENT. No party has ever asserted or threatened to assert a claim of patent infringement against Solar based on or relating to the invention described in the Patent Application and to the best of Solar's knowledge, there is no specific patent or prior claim of patent rights that would be infringed by the practice of the invention described in the Patent Applications, other than any patent cited in the Patent Applications. However, Solar is aware, through publicly available information such as news reports, that patents purporting to cover the use of bar-codes and bar-code symbologies exist, and that it is possible that use of bar-codes, either in accordance with the Patent Applications or otherwise, may infringe such patents. Such general knowledge by Solar shall not constitute Solar's "knowledge" of a specific patent that would be infringed for purposes of determining whether Solar has breached its representations and warranties under this Section 7.2(d). (E) LITIGATION. No litigation, action, proceedings (legal, equitable or administrative), arbitration or 10 otherwise (including but not limited to claims for infringement by Solar and/or against Solar) are pending or threatened that might materially affect Solar's business or Solar's fulfillment of its obligations under this Agreement, except for WHEELS MOTOR SPORTS V. SOLAR. (F) BANKRUPTCY. No bankruptcy, receivership or other such proceedings are threatened or pending against Solar. 7.3 REPRESENTATIONS AND WARRANTIES OF NEOMEDIA. NeoMedia represents and warrants to Solar that, as of the Closing: (A) FINANCIAL RECORDS. To the best of NeoMedia's knowledge, the financial records for NeoMedia disclosed to Solar contain a full and complete record and account of the operations of the business and truthfully set forth the results of the operation for the years represented thereby and, furthermore, that there have been no material changes in the financial condition of the business before the time set for the Closing as described herein except for transactions normal to said business operations and in the ordinary course thereof. (B) LITIGATION. No litigation, action, proceedings (legal, equitable or administrative), arbitration or otherwise (including but not limited to claims for infringement by NeoMedia and/or against NeoMedia) are pending or threatened that might materially affect NeoMedia's business or NeoMedia's fulfillment of its obligations under this Agreement. (C) BANKRUPTCY. No bankruptcy, receivership or other such proceedings are threatened or pending against NeoMedia. (D) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC Reports filed prior to the date hereof, since December 31, 1997 NeoMedia and its subsidiaries have conducted their respective businesses only in, and have not engaged in any material transaction other than according to, the ordinary and usual course of such businesses and there has not been (i) any change in the financial condition, properties, business or results of operations of NeoMedia and its subsidiaries or any development or combination of developments affecting NeoMedia of which management of NeoMedia has knowledge, except those changes, developments or combinations of developments that, individually or in the aggregate, are not reasonably likely to result in a material adverse effect on NeoMedia's business, operations, properties or financial condition; (ii) any material damage, destruction or other casualty loss with respect to any material asset or property owned, leased or otherwise used by NeoMedia or any of its subsidiaries, whether or not covered by insurance; (iii) any material change by NeoMedia in accounting principles, practices or methods; or (iv) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of NeoMedia, except for dividends or other distributions on its capital stock publicly announced prior to the date of the closing. (E) NO OTHER LIENS. Except for that certain security interest granted by NeoMedia to IBM Credit Corporation, NeoMedia has not filed or permitted to be filed any financing statement or similar instrument (other than any which have been filed on behalf of Solar) and no Person has any lien, encumbrance or other right that will attach to the Intellectual Property upon acquisition by NeoMedia pursuant to this Purchase Agreement. ARTICLE VIII INDEMNITY AND LIABILITY 8.1 SOLAR'S INDEMNIFICATION OBLIGATIONS. Contingent upon NeoMedia's compliance with the procedures set forth in Section 8.3, Solar agrees, at its expense, to defend and settle any claims by any third party against 11 NeoMedia or any of its Affiliates, or any of the directors, officers, employees or agents of any of them, arising out of a breach by Solar of its representations and warranties under Article VII. Notwithstanding the foregoing, Solar shall not have any obligation to defend NeoMedia from any suit by shareholders, any suit based on copyright or trademark infringement, or any suit based on patent infringement if the infringing acts are based on NeoMedia's particular implementation of the inventions set forth in the Patent Application. 