-----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, DYcLwanKG+HZfwRyuQ+htoE4kwHERNWYzHN6sJUv8owQvngMvTn08awBnrk/W9QZ lELWTX07vXh2n/xK73lYRA== 0001144204-05-006759.txt : 20050304 0001144204-05-006759.hdr.sgml : 20050304 20050304172901 ACCESSION NUMBER: 0001144204-05-006759 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050304 DATE AS OF CHANGE: 20050304 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21743 FILM NUMBER: 05662208 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 10KSB 1 v013795_10ksb.txt =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ____________ to__________ Commission File Number 0-21743 NEOMEDIA TECHNOLOGIES, INC. (Exact Name of Issuer in Its Charter) Delaware 36-3680347 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2201 Second Street, Suite 402 Fort Myers, Florida 33901 (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number (Including Area Code) 239-337-3434 Securities Registered Under Section 12(b) of the Exchange Act: Name of each exchange Title of Each Class on which registered Common Stock, par value $.01 Over-the-Counter Bulletin Board Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if disclosure of delinquent filers in response to Item 405 of Regulation S-X is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_| Issuer's consolidated revenue for its most recent fiscal year was $1,700,000. The aggregate market value of the voting stock held by non-affiliates of the issuer based on the price at which shares of common stock closed on the Over-the-Counter Bulleting Board on January 31, 2005 ($0.24) was $89,000,000. Determination of stock ownership by non-affiliates is made solely for purposes of responding to the requirements of the form and the registrant is not bound by this determination for any other purpose. As of January 31, 2005, there were outstanding 437,356,497 shares of the issuer's Common Stock. =============================================================================== PART I CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-KSB contains forward-looking statements and information relating to NeoMedia Technologies, Inc. ("NeoMedia" or "the Company"). NeoMedia intends to identify forward-looking statements in this prospectus by using words such as "believes," "intends," "expects," "may," "will," "should," "plan," "projected," "contemplates," "anticipates," "estimates," "predicts," "potential," "continue," or similar terminology. These statements are based on the Company's beliefs as well as assumptions the Company made using information currently available to us. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect the Company's current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. ITEM 1. DESCRIPTION OF BUSINESS General NeoMedia develops proprietary technologies that link physical information and objects to the Internet marketed under the "PaperClick(R)" brand name. The Company has also developed an extensive patent portfolio covering convergence of the physical world and the Internet. During 2004, NeoMedia acquired CSI International, Inc. and incorporated its Micro Paint Repair business unit, specializing in chemical technologies and processes for auto paint repair systems. NeoMedia also acts as a value-added reseller of computer equipment and software, and provided specialized consulting services around these products. The Company has adopted a code of ethics, as required by the rules of the SEC (attached as exhibit 10.55 hereto). This code of ethics applies to all of the Company's directors, officers and employees. The code of ethics, and any amendments to, or waivers from, the code of ethics, is available in print, at no charge, to any stockholder who requests such information. Company Structure The Company is structured and evaluated by its Board of Directors and Management as three distinct business units: - NeoMedia Internet Switching Software (NISS), - NeoMedia Consulting and Integration Services (NCIS), and - NeoMedia Micro Paint Repair (NMPR) NISS is the core business and is based in the United States, with development and operating facilities in Fort Myers, Florida. NISS develops and supports the Company's physical world to Internet core technology, including NeoMedia's PaperClick(R) linking "switch" and application platforms. NISS also manages the Company's intellectual property portfolio, including the identification and execution of licensing opportunities surrounding the patents. 1 NCIS is the original business line upon which the Company was founded. This unit resells client-server equipment and related software, and general and specialized consulting services. Systems integration services also identifies prospects for custom applications based on NeoMedia's products and services. These operations are based in Lisle, Illinois. NMPR is the business unit encompassing the recently-acquired CSI International paint repair and chemical line. NMPR is attempting to commercialize its unique micro-paint repair solution. The Company completed its acquisition of CSI on February 6, 2004. Following the anticipated completion of NeoMedia's pending acquisition of BSD Software, Inc., NeoMedia will add a fourth business unit called NeoMedia Telecom Services, Inc. Company History 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., 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. NeoMedia also has the following wholly-owned subsidiaries: NeoMedia Micro Paint Repair, Inc., incorporated in Nevada; NeoMedia Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A., incorporated in Guatemala; NeoMedia Technologies of Canada, Inc., incorporated in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH, incorporated in Austria; NeoMedia Technologies Holding Company B.V., incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and NeoMedia Technologies UK Limited, incorporated in the United Kingdom. In October 2004, NeoMedia established NeoMedia Telecom Services, Inc. in Nevada for the purpose of acquiring BSD Software, Inc. Recent Developments Acquisition of CSI International, Inc. On February 6, 2004, NeoMedia acquired CSI International, Inc., of Calgary, Alberta, Canada, a private technology products company in the micro paint repair industry. NeoMedia paid 7,000,000 shares of NeoMedia's common stock, plus $2.5 million cash in exchange for all outstanding shares of CSI. NeoMedia has centralized the administrative functions in its Ft. Myers, Florida headquarters, and maintains the sales and operations office in Calgary, Alberta, Canada. Pending Acquisition of BSD Software, Inc. On December 21, 2004, NeoMedia signed a merger agreement with BSD Software Inc., ("BSD") of Calgary, Alberta, Canada (OTCBB: BSDS). Under the terms of the agreement, each share of BSD stock will be exchanged for NeoMedia stock equivalent to .07 divided by the volume-weighted average price of NeoMedia stock for the five days prior to the effective time of the merger. Closing will occur 2 when all regulatory approvals have been granted, including effectiveness of a Form S-4 information/registration statement registering the NeoMedia shares to be granted in the transaction. The number of NeoMedia shares to be granted in the exchange will change depending on NeoMedia's stock price at the time of closing. Because a majority of BSD shareholders have approved the merger prior to the signing of the merger agreement, BSD will not hold a shareholders meeting to vote on the merger. Prior to closing, the merger can be terminated by BSD if more than 5% of BSD's outstanding shares dissent to the merger. The merger can be terminated prior to closing by NeoMedia if, at the time of closing, BSD has: (i) less than $850,000 in assets, (ii) more than $5,000,000 in liabilities, or (iii) more than 35,000,000 shares of common stock outstanding. Either party can terminate the merger if the merger has not closed by March 31, 2005, which date may be extended by mutual consent of NeoMedia and BSD. Acquisition of Secure Source Technologies, Inc. On October 8, 2003, NeoMedia acquired Secure Source Technologies, a provider of security solutions and covert security technology for the manufacturing and financial services industries, in exchange for 3.5 million shares of NeoMedia's common stock. With the purchase of SST, NeoMedia acquired additional patents that complement its existing intellectual property portfolio, as well as a security software platform, and computer equipment. iPoint-Media Ltd. On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of Tel Aviv, Israel, entered into a business development agreement. In exchange for entering into the service agreement, NeoMedia received 7% ownership in iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In addition to the business development agreement, NeoMedia acquired an additional 10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for $1 million cash. iPoint-media was founded in April 2001 as a spin off from Imagine Visual Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli holding company, Singapore-based Keppel T&T, and marketing and advertising group WPP. iPoint-media specializes in Customer Interaction Management and is the world's 1st developer of IP Video Call Centers for Deutsche Telecom. Muki Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European customer support center in The Netherlands. iPoint-media's mission is to become the video access platform and application engine of choice for service providers. On October 26, 2004, NeoMedia announced that it would issue its first-ever stock dividend with the distribution of common shares of iPoint-media Ltd. of Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435 shares) of iPoint-media's common stock to NeoMedia shareholders of record as of November 17, 2004. The date of the property dividend payment will be announced after the Securities and Exchange Commission declares iPoint-media's Form SB-2 registration statement effective. PaperClick(R) Developments On December 13, 2004, NeoMedia introduced PaperClick(R) Mobile Marketing Services, a tool that allows global marketers and advertising agencies to have one-on-one contact with consumers through cell phones and other mobile wireless devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional content, which can be updated and changed by marketers, while giving consumers one-click e-commerce buying power. The latest addition to the Mobile Marketing 3 Services suite lets users of a wide range of already-in-use camera phones "take pictures" of special created codes on packages and promotional items and connect in one-click to marketing information. First available for Nokia(R) Series 60 mobile phones, the new capability complements the launch of the PaperClick(R) Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in 2003. On December 6, 2004, NeoMedia signed a non-binding Letter of Intent with Nextcode Corporation to form a strategic partnership, with joint marketing and sales efforts, involving use of NeoMedia's PaperClick(R) technology and Nextcode Corporation's barcode reading software. Nextcode, based in Concord, Massachusetts, provides barcode reading software and technology designed to enhance the usability of mobile phones and enable access to Internet-based content, services and commerce. When finalized, the one-year renewable agreement would give the companies mutual rights to resell PaperClick(R) Client Software, PaperClick(R) Code Activation, PaperClick(R) Server Software and PaperClick(R) Integration Services, as well as Nextcode's mobile barcode decoding applications and Nextcode's code creation and publishing systems. During October 2004, NeoMedia entered into a marketing alliance with Science Applications International Corporation (SAIC) to jointly establish, launch, promote and manage the new worldwide mobile "PaperClick(R) WordRegistryTM," a linking and switching platform for use on Web-enabled cell phones and PDA's. When used with PaperClick(R) Mobile Go-Window, NeoMedia's new wireless product which creates a text-entry window on a phone or PDA screen, registered words (or registered phrases) are entered to bring up an automatic link to specific targeted products and promotions. No official date has been set for the launch of the WordRegistryTM. During 2003, NeoMedia unveiled its PaperClick(R) for Camera Cell PhonesTM product, which reads and decodes UPC/EAN or other bar codes to link users to the Internet, providing information and enabling e-commerce on a compatible camera cell phone, such as the Nokia 3650 model. During the second quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a horizontal bar on the screen of a wireless device where users can enter numeric strings from UPC or other bar codes to link directly to targeted online information via patented PaperClick(R) technology and software. The PaperClick(R) Mobile Go-WindowTM currently works with Palm(TM) Tungsten C PDA, the Handspring(TM) Treo 270 and 600 Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent Device Profile) standard, Microsoft Windows Mobile(TM)-based Smartphones, Nokia Series 60 phones, Sendo(R) X, Panasonic(R) X700, and Siemens(R) SX-1. During 2003, NeoMedia unveiled the go-to-market strategy for its PaperClick(R) suite of products. Over the past several months, NeoMedia has signed contracts with several key partners outlined in the strategy, including agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (USA), AURA Digital Communications (Australia), Relyco (USA), E&I Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (USA), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed with systems integrator SAIC to create the PaperClick(R) WordRegistryTM, and European advertising agency 12Snap. In June 2004, NeoMedia entered into a collaborative agreement with Intel Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently introduced Intel PXA27x processor family-based cellular phones. In addition, during June 2004 NeoMedia signed a teaming agreement with IPSO, an integrator of proprietary solutions developed by its provider companies for financial institution members and a leader in meeting Check 21 standards. Enacted by Congress and signed into law last year, Check 21 requires banks to begin accepting substitute checks (called IRDs for image replacement documents) in lieu of original checks as of October 29, 2004. NeoMedia and IPSO could partner on proposals and presentations surrounding Check 21. During January 2005, NeoMedia signed a Letter of Intent to enter into a licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of mobile marketing products to be used with Shelron's ActivShopper comparison shopping toolbar (attached as Exhibit 10.56 hereto). The agreement will give Shelron Group, Inc. the worldwide rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell phones and PDA's. ActivShopper is a free software download designed to automatically scan, locate and compare prices for items a consumer selects at an e-commerce site. 4 AirClic, Inc. Scanbuy, Inc., and LScan Technologies, Inc. Lawsuits On January 23, 2004, NeoMedia filed a patent infringement lawsuit against AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern District of Illinois, claiming that each of the parties has manufactured, or has manufactured for it, and has used, or actively induced others to use, technology which allows customers to use a built-in UPC bar code scanner to scan individual items and access information, thereby infringing NeoMedia's patents. The complaint stated that on information and belief, AirClic, Scanbuy and LScan had actual and constructive notice of the existence of the patents-in-suit, and, despite such notice, failed to cease and desist their acts of infringement, and continue to engage in acts of infringement of the patents-in-suit. On April 15, 2004, the court dismissed the suit against AirClic and Scanbuy for lack of personal jurisdiction. On April 19, 2004, AirClic filed a declaratory judgment action against NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June 10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in Pennsylvania for patent infringement. AirClic answered and counterclaimed on May 13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004. NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims was filed on August 3, 2004. The two actions were consolidated and the parties are currently engaged in discovery. NeoMedia voluntarily dismissed the suit against LScan in the Northern District of Illinois and re-filed the suit on May 26, 2004, in the Eastern District of Pennsylvania. After LScan failed to answer, NeoMedia filed and served its motion for default judgment on July 6, 2004. The Court entered default judgment on July 7, 2004. On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern District of New York alleging that NeoMedia infringed Scanbuy's copyrights, violated the Lanham Act and committed deceptive trade practices and tortious interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District of New York alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. The parties are currently engaged in discovery in both of these actions. Virgin Entertainment Group Lawsuit On January 2, 2004, NeoMedia filed a patent infringement lawsuit against Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin Megastore ("Virgin"). The complaint for Patent Infringement and Damages was filed in the United States District Court for the Northern District of Illinois, by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The complaint claims that Virgin has infringed four of NeoMedia's patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint alleges that the Virgin Megaplay Stations located in Virgin's Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to allow customers to scan UPC codes from in-store CDs and DVDs to access Internet-based product information, such as music and movie previews, and album and video art. The complaint also alleges that Virgin had notice of NeoMedia's patents since the latter part of 2002 or before, yet it continued with its infringing activities. The complaint seeks compensatory damages for Virgin's infringement, with those damages to be trebled due to the willful and wanton nature of the infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin from its infringing activities. Virgin answered NeoMedia's complaint on March 1, 2004. The parties are currently engaged in discovery. 5 Industry Overview NeoMedia Internet Switching Software The goal of NeoMedia's Internet Switching Software business segment is to promote mass adoption of the Company's switch and background computer process to link physical world objects to the Internet. The Company's switching platform is a state-of-the-art open and extensible cross-media publishing tool that applies to customers in a variety of industrial, commercial, and educational applications. This business segment is also responsible for licensing NeoMedia's intellectual property to others as a means of promoting this new market as well as providing a revenue and cash resource. NeoMedia has been developing its physical world-to-Internet technology and offerings since 1996 and considers itself an innovator and pioneer in this industry. In the past several years, NeoMedia has seen similar technologies and concepts emerge in the marketplace, and sees these events as a positive validation of the physical world-to-internet concept. NeoMedia believes the key to the adoption of physical world-to-Internet technologies in the marketplace will be in the development of real world applications that provide the end user a valuable experience. NeoMedia believes that, with an estimated 1.5 billion mobile phone users worldwide, mobile devices such as cellular telephones and PDAs are a key device in the development of the physical world to Internet marketplace. To this end, during 2003, NeoMedia announced its PaperClick(R) for Camera Cell PhonesTM product, which reads and decodes UPC/EAN or other bar codes to link users to the Internet, providing information and enabling e-commerce on a compatible camera cell phone. During 2004, NeoMedia introduced PaperClick(R) Mobile Marketing Services, a mobile solution using PaperClick(R) for Camera Cell Phones that allows global marketers and advertising agencies to have one-on-one contact with consumers through cell phones and other mobile wireless devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional content, which can be updated and changed by marketers, while giving consumers one-click e-commerce buying power. The latest addition to the Mobile Marketing Services suite lets users of a wide range of already-in-use camera phones "take pictures" of special created codes on packages and promotional items and connect in one-click to marketing information. NeoMedia Consulting and Integration Services The Company believes that the technology and equipment resale business is becoming a commodity industry for products undifferentiated by value added proprietary elements and services. Resale operations are also being compressed as equipment manufacturers consolidate their distribution channels. Proprietary products, such as NeoMedia encoders, offer a competitive value-add to the Company's NCIS business. The Company believes that it has unique offerings, which, to the extent that they meet market needs, should offer the potential for growth in this industry. In addition, the Company's recent addition of Storage Area Network Solutions allows it to participate in the higher-margin area of the open systems marketplace. The NCIS division also sells migration products (tools designed to "migrate" software code from one platform to another platform) primarily to mid-sized to large corporations and government agencies. The products include proprietary products and software tools to migrate Wang, HP3000, Data General, DEC and IBM DOS/VSE platforms (legacy systems) to a Unix or NT open system platform. NeoMedia Micro Paint Repair NMPR serves the light collision and paint repair industry offering products and processes that are designed to increase customer productivity and profits. NMPR's products are positioned to augment traditional paint repair 6 methods commonly used in body shops, as well as allowing non-body shop operations to expand their service offerings. The micro paint repair industry is a sub-segment of the aftermarket automotive coatings business. Strategy NeoMedia Internet Switching Software NeoMedia has spent the past decade developing and patenting the now confirmed space of linking the physical and Internet environments, and developing and implementing five generations of continuously refined switch technology that bridge these environments. During the past year and half, NeoMedia has introduced PaperClick(R) for Camera Cell Phones and PaperClick(R) Mobile Marketing Services, shifting the focus of this dynamic unit to the rapidly-emerging mobile marketing sector. The Company is strategically pursuing potential licensees of the PaperClick(R) switching platform, as well as intellectual property licensing opportunities with organizations attempting to commercialize physical world-to-Internet technology, such as Symbol Technologies, A.T. Cross Company and Brandkey Systems Corporation. NeoMedia Consulting and Integration Services The goal of the NCIS unit is to continue to provide customized technology infrastructure solutions, as well as act as the integration arm for the PaperClick(R) family of products. NeoMedia Micro Paint Repair NeoMedia's proprietary Micro Paint Repair system can dramatically reduce costs for current