8.2 NEOMEDIA'S INDEMNIFICATION OBLIGATIONS. Contingent upon Solar's compliance with the procedures set forth in Section 8.3, NeoMedia agrees, at its expense, to defend and settle any claims by any third party against Solar or any of its Affiliates, or any of the directors, officers, employees or agents of any of them, arising out of a breach by NeoMedia of its representations and warranties under Article VII. 8.3 PROCEDURES FOR INDEMNIFICATION. If any claim that is subject to a defense obligation is asserted by a third party, the party entitled to defense shall promptly notify (no later than two weeks after written notice of such claim) the party obligated to provide such defense of the claim and any matters that may be subject to the defense and of which the notifying party has knowledge. The defending party shall promptly assume the defense of such matters, and if the defending party fails to do so, the party entitled to defense may assume the defense at the defending party's expense. The defending party shall have sole control over the defense; provided, however, that the defending party shall not enter into any settlement without the consent of the party entitled to a defense, which consent shall not be unreasonably withheld. Except as set forth in the proceeding sentence, the defending party shall pay all costs and expenses, including without limitation reasonable attorneys' fees and expenses, arising out of the defense of any claim that is the subject of a defense obligation under this Article, judgments and any settlements entered into with the defending party's consent. The parties obligations under this Article VIII shall only survive for a period of ten (10) years after the termination of this Agreement if no Patent is issued or, if a Patent is issued then shall survive for the life of the last-to-expire of the Patents. ARTICLE IX CLOSING 9.1 TIME AND PLACE. The Closing shall take place on December 31, 1998, at the offices of McBride Baker & Coles, 500 West Madison Street, 40th Floor, Chicago, Illinois. Closing may be rescheduled at the reasonable request of either party. 9.2 CONDITIONS TO THE CLOSING TO BE MET BY SOLAR. NeoMedia's obligation to close is subject to the fulfillment to the reasonable satisfaction of NeoMedia, at or before the Closing, of each of the following conditions: (A) at the Closing, Solar shall have successfully made the deliveries enumerated in Section 9.4; (B) the Parties shall have entered into the form of trademark license agreement attached as EXHIBIT I, and the form of option agreements attached as EXHIBIT J and EXHIBIT K; and (C) All of Solar's warranties and representations made in Section 7.2(a), 7.2(c) and 7.2(d) are true. 9.3 CONDITIONS TO THE CLOSING TO BE MET BY NEOMEDIA. Solar's obligation to close is subject to the fulfillment to the reasonable satisfaction of Solar, at or before the Closing, of each of the following conditions: 12 (A) at the Closing, NeoMedia shall have successfully made the deliveries enumerated in Section 9.5; (B) NeoMedia shall have deposited into escrow the documents that it is required to deposit under Section 5.8; (C) the common stock of NeoMedia shall be listed for trading on the NASDAQ Stock Exchange; (D) IBM Credit Corporation and NeoMedia shall have executed and delivered to Solar a subordination agreement substantially in the form of EXHIBIT L; and (E) all of NeoMedia's representations and warranties made in Section 7.3(e) are true. 9.4 DELIVERIES BY SOLAR AT THE CLOSING. At the Closing, Solar shall deliver or cause to be delivered to NeoMedia: (A) the Assignment as specified in Section 2.1; (B) a good standing certificate for Solar issued by the Secretary of State of Illinois not more than thirty (30) days before the date of the Closing; (C) a certificate of the Secretary of Solar attesting to the incumbency of the officers executing this Agreement and the other certificates and agreements; (D) certified copies of the resolutions of the board of directors of Solar approving this Agreement and the transactions contemplated hereby; including the Assignment; and (E) certified copies of Solar's articles of incorporation and by-laws in effect as of the date of the Closing. 9.5 DELIVERIES BY NEOMEDIA. At the Closing, NeoMedia shall deliver or cause to be delivered to Solar: (A) the cash and Warrants as specified in Section 4.1; (B) a duly executed security agreement in the form of EXHIBIT F; (C) a duly executed power to inspect in the form attached as EXHIBIT C; (D) a duly executed option to enter into certain software license agreements in the form attached as EXHIBIT J; (E) a duly executed option to enter into certain value added reseller and distribution agreements in the form attached as EXHIBIT K; (F) a good standing certificate for NeoMedia issued by the Secretary of State of Delaware not more than thirty (30) days before the date of the Closing; (G) a certificate of the Secretary of NeoMedia attesting to the incumbency of the officers executing this Agreement and the other certificates and agreements delivered by NeoMedia at the Closing; 13 (H) certified copies of the resolutions of the board of directors of NeoMedia approving this Agreement and the transactions contemplated hereby, including the issuance of Warrants; (I) certified copies of NeoMedia's articles of incorporation and by-laws in effect as of the date of the Closing; and (J) a subordination agreement substantially in the form of EXHIBIT L executed by NeoMedia and IBM Credit Corporation. 9.6 FURTHER ASSURANCES. Either party, from time to time after the Closing, at the other party's request, shall execute, acknowledge and deliver to the requesting party such other instruments of conveyance and transfer and will take such other actions and execute and deliver (or cause the execution and delivery by third parties of) such other documents, certifications, consents and further assurances as the requesting party may reasonably request in order to vest more effectively in the requesting party, or to put the requesting party more fully in possession of, any of the pertinent rights, or to better enable the requesting party to complete, perform or discharge any of the assumed obligations hereunder. Each party shall cooperate with the other and execute and deliver to the other such other instruments and documents and take such other actions as may be reasonably requested from time to time by such other party as necessary to carry out, evidence and confirm the intended purposes of this Agreement. ARTICLE X TERM AND TERMINATION 10.1 TERM. The term of this Agreement shall commence as of the Effective Date and, unless earlier terminated in accordance with Sections 10.2 or 10.3 below, shall expire upon payment by NeoMedia of all consideration to Solar under Sections 4.1 and 4.2. 10.2 TERMINATION BEFORE THE CLOSING. Prior to the Closing, this Agreement may be terminated by both parties by mutual written agreement. 10.3 TERMINATION AFTER THE CLOSING. After the Closing, this Agreement may be terminated by: (a) both parties by mutual written agreement; or (b) by either party upon written notice to the other if all of the following conditions are met: (i) there are no issued Patents in the United States, (ii) there are no pending Patent Applications in the United States or abandoned Patent Applications in the United States for which a petition or other procedure is available for revival; and (iii) the absence of any pending Patent Applications in the United States is not due to NeoMedia's failure to comply with its obligations under Article III. 10.4 EFFECT OF TERMINATION. (A) CONFIDENTIAL INFORMATION. Unless otherwise explicitly provided elsewhere in this Agreement, upon termination or expiration of this Agreement each party shall promptly return to the other any documents containing Confidential Information belonging to the other party. (B) SURVIVAL. Sections 2.3, 4.4 and 10.4 and all of Articles V, VI, VII, VIII and XI shall survive termination or expiration of this Agreement. (C) OTHER AGREEMENTS. The termination or expiration of this Agreement shall terminate the security agreement and license agreement entered into pursuant to Section 5.4 and the escrow agreement entered into pursuant to Section 5.8. However, termination or expiration of this Agreement shall not effect other agreements entered into pursuant to this Agreement including the agreements entered into pursuant to 14 Sections 6.6, 6.7 and 6.8. ARTICLE XI MISCELLANEOUS 11.1 NOTICES. All notices and other communications hereunder shall be in writing and: (a) delivered personally, (b) mailed first class mail (postage pre-paid), certified, return receipt requested, or (c) sent by documented overnight delivery service, in each case, to the receiving party at the appropriate address or number, as applicable, set forth below. Notices shall be deemed to have been given hereunder when delivered personally, three (3) days after deposit with the U.S. Postal Service as certified or registered mail, postage prepaid, return receipt requested, and one (1) day after deposit with a reputable overnight courier service. Otherwise, notice shall be deemed to have been given hereunder when actually received. Notices to Solar shall be addressed to: Solar Communications, Inc. 1120 Frontenac Road Naperville, Illinois 60563-1799 Attention: Frank Hudetz, Chief Executive Officer Facsimile: (630) 983-5773 with a copy to: McBride Baker & Coles 500 West Madison Street 40th Floor Chicago, Illinois 60661 Attention: David Ackerman Facsimile: (312) 993-9350 or to such other address or to the attention of such other person as Solar may designate by written notice to NeoMedia. Notices to NeoMedia shall be addressed to: NeoMedia Technologies, Inc. 2201 Second St., Suite 600 Ft. Myers, FL 33901 Attention: Charles W. Fritz, President and CEO Facsimile: (941) 337-3361 with a copy to: NeoMedia Technologies, Inc. 2201 Second St., Suite 600 Ft. Myers, FL 33901 Attention: Marianne LePera, General Counsel Facsimile: (941) 337-3361 or to such other address and/or to the attention of such other person as NeoMedia may designate by written notice to Solar. 15 11.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without reference to the choice of law principles thereof. 