auto body repair facilities, or create a new profit center for auto-related businesses that do not currently offer paint repair. NeoMedia is attempting to market its Micro Paint Repair system to a myriad of automotive industry businesses, from auto dealers to body shops to glass repair shops, and more. Products/Services NeoMedia Internet Switching Software PaperClick(R) Mobile Marketing Service PaperClick(R) is a Mobile Marketing Service that enables brand managers and consumer product manufacturers to market directly to their target customers via their portable devices such as mobile phones, and PDAs. Using products, brand names, and marketing collateral, brand managers and consumer product manufacturers can interact directly with their customers. By entering a word or phrase (such as your brand name or tagline) into a mobile device, or by taking a picture of a barcode on your product or your marketing collateral, a consumer can retrieve tailored Web content in one click - - even pages deep within a website. PaperClick(R) bypasses long URLs, search engines, or difficult-to-navigate phone menus. PaperClick(R) can directly link a word or code to mobile commerce, rebates, contests, coupons, registration, instructional videos, ad tracking, polling, customer profiling, and more. 7 PaperClick(R) links a unique identifier (barcode or word) to a specific URL (Web page) using a simple 5-step process: Step 1: Activation - A barcode or word is activated by the product manufacturer Step 2: A PaperClick(R)-enabled device retrieves the code or word Step 3: The device's Web browser is automatically launched and connects to a designated server Step 4: The server retrieves the specific URL based on the barcode or word Step 5: The URL is downloaded to the device's browser The PaperClick(R) solution consists of: Word Activation 1. Register brand names or taglines in the PaperClick(R) WordRegistryTM. The WordRegistryTM, a joint effort of NeoMedia and Fortune 500 company S.A.I.C., which is the official repository for PaperClick(R) Words 2. Bid on non-trademarked words. Non-trademarked words (such as cola, burger, car) will be auctioned to the highest bidder via the PaperClick(R) WordRegistryTM 3. Activate your brand names and taglines by linking them to mobile web content using Link Manager Software Created Code Activation - NeoMedia can create custom PaperClick(R) Codes to place on product packaging or literature, a subway poster, a direct mailer, or other marketing collateral. Consumers with a camera phone simply snap a picture of the code and link directly to Web content designated by the product's manufacturer. Existing Code Activation - As with created codes, PaperClick(R) can link already-existing product codes, such as UPC, EAN, JAN, and ISBN codes, to tailored Web content. With activation, NeoMedia also provides the following word and code link management tools: Link Manager Software - Software for a PC that allows a product owner to link words and codes to a specific URL. Handset Software - Device software required for a mobile device customers to read activated codes and words. Basic Reporting - Allows product owner to track the number of consumer "hits" by code, date and time. 8 NeoMedia also offers the following value-added services with word or code activation: Click Management Services - Link Manager Service - NeoMedia will manage the linking of all words and codes on behalf of a product owner - Code Verification - NeoMedia will test each code to ensure that it is printed properly and that it links to the correct URL Web Content Creation Services - NeoMedia assists its customers in creating Web content for mobile devices in XHTML, WAP and other mobile formats. MobileMarketing Campaign Services - NeoMedia helps its customers create mobile advertising campaigns using their products with PaperClick(R) technology. Customized Reporting - NeoMedia offers customized reporting and data mining that allows product owners to receive additional data about their marketing campaigns. ServerSoftware - For product owners that are managing a large number of codes or words, NeoMedia offers Server Software that allows them to store the links within their organization's network. Intellectual Property Licensing. The Company currently holds six U.S. patents relating to the physical world-to-Internet marketplace, and an additional six patents acquired in 2003 with the purchase of Secure Source Technologies related to document security. The Company's core physical-world-to-Internet patent portfolio (Patent No. 5,933,829, No. 5,978,773, No. 6,108,656, No. 6,199,048, No. 6,434,561, and No. 6,542,933) is comprised of "system and method" patents that cover the use of machine-readable data for information retrieval. Among the identifiers that could be classified as machine-readable are PaperClick(R)-enabled 2D barcodes, 1D barcodes, UPC/EAN barcodes, magnetic stripes, OCR/ICR, RFID, smartcards, numbers, hot words, and voice. The Company intends to license this intellectual property portfolio to companies endeavoring to tap the potential of this emerging market. To date, the Company has entered into such agreements with Digital:Convergence, A.T. Cross Company, Symbol Technologies, and Brandkey Systems Corporation. During 2002, the Company entered into an agreement with Baniak Pine and Gannon, a law firm specializing in patent licensing and litigation, under which the firm will represent NeoMedia in seeking out potential licensees of NeoMedia's patent portfolio. 9 NeoMedia Consulting and Integration Services NCIS is a group of highly skilled application developers thoroughly familiar with systems integration, storage networks, and other associated technologies who contract to develop custom applications for clients. System integration project management & consulting services are offered through NeoMedia's NCIS business unit. These services fall into two broad categories: A. For implementation of PaperClick(R)Mobile Marketing Service B. For development and implementation of Customized Applications (A) Services for implementation of PaperClick(R) Mobile Marketing Service The NCIS business unit is comprised of the executive team, technical team, and project managers to establish and deploy a common set of processes and templates, presenting an organized, unified implementation from each project manager. These reusable project management components enable fast, efficient PaperClick(R) project deployment. Key functions of the NCIS business unit are to: o Create PaperClick(R) Implementation Vision. o Develop methodology including updating and deployment of best practices. o Facilitate team communication through common processes, deliverables, and terminology. o Support a common repository so that prior project management deliverables can be candidates for reuse by similar projects. o Provide clients (and internal management) continual training to build core project management competencies, a common set of experiences, and an understanding of PaperClick(R) technical development. o Track status of PaperClick(R) projects, and provide project visibility to management in a common and consistent manner. Services complementary to a PaperClick(R) project implementation are also provided. They may consist of consulting or hardware services that are part of the project, such as additional servers, network configurations etc., or totally separate from the project due to a parallel need. Services may also include continuation and maintenance of completed projects. Post implementation change orders, training, and code alterations are handled through this division of the System Integration Business Unit. (B) Services for development and implementation of Customized Applications: NeoMedia's NCIS business assists clients in developing and implementing their own customized PaperClick(R) applications. Storage Area Networks (SAN). SAN is a Storage Management solutions and consultancy consisting of tools and services that insure data integrity, efficiency and accessibility, achieved through moving data backup, access and archival functions off of traditional Local Area Networks (LANs) and Wide Area Networks (WANs) that are added on to a highly reliable independent managed network. 10 Product Sales and Equipment Re-sales. NCIS markets and sells proprietary software products, including high-density symbology encoders (e.g. PDF417 and UPS Maxicode) and resells client-server hardware and related systems such as Sun Microsystems, IBM and others , as well as related applications software and services. NeoMedia Micro Paint Repair NMPR's system utilizes proprietary technology to repair cosmetic automobiles damage such as chips, scratches, spots, blemishes, and oxidized paint. While competitive paint repair products utilize a mechanical fix, the NMPR system chemically alters the paint to make the repair invisible to the naked eye, even with the most lustrous metal flake and pearlized auto paints. Repairs can be completed in a fraction of the time of conventional methods, and all of NMPR's products are free of harmful isocyanates. The products offered through NMPR include: NMPR Paint System - NMPR offers a license to use its proprietary NMPR Paint System, along with a training program and ongoing technical support relating to the system. NMPR Paint System Products - NMPR supplies the products necessary for a paint system operator to implement an NMPR Paint System. Products include NMPR's proprietary chemicals, auto paint, and application hardware. NMPR Specialty Products - NMPR offers a variety of non-paint related specialty products, including dent repair, interior cleaning, corrosion protection, windshield repair, and warranty programs. NMPR Paint Repair Services - NMPR currently operates a paint repair facility in its Calgary office. The facility utilizes the NMPR Paint System to make cosmetic repairs to automobiles for dealerships, rental car companies, and consumers. Strategic Relationships NeoMedia Internet Switching Software During January 2002, the Company engaged Baniak Pine and Gannon, a Chicago law firm specializing in intellectual property licensing and litigation. The firm assists the Company in seeking out potential licensees of its intellectual property portfolio, including any resulting litigation. Baniak Pine and Gannon currently represents NeoMedia in its lawsuits against AirClic, Scanbuy, LScan, and Virgin. During May 2002, the Company granted a personal, worldwide, non-exclusive, limited intellectual property licensing agreement to Brandkey Systems Corporation. Brandkey paid the Company a $50,000 upfront licensing fee in 2002, a $25,000 royalty in 2003, a $50,000 royalty in 2004, and is obligated to pay 2.5% of all future royalty-based revenues earned by Brandkey, with minimum royalties of $50,000 in 2004, and $75,000 in 2005 and after. On October 30, 2003, NeoMedia unveiled the go-to-market strategy for its PaperClick(R) suite of products. Since that time, NeoMedia has signed contracts with several key partners outlined in the strategy, including channel partners Big Gig Strategies, SRP Consulting, and Relyco, systems integrator Science Applications International Corporation (SAIC), and European advertising agency 12Snap. 11 In June 2004, NeoMedia entered into a collaborative agreement with Intel Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently introduced Intel PXA27x processor family-based cellular phones. On June 3, 2004, NeoMedia announced that it signed a teaming agreement with IPSO, an integrator of proprietary solutions developed by its provider companies for financial institution members and a leader in meeting Check 21 standards. During 2003 and 2004, NeoMedia engaged key partners around the world to assist in the anticipated roll-out of the PaperClick(R) family of products. During this time, NeoMedia has partnered with distributors and resellers such as Big Gig Strategies (United Kingdom), SRP Consulting (USA), AURA Digital Communications (Australia), Relyco (USA), E&I Marketing (Taiwan), Deusto Sistemas (Spain), and Jorge Christen and Partners LLP (Mexico). NeoMedia Consulting and Integration Services Through this segment, the Company provides services and products to a spectrum of customers, ranging from closely held companies to large corporations. NeoMedia Micro Paint Repair On June 1, 2004, NeoMedia entered into a distribution agreement with Micro Paint Systems (Australasia) Limited of New Zealand for exclusive distribution rights to NeoMedia's Micro Paint Repair products in Australia and New Zealand. The agreement is contingent upon a minimum purchase of 500 systems over five years in that territory. NeoMedia received an initial payment on signing of the contract, which included the fee for four initial systems. On August 2, 2004, NeoMedia announced that it signed a distribution agreement with Motor Dealer's Association (MDA) Co-Auto Ltd., the largest buying consortium for new car franchised dealers in Western Canada. The agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon. Sales and Marketing NeoMedia Internet Switching Software During 2003 and 2004, NeoMedia has worked to establish a global network of direct salespeople and resellers to sell and market the PaperClick(R) suite of products. NeoMedia currently employs 8 direct sales and technical consultants in its Lisle, Illinois office who represent the NISS and NCIS business units. Additionally, NeoMedia has established reseller relationships with industry innovators, with a presence in the US, Europe, South America, Asia, and Australia. NeoMedia Consulting and Integration Services The Company, through its systems integration services segment, markets its products and services, as well as those for which it acts as a re-marketer, primarily through a direct sales force, which was composed of three individuals 12 as of December 31, 2004. In addition, this business unit also relies upon strategic alliances to help market products and services, provide lead referrals, and establish informal co-marketing arrangements. NeoMedia's representatives attend seminars and trade shows, both as speakers and participants, to help market products and services. In addition, this business segment has three agents in the United States that sell NeoMedia's products and services. NeoMedia Micro Paint Repair NeoMedia markets its Micro Paint Repair products and services primarily through a direct sales force. In addition, this business unit is exploring strategic alliances to help market products and services, provide lead referrals, and establish informal co-marketing arrangements. This business segment is also establishing an agent network in the United States and Canada to sell NeoMedia's products and services. To this end, during 2004 NeoMedia Micro Paint Repair signed distribution agreements with MDA Co-Auto Ltd., the largest buying consortium for new car franchised dealers in Western Canada, and Micro Paint Systems (Australasia) Limited of New Zealand. Customers NeoMedia Internet Switching Software PaperClick(R). NeoMedia's customers for its PaperClick(R) physical world-to-Internet offerings have included Amway, Solar Communications, Inc., and NYCO Products Company. Intellectual Property Licensing. To date, the Company has entered into IP licensing agreements with Digital:Convergence Corporation, A.T. Cross Company, Symbol Technologies, and Brandkey Systems Corporation. The Company intends to pursue additional license agreements in the future. NeoMedia Consulting and Integration Services NCIS provides equipment and software reselling and integration and automation consulting services to a variety of customers across a range of industries, including telecommunications, insurance, financial services, manufacturing, government entities, and more. NeoMedia Micro Paint Repair The customer base for the NMPR business unit consists primarily of auto dealers and repair shops throughout Canada, the US, and Australia/New Zealand. In addition, the Company is party to distribution arrangements with several organizations, including MDA Co-Auto and Novus in Canada, and Micro Paint Systems Australasia in New Zealand. 13 Research and Development NeoMedia Internet Switching Software NISS employed 3 persons in the area of product development as of December 31, 2004. During the years ended December 31, 2004 and 2003, NISS incurred total software development costs of $462,000 and $332,000, respectively. NeoMedia Consulting and Integration Services Any future research or development of products relating to the NCIS business unit will be performed by the NISS division or outside contractors. NeoMedia Micro Paint Repair During October 2004, NeoMedia contracted the founder of the CSI International to provide research and development services for its Micro Paint Repair business. In addition, NeoMedia has 1 employee in its Calgary, Alberta, Canada office, to assist with research and development. During the years ended December 31, 2004 and 2003, NMPR incurred total product development costs of $19,000 and $0, respectively. Intellectual Property Rights The Company's success in the physical world-to-Internet and the value-added systems integration markets is dependent upon its proprietary technology, including patents, and other intellectual property, and on its ability to protect its proprietary technology and other intellectual property rights. In addition, the Company must conduct its operations without infringing on the proprietary rights of third parties. The Company also intends to rely upon unpatented trade secrets and the know-how and expertise of its employees. To protect its proprietary technology and other intellectual property, the Company relies primarily on a combination of the protections provided by applicable patent, copyright, trademark, and trade secret laws, as well as on confidentiality procedures and licensing arrangements. The Company has six U.S. patents for its physical world-to-Internet technology, an additional patent for which the Company received a notification of issuance from the US Patent and Trademark Office in 2005, an additional patent in Mexico for which the Company received a notification of issuance from the Mexicano de la Propiedad Industrial in 2005, and an additional six patents acquired with the purchase of Secure Source Technologies related to document security. The Company also has several trademarks relating to its proprietary software products. Competition NeoMedia Internet Switching Software Although the Company has been developing its physical world-to-Internet technology and offerings since 1996, the market surrounding the technology is only now beginning to take shape. Over the past year, new technologies and concepts have emerged in the physical world-to-Internet space, specifically relating to mobile commerce and mobile marketing on Internet-enabled cellular phones and PDAs. NeoMedia views the increased development of other products in this space as a validation of the physical world-to-Internet concept and believes that the increased promotion of these products and services by NeoMedia 14 and other companies in this space will raise consumer awareness of this technology, resulting in a larger, and more rapidly-developing market. The Company believes its portfolio of physical world-to-Internet technologies and patents could provide a barrier to entry for many potential competitors. NeoMedia Consulting and Integration Services. Competitors in the consulting and integration services business range from local, small privately held companies to large national and international organizations, including large consulting firms. A large number of companies act as re-marketers of another party's products, and therefore, the competition in this area is intense. In some instances, the Company, in acting as a re-marketer, may compete with the original manufacturer. NeoMedia Micro Paint Repair. ? NeoMedia's competitors in the micro paint repair consist primarily of suppliers of traditional paint repair methods, such as automotive paint manufacturers. Product Liability The Company has never had any product liability claim asserted against it. Currently the Company maintains product liability insurance, but there can be no guarantee that such policy will be sufficient to cover any claims made against the Company. Government Regulation Existing or future legislation could limit the growth of use of the Internet, which would curtail the Company's revenue growth. Statutes and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Congress recently passed laws regarding children's online privacy, copyrights and taxation. The law remains largely unsettled, even in areas where there has been legislative action. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet, e-commerce and online advertising. In addition, the growth and development of e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. Certain of the Company's proprietary technology allows for the storage of demographic data from NeoMedia's users. In 2000, the European Union adopted a directive addressing data privacy that may limit the collection and use of certain information regarding Internet users. This directive may limit the Company's ability to collect and use information collected by the Company's technology in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. The Company could incur significant additional expenses if new regulations regarding the use of personal information are introduced or if the Company's privacy practices are investigated. Environmental Protection Compliance The Company's Micro Paint Division operations are subject to normal environmental protection regulations. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the 15 environment, is not expected to have a material effect upon the capital expenditures, earnings or the competitive position of the Company. However, environmental requirements are constantly changing, and it is difficult to predict the effect of future requirements on the Company. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. Employees As of December 31, 2004, the Company employed 34 persons, of which 16 are located at the Company's headquarters in Fort Myers, Florida, 8 at the Company's Lisle, Illinois office, 8 at the Company's Calgary, Alberta, Canada office, and 2 remote employees. None of the Company's employees are represented by a labor union or bound by a collective bargaining agreement. The Company believes that its employee relations are good. The Company's success depends on a significant extent on the performance of its senior management and certain key employees. Competition for highly skilled employees, including sales, technical and management personnel, is intense in the computer industry. The Company's failure to attract additional qualified employees or to retain the services of key personnel could materially adversely affect the Company's business. Safe Harbor Provision of the Private Securities Litigation Act of 1995 The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for software products is generally characterized by rapidly changing technology, frequent new product introductions and changes in customer requirements which can render existing products obsolete or unmarketable. The statements contained in this document that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission. The forward-looking statements are based on the beliefs of the management of the Company, as well as assumptions made by, and information currently available to, the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2005 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's limited operating history on which expectations regarding its future performance can be based, competition from, among others, high technology companies that have greater financial, technical and marketing resources and distribution capabilities than the Company, the availability of sufficient capital, the effectiveness of the Company's efforts to control operating expenses and general economic and business conditions affecting the Company and its customers in the United States and other countries in which the Company sells and anticipates to sell its products and services. 