11.3 JURISDICTION AND VENUE. Any legal action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be instituted exclusively in the courts of the State of Illinois, located in the City of Chicago or, provided subject matter jurisdiction exists, in the United States federal court for the Northern District of Illinois, located in Chicago, Illinois, and each party hereto agrees not to assert as a defense in any such action, suit or proceeding any claim that such party is not subject personally to the jurisdiction of such courts, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper, or that this Agreement or the subject matter hereof may not be enforced in or by such court. Each party further irrevocably submits to the exclusive jurisdiction of such courts in any such action, suit or proceeding. 11.4 WAIVER OF JURY TRIAL. Each of the parties does hereby waive any rights it might otherwise have to a jury trial of any claim or cause of action based upon or arising out of this Agreement and does also waive any bond or surety or security upon such bond that might, but for this waiver, be required of any party. This waiver is irrevocable, meaning that it may not be modified, either orally or in writing, and the waiver shall apply to any subsequent amendments, renewals, supplements or modifications to this Agreement. In the event of litigation, this Agreement may be filed with the court as written consent by both parties to a bench trial. 11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party hereto will assign its rights under this Agreement without the express written consent of the other parties hereto, except that either party may, without the consent of the other party, upon notice to the other party, assign its rights under this Agreement to an Affiliate or to third party assignee with or to whom the assigning party is merging, consolidating or selling substantially all of its assets in the business which relates to the Intellectual Property; provided, however, in either case, the Affiliate or other assignee must assume the obligations of the assigning party hereunder. No assignment of this Agreement that is effected under this Section 11.5 without the requisite consent of the non-assigning party shall relieve the assigning party of its obligations to the other under this Agreement. 11.6 INTERPRETATION; RECITALS, EXHIBITS, SCHEDULES. The headings contained in this Agreement, in any Exhibit or Schedule hereto, and in the Table of Contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All Exhibits annexed hereto or referred to herein, are hereby incorporated in and made a part of this Agreement as if set forth in full herein. All capitalized terms defined herein apply equally to both the singular and plural forms of such terms. When a reference is made in this Agreement to a Section, Article or Exhibit such reference shall be to a Section or Article of, or an Exhibit to, this Agreement unless otherwise indicated. All monetary amounts refer to U.S. dollars unless otherwise indicated. 11.7 AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party (or such party's duly authorized agent) against whom enforcement of any such modification or amendment is sought. Either party may, only by an instrument in writing, waive compliance by the other party regarding any term or provision of this Agreement. The waiver by a party of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. Notwithstanding the consummation of the transactions contemplated hereby: (a) neither party shall be deemed to have waived any breach of the provisions hereof occurring before the Closing, and (b) each party shall be deemed to have preserved all rights with respect to any such breach, in each case, unless it shall have executed a written waiver with respect thereto. 11.8 SEVERABILITY. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the 16 remaining provisions hereof nor the legality, validity, or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby, and the remainder of the provisions of this Agreement shall remain in full force and effect. The parties shall endeavor in good faith negotiations to replace any illegal, invalid or unenforceable provision with a valid, legal and enforceable provision, the economic effect of which comes as close as possible to the illegal, invalid or unenforceable provision. 11.9 NO ELECTION OF REMEDIES. The remedies accorded to each party in this Agreement are, unless otherwise specified herein, cumulative and in addition to those provided by law, and can be exercised separately, concurrently or successively. 11.10 RELATIONSHIP OF PARTIES. The parties are independent contractors. Nothing stated in this Agreement shall be deemed to create the relationship of partners, joint venturers, employee-employer or franchiser-franchisee between the parties hereto. 11.11 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each party and delivered to the other party. 