16 RISK FACTORS Risks Specific To NeoMedia The Company Has Historically Lost Money and Losses May Continue The Company has incurred substantial losses since its inception, and anticipates continuing to incur substantial losses for the foreseeable future. The Company incurred a loss of $7,230,000 in the year ended December 31, 2004 and $5,382,000 in the year ended December 31, 2003. The Company's accumulated losses were approximately $83,377,000 as of December 31, 2004. As of December 31, 2004 and 2003, the Company had a working capital (deficit) of approximately $(2,597,000) and $(6,526,000), respectively. The Company had stockholders' equity / (deficit) of $4,392,000 and $(3,203,000) at December 31, 2004 and 2003, respectively. The Company generated revenues of $1,700,000 and $2,400,000 for the years ended December 31, 2004 and 2003, respectively. In addition, during the years ended December 31, 2004 and 2003, the Company recorded negative cash flows from operations of $4,650,000 and $2,979,000, respectively. To succeed, the Company must develop new client and customer relationships and substantially increase its revenue derived from improved products and additional value-added services. The Company has expended and to the extent it has available financing, the Company intends to continue to expend substantial resources to develop and improve its products, increase its value-added services and to market its products and services. These development and marketing expenses must be incurred well in advance of the recognition of revenue. As a result, the Company may not be able to achieve or sustain profitability. The Company's Independent Accountants Have Added Going Concern Language To Their Report On The Company's Financial Statements, Which Means That The Company May Not Be Able To Continue Operations The report of Stonefield Josephson, Inc., the Company's independent auditors, with respect to the Company's financial statements and the related notes for the years ended December 31, 2004 and 2003, indicates that, at the date of their report, the Company had suffered recurring losses from operations and that the Company's current cash position raises substantial doubt about its ability to continue as a going concern. The Company's financial statements do not include any adjustments that might result from this uncertainty. There is Limited Information Upon Which Investors Can Evaluate The Company's Business Because The Physical World - to - Internet Market Has Existed For A Short Period Of Time The physical world-to-Internet market in which the Company operates is a recently developed market. Further, the Company has conducted operations in this market only since March 1996. Consequently, the Company has a relatively limited operating history upon which an investor may base an evaluation of the Company's primary business and determine the Company's prospects for achieving its intended business objectives. The Company is prone to all of the risks inherent to the establishment of any new business venture, including unforeseen changes in its business plan. An investor should consider the likelihood of the Company's future success to be highly speculative in light of the Company's limited operating history in its primary market, as well as the limited resources, problems, expenses, risks, and complications frequently encountered by similarly situated companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as the physical world-to-Internet space. To address these risks, the Company must, among other things: 17 o maintain and increase its client base; o implement and successfully execute its business and marketing strategy; o continue to develop and upgrade its products; o continually update and improve its service offerings and features; o respond to industry and competitive developments; and o attract, retain, and motivate qualified personnel. The Company may not be successful in addressing these risks. If the Company is unable to do so, its business, prospects, financial condition, and results of operations would be materially and adversely affected. NeoMedia's future success depends on the timely introduction of new products and the acceptance of these new products in the marketplace. Rapid technological change and frequent new product introductions are typical for the markets NeoMedia serves. NeoMedia's future success will depend in large part on continuous, timely development and introduction of new products that address evolving market requirements. To the extent that NeoMedia fails to introduce new and innovative products, it may lose market share to its competitors, which may be difficult to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could materially damage NeoMedia's business. The Company's Common Stock Is Subject to Price Volatility As a result of the emerging and evolving nature of the markets in which the Company competes, as well as the current nature of the public markets and the Company's current financial condition, the Company believes that its operating results may fluctuate materially, as a result of which quarter-to-quarter comparisons of its results of operations may not be meaningful. If in some future quarter, whether as a result of such a fluctuation or otherwise, the Company's results of operations fall below the expectations of securities analysts and investors, the trading price of the Company's common stock would likely be materially and adversely affected. An investor should not rely on the Company's results of any interim period as an indication of its future performance. Additionally, the Company's quarterly results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. Factors that may cause the Company's quarterly results to fluctuate include, among others: o the Company's ability to retain existing clients and customers; o the Company's ability to attract new clients and customers at a steady rate; o the Company's ability to maintain client satisfaction; o the Company's ability to motivate potential clients and customers to acquire and implement new technologies; o the extent to which the Company's products gain market acceptance; o the timing and size of client and customer purchases; o introductions of products and services by competitors; o price competition in the markets in which the Company competes; o the pricing of hardware and software that the Company resells or integrates into its products; 18 o the level of use of the Internet and online services, as well as the rate of market acceptance of physical world-to-Internet marketing; o the Company's ability to upgrade and develop its systems and infrastructure in a timely and effective manner; o the Company's ability to attract, train, and retain skilled management, strategic, technical, and creative professionals; o the amount and timing of operating costs and capital expenditures relating to the expansion of the Company's business, operations, and infrastructure; o unanticipated technical, legal, and regulatory difficulties with respect to use of the Internet; and o general economic conditions and economic conditions specific to Internet technology usage and electronic commerce. The Company's Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements The Company's common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements may reduce the potential market for the Company's common stock by reducing the number of potential investors. This may make it more difficult for investors in the Company's common stock to sell shares to third parties or to otherwise dispose of them. This could cause the Company's stock price to decline. Penny stocks are stock: o with a price of less than $5.00 per share; o that are not traded on a "recognized" national exchange; o whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or o in issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. The Company Is Uncertain Of The Success Of Its Internet Switching Software Business Unit And The Failure Of This Unit Would Negatively Affect The Price Of The Company's Stock The Company provides products and services that provide a link from physical objects, including printed material, to the Internet. The Company can provide no assurance that: o this Internet Switching Software business unit will ever achieve profitability; 19 o the Company's current product offerings will not be adversely affected by the focusing of its resources on the physical world-to-Internet space; or o the products the Company develops will obtain market acceptance. In the event that the Internet Switching Software business unit should never achieve profitability, that the Company's current product offerings should so suffer, or that the Company's products fail to obtain market acceptance, the Company's business, prospects, financial condition, and results of operations would be materially adversely affected. A Large Percentage Of The Company's Assets Are Intangible Assets, Which Will Have Little Or No Value If Its Operations Are Unsuccessful At December 31, 2004, approximately 49% of the Company's total assets were intangible assets, consisting primarily of rights related to its patents and other intellectual property. If the Company's operations are unsuccessful, these assets will have little or no value, which will materially adversely affect the value of the Company's stock and the ability of its stockholders to recoup their investments in the Company's capital stock. The Company's ISS Business Unit Marketing Strategy Has Not Been Tested And May Not Result In Success To date, the Company has conducted limited marketing efforts directly relating to its ISS business unit. All of the Company's marketing efforts have been largely untested in the marketplace, and may not result in sales of its products and services. To penetrate the markets in which the Company competes, the Company will have to exert significant efforts to create awareness of, and demand for, its products and services. With respect to the Company's marketing efforts conducted directly, the Company intends to expand its sales staff upon the receipt of sufficient operating capital. The Company's failure to further develop its marketing capabilities and successfully market its products and services would have a material adverse effect on its business, prospects, financial condition, and results of operations. The Company's Internally Developed Systems May Put The Company At A Competitive Disadvantage The Company uses internally developed technologies for a portion of its systems integration services, as well as the technologies required to interconnect its clients' and customers' physical world-to-Internet systems and hardware with its own. As the Company developed these systems in order to integrate disparate systems and hardware on a case-by-case basis, these systems may require a significant amount of customization. Such client and customer specific customization is time-consuming and costly and may place the Company at a competitive disadvantage when compared to competitors. The Company Could Fail to Attract Or Retain Key Personnel The Company's future success will depend in large part on its ability to attract, train, and retain additional highly skilled executive level management, creative, technical, and sales personnel. Competition is intense for these types of personnel from other technology companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than the Company has. The Company may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. The Company's failure to attract and retain 20 qualified personnel would have a material adverse effect on its business, prospects, financial condition, and results of operations will be materially adversely affected. The Company Depends Upon Its Senior Management And Their Loss Or Unavailability Could Put The Company At A Competitive Disadvantage The Company's success depends largely on the skills of certain key management and technical personnel, including Charles T. Jensen, its President, Chief Executive Officer and Chief Operating Officer, and Charles W. Fritz, the Company's founder and Chairman of the Board of Directors. The loss of the services of Mr. Jensen or Mr. Fritz could materially harm the Company's business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. The Company does not presently maintain a key-man life insurance policy on Mr. Jensen or Mr. Fritz. NeoMedia May Be Unsuccessful In Integrating Its Micro Paint Repair Business With Its Current Business The success of NeoMedia's Micro Paint Repair business unit could depend on the ability of NeoMedia's executive management to integrate the business plan with the business plan of NeoMedia's NCSI and NISS business units. The NMPR business unit operates in a separate industry from NeoMedia's other two business units. The Company May Be Unable To Protect Its Intellectual Property Rights And May Be Liable For Infringing The Intellectual Property Rights Of Others The Company's success in the physical world-to-Internet and the value-added systems integration markets is dependent upon its proprietary technology, including its patents and other intellectual property, and on the Company's ability to protect its proprietary technology and other intellectual property rights. In addition, the Company must conduct its operations without infringing on the proprietary rights of third parties. The Company also intends to rely upon unpatented trade secrets and the know-how and expertise of its employees, as well as its patents. To protect its proprietary technology and other intellectual property, the Company relies primarily on a combination of the protections provided by applicable patent, copyright, trademark, and trade secret laws as well as on confidentiality procedures and licensing arrangements. The Company has six patents for its core physical world-to-Internet technology, and an additional six patents acquired with the purchase of Secure Source Technologies related to document security in 2003. The Company also has several trademarks relating to its proprietary products. Although the Company believes that it has taken appropriate steps to protect its unpatented proprietary rights, including requiring that its employees and third parties who are granted access to its proprietary technology enter into confidentiality agreements with the Company, the Company can provide no assurance that these measures will be sufficient to protect its rights against third parties. Others may independently develop or otherwise acquire patented or unpatented technologies or products similar or superior to those of the Company. The Company licenses from third parties certain software tools that it includes in its services and products. If any of these licenses were terminated, the Company could be required to seek licenses for similar software from other third parties or develop these tools internally. The Company may not be able to obtain such licenses or develop such tools in a timely fashion, on acceptable terms, or at all. Companies participating in the software and Internet 21 technology industries are frequently involved in disputes relating to intellectual property. The Company may in the future be required to defend its intellectual property rights against infringement, duplication, discovery, and misappropriation by third parties or to defend against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies. Any such litigation or disputes could result in substantial costs to, and a diversion of effort by, the Company. An adverse determination could subject the Company to significant liabilities to third parties, require the Company to seek licenses from, or pay royalties to, third parties, or require the Company to develop appropriate alternative technology. Some or all of these licenses may not be available to the Company on acceptable terms or at all, and the Company may be unable to develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. The Company Is Exposed To Product Liability Claims And An Uninsured Claim Could Have A Material Adverse Effect On The Company's Business, Prospects, Financial Condition, And Results Of Operations, As Well As The Value Of Its Stock Many of the Company's projects are critical to the operations of its clients' businesses. Any failure in a client's information system could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. The Company could, therefore, be subject to claims in connection with the products and services that the Company sells. The Company does not currently maintain product liability insurance. There can be no assurance that: o the Company has contractually limited its liability for such claims adequately or at all; o the Company would have sufficient resources to satisfy any liability resulting from any such claim; The successful assertion of one or more large claims against the Company could have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. The Company Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares In Order To Realize Their Investment The Company has not paid any cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. The Company intends to retain future earnings, if any, for reinvestment in the development and marketing of its products and services. As a result, investors may have to sell their shares of common stock to realize their investment. Some Provisions Of The Company's Certificate of Incorporation And By-Laws May Deter Takeover Attempts, Which May Limit The Opportunity Of The Company's Stockholders To Sell Their Shares At A Premium To The Then Market Price Some of the provisions of the Company's certificate of incorporation and by-laws could make it more difficult for a third party to acquire the Company, even if doing so might be beneficial to the Company's stockholders by providing them with the opportunity to sell their shares at a premium to the then market price. On December 10, 1999, the Company's Board of Directors adopted a stockholders rights plan and declared a non-taxable dividend of one right to acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each outstanding share of the Company's common stock to stockholders of record on December 10, 1999 and each share of common stock issued thereafter until a 22 pre-defined hostile takeover date. The stockholder rights plan was adopted as an anti-takeover measure, commonly referred to as a "poison pill." The stockholder rights plan was designed to enable all stockholders not engaged in a hostile takeover attempt to receive fair and equal treatment in any proposed takeover of NeoMedia and to guard against partial or two-tiered tender offers, open market accumulations and other hostile tactics to gain control of NeoMedia. The stockholders rights plan was not adopted in response to any effort to acquire control of NeoMedia at the time of adoption. This stockholders rights plan may have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of NeoMedia or a change in control of NeoMedia. Certain of the Company's directors, officers and principal stockholders, Charles W. Fritz, William E. Fritz and The Fritz Family Limited Partnership and their holdings were exempted from the triggering provisions of the Company's "poison pill" plan, as a result of the fact that, as of the plan's adoption, their holdings might have otherwise triggered the "poison pill". In addition, the Company's certificate of incorporation authorizes the Board of Directors to designate and issue preferred stock, in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion, and redemption rights, and sinking fund provisions. The Company is authorized to issue a total of 25,000,000 shares of Preferred Stock, par value $0.01 per share. The Company has no present plans for the issuance of any preferred stock. However, the issuance of any preferred stock could have a material adverse effect on the rights of holders of the Company's common stock, and, therefore, could reduce the value of shares of the Company's common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict NeoMedia's ability to merge with, or sell its assets to, a third party. The ability of the Board of Directors to issue preferred stock could have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of the Company or a change in the Company's control thereby preserving NeoMedia's control by the current stockholders. 