11.12 ENTIRE AGREEMENT. This Agreement, and the Exhibits thereto, contains the entire agreement between the parties with respect to the subject matter hereof, and there are no agreements or understandings between the parties other than those set forth or referred to herein or therein. IN WITNESS WHEREOF, the parties have each duly executed and delivered this Agreement as of the Effective Date. NEOMEDIA TECHNOLOGIES, INC., SOLAR COMMUNICATIONS, INC. a Delaware corporation an Illinois corporation By: __________________________________ By: _____________________- Charles W. Fritz Peter R. Hudetz Its: Chief Executive Officer Its: President 17 AMENDMENT AND CLARIFICATION THIS AMENDMENT AND CLARIFICATION ("AMENDMENT") is entered into as of February 15, 1999 ("AMENDMENT EFFECTIVE DATE") by and between Solar Communications, Inc., an Illinois corporation ("SOLAR"), and NeoMedia Technologies, Inc., a Delaware corporation ("NEOMEDIA"). WHEREAS, Solar and NeoMedia have entered into a certain Purchase Agreement, including exhibits thereto, dated as of December 31, 1998 (the "PURCHASE AGREEMENT") whereby Solar sold, and NeoMedia purchased, certain patent applications owned by Solar relating to encoding of network address information in a bar-code or other machine readable format; WHEREAS, pursuant to the Purchase Agreement, Solar and NeoMedia have entered into a Patent License Agreement dated as of December 31, 1998 ("PATENT LICENSE"), an Option Agreement -- Software License dated as of December 31, 1998 ("SOFTWARE AGREEMENT"); and an Option Agreement -- VAR Distribution dated as of December 31, 1998 ("DISTRIBUTION AGREEMENT") (collectively, the "AGREEMENTs"); WHEREAS, the parties desire to clarify certain terms in the Agreements and to make certain amendments to the Software Agreement and Distribution Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and promises herein contained and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties have agreed as follows: 1. PATENT LICENSE. For purposes of Section 2.3 of the Patent License, the term "license rights granted by Licensor prior to the Effective Date" shall be deemed to include rights granted by NeoMedia to third parties to distribute software and other products. 2. SOFTWARE AGREEMENT. For purposes of Section 2 of the Software Agreement, the term "product application" shall be defined to include the bundling of non-tethered writing instruments or styli. In accordance with Section 2 of the Software Agreement, Solar's rights under the Software Agreement shall be subject to exclusive rights granted by NeoMedia with respect to such product applications, provided that Solar shall not be excluded from using the Licensed Product to enable printed products and printing services, as those terms are used in the Software Agreement, with the capabilities of the Licensed Product. The Software Agreement is amended by deleting the term "LICENSED SOFTWARE" as it appears in Section 2 and Section 6 of the Software Agreement and inserting in its place "Licensed Product." 3. DISTRIBUTION AGREEMENT. For purposes of Section 2 of the Distribution Agreement, the term "product application" shall be defined to include the bundling of non-tethered writing instruments or styli. In accordance with Section 2 of the Distribution Agreement, Solar's rights under the Distribution Agreement shall be subject to exclusive rights granted by NeoMedia with respect to such product applications, provided that Solar shall not be not excluded from reselling NeoMedia Products with printed products and printing services, as those terms are used in the Distribution Agreement. The Distribution Agreement is hereby amended by deleting the term "LICENSED SOFTWARE" where it appears in Section 2 and inserting in its place the term "NeoMedia Products". IN WITNESS WHEREOF, the parties have each duly executed and delivered this Amendment as of the Amendment Effective Date. NEOMEDIA TECHNOLOGIES, INC., a SOLAR COMMUNICATIONS, INC., an Delaware corporation Illinois corporation By:___________________________ By:_______________________________ Its:__________________________ Its: _____________________________ 18 EX-23.2 3 NeoMedia Technologies, Inc. Exhibit 23.2 Independent Auditors' Consent INDEPENDENT AUDITORS' CONSENT The Board of Directors NeoMedia Technologies, Inc: 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 12, 1999, relating to the consolidated balance sheets of NeoMedia Technologies, Inc. and subsidiaries (collectively referred to as the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, cash flows and stockholders' equity for the years then ended, which report appears in the December 31, 1998 annual report on Form 10-KSB of NeoMedia Technologies, Inc. Our report dated March 12, 1999 contains an explanatory paragraph that states that the Company has suffered recurring losses from operations, has a significant accumulated deficit, and working capital deficiency which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP - --------------- KPMG LLP Miami, Florida April 15, 1999 EX-27 4 ARTICLE 5 FDS FOR DECEMBER 31, 1998
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 1,350 0 6,137 225 0 8,115 7,991 3,476 12,630 8,568 0 0 0 25,255 (21,994) 12,630 23,478 23,478 19,149 19,149 15,945 547 (121) (11,495) 0 (11,495) 0 0 0 (11,495) (1.34) (1.34)
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