23 Risks Relating To The Company's Industry The Security of the Internet Poses Risks To The Success Of The Company's Entire Business Concerns over the security of the Internet and other electronic transactions and the privacy of consumers and merchants may inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions, which may have a material adverse effect on the Company's physical world-to-Internet business. The Company Will Only Be Able To Execute Its Physical World-To-Internet Business Plan If Mobile Internet Usage and Electronic Commerce Continue To Grow The Company's future revenues and any future profits are substantially dependent upon the widespread acceptance and use of the mobile Internet and other online services as an effective medium of information and commerce. If use of the mobile Internet and other online services does not continue to grow or grows more slowly than the Company expects, if the infrastructure for the mobile Internet and other online services does not effectively support the growth that may occur, or if the mobile Internet and other online services do not become a viable commercial marketplace, the Company's physical world-to-Internet business, and therefore its business, prospects, financial condition, and results of operations, could be materially adversely affected. Rapid growth in the use of, and interest in, the Internet, the Web, and online services is a recent phenomenon, and may not continue on a lasting basis. In addition, customers may not adopt, and continue to use, the mobile Internet and other online services as a medium of information retrieval or commerce. Demand and market acceptance for recently introduced services and products over the mobile Internet are subject to a high level of uncertainty, and few services and products have generated profits. For the Company to be successful, consumers and businesses must be willing to accept and use novel and cost efficient ways of conducting business and exchanging information. In addition, the public in general may not accept the mobile Internet and other online services as a viable commercial or information marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the mobile Internet and other online networks continue to experience significant growth in the number of users, their frequency of use, or in their bandwidth requirements, the infrastructure for the mobile Internet and online networks may be unable to support the demands placed upon them. In addition, the mobile Internet or other online networks could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of activity, or due to increased governmental regulation. Significant issues concerning the commercial and informational use of the mobile Internet and online networks technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of mobile Internet business solutions that utilize these technologies. Changes in, or insufficient availability of, telecommunications services to support the mobile Internet or other online services also could result in slower response times and adversely affect usage of the mobile Internet and other online networks generally and the Company's physical world-to-Internet product and networks in particular. The Company May Not Be Able To Adapt As The Internet, Physical World-to-Internet, Equipment Resales And Systems Integrations Markets, And Customer Demands Continue To Evolve The Company may not be able to adapt as the Internet, physical world-to-Internet, equipment resales and systems integration markets, and 24 consumer demands continue to evolve. The Company's failure to respond in a timely manner to changing market conditions or client requirements would have a material adverse effect on its business, prospects, financial condition, and results of operations. The Internet, physical world-to-Internet, equipment resales, and systems integration markets are characterized by: o rapid technological change; o changes in user and customer requirements and preferences; o frequent new product and service introductions embodying new technologies; and o the emergence of new industry standards and practices that could render proprietary technology and hardware and software infrastructure obsolete. The Company's success will depend, in part, on its ability to: o enhance and improve the responsiveness and functionality of the Company's products and services; o license or develop technologies useful in the Company's business on a timely basis; o enhance the Company's existing services, and develop new services and technologies that address the increasingly sophisticated and varied needs of its prospective or current customers; and o respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. NeoMedia's Competitors In The Micro Paint Repair Industry Could Duplicate NeoMedia's Proprietary Processes NeoMedia's success in the micro paint repair industry depends upon proprietary chemical products and processes. There is no guarantee that NeoMedia's competitors will not duplicate NeoMedia's proprietary processes. The Company May Not Be Able To Compete Effectively In Markets Where Its Competitors Have More Resources While the market for physical world-to-Internet technology is relatively new, it is already highly competitive and characterized by an increasing number of entrants that have introduced or developed products and services similar to those offered by the Company. The Company believes that competition will intensify and increase in the future. The Company's target market is rapidly evolving and is subject to continuous technological change. As a result, the Company's competitors may be better positioned to address these developments or may react more favorably to these changes, which could have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. In addition, the equipment resales and systems integration markets are increasingly competitive. The Company competes in these industries on the basis of a number of factors, including the attractiveness of the services offered, the breadth and quality of these services, creative design and systems engineering expertise, pricing, technological innovation, and understanding clients' needs. A number of these factors are beyond the Company's control. Existing or future competitors may develop or offer products or services that provide significant technological, creative, performance, price, or other advantages over the products and services offered by the Company. 25 Many of the Company's competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than NeoMedia. Based on total assets and annual revenues, the Company is significantly smaller than its two largest competitors in the physical world-to-Internet industry, the primary focus of its business. Similarly, the Company competes against significantly larger and better-financed companies in its systems integration and resales businesses, including the manufacturers of the equipment and technologies that the Company integrates and resells. If the Company competes with its primary competitors for the same geographical or institutional markets, their financial strength could prevent the Company from capturing those markets. The Company may not successfully compete in any market in which the Company conducts or may conduct operations. In addition, based on the increasing consolidation, price competition and participation of equipment manufacturers in the systems integration and equipment resales markets, the Company believes that it will no longer be able to compete effectively in these markets in the future. It is for this reason, that the Company has increasingly focused its business plan on competing in the emerging market for physical world-to-Internet products. In The Future There Could Be Government Regulations And Legal Uncertainties Which Could Harm The Company's Business The Company is not currently subject to direct regulation by any government agency other than laws or regulations applicable generally to electronic commerce. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and other online services, could have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as taxation, user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. The growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for the Company's services and increase its cost of doing business, or otherwise have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy and it may take time to resolve these issues definitively. Certain of the Company's proprietary technology allows for the storage of demographic data from the Company's users. In 2000, the European Union adopted a directive addressing data privacy that may limit the collection and use of certain information regarding Internet users. This directive may limit the Company's ability to collect and use information collected by its technology in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. The Company could incur significant additional expenses if new regulations regarding the use of personal information are introduced or if the Company's privacy practices are investigated. 26 ITEM 2. Description of Properties The Company's principal executive, development and administrative office is located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. The Company occupies approximately 5,000 square feet under terms of a written lease from an unaffiliated party which expires on July 31, 2005, with monthly rent totaling approximately $7,000. The Company maintains a sales facility at 2150 Western Court, Suite 230, Lisle, Illinois 60532, occupying approximately 6,000 square feet under the terms of a written lease from an unaffiliated party expiring on October 31, 2004, with monthly rent totaling approximately $4,000. The Company has a one-year renewal option on the facility. The Company maintains a production and product development facility for its Micro Paint Repair Business unit in Calgary, Alberta, Canada, occupying approximately 4,000 square feet under the terms of a written month-to-month lease from an affiliated party with monthly rent totaling $2,400. During February 2005, the Company signed a lease to occupy a 10,000 square foot Micro Paint Repair facility in Ft. Myers, Florida, under the terms of a written lease from an unaffiliated party expiring on February 28, 2008, with monthly rent totaling approximately $9,000. The facility will host training, demonstrations, production, distribution, and retail services for the Micro Paint Repair business unit. The Company believes that existing office space is adequate to meet current and short-term requirements. ITEM 3. Legal Proceedings The Company is involved in the following legal actions arising in the normal course of business, both as claimant and defendant. AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. On January 23, 2004, NeoMedia filed a patent infringement lawsuit against AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern District of Illinois, claiming that each of the parties has manufactured, or has manufactured for it, and has used, or actively induced others to use, technology which allows customers to use a built-in UPC bar code scanner to scan individual items and access information, thereby infringing NeoMedia's patents. The complaint stated that on information and belief, AirClic, Scanbuy and LScan have had actual and constructive notice of the existence of the patents-in-suit, and, despite such notice, failed to cease and desist their acts of infringement, and continue to engage in acts of infringement of the patents-in-suit. On April 15, 2004, the court dismissed the suit against AirClic and Scanbuy for lack of personal jurisdiction. On April 19, 2004, AirClic filed a declaratory judgment action against NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June 10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in Pennsylvania for patent infringement. AirClic answered and counterclaimed on May 13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004. NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims was filed on August 3, 2004. The two actions were consolidated and the parties are currently engaged in discovery. 27 NeoMedia voluntarily dismissed the suit against LScan in the Northern District of Illinois and re-filed the suit on May 26, 2004, in the Eastern District of Pennsylvania. After LScan failed to answer, NeoMedia filed and served its motion for default judgment on July 6, 2004. The Court entered default judgment on July 7, 2004. On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern District of New York alleging that NeoMedia infringed Scanbuy's copyrights, violated the Lanham Act and committed deceptive trade practices and tortious interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District of New York alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. The parties are currently engaged in discovery in both of these actions. Virgin Entertainment Group On January 2, 2004, NeoMedia filed a patent infringement lawsuit against Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin Megastore ("Virgin"). The complaint for Patent Infringement and Damages was filed in the United States District Court for the Northern District of Illinois, by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The complaint claims that Virgin has infringed four of NeoMedia's patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint alleges that the Virgin Megaplay Stations located in Virgin's Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to allow customers to scan UPC codes from in-store CDs and DVDs to access Internet-based product information, such as music and movie previews, and album and video art. The complaint also alleges that Virgin had notice of NeoMedia's patents since the latter part of 2002 or before, yet it continued with its infringing activities. The complaint seeks compensatory damages for Virgin's infringement, with those damages to be trebled due to the willful and wanton nature of the infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin from its infringing activities. Virgin answered NeoMedia's complaint on March 1, 2004. The parties are currently engaged in discovery. Other Litigation On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against NeoMedia seeking payment of approximately $170,000 in past due legal services. The amount in question is subject to an unsecured promissory note that matured unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash payments totaling approximately $196,000, to be paid at a rate of $30,000 per quarter until the balance is satisfied. NeoMedia had a remaining liability of $33,000 relating to this matter as of December 31, 2004, which was included in accrued expenses. On December 7, 2004, Reitler Brown & Rosenblatt LLC, filed a complaint against NeoMedia seeking payment of approximately $422,000 in past due legal services and accrued interest. NeoMedia had a remaining liability of $422,000 relating to this matter as of December 31, 2004, which was included in accounts payable and accrued expenses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 28 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The Company's shares trade on the OTC Bulletin Board under the symbol "NEOM." As of December 31, 2004, the Company had 432,525,053 common shares outstanding. The following table summarizes the high and low closing sales prices per share of the common stock for the periods indicated as reported on The OTC Bulletin Board and Nasdaq SmallCap Market, as applicable: (U.S. $) ---------------------------------------------------------- 2002 HIGH LOW ---------------------------------------------------------- First Quarter $0.41 $0.14 Second Quarter 0.17 0.05 Third Quarter 0.10 0.02 Fourth Quarter 0.05 0.01 ---------------------------------------------------------- 2003 HIGH LOW ---------------------------------------------------------- First Quarter $0.06 $0.01 Second Quarter 0.04 0.01 Third Quarter 0.29 0.01 Fourth Quarter 0.23 0.10 ---------------------------------------------------------- 2004 HIGH LOW ---------------------------------------------------------- First Quarter $0.16 $0.14 Second Quarter $0.11 $0.05 Third Quarter $0.12 $0.06 Fourth Quarter $0.30 $0.06 (b) Holders. As of December 31, 2004, NeoMedia had an estimated 8,500 recordholders of common stock. (c) Dividends. The Company has not declared or paid any dividends on its common stock during the years ended December 31, 2003 or 2004. The Company will base any issuance of dividends upon its earnings, financial condition, capital requirements and other factors considered important by its board of directors. Delaware law and the Company's certificate of incorporation do not require the board of directors to declare dividends on the Company's common stock. The Company expects to retain all earnings, if any, generated by its operations for the development and growth of its business and does not anticipate paying any dividends to its stockholders for the foreseeable future. (d) Recent Issuances of Unregistered Securities. On June 25, 2004, the Company issued to Marvin Tkachuk, an unrelated distribution agent, 322,228 shares of common stock in exchange for exclusivity rights under a distribution contract. The shares were valued at $0.074, which was the market price at the time of the agreement. On June 9, 2004, the Company issued to Stanton Hill, a current outside consultant and former president of CSI International, Inc., 518,185 shares of common stock as payment for debt acquired with the purchase by NeoMedia of CSI in February 2004. The shares were valued at $0.061, which was the market price at the time of the agreement. 29 On March 8, 2004, the Company issued to Stone Street Asset Management, LLC, 40,000,000 warrants to purchase shares of common stock at an exercise price of $0.05 per share. The market price at the time of issuance was $0.11. On February 25, 2004, the Company issued 103,199 shares of stock to David Kaminer, as payment of past due professional services. The shares were valued at $0.097. The market price at the time of the agreement was $0.102. On February 6, 2004, the Company issued 7,000,000 shares of common stock to CSI International, Inc. shareholders in connection with NeoMedia's purchase of CSI. The closing market price on the date of issuance was $0.10. On October 31, 2003, the Company entered into an agreement to issue 8,000,000 shares of stock to International Digital Scientific, Inc., as payment of all past and future amounts owed under a note payable from 1994. The shares were valued at $0.113. The market price at the time of the agreement was $0.113. On October 23, 2003, the Company entered into an agreement to issue 3,000,000 shares of stock to Orsus Solutions, USA, Inc., an unrelated vendor, as payment of past due liabilities of $331,000. The shares were valued at $0.107. The market price at the time of the agreement was $0.107. On October 28, 2003, the Company issued 95,238 shares of stock to Newbridge Securities Corporation, an unrelated advisor, for services relating to the Standby Equity Distribution Agreement. The shares were valued at $0.105, the market price on the date of issuance. On October 27, 2003, the Company issued 7,279 shares of stock to one unrelated vendor as payment of past due liabilities of $1,000. The shares were valued at $0.105, the market price on the date of issuance. On October 27, 2003, the Company issued to Cornell Capital Partners, LP, 10,000,000 warrants to purchase shares of its common stock at an exercise price of $0.05 per share. The warrants were issued as a one-time commitment fee relating to the Standby Equity Distribution Agreement between Cornell and NeoMedia. On October 3, 2003, the Company finalized its purchase of Secure Source Technologies, Inc. for 3,500,000 shares of stock. The shares were valued at $0.14, the market price on the date of closing. On October 20, 2003, the Company issued 66,841 shares of stock to one unrelated vendor as payment of past due liabilities of $10,000. The shares were valued at $0.10. The market price on the date of the agreement was $0.10. On October 7, 2003, the Company issued 103,907 shares of stock to one unrelated vendor as payment of past due liabilities of $16,000. The shares were valued at $0.13. The market price on the date of the agreement was $0.13. On October 6, 2003, the Company issued 37,743 shares of stock to one unrelated vendor as payment of past due liabilities of $5,000. The shares were valued at $0.14. The market price on the date of issuance was $0.16. On September 25, 2003, the Company issued 875,855 shares of stock to an unrelated vendor as payment of past due liabilities totaling $34,000. The shares were valued at $0.23 based on the market price on the grant date. The market price on the date of issuance was $0.20. 30 On August 26, 2003, the Company issued 1,600,000 shares of stock to a former employee as payment of past due incentive compensation in the amount of $29,000. The shares were valued at $0.02. The market price on the date of issuance was $0.02. On August 26, 2003, the Company entered into an agreement to issue 450,000 shares of stock an unrelated vendor as payment of past due liabilities totaling $9,000. The shares were valued at $0.02. The market price on the date of the agreement was $0.02. On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of its outside directors. This amount was added to the principal of a $10,000 note payable to Mr. Fritz that matures in April 2004, with all other terms of the note remaining the same. As consideration for the loan, the Company granted Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.01 per share. On April 21, 2003, the Company sold 25,000,000 shares of its common stock, par value $0.01, in a private placement at a price of $0.01 per share. The Company's stock price at the time of the sale was $0.012. In connection with the sale, the Company also granted the purchaser 25,000,000 warrants to purchase shares of its common stock at an exercise price of $0.01 per share. The warrants had a fair value of $298,000 and have been recorded as a cost of issuance. The purchaser was William E. Fritz, a member of the Company's Board of Directors. Proceeds to NeoMedia from sale of the shares were $250,000. The Company recognized a discount expense in general and administrative expenses of approximately $50,000 relating to this transaction with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional shares of common stock at a price of $0.01 per share. On April 17, 2003, the Company's Board of Directors approved the payment in full of approximately $154,000 of liabilities owed by us to Charles W. Fritz, its Founder and Chairman of the Board of Directors, through the issuance of 15,445,967 shares of common stock. The shares were valued at $0.01. The market price on the date of issuance was $0.011. The Company recognized an expense in general and administrative expenses of approximately $15,000 relating to this transaction with Mr. Fritz. The Company relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and the Company's transfer agent was instructed not to permit transfers unless directed to do so by us, after approval by the Company's legal counsel. The Company believes that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. The Company also believes that the investors had access to the same type of information as would be contained in a registration statement. 31 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NISS (Physical-World-to-Internet Offerings) Business Unit Developments. Over the past several years, NeoMedia's focus has been aimed toward the commercialization of its Internet Switching Systems (NISS) business unit. NISS consists of the patented PaperClick(R) technology that enables users to link directly from the physical to the digital world, as well as the patents surrounding certain physical-world-to-web linking processes. NeoMedia's mission is to invent, develop, and commercialize technologies and products that effectively leverage the integration of the physical and electronic to provide clear functional value for its end-users, competitive advantage for their business partners and return-on-investment for their investors. On September 8, 2003, NeoMedia announced its PaperClick(R) for Camera Cell PhonesTM product, which reads and decodes UPC/EAN or other bar codes to link users to the Internet, providing information and enabling e-commerce on a compatible camera cell phone, such as the Nokia 3650 model. During the second quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a horizontal bar on the screen of a wireless device where users can enter numeric strings from UPC or other bar codes to link directly to targeted online information via patented PaperClick(R) technology and software. The PaperClick(R) Mobile Go-WindowTM currently works with Palm(TM) Tungsten C PDA, the Handspring(TM) Treo 270 and 600 Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent Device Profile) standard, and Microsoft Windows Mobile(TM)-based Smartphones. During 2003, NeoMedia unveiled the go-to-market strategy for its PaperClick(R) suite of products. Over the past several months, NeoMedia has signed contracts with several key partners outlined in the strategy, including agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (USA), AURA Digital Communications (Australia), Relyco (USA), E&I Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (USA), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed with systems integrator SAIC to create the PaperClick(R) WordRegistryTM, and European advertising agency 12Snap to provide click management services for PaperClick(R) products in Europe. In June 2004, NeoMedia entered into a collaborative agreement with Intel Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently introduced Intel PXA27x processor family-based cellular phones. In addition, during June 2004 NeoMedia signed a teaming agreement with IPSO, an integrator of proprietary solutions developed by its provider companies for financial institution members and a leader in meeting Check 21 standards. Enacted by Congress and signed into law last year, Check 21 requires banks to begin accepting substitute checks (called IRDs for image replacement documents) in lieu of original checks as of October 29, 2004. NeoMedia and IPSO could partner on proposals and presentations surrounding Check 21. During October 2004, NeoMedia and SAIC entered into a marketing alliance to jointly establish, launch, promote and manage the new worldwide mobile "PaperClick(R) WordRegistryTM," a linking and switching platform for use on Web-enabled cell phones and PDA's. When used with PaperClick(R) Mobile Go-Window, NeoMedia's new wireless product, which creates a text-entry window on a phone or PDA screen, registered words (or registered phrases) are entered to bring up an automatic link to specific targeted products and promotions. No official date has been set for the launch of the WordRegistryTM. During January 2005, NeoMedia signed a Letter of Intent to enter into a licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of mobile marketing products to be used with Shelron's ActivShopper comparison shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide 32 rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell phones and PDA's. ActivShopper is a free software download designed to automatically scan, locate and compare prices for items a consumer selects at an e-commerce site. NMPR (Micro Paint Repair) Business Unit Developments. On February 6, 2004, NeoMedia acquired 100% ownership of CSI International, Inc., of Calgary, Alberta, Canada, a private technology products company in the micro paint repair industry. NeoMedia currently has approximately 50 active paint repair end-user system agreements. On June 1, 2004, NeoMedia announced that it had entered into a distribution agreement with Micro Paint Systems (Australasia) Limited of New Zealand for exclusive distribution rights to NeoMedia's Micro Paint Repair products in Australia and New Zealand. The agreement is contingent upon a minimum purchase of 500 systems over five years in that territory. NeoMedia received an initial payment on signing of the contract, which included the fee for four initial systems. On June 22, 2004, NeoMedia announced its new product called "Silver Solutions," a process created specifically to mend the popular high metallic and pearl paint finishes on new cars. On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair business unit added five more licensees as part of a private label contract with Crackmaster Distributors Ltd., a Canadian auto aftermarket company. On August 2, 2004, NeoMedia announced that it signed a distribution agreement with Motor Dealer's Association (MDA) Co-Auto Ltd., the largest buying consortium for new car franchised dealers in Western Canada. The agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon. NCIS (Systems Integration) Business Unit Developments. NCIS (systems integration service offerings) is the original business line upon which the Company was organized. This unit resells client-server equipment and related software, and general and specialized consulting services. Systems integration services also identifies prospects for custom applications based on NeoMedia's products and services. These operations are based in Lisle, Illinois. Acquisitions CSI International, Inc. On February 6, 2004, NeoMedia acquired 100% ownership of CSI International, Inc., of Calgary, Alberta, Canada, a private company in the micro paint repair industry. NeoMedia issued 7,000,000 shares of its common stock, plus $2.5 million cash in exchange for all outstanding shares of CSI. NeoMedia has centralized the administrative functions in its Ft. Myers, Florida headquarters, and maintains a sales office in Calgary, Alberta, Canada. BSD Software, Inc. On December 21, 2004, NeoMedia and BSD Software Inc. ("BSD") (OTCBB: BSDS) signed a definitive Agreement and Plan of Merger. BSD owns 90% of the outstanding shares of Triton Global Business Services, Inc., a provider of live and automated operator calling services 33 and e-business support, including billing, clearinghouse and information management services, to companies in the telecommunications industry. BSD's shareholders will receive, for each share of BSD stock owned, NeoMedia stock equivalent to .07 divided by the volume-weighted average price of NeoMedia stock for the five days prior to the effective time of the merger. The agreement has been approved by holders of approximately 63% of BSD's outstanding shares and its Board. NeoMedia and BSD expect to file a joint registration/information statement with the SEC in the first quarter of 2005. NeoMedia expects to complete the merger when the review is complete and the registration is approved. At this time, the exchange rate will be determined and closing will be held. Closing is subject to the terms and conditions outlined in the merger agreement, as well as regulatory approval of the merger and registration/information statement by the United States Securities and Exchange Commission. Secure Source Technologies, Inc. On October 8, 2003, NeoMedia acquired Secure Source Technologies, a provider of security solutions and covert security technology for the manufacturing and financial services industries, in exchange for 3.5 million shares of NeoMedia's common stock. With the purchase of SST, NeoMedia acquired additional patents that complement its existing intellectual property portfolio, as well as a security software platform, and computer equipment. iPoint-Media Ltd. On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of Tel Aviv, Israel, entered into a business development agreement. In exchange for entering into the service agreement, NeoMedia received 7% ownership in iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In addition to the business development agreement, NeoMedia acquired an additional 10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for $1 million cash. iPoint-media was founded in April 2001 as a spin off from Imagine Visual Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli holding company, Singapore-based Keppel T&T, and marketing and advertising group WPP. iPoint-media specializes in Customer Interaction Management and is the world's 1st developer of IP Video Call Centers for Deutsche Telecom. Muki Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European customer support center in The Netherlands. iPoint-media's mission is to become the video access platform and application engine of choice for service providers. On October 26, 2004, NeoMedia announced that it would issue its first-ever stock dividend with the distribution of common shares of IPoint-media Ltd. of Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435 shares) of iPoint-media's common stock to NeoMedia shareholders of record as of November 17, 2004. The date of the property dividend payment will be announced after the Securities and Exchange Commission declares iPoint-media's Form SB-2 registration statement effective. NeoMedia's 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 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. 34 Critical Accounting Policies The U.S. Securities and Exchange Commission ("SEC") issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, NeoMedia's most critical accounting policies include: inventory valuation, which affects cost of sales and gross margin; and the valuation of intangibles, which affects amortization and impairment of goodwill and other intangibles. NeoMedia also has other key accounting policies, such as policies for revenue recognition, including the deferral of a portion of revenues on sales to distributors, allowance for doubtful accounts, and stock-based compensation. The methods, estimates and judgments NeoMedia uses in applying these most critical accounting policies have a significant impact on the results it reports in its consolidated financial statements.. Intangible Asset Valuation. The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, NeoMedia primarily uses the weighted-average probability method outlined in SFAS 144. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates NeoMedia has used are consistent with the plans and estimates that NeoMedia uses to manage its business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect NeoMedia's net operating results. Allowance for Doubtful Accounts. NeoMedia maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Allowance for doubtful accounts is based on NeoMedia's assessment of the collectibility of specific customer accounts, the aging of accounts receivable, NeoMedia's history of bad debts, and the general condition of the industry. If a major customer's credit worthiness deteriorates, or NeoMedia's customers' actual defaults exceed historical experience, NeoMedia's estimates could change and impact its reported results. Inventory. Inventories are stated at lower of cost (using the first-in, first-out method) or market. The Company continually evaluates the composition of its inventories assessing slow-moving and ongoing products and maintains a reserve for slow-moving and obsolete inventory as well as related disposal costs. Stock-based Compensation. NeoMedia records stock-based compensation to outside consultants at fair market value in general and administrative expense. NeoMedia does not record expense relating to stock options granted to employees with an exercise price greater than or equal to market price at the time of grant. NeoMedia reports pro-forma net loss and loss per share in accordance with the requirements of SFAS 123 and 148. This disclosure shows net loss and loss per share as if NeoMedia had accounted for its employee stock options under the fair value method of those statements. Pro-forma information is calculated using the Black-Scholes pricing method on the date of grant. This option valuation model requires input of highly subjective assumptions. Because NeoMedia's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of fair value of its employee stock options. 35 Estimate of Litigation-based Liability. NeoMedia is defendant in certain litigation in the ordinary course of business (see "Legal Proceedings"). NeoMedia accrues liabilities relating to these lawsuits on a case-by-case basis. NeoMedia generally accrues attorney fees and interest in addition to the liability being sought. Liabilities are adjusted on a regular basis as new information becomes available. NeoMedia consults with its attorneys to determine the viability of an expected outcome. The actual amount paid to settle a case could differ materially from the amount accrued. Revenue Recognition. NeoMedia derives revenues from three primary sources: (1) license revenues and (2) resale of software and technology equipment and service fee revenues, and (3) sale of its proprietary Micro Paint Repair solution. (1) License fees, including Intellectual Property licenses, represent revenue from the licensing of NeoMedia's proprietary software tools and applications products. NeoMedia licenses its development tools and application products pursuant to non-exclusive and non-transferable license agreements. Resales of software and technology equipment represent revenue from the resale of purchased third party hardware and software products and from consulting, education, maintenance and post contract customer support services. The basis for license fee revenue recognition is substantially governed by American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended, and Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue Recognition, With Respect to Certain Transactions.". License revenue is recognized if persuasive evidence of an agreement exists, delivery has occurred, pricing is fixed and determinable, and collectibility is probable. (2) Revenue for resale of software and technology equipment and service fee is recognized based on guidance provided in SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in Financial Statements," as amended (SAB 104). Software and technology equipment resale revenue is recognized when all of the components necessary to run software or hardware have been shipped. Service revenues including maintenance fees for providing system updates for software products, user documentation and technical support are recognized over the life of the contract. Software license revenue from long-term contracts has been recognized on a percentage of completion basis, along with the associated services being provided. Other service revenues, including training and consulting, are recognized as the services are performed. NeoMedia uses stand-alone pricing to determine an element's vendor specific objective evidence (VSOE) in order to allocate an arrangement fee amongst various pieces of a multi-element contract. NeoMedia records an allowance for doubtful accounts on a customer-by-customer basis as appropriate. In December 2003, the SEC issued SAB 104, "Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of 36 SAB 104, which was effective upon issuance. The adoption of SAB 104 did not impact the consolidated financial statements. (3) Revenue for training and certification on NeoMedia's Micro Paint Repair systems is recognized equally over the term of the contract, which is currently one year. A portion of the initial fee paid by the customer is allocated to training costs and initial products sold with the system, and is recognized upon completion of training and shipment of the products. Ongoing product and service revenue is recognized as products are shipped and services performed. 37 Results of Operations for the Year Ended December 31, 2004 as Compared to the Year Ended December 31, 2003 Net sales. Total net sales for the year ended December 31, 2004 were $1,700,000, which represented a $700,000, or 29%, decrease from $2,400,000 for the year ended December 31, 2003. This decrease primarily resulted from reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions, offset by new sales from the Company's Micro Paint Repair business acquired during February 2004. NeoMedia could realize an increase in license fees over the next 12 months if the Company is successful in implementing its PaperClick(R) go-to-market strategy, or if pending court cases involving its intellectual property are resolved in NeoMedia's favor. NeoMedia could also realize a material increase in Micro Paint Repair revenue if the Company is successful in implementing its business plan for that business unit. License fees. License fees were $343,000 for the year ended December 31, 2004, compared with $414,000 for the year ended December 31, 2003, a decrease of $71,000, or 17%. The decrease was due to lower sales of internally developed software licenses in 2004. NeoMedia could realize an increase in license fees over the next 12 months if the Company is successful in implementing its PaperClick(R) go-to-market strategy, or if pending court cases involving its intellectual property are resolved in NeoMedia's favor. Resales of software and technology equipment and service fees. Resales of software and technology equipment and service fees decreased by $1,356,000, or 68%, to $630,000 for the year ended December 31, 2004, as compared to $1,986,000 for the year ended December 31, 2003. This decrease primarily resulted from reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions. NeoMedia intends to continue to pursue additional resales of equipment, software and services. NeoMedia expects resales to more closely resemble the results for the year ended December 31, 2004, rather than the year ended December 31, 2003. Micro Paint Repair products and services. Sales of Micro Paint Repair products and services were $727,000 for the year ended December 31, 2004. NeoMedia acquired this business on February 6, 2004, and as a result there were no sales of Micro Paint Repair products and services during the year ended December 31, 2003. NeoMedia could realize a material increase in Micro Paint Repair revenue if the Company is successful in implementing its business plan for that business unit. Cost of license fees. Cost of license fees was $324,000 for the year ended December 31, 2004, an increase of $24,000, or 8%, compared with $300,000 for the year ended December 31, 2003. The increase resulted from increased amortization of capitalized patent costs during 2004 compared with 2003. Cost of resales of software and technology equipment and service. Cost of resales of software and technology equipment and service was $604,000 for the year ended December 31, 2004, a decrease of $1,225,000, or 67%, compared with $1,829,000 for the year ended December 31, 2003. The decrease resulted from decreased resales in 2004 compared with 2003. Cost of resales as a percentage of related resales was 96% in 2004, compared to 92% in 2003. This increase is due to revenue declining more rapidly than the fixed portion of costs of resales, coupled with eroding margins in the resale business. NeoMedia expects costs of resales to fluctuate with the mix of sales of equipment, software, and services over the next 12 months. Cost of Micro Paint Repair products and services. Cost of micro paint repair products and services was $541,000 for the year ended December 31, 2004. Cost of micro paint repair products and services as a percentage of related sales was 74%. NeoMedia acquired this business on February 6, 2004, and as a result there were no cost of sales of micro paint repair products and services during the year ended December 31, 2003. NeoMedia expects cost of micro paint repair products and services to increase with Micro Paint Repair revenue over the next 12 months as the Company continues its roll-out of this business unit. 38 Gross Profit. Gross profit was $231,000 for the year ended December 31, 2004, a decrease of $40,000, or 15%, compared with gross profit of $271,000 for the year ended December 31, 2003. This decrease was primarily the result of reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions. Sales and marketing. Sales and marketing expenses were $2,046,000 for the year ended December 31, 2004, compared to $523,000 for the year ended December 31, 2003, an increase of $1,523,000 or 291%. This increase resulted primarily from the addition of recently-acquired Micro Paint Repair business sales force and cost associated with marketing and as promotion of the Company's PaperClick(R) and Micro Paint Repair products. NeoMedia expects sales and marketing expense to increase over the next 12 months with the continued development and anticipated rollout of the PaperClick(R) and Micro Paint Repair product suites, as well as the anticipated acquisition of BSD Software. General and administrative. General and administrative expenses decreased by $2,055,000, or 48%, to $2,215,000 for the year ended December 31, 2004, compared to $4,270,000 for the year ended December 31, 2003. The decrease resulted primarily from non-cash expenses relating to the Company's option repricing program, expense for stock options issued with exercise prices below market price, and higher stock-based professional service expense in 2003 as compared with 2004. NeoMedia expects general and administrative expense to increase over the next 12 months with the recent acquisition of CSI International and the potential acquisition of BSD Software. Research and development. During the year ended December 31, 2004, NeoMedia charged to expense $651,000 of research and development costs, an increase of $319,000 or 96% compared to $332,000 charged to expense for the year ended December 31, 2003. The increase is primarily due to the addition of development headcount and computer systems during 2004, as well as development costs associated with the Micro Paint Repair business unit acquired in 2004. NeoMedia expects research and development costs to increase over the next 12 months with the continued development efforts of its PaperClick(R) and Micro Paint Repair products and services. Gain on extinguishment of debt. During the year ended December 31, 2004, NeoMedia recognized a gain on extinguishment of debt of $140,000, resulting from the payment of debt at a discount to the book value of the debt, an increase of $292,000, or 192%, compared with a loss on extinguishment of debt of $152,000 for the year ended December 31, 2003. These gains resulted from a difference between the cash or market value of stock issued to settle the debt and the carrying value of the debt at the time of settlement. Amortization of debt discount. During the year ended December 31, 2004, NeoMedia recognized an amortization of debt issuance cost of $2,500,000 relating to the fair value of warrants granted to Cornell Capital Partners in connection with promissory notes issued to Cornell by NeoMedia during January 2004. NeoMedia did not recognize any such expense during the year ended December 31, 2003. During the year ended December 31, 2004, NeoMedia amortized the full $2.5 million discount value relating to the Cornell warrants, and as a result does not expect to recognize such expense in the next 12 months. Interest expense. Interest expense consists primarily of interest accrued for creditors as part of financed purchases, past due balances, notes payable and interest earned on cash equivalent investments. Interest expense decreased by $187,000, or 50%, to $189,000 for the year ended December 31, 2004 from $376,000 for the year ended December 31, 2003, due to reduced expense associated with vendor settlements and debt in 2004 compared with 2003. Net Loss. The net loss for the year ended December 31, 2004 was $7,230,000, which represented a $1,848,000, or 34% increase from a $5,382,000 loss for the year ended December 31, 2003. The increase resulted primarily from the amortization of debt issuance cost of $2,500,000 in 2004, offset by reduced general and administrative costs in 2004. 39 Liquidity and Capital Resources As of December 31, 2004, NeoMedia's cash balance was $2,634,000, compared to $61,000 at December 31, 2003. Net cash used in operating activities was approximately $4,650,000 for the year ended December 31, 2004, compared with $2,979,000 for the year ended December 31, 2003, an increase of $1,671,000, or 56%. The increase was primarily due to increased sales and marketing expenses in 2004 associated with NeoMedia's PaperClick(R) products, the addition of infrastructure with the acquisition of CSI, and the continued payment of accounts payable and accruals incurred in previous years. NeoMedia's net cash flow used in investing activities for the years ended December 31, 2004 and 2003, was $1,252,000 and $281,000, respectively, an increase of $971,000, or 346%. The increase was due to the Company's $1 million investment in I-Point Media Ltd. during 2004. Net cash provided by financing activities for the years ended December 31, 2004 and 2003 was $8,535,000 and $3,251,000, respectively, an increase of $5,284,000, or 163%. The increase was due to increased draws under the Company's Standby Equity Distribution Agreement with Cornell Capital Partners in 2004 as compared with 2003. During the years ended December 31, 2004 and 2003, NeoMedia's net loss totaled $7,230,000 and $5,382,000, respectively. As of December 31, 2004, NeoMedia had accumulated losses from operations of $83,377,000, had a working capital deficit of $2,597,000, and $2,634,000 in cash balances. The accompanying consolidated financial statements have been prepared assuming NeoMedia will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments that might result from NeoMedia's inability to continue as a going concern. NeoMedia may obtain up to $20 million through its Standby Equity Distribution Agreement with Cornell Capital Partners. As of December 31, 2004, NeoMedia had drawn $8 million against the Standby Equity Distribution Agreement, leaving an available balance of $12 million. NeoMedia sold approximately 107 million shares during 2004 to Cornell to draw $8 million against the Standby Equity Distribution Agreement. There can be no assurances that the market for NeoMedia's stock will support the sale of sufficient shares of NeoMedia's common stock to raise sufficient capital to sustain operations for such a period, or that actual revenue will meet management's expectations. If necessary funds are not available, NeoMedia's business and operations would be materially adversely affected and in such event, NeoMedia would attempt to reduce costs and adjust its business plan. 40 Contractual Obligations The following table presents the Company's contractual obligations as of December 31, 2004, over the next five years and thereafter:
Payments by Period (in thousands) - --------------------------------------------------------------------------------------------------- Less Than 1-3 4-5 After 5 Amount 1 Year Years Years Years --------- --------- --------- --------- --------- Legal Settlements $ 185 $ 181 $ 4 $ -- $ -- Vendor Settlements & Agreements 89 73 16 -- -- Operating Leases 89 89 -- -- -- Short Term Debt 1,136 1,136 -- -- -- --------- --------- --------- --------- --------- Total Contractual Cash Obligations $ 1,499 $ 1,479 $ 20 $ -- $ -- ========= ========= ========= ========= =========
Intangible Assets At the end of each quarter, or upon occurrence of material events relating to a specific intangible item, NeoMedia performs impairment tests on each of its intangible assets, which include goodwill, capitalized patent costs, repair chemical formulations and proprietary process, customer base and trademarks, and capitalized and purchased software costs. In doing so, NeoMedia evaluates the carrying value of each intangible asset with respect to several factors, including historical revenue generated from each intangible asset, application of the assets in NeoMedia's current business plan, and projected discounted cash flow to be derived from the asset. Intangible asset balances are then adjusted to their current net realizable value based on these criteria if impaired. The Company received an independent valuation of its patent portfolio as of December 31, 2003. In addition, the Company had an independent valuation on the intangible assets acquired through the acquisition of CSI and has assigned the fair value of the intangible assets based on the fair value assessed in the appraisal. The independent valuation concluded that no impairment was necessary as of December 31, 2003. No impairment charges were taken during the year ended December 31, 2004 or 2003. Financing Agreements As of December 31, 2003 and 2002, NeoMedia was party to a commercial financing agreement with GE Access that provides short-term financing for certain computer hardware and software purchases. This arrangement allows NeoMedia to re-sell high-dollar technology equipment and software without committing cash resources to financing the purchase. Termination of this financing relationship with GE Access could materially adversely affect NeoMedia's financial condition by hindering its ability to resell hardware and software. Management expects the agreement to remain in place in the near future. As of December 31, 2004, the amount payable under this financing arrangement was approximately $17,000. Note Payable to Cornell Capital Partners, LLC On October 18, 2004, the Company borrowed from Cornell the gross amount of $1,085,000 before discounts and fees. Cornell withheld a retention fee of $85,000 related to the issuance of stock to pay off the debt in the future. The note was repaid during January 2005. The Company invested the proceeds from the note in iPoint-media pursuant to the investment agreement between NeoMedia and iPoint-media (see "iPoint-media Ltd." for description of agreement). 41 Going Concern The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Through December 31, 2004, NeoMedia has not been able to generate sufficient revenues from its operations to cover its costs and operating expenses. Although NeoMedia has been able to issue its common stock or other financing for a significant portion of its expenses, it is not known whether NeoMedia will be able to continue this practice, or if revenue will increase significantly to be able to meet cash operating expenses. This, in turn, raises substantial doubt about NeoMedia's ability to continue as a going concern. Management believes that NeoMedia will be able to raise additional funds through its $20 million Standby Equity Distribution Agreement with Cornell, or through other strategic investments. However, there can be no assurances that the market for NeoMedia's stock will support the sale of sufficient shares of stock to raise enough capital to sustain operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Based on current cash balances and operating budgets, as well as the $12 million available under its Standby Equity Distribution Agreement, NeoMedia believes it has sufficient financing available to operate until at least December 31, 2005. NeoMedia cannot predict whether additional financing will be available, its form, whether equity or debt, or be in another form, or if it will be successful in identifying entities with which it may consummate a merger or other corporate finance transactions. Effect Of Recently Issued Accounting Pronouncements In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104 did not impact the consolidated financial statements. In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. The disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of the disclosure requirements of EITF 03-1 and does not believe the impact will be significant to the Company's overall results of operations or financial position. Once the FASB reaches a final decision on the measurement and recognition provisions, the company will evaluate the impact of the adoption of EITF 03-1. In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and 42 require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. . The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS 152). The amendments made by Statement 152 amend FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005 with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment". Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently evaluating the impact of the adoption of this Statement. 43 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 None. ITEM 8A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. NeoMedia's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of NeoMedia's "disclosure controls and procedures" (as defined in Sections 13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period reported in this annual report (the "Evaluation Date"), concluded that NeoMedia's disclosure controls and procedures were effective and designed to ensure that material information relating to NeoMedia and its consolidated subsidiaries is accumulated and would be made known to them by others within those entities as appropriate to allow timely decisions regarding required disclosures. Changes in Internal Controls. NeoMedia does not believe that there are significant deficiencies in the design or operation of its internal controls that could adversely affect its ability to record, process, summarize and report financial data. Although there were no significant changes in NeoMedia's internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date, NeoMedia's senior management, in conjunction with its Board of Directors, continuously reviews overall company policies and improves documentation of important financial reporting and internal control matters. NeoMedia is committed to continuously improving the state of its internal controls, corporate governance and financial reporting. Limitations on the Effectiveness of Controls. NeoMedia's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 44 Report of Independent Registered Public Accounting Firm Board of Directors NeoMedia Technologies, Inc. We have audited the accompanying consolidated balance sheets of NeoMedia Technologies, Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's significant operating losses and working capital deficit raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ STONEFIELD JOSEPHSON, INC. - ------------------------------ CERTIFIED PUBLIC ACCOUNTANTS Irvine, California February 11, 2005 F-1 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share data)
December 31, 2004 ------------ ASSETS Current assets: Cash and cash equivalents $ 2,634 Trade accounts receivable, net of allowance for doubtful accounts of $46 282 Inventories, net of allowance for obsolete & slow-moving inventory of $0 115 Prepaid expenses and other current assets 386 ------------ Total current assets 3,417 Property and equipment, net 110 Capitalized patents, net 2,174 Micro paint repair chemical formulations and proprietary process, net 1,630 Goodwill 1,099 Other Intangible assets, net 221 Investment in iPoint-media, Ltd. 1,000 Cash surrender value of life insurance policy 728 Other long-term assets 27 ------------ Total assets $ 10,406 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,911 Amounts payable under settlement agreements 103 Liabilities of discontinued business unit 676 Sales taxes payable 108 Accrued expenses 1,566 Deferred revenues and other 514 Notes payable 1,136 ------------ Total current liabilities 6,014 ------------ Shareholders' equity: Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued and outstanding -- Common stock, $0.01 par value, 1,000,000,000 shares authorized, 436,746,758 shares issued and 432,525,053 outstanding 4,325 Additional paid-in capital 84,728 Deferred stock-based compensation (445) Accumulated deficit (83,377) Accumulated other comprehensive loss - foreign currency translation adjustment (60) Treasury stock, at cost, 201,230 shares of common stock (779) ------------ Total shareholders' equity 4,392 ------------ Total liabilities and shareholders' equity $ 10,406 ============
The accompanying notes form an integral part of these consolidated financial statements. F-2 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years Ended December 31, -------------------------------- 2004 2003 -------------- -------------- NET SALES: License fees $ 343 $ 414 Resale of software and technology equipment and service fees 630 1,986 Micro paint repair products and services 727 -- -------------- -------------- Total net sales 1,700 2,400 -------------- -------------- COST OF SALES: License fees 324 300 Resale of software and technology equipment and service fees 604 1,829 Micro paint repair products and services 541 -- -------------- -------------- Total cost of sales 1,469 2,129 -------------- -------------- GROSS PROFIT 231 271 Sales and marketing expenses 2,046 523 General and administrative expenses 2,215 4,270 Research and development costs 651 332 -------------- -------------- Loss from operations (4,681) (4,854) Gain (loss) on extinguishment of debt 140 (152) Amortization of debt discount (2,500) -- Interest expense, net (189) (376) -------------- -------------- NET LOSS (7,230) (5,382) Other comprehensive loss: Foreign currency translation adjustment (60) -- -------------- -------------- COMPREHENSIVE LOSS $ (7,290) $ (5,382) ============== ============== LOSS PER SHARE--BASIC AND DILUTED $ (0.02) $ (0.04) ============== ============== Weighted average number of common shares--basic and diluted 329,362,127 125,029,723 ============== ==============
The accompanying notes form an integral part of these consolidated financial statements. F-3 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, ------------------------ 2004 2003 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,230) $ (5,382) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of discount on note payable 2,500 -- Depreciation and amortization 674 470 Inventory reserve -- 13 Bad debt 24 191 Expense (decrease of fair value) for repriced options 104 773 Fair value of expense portion of stock-based compensation granted for professional services 626 1,000 Interest expense allocated to debt 3 56 Discount related to common stock issuance -- 50 Loss on payment of accounts payable in stock -- 152 (Increase)/decrease in value of life insurance policies (1) (35) Changes in operating assets and liabilities Trade accounts receivable, net (82) 212 Inventory (58) (3) Other current assets 68 273 Accounts payable (421) (1,064) Amounts payable under settlement agreements (669) 772 Liabilities of discontinued business unit 19 (838) Sales taxes payable (29) (189) Accrued expenses (177) 936 Deferred revenue other current liabilities (1) (366) ---------- ---------- Net cash used in operating activities (4,650) (2,979) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Amounts issued under notes receivable -- (209) Investment in iPoint-media, Ltd. (1,000) -- Capitalization of software development and purchased intangible assets (141) (28) Acquisition of property and equipment (111) (44) ---------- ---------- Net cash used in investing activities (1,252) (281) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, net of issuance costs of $620 in 2004 and $226 in 2003 7,906 250 Net proceeds from exercise of stock options and warrants 2,687 406 Borrowings under notes payable and long-term debt 9,085 3,350 Repayments on notes payable and long-term debt (8,753) (755) Cash paid to acquire CSI International, Inc. (net of cash acquired) (2,390) -- ---------- ---------- Net cash provided by financing activities 8,535 3,251 ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (60) -- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,573 (9) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 61 70 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,634 $ 61 ========== ========== F-4 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid/(received) during the period $ 111 $ 6 Income taxes paid -- -- Non-cash investing and financing activities: Reduction in accounts payable and accruals for debt paid in stock 190 1,509 Reduction of note payable paid in stock 32 -- Reduction of long-term debt and accrued interest paid in stock -- 904 Fair value of stock issued for services and deferred to future periods 653 282 Fair value of shares issued to acquire CSI Int'l (net of costs of registration) 695 -- Change in net assets resulting from acquisition of CSI (net of cash acquired) 3,090 -- Value of stock granted to acquire Secure Source Technologies, Inc. -- 500 Gain (loss) on extinguishment of debt 140 (152) Direct costs associated with Standby Equity Distribution Agreement and Equity Line of Credit 2,216 6,772 Fair value of warrants issued as a direct incremental cost of financing -- 93 Discount recognized on the issuance of stock with notes payable -- 56
The accompanying notes form an integral part of these consolidated financial statements. F-5 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
---------------------------------------------------------------------------------------- Common Stock ------------------------------------------------- Accumulated Additional Deferred Other Paid-in Stock Comprehensive Shares Amount Capital Compensation Loss - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 30,746,968 $ 307 $ 65,442 (231) $ 0 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Shares issued to Cornell Capital Partners under Equity line of Credit 98,933,244 990 1,803 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Issuance of Common Stock through private Placement, Net of $6,818 of issuance costs 25,000,000 250 50 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Exercise of employee options 15,599,175 156 0 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Exercise of Warrants 28,904,900 289 (39) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Expense associated with option & warrant repricing -- -- 774 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Fair value stock, options, & warrants issued for professional services rendered 4,030,424 40 385 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Stock issued to pay past due liabilities 40,776,546 408 2,505 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Issuance of warrants and stock with debt -- -- 19 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Expense recognized for options issued with exercise price below market price -- -- 626 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Change in Deferred Stock Compensation -- -- -- (51) -- - --------------------------------------------------------------------------------------------------------------------------------- Net Loss -- -- -- -- -- ================================================================================================================================= BALANCE, DECEMBER 31, 2003 243,991,257 $ 2,440 $ 71,565 $ (282) $ 0 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Shares issued to Cornell Capital Partners under ELOC and SEDA 112,743,417 1,127 6,864 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 12,860,616 129 43 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Exercise of stock warrants 51,510,000 515 2,000 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Fair value stock, options, & warrants issued for professional services rendered 2,013,375 20 785 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Stock issued to pay past due liabilities 2,406,388 24 242 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Stock issued in connection with acquisition of CSI International 7,000,000 70 625 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Expense associated with option repricing -- -- 104 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Fair value of warrants issued with debt -- -- 2,500 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Change in Deferred Stock Compensation -- -- -- (163) -- - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive loss - foreign currency translation adjustment -- -- -- -- (60) - --------------------------------------------------------------------------------------------------------------------------------- Net Loss -- -- -- -- -- ================================================================================================================================= BALANCE, DECEMBER 31, 2004 432,525,053 $ 4,325 $ 84,728 (445) $ (60) =================================================================================================================================
F-6
---------------------------------------------------------------------- Treasury Stock ---------------------------- Total Accumulated Stockholders' Deficit Shares Amount Equity - --------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 $ (70,765) 201,230 $ (779) $ (6,026) - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Shares issued to Cornell Capital Partners under Equity line of Credit -- -- -- 2,793 - --------------------------------------------------------------------------------------------------------------- Issuance of Common Stock through private Placement, Net of $6,818 of issuance costs -- -- -- 300 - --------------------------------------------------------------------------------------------------------------- Exercise of employee options -- -- -- 156 - --------------------------------------------------------------------------------------------------------------- Exercise of Warrants -- -- -- 250 - --------------------------------------------------------------------------------------------------------------- Expense associated with option & warrant repricing -- -- -- 774 - --------------------------------------------------------------------------------------------------------------- Fair value stock, options, & warrants issued for professional services rendered -- -- -- 425 - --------------------------------------------------------------------------------------------------------------- Stock issued to pay past due liabilities -- -- -- 2,913 - --------------------------------------------------------------------------------------------------------------- Issuance of warrants and stock with debt -- -- -- 19 - --------------------------------------------------------------------------------------------------------------- Expense recognized for options issued with exercise price below market price -- -- -- 626 - --------------------------------------------------------------------------------------------------------------- Change in Deferred Stock Compensation -- -- -- (51) - --------------------------------------------------------------------------------------------------------------- Net Loss (5,382) -- -- (5,382) =============================================================================================================== BALANCE, DECEMBER 31, 2003 $ (76,147) 201,230 $ (779) $ (3,203) - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Shares issued to Cornell Capital Partners under ELOC and SEDA -- -- -- 7,991 - --------------------------------------------------------------------------------------------------------------- Exercise of stock options -- -- -- 172 - --------------------------------------------------------------------------------------------------------------- Exercise of stock warrants -- -- -- 2,515 - --------------------------------------------------------------------------------------------------------------- Fair value stock, options, & warrants issued for professional services rendered -- -- -- 805 - --------------------------------------------------------------------------------------------------------------- Stock issued to pay past due liabilities -- -- -- 266 - --------------------------------------------------------------------------------------------------------------- Stock issued in connection with acquisition of CSI International -- -- -- 695 - --------------------------------------------------------------------------------------------------------------- Expense associated with option repricing -- -- -- 104 - --------------------------------------------------------------------------------------------------------------- Fair value of warrants issued with debt -- -- -- 2,500 - --------------------------------------------------------------------------------------------------------------- Change in Deferred Stock Compensation -- -- -- (163) - --------------------------------------------------------------------------------------------------------------- Comprehensive loss - foreign currency translation adjustment -- -- -- (60) - --------------------------------------------------------------------------------------------------------------- Net Loss (7,230) -- -- (7,230) =============================================================================================================== BALANCE, DECEMBER 31, 2004 $ (83,377) 201,230 $ (779) $ 4,392 ===============================================================================================================
The accompanying notes form an integral part of these consolidated financial statements. F-7 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS Basis of Presentation The consolidated financial statements include the financial statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A. incorporated in Guatemala; NeoMedia Technologies of Canada, Inc. incorporated in Canada; NeoMedia Tech, Inc. incorporated in Delaware; NeoMedia EDV GmbH incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V. incorporated in Mexico; NeoMedia Technologies do Brasil Ltd. incorporated in Brazil, NeoMedia Technologies UK Limited incorporated in the United Kingdom, NeoMedia Micro Paint Repair, Inc. a Nevada corporation, and NeoMedia Telecom Services, Inc. a Nevada corporation, and are collectively referred to as "NeoMedia" or the "Company". The consolidated financial statements of NeoMedia are presented on a consolidated basis for all years presented. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported net losses of $7,230,000 and $5,382,000 for the years ended December 31, 2004 and 2003, respectively, and has an accumulated deficit of $83,377,000 as of December 31, 2004. In addition, the Company had working capital deficit of $2,597,000 as of December 31, 2004. The Company cannot be certain that anticipated revenues from operations will be sufficient to satisfy its ongoing capital requirements. Management's belief is based on the Company's operating plan, which in turn is based on assumptions that may prove to be incorrect. If the Company's financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity, debt, or another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. Should these financing sources fail to materialize, management would seek alternate funding sources through sale of common and/or preferred stock. Management's plan is to secure adequate funding to bridge to profitability from the Company's PaperClick(R) business, intellectual property portfolio and Micro Paint Repair business. F-8 Nature of Business Operations During 2004, NeoMedia was structured as three distinct business units: NeoMedia Internet Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS), and NeoMedia Micro Paint Repair (NMPR). NISS (physical world-to-Internet offerings) is the core business and is based in the United States, with development and operating facilities in Fort Myers, Florida. NISS develops and supports NeoMedia's physical world to Internet core technology, including the linking "switch" and application platforms. NISS also manages NeoMedia's intellectual property portfolio, including the identification and execution of licensing opportunities surrounding the patents. NCIS (systems integration service offerings) is the original business line upon which NeoMedia was organized. This unit resells client-server equipment and related software, and general and specialized consulting services. Systems integration services also identifies prospects for custom applications based on NeoMedia's products and services. These operations are based in Lisle, Illinois. NMPR (Micro Paint Repair offerings) is the business unit encompassing the recently-acquired CSI International chemical line. NMPR is attempting to commercialize its unique micro-paint repair solution. The Company completed its acquisition of CSI on February 6, 2004. As a result, NeoMedia's results for the year ended December 31, 2003 do not include operations from this business unit. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For the purposes of the consolidated balance sheet and consolidated statements of cash flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. The Company maintains bank accounts with balances which, at times, may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company believes it is not exposed to any significant risk on bank deposit accounts. As of December 31, 2004, the Company had cash balances of $2,692,000 which were not insured by the FDIC. Financial Instruments The carrying amount of the Company's cash equivalents, accounts receivable, prepaid expenses, other current assets, cash surrender value of life insurance policy, accounts payable and accrued expenses, accrued salaries and benefits, and payable to merchants approximates their estimated fair values due to the short-term maturities of those financial instruments. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. F-9 It is not practicable to estimate the fair value of the Company's 17% investment in the common stock of i-Point Media Ltd., which distributes video, audio and data over IP networks, because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. However, management believes that the carrying amount (on the cost method) of $1,000,000 at December 31, 2004 was not impaired. Pertinent financial information reported by iPoint Media Ltd. is as follows: (in thousands of US dollars) --------------------------- 2004 2003 ----------- ------------ Total assets $1,119 $193 Stockholders' deficit (341) (1,451) Revenues 514 618 Net loss (695) (544) Accounts Receivable The Company reports accounts receivable at net realizable value. The Company's terms of sale provide the basis for when accounts become delinquent or past due. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of accounts receivable. Receivables are generally charged off and sent to a collections agency after ninety days past due. It is at least reasonably possible that the Company's estimate of the allowance for doubtful accounts will change in the near-term. At December 31, 2004, the allowance for doubtful accounts was $46,000. Inventories Inventories are stated at the lower of cost or market, and at December 31, 2003 was comprised of purchased computer technology resale products and micro paint repair products. Cost is determined using the first-in, first-out method. At December 31, 2003, the reserve for obsolescence was $13,000.There was no reserve as of December 31, 2004. Property and Equipment Property and equipment are carried at cost less allowance for accumulated depreciation. Repairs and maintenance are charged to expense as incurred. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations. The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures, which increase the life of an asset, are capitalized and depreciated over the estimated remaining life of the asset. The estimated service lives of property and equipment are as follows: Furniture and fixtures 7 years Computer equipment 3 to 5 years Capitalized Patents Patents (including patents pending and intellectual property) are stated at cost, less accumulated amortization. Patents are generally amortized over periods ranging from five to seventeen years. F-10 Micro Paint Chemical Formulations and Proprietary Processes Micro Paint Repair chemical formulations and proprietary processes consists of the estimated fair value of the formulations acquired from CSI International, Inc. that are used in NeoMedia's Micro Paint Repair business unit. The estimated fair value was determined using an independent appraisal of the assets and liabilities acquired in the transaction. This value is being amortized using the straight-line method over its estimated useful life of 10 years. Goodwill Goodwill consists of the excess fair value of purchase price paid for CSI International, Inc. over the identifiable net assets and liabilities acquired. Goodwill was determined using an independent appraisal of the assets and liabilities acquired in the transaction. Goodwill was not assigned a life and will be tested for impairment as defined by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Other Intangible Assets Other intangible assets consists of customer base/contracts, copyrighted material and acquired software products, which are amortized over the expected life of the product, generally three to five years. Investments Investments consist of NeoMedia's investment in iPoint-media. On September 7, 2004, NeoMedia acquired 17% ownership of iPoint-media, consisting of 69,196 shares of common stock, for $1 million cash. NeoMedia has recorded the investment at cost as of December 31, 2004. Evaluation of Long-Lived Assets In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The statement also supersedes certain provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period or periods in which the losses are incurred rather than as of the measurement date, as presently required. NeoMedia adopted this new statement on January 1, 2002, and concluded that the effect of adopting this statement had no material impact on NeoMedia's financial position, results of operations, or cash flows. Amounts Due Under Settlement Agreements NeoMedia is party to various settlement agreements with certain of its vendors relating to past due accounts payable. The settlement agreements generally call for monthly payment installments against such past due amounts. F-11 Revenue Recognition During 2004 and 2003, NeoMedia derived revenues from three primary sources: (1) license revenues, (2) resale of software and technology equipment and service fee revenues, and (3) Micro Paint Repair sales. (1) License fees, including Intellectual Property license, represent revenue from the licensing of NeoMedia's proprietary software tools and applications products. NeoMedia licenses its development tools and application products pursuant to non-exclusive and non-transferable license agreements. Resales of software and technology equipment represent revenue from the resale of purchased third party hardware and software products and from consulting, education, maintenance and post contract customer support services. The basis for license fee revenue recognition is substantially governed by American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended, and Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. License revenue is recognized if persuasive evidence of an agreement exists, delivery has occurred, pricing is fixed and determinable, and collectibility is probable. (2) Revenue for resale of software and technology equipment and service fee is recognized based on guidance provided in Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," as amended (SAB 104). Software and technology equipment resale revenue is recognized when all of the components necessary to run software or hardware have been shipped. Service revenues include maintenance fees for providing system updates for software products, user documentation and technical support and are recognized over the life of the contract. Software license revenue from long-term contracts has been recognized on a percentage of completion basis, along with the associated services being provided. Other service revenues, including training and consulting, are recognized as the services are performed. The Company uses stand-alone pricing to determine an element's vendor specific objective evidence (VSOE) in order to allocate an arrangement fee amongst various pieces of a multi-element contract. NeoMedia records an allowance for uncollectible accounts on a customer-by-customer basis as appropriate. (3) NeoMedia's Micro Paint Repair business unit derives revenue from: (a) the right to use NeoMedia's proprietary Micro Paint Repair system, (b) paint products and services, (c) training, and (d) technical support. (a) Paint system revenue is a one-time fee paid by NeoMedia's customer to use NeoMedia's proprietary paint system, and is deferred and recognized over the expected life of the relationship, which was estimated at one year during 2004. (b) Paint product and service revenue is recognized when products are shipped or when services are performed. (c) Training revenue is recognized upon completion of a company-certified training course. (d) Technical support revenue is recognized on a monthly basis as support services are provided. Shipping and Handling Costs Shipping and handling costs are passed through to the Company's customers, and are netted in cost of goods sold. Research and Development Costs associated with the planning and designing phase of software development, including coding and testing activities, and related overhead, necessary to establish technological feasibility of the Company's internally-developed software products, are classified as research and development and expensed as incurred. F-12 Stock Based Compensation The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized over the vesting period based on the excess, if any, on the date of grant of the fair value of the Company's shares over the employee's exercise price. When the exercise price of the option is less than the fair value price of the underlying shares on the grant date, deferred stock compensation is recognized and amortized to expense in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 44 over the vesting period of the individual options. Accordingly, if the exercise price of the Company's employee options equals or exceeds the market price of the underlying shares on the date of grant no compensation expense is recognized. Options or shares awards issued to non-employees and directors are valued using the Black-Scholes pricing model and expensed over the period services are provided. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends, SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 expands the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The transition provisions do not currently have an impact on the Company's consolidated financial position and results of operations as the Company has not elected to adopt the fair value-based method of accounting for stock-based employee compensation under SFAS NO. 123. The disclosure provisions of SFAS No. 148 are effective for financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure requirements in the first quarter of 2003. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, except when options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Years Ended December 31, ------------------------ 2004 2003 ---------- ---------- Net Loss, as reported $ (7,230) $ (5,382) Compensation recognized under APB 25 -- 623 Compensation recognized under SFAS 123 (1,445) (962) ---------- ---------- Pro-forma net loss $ (8,675) $ (5,721) ========== ========== Net Loss per share: Basic and diluted - as reported $ (0.02) $ (0.04) ========== ========== Basic and diluted - pro-forma $ (0.03) $ (0.05) ========== ========== For grants in 2004 and 2003, the following assumptions were used: (i) no expected dividends; (ii) a risk-free interest rate of 4.5%; (iii) expected F-13 volatility ranging from 438% to 451% for 2004 and from 253% to 457% for 2003, and (iv) an expected life of the shorter of 3 years or the stated life of the option for options granted in 2004 and 2003. The fair-value was determined using the Black-Scholes option-pricing model. The estimated fair value of grants of stock options and warrants to non-employees of NeoMedia is charged to expense in the consolidated financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes", income taxes are accounted for using the assets and liabilities approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The Company has recorded a 100% valuation allowance as of December 31, 2004. Translation of Foreign Currency The functional currency of the Company's Micro Paint Repair business is the Canadian dollar. Financial statements from the Micro Paint Repair business unit are translated to United States dollars at the exchange rates in effect at the balance sheet date for assets and liabilities and at average rates for the period for revenues and expenses. Resulting exchange differences are accumulated as a component of accumulated other comprehensive loss. Computation of Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per share because these securities are anti-dilutive for all years presented. The shares excluded from the calculation of diluted net loss per share are detailed in the table below: December 31, 2004 December 31, 2003 ----------------- ----------------- Outstanding Stock Options 52,804,121 33,512,507 Outstanding Warrants 18,825,000 26,195,000 Reclassifications Certain reclassifications have been made to the 2002 consolidated financial statements to conform to the 2003 presentation. F-14 Recent Accounting Pronouncements In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104 did not impact the consolidated financial statements. In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. The disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of the disclosure requirements of EITF 03-1 and does not believe the impact will be significant to the Company's overall results of operations or financial position. Once the FASB reaches a final decision on the measurement and recognition provisions, the company will evaluate the impact of the adoption of EITF 03-1. In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. . The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS 152). The amendments made by Statement 152 amend FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005 with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have F-15 commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position. In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment". Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently evaluating the impact of the adoption of this Statement. 3. EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS ("CORNELL") On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of Credit Agreement under which Cornell agreed to purchase up to $10 million of NeoMedia's common stock over a two-year period, with the timing and amount of the purchase at the Company's discretion. The maximum amount of each purchase was $150,000 with a minimum of seven days between purchases. The shares were valued at 98% of the lowest closing bid price during the five-day period following the delivery of a notice of purchase by NeoMedia. The Company paid 5% of the gross proceeds of each purchase to Cornell. On October 27, 2003, the Company and Cornell entered into a $20 million Standby Equity Distribution Agreement. The terms of the agreement are identical to the terms of the previous Equity Line of Credit, except that the maximum "draw" under the new agreement is $280,000 per week, not to exceed $840,000 in any 30-day period, and Cornell will purchase up to $20 million of the Company's common stock over a two-year period. As a consideration fee for Cornell to enter into the agreement, the Company issued 10 million warrants to Cornell with an exercise price of $0.05 per share, and a term of five years. Cornell exercised the warrants in January 2004, resulting in $500,000 cash receipts to the Company. In November 2003, the Company filed a Form SB-2 to register 200 million shares under this $20 million Standby Equity Distribution Agreement. In January 2004, the Form SB-2 was declared effective by the Securities and Exchange Commission. F-16 During the years ended December 31, 2004 and 2003, the Company sold 112,743,417 and 98,933,244 shares, respectively, of its common stock to Cornell under the Standby Equity Distribution Agreement and Equity Line of Credit. The following table summarizes funding received and from, and shares sold to, Cornell during the years ended December 31, 2004 and 2003: Year Ended December 31, -------------------------------- 2004 2003 -------------- -------------- Number of shares sold to Cornell 112,743,417 98,933,244 Gross Proceeds from sale of shares to Cornell 10,123,000 9,565,000 Less: discounts and fees* (1,967,000) (6,772,000) -------------- -------------- Net Proceeds from sale of shares to Cornell $ 8,156,000 $ 2,793,000 -------------- -------------- * - In accordance with terms of Standby Equity Distribution Agreement, stock is valued at 98% of the lowest closing bid price during the week it is sold 5. PROPERTY AND EQUIPMENT As of December 31, 2004, property and equipment consisted of the following: (dollars in thousands) ------------- 2004 ------------- Furniture and fixtures $ 273 Equipment 149 ------------- Total 422 Less: accumulated depreciation Furniture and fixtures (262) Equipment (50) ------------- Total property and equipment, net $ 110 ============= Depreciation expense was $66,000 and $83,000 for the years ended December 31, 2004 and 2003, respectively. F-17 6. INTANGIBLE ASSETS As of December 31, 2004, intangible assets consisted of the following:
(dollars in thousands) 2004 ---------- Patents and related costs $ 3,645 Micro paint repair chemical formulations and proprietary process 1,800 Goodwill 1,099 Other intangible assets 788 ---------- Total 7,332 Less: accumulated amortization Patents and related costs (1,471) Micro paint repair chemical formulations and proprietary process (170) Other intangibles (567) ---------- Intangible assets, net $ 5,124 ==========
Capitalized patent activity for the year ended December 31, 2004 was as follows: (dollars in thousands) ------------ 2004 ------------ Beginning balance $ 2,415 Additions 80 Amortization (321) ------------ Ending balance $ 2,174 ============ Amortization expense of capitalized patents was $321,000 and $273,000 for the years ended December 31, 2004 and 2003, respectively. The weighted-average amortization period of capitalized patents as of December 31, 2004 was 7.6 years. Capitalized Micro Paint Repair chemical formulations and propriety process activity for the year ended December 31, 2004 was as follows: (dollars in thousands) ------------ 2004 ------------ Beginning balance $ -- Micro paint repair chemical formulations and propriety process obtained through acquisition of CSI International 1,800 Amortization (170) ------------ Ending balance $ 1,630 ============ F-18 Amortization expense of Micro Paint Repair chemical formulations and propriety process was $170,000 and $0 for the years ended December 31, 2004 and 2003, respectively. The weighted-average amortization period of capitalized repair chemical formulations and propriety process as of December 31, 2004 was 10 years. Capitalized goodwill activity for the year ended December 31, 2004 was as follows: (dollars in thousands) ------------ 2004 ------------ Beginning balance $ -- Goodwill obtained through acquisition of CSI International 1,099 ------------ Ending balance $ 1,099 ============ There was no amortization expense of goodwill for the years ended December 31, 2004 and 2003, respectively. Other intangible assets activity for the year ended December 31, 2004 was as follows: (dollars in thousands) ------------ 2004 ------------ Beginning balance $ 118 Additions 220 Amortization (117) ------------ Ending balance $ 221 ============ Amortization expense of capitalized and purchased software costs and other intangible assets was $117,000 and $114,000 for the years ended December 31, 2004 and 2003, respectively. The weighted-average amortization period of capitalized and purchased software costs as of December 31, 2004 was 4.7 years. As of December 31, 2004, the Company estimated future amortization expense of capitalized patents and software for the next five years to be: (In Thousands) -------------- 2005 598 2006 525 2007 498 2008 487 2009 437 F-19 7. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE Allowance for doubtful accounts activity for the year ended December 31, 2004 was as follows: (dollars in thousands) --------------- 2004 --------- Beginning balance $ 49 Bad debt 24 Write-off of uncollectible accounts (27) --------- Ending balance $ 46 ========= Inventory reserve for the year ended December 31, 2004 was $0. 8. FINANCING AGREEMENTS As of December 31, 2004, the Company was party to a commercial financing agreement with GE Access that provides short-term financing for certain computer hardware and software purchases. This arrangement allows the Company to re-sell high-dollar technology equipment and software without committing cash resources to financing the purchase. Termination of the Company's financing relationship with GE Access could have a material adverse effect the Company's financial condition. Management expects the agreement to remain in place in the near future. As of December 31, 2004 the amount payable under this financing arrangement was approximately $17,000. 9. NOTES PAYABLE On March 13, 2003, the Company borrowed from Cornell the gross amount of $262,000 before discounts and fees. The note was repaid in full during 2003. On May 27, 2003, the Company borrowed from Cornell the gross amount of $245,000 before discounts and fees. The note was repaid in full during 2003. On June 24, 2003, the Company borrowed from Cornell the gross amount of $400,000 before discounts and fees. The note was repaid in full during 2003. On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of its outside directors. This amount was added to the principal of the $10,000 note payable to Mr. Fritz entered into during April 2003, with all other terms of the note remaining the same. As consideration for the loan, the Company granted Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.01 per share. The warrants had a fair value of approximately $74,000. In accordance with EITF 00-27, the Company recorded the relative fair value of the warrants as a discount against the note, and is amortizing the discount over the life of the note. The note was paid in full during April 2004. On July 21, 2003, the Company borrowed from Cornell the gross amount of $200,000 before discounts and fees. The note was repaid in full during 2003. On August 1, 2003, the Company borrowed from Cornell the gross amount of $200,000 before discounts and fees. The note was repaid in full during 2003. F-20 On August 29, 2003, the Company borrowed $50,000 from William E. Fritz, one of its outside directors, under an unsecured note payable. The note was paid in full during September 2003. On September 2, 2003, the Company borrowed from Cornell the gross amount of $200,000 before discounts and fees. The note was repaid in full during 2003. On September 11, 2003, the Company received funding in the form of a promissory note from Cornell in the gross amount of $500,000 before discounts and fees. The note was repaid in full during 2003. On September 29, 2003, the Company borrowed from Cornell the gross amount of $1,500,000 before discounts and fees. The note was repaid in full during 2003. On January 20, 2004, the Company borrowed from Cornell the gross amount of $4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was used to fund the acquisition of CSI International, Inc. during February 2004. Cornell withheld a $315,000 retention fee related to the issuance of stock to pay off the debt in the future. The Company paid this note in full during 2004. The Company also granted to Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an exercise price of $0.05 per share during January 2004. In April 2004, the Company filed a Form SB-2 to register 40 million shares underlying warrants granted to Cornell (and subsequently transferred by Cornell to Stone Street Asset Management LLC) in connection with a promissory note issued by the Company to. In May 2004, the Form SB-2 was declared effective by the Securities and Exchange Commission. The fair value of the warrants using the Black-Scholes pricing model was $5,000,000. In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", the Company has compared the relative fair values of the warrants and the face value of the notes, and has allocated a value of $2.5 million to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million note issued in January 2004 and $0.5 million against the $1 million note in April 2004. The $2.5 million was recorded as a discount against the carrying value of the note. The $2.5 million that was allocated to the notes is considered a discount on the promissory notes, and therefore was amortized over the life of the notes using the effective interest method, in accordance with Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141, "Business Combinations". Accordingly, the Company recorded an amortization of discount of $2,500,000 related to the warrants during the year ended December31, 2004. Stone Street Asset Management LLC exercised the warrants during November 2004, resulting in net funds to NeoMedia of $2 million. On April 8, 2004, the Company borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee related to the issuance of stock to pay off the debt in the future. The Company paid this note in full during 2004. On July 2, 2004, the Company borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee related to the issuance of stock to pay off the debt in the future. The Company paid this note in full during 2004. On August 6, 2004, the Company borrowed from Cornell the gross amount of $2,000,000 before discounts and fees. Cornell withheld a retention fee of $153,000 related to the issuance of stock to pay off the debt in the future. The Company paid this note in full during 2004. On October 18, 2004, the Company borrowed from Cornell the gross amount of $1,085,000 before discounts and fees. Cornell withheld a retention fee of $85,000 related to the issuance of stock to pay off the debt in the future. As of December 31, 2004, the Company had not made any payments against this note. The Company paid this note in full during the first quarter of 2005. The Company invested the proceeds from the note in iPoint-media pursuant to the investment agreement between NeoMedia and I-Point Media Ltd. F-21 10. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject NeoMedia to concentrations of credit risk consist primarily of trade accounts receivable with customers. NeoMedia extends credit to its customers as determined on an individual basis and has included an allowance for doubtful accounts of $46,000 in its December 31, 2004 consolidated balance sheet. In addition, a single company supplies the majority of the Company's resold equipment and software, which is re-marketed to this customer. Accordingly, the loss of this supplier could materially adversely affect the Company's operations. 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 37% and 83% of NeoMedia's revenue for the years ended December 31, 2004 and 2003, respectively. F-22 11. ACQUISITIONS Acquisition of CSI International, Inc. ("CSI") On February 6, 2004, NeoMedia acquired 100% ownership of CSI International, Inc., of Calgary, Alberta, Canada, a private technology products company in the micro paint repair industry. NeoMedia paid a purchase price including an issuance of 7,000,000 shares of its common stock, and cash of $2,500,000 in exchange for all outstanding shares of CSI. The shares were valued at $0.10 per share, which was the market price of NeoMedia's common stock on the Over-the-counter Bulletin Board exchange around the acquisition date. NeoMedia also incurred direct costs of the business combination totaling $5,000, which are included in the purchase price for purposes of allocating assets acquired and liabilities assumed. The acquisition was accounted for under the purchase method. The actual purchase price was based on cash paid, the fair value of NeoMedia stock around the date of the acquisition, and direct costs associated with the combination. The purchase price was allocated as follows:
(Dollars in Thousands) ---------- Value of 7 Million Shares Issued ($0.10 per share) $ 700 Cash paid 2,500 Direct costs of acquisition 5 ---------- Total Fair Value of Purchase Price $ 3,205 ---------- Assets Purchased: Cash $ 115 Accounts receivable, net 67 Inventory 54 Other current assets 12 Investments 25 Property, plant & equipment 8 Micro paint repair chemical formulations and proprietary process 1,800 Goodwill 1,099 Customer base / contracts 110 Copyrighted materials 50 ---------- Total Assets Purchased 3,340 ---------- Less Liabilities Assumed: Accounts payable (23) Accrued liabilities (12) Notes payable (100) ---------- Total Liabilities Assumed (135) ----------
The combination is being accounted for as a purchase business combination as defined by Statement of Financial Accounting Standards No. 141, Business Combinations. The final allocation of the excess purchase price over net tangible assets was determined based on independent appraisal of the assets purchased. The values assigned to intangible assets, aside from goodwill, are subject to amortization. The intangible assets were assigned the following lives for amortization purposes: F-23 Intangible asset (life in ---------------- years) Micro paint repair chemical formulations and proprietary process 10 Customer base / contracts 5 Copyrighted materials 5 Goodwill was not assigned a life and will be tested for impairment as defined by Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The accompanying consolidated statement of operations presented herein contains the results of operations for CSI for the period February 6, 2004, through December 31, 2004 Pro-forma results of operations as if NeoMedia and CSI had combined as of January 1, 2004 and 2003 are as follows:
Year Ended December 31, 2004 ---------------------------------------------------------------- (A) Pro-forma CSI Adjust- Pro-forma NeoMedia Int'l ments Combined ------------------------------------------------ ------------ Total net sales $ 1,700 791 (727)(A) $ 1,764 Loss from operations $ (4,681) (1,746) 1,720 (A) $ (4,707) Net loss $ (7,230) (2,639) 2,613 (A) $ (7,256) Net loss per share-basic and diluted $ (0.02) $ (0.02) Weighted average number of common shares - basic and diluted 329,362,127 690,411 (B) 330,052,538
Year Ended December 31, 2003 ------------------------------------------------------------------ (A) Pro-forma CSI Adjust- Pro-forma NeoMedia Int'l ments Combined ------------------------------------------------ -------------- Total net sales $ 2,400 654 -- (A) $ 3,054 Loss from operations $ (4,854) 34 -- (A) $ (4,820) Net loss $ (5,382) 34 -- (A) $ (5,348) Net loss per share-basic and diluted $ (0.04) (A) $ (0.04) Weighted average number of common shares - basic and diluted 125,029,723 7,000,000 (B) 132,029,723
Pro-forma Adjustments (A) - Adjustments are to reflect operations of CSI from February 6, 2004 through December 31, 2004, which are included in NeoMedia's operations for year ended December 31, 2004. (B) - To adjust weighted average shares outstanding as if the 7,000,000 shares issued as part of the purchase price of CSI on February 6, 2004, had been issued on January 1, 2004 and 2003 F-24 BSD Software, Inc. ("BSD) On December 21, 2004, NeoMedia Technologies, Inc. ("NeoMedia") (OTCBB:NEOM) and BSD Software Inc. ("BSD") (OTCBB: BSDS) signed a definitive Agreement and Plan of Merger, the form of which is attached as Exhibit 16.1 hereto. BSD owns 90% of the outstanding shares of Triton Global Business Services, Inc., a provider of live and automated operator calling services and e-business support, including billing, clearinghouse and information management services, to companies in the telecommunications industry. BSD's shareholders will receive, for each share of BSD stock owned, NeoMedia stock equivalent to .07 divided by the volume-weighted average price of NeoMedia stock for the five days prior to the effective time of the merger. The agreement has been approved by holders of approximately 63% of BSD's outstanding shares and its Board. NeoMedia and BSD intend to file a joint registration/information statement with the SEC for review. Upon effectiveness of the registration, the exchange rate will be determined, a closing meeting will be held, and the acquisition and merger will be completed. Closing is subject to the terms and conditions outlined in the merger agreement, as well as regulatory review of the merger and registration/information statement by the United States Securities and Exchange Commission. Prior to closing, the merger can be terminated by BSD if more than 5% of BSD's outstanding shares dissent to the merger. The merger can be terminated prior to closing by NeoMedia if, at the time of closing, BSD has: (i) less than $850,000 in assets, (ii) more than $5,000,000 in liabilities, or (iii) more than 35,000,000 shares of common stock outstanding. Either party can terminate the merger if the merger has not closed by March 31, 2005, which date may be extended by mutual consent of NeoMedia and BSD. Secure Source Technologies, Inc. ("SST") On October 8, 2003, the Company acquired 100% ownership of SST, a provider of security solutions and covert security technology for the manufacturing and financial services industries, in exchange for 3.5 million shares of the Company's common stock. With the purchase of SST, the Company acquired additional patents that compliment its existing intellectual property portfolio, as well as a security software platform, and computer equipment. Prior to the acquisition, SST was inactive and had minimal operating activities. The acquisition was accounted for under the purchase method. The final purchase price was based on the fair value of the Company's stock on the dates of the grant. The purchase price was allocated as follows: (Dollars in Thousands) Value of 3.5 Million Shares Issued (Purchase Price) $500 Assets Purchased: Computer Equipment 1 Software Platform 77 Patents 422 ------------ Total Purchase Price Allocation $ 500 ------------ F-25 The proforma financial information is not presented as this acquisition was not considered significant or material to the combined financial statements on the date of the acquisition. The values assigned to intangible assets are subject to amortization. The acquired software platform has no residual value and a weighted-average amortization period of 3 years. The acquired patents have no residual value and a weighted-average amortization period of 11.1 years. The results of SST are included in the consolidated financial statements for the period October 8, 2003 through December 31, 2004. 13. 2000 EXECUTIVE INCENTIVE During the years ended December 31, 2004 and 2003, the Company satisfied a portion of its 2000 accrued executive incentive obligation through the issuance of common stock to current and former employees who had participated in the plan. The Company relieved approximately $160,000 and $692,000 of the liability through the issuance of approximately 1.5 and 15.4 million shares during the years ended December 31, 2004 and 2003, respectively. The excess of the fair value of the common stock issued over the outstanding accrued bonuses was included in the gain (loss) on extinguishment of debt. 14. COMPREHENSIVE LOSS Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders' investment that, under accounting principles generally accepted in the United States, are excluded from net income. Changes in the components of other comprehensive loss are as follows: 2004 -------- Beginning balance $ -- Additions: Foreign currency translation adjustment (60) -------- Ending Balance $ (60) ======== F-26 15. INCOME TAXES For the years ended December 31, 2004 and 2003, the components of income tax expense were as follows: 2004 2003 ---------- ---------- (In thousands) Current $ -- $ -- Deferred -- -- Foreign -- -- ---------- ---------- Income tax expense/(benefit) $ -- $ -- ========== ========== As of December 31, 2004 and 2003, 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:
2004 2003 ------------ ------------ Accrued employee benefits $ -- $ 8 Provisions for doubtful accounts 18 20 Capitalized software development costs and fixed assets 799 740 Net operating loss carryforwards (NOL) 30,319 27,014 Accruals 501 578 Write-off of long-lived assets 2070 2,070 State taxes 156 107 Alternative minimum tax credit carryforward 45 45 ------------ ------------ Total deferred tax assets 33,908 30,582 Valuation Allowance (33,908) (30,582) ------------ ------------ Net deferred income tax asset $ -- $ -- ============ ============
Because it is more likely than not that NeoMedia will not realize the benefit of its deferred tax assets, a valuation allowance has been established against them. For the years ended December 31, 2004 and 2003, the income tax benefit differed from the amount computed by applying the statutory federal rate of 34% as follows: 2004 2003 ---------- ---------- Benefit at federal statutory rate $ (2,458) $ (1,830) State income taxes, net of federal (286) (213) Permanent and other, net (582) 142 Change in valuation allowance 3,326 1,901 ---------- ---------- Income tax expense/(benefit) $ -- $ -- ========== ========== As of December 31, 2004, NeoMedia had net operating loss carryforwards for federal tax purposes totaling approximately $76 million which may be used to offset future taxable income, or, if unused expire between 2011 and 2020. As a result of certain of NeoMedia's equity activities, NeoMedia anticipates that the annual usage of its pre-1998 net operating loss carryforwards should be further restricted pursuant to the provisions of Section 382 of the Internal Revenue Code. F-27 16. TRANSACTIONS WITH RELATED PARTIES During August 2003, the Company borrowed $50,000 from William E. Fritz, one of its outside directors, under an unsecured note payable with a term of 30 days. The note was repaid in full during September 2003. During July 2003, the Company borrowed $25,000 from William E. Fritz, one of its outside directors. This amount was added to the principal of a $10,000 note payable to Mr. Fritz that matures in April 2004, with all other terms of the note remaining the same. As consideration for the loan, the Company granted Mr. Fritz 2,500,000 warrants to purchase shares of its common stock at an exercise price of $0.01 per share. The full principle of $35,000 plus interest was paid in full during 2004. During April 2003, the Company entered into a consulting agreement with William Fritz, an outside director, for consulting and advisement services relating to the merger with Loch Energy, Inc., and to the subsequent implementation of various management programs surrounding the business. The agreement called for total payments of $250,000 over a period of one year. During August 2003, the Company paid the consulting contract in full. During September 2003, the consulting contract was rescinded and the full $250,000 was returned to NeoMedia. During April 2003, the Company's Board of Directors approved the payment in full of approximately $154,000 of liabilities owed by NeoMedia to Charles W. Fritz, the Company's Founder and Chairman of the Board of Directors, through the issuance of 15,445,967 shares of common stock. The Company recognized a discount expense in general and administrative expenses of approximately $15,000 relating to this transaction with Mr. Fritz. During April 2003, the Company sold 25,000,000 shares of its common stock, par value $0.01, in a private placement at a price of $0.01 per share to William Fritz. The Company's stock price at the time of the sale was $0.012. In connection with the sale, the Company also granted 25,000,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.01 per share. The warrants had a fair value of $298,000 and have been recorded as a cost of issuance. The Company recognized a discount expense in general and administrative expenses of approximately $50,000 relating to this transaction with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional shares of common stock at a price of $0.01 per share. During November 2002, the Company issued Convertible Secured Promissory Notes with an aggregate face value of $60,000 to 3 separate parties, including Charles W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an outside director; and James J. Keil, an outside director. The notes had an interest rate of 15% per annum, and matured at the earlier of i.) four months, or ii.) the date the shares underlying the Cornell Equity Line of Credit were registered with the SEC. The notes were convertible, at the option of the holder, into either cash or shares of the Company's common stock at a 30% discount to either market price upon closing, or upon conversion, whichever is lower. The Company also granted to the holders an additional 1,355,670 shares of its common stock and 60,000 warrants to purchase shares of its common stock at $0.03 per share, with a term of three years. The warrants and shares were issued in January 2003. In addition, since this debt is convertible into equity at the option of the note holder at beneficial conversion rates, an embedded beneficial conversion feature was recorded as a debt discount and amortized using the effective interest rate over the life of the debt in accordance with EITF 00-27. Total cost of beneficial conversion feature, fair value of the stock and cost of warrants issued exceed the face value of the notes payable, therefore, only $60,000, the face amount of the note, was recognizable as debt discount, and F-28 amortized over the life of the notes payable. During March 2003, two of the affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the maturity date due to NeoMedia's capital constraints. The Company repaid Charles Fritz's note in full during March 2003, and repaid James J. Keil's note in full during April 2003. The Company repaid the balance on William Fritz's note during 2004. The new note also included a provision under which, as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future revenue generated from the Company's intellectual property. During April 2002, the Company borrowed $11,000 from William E. Fritz under a note payable bearing interest at 8% per annum with a term of 60 days. The note was repaid in April 2003. During March 2002, the Company borrowed $190,000 from William E. Fritz under a note payable bearing interest at 8% per annum with a term of 16 days. The note was repaid during March 2002. During February 2002, the Company borrowed $10,000 from William E. Fritz under a note payable bearing interest at 8% per annum with a term of 30 days. The note was repaid in April 2003. During October 2001, the Company borrowed $4,000 from Charles W. Fritz, NeoMedia's Chairman, its former Chief Executive Officer and a director, under a note payable bearing interest at 10% per annum with a term of six months. The note was repaid in April 2003. The Company believes that all of the above transactions were conducted at "arm's length", representing what NeoMedia believes to be fair market value for those services. 17. 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, 2004 and 2003, NeoMedia's rent expense was $229,000 and $265,000, respectively. NeoMedia is party to various payment arrangements with its vendors that call for fixed payments on past due liabilities. NeoMedia is also party to various consulting agreements that carry payment obligations into future years. The following is a schedule of the future minimum payments under non-cancelable operating leases in effect as of December 31, 2004: Payments (In thousands) ----------------- 2005 89 2006 -- Thereafter -- ----------------- Total $ 89 ================= As of December 31, 2004, none of the Company's employees were under contract. Additionally, as of December 31, 2004, the Company was not a party to any long-term consulting agreements that are required to be paid in cash. Legal Proceedings The Company is involved in various legal actions arising in the normal course of business, both as claimant and defendant. While it is not possible to determine with certainty the outcome of these matters, it is the opinion of management that the eventual resolution of the following legal actions could have a material adverse effect on the Company's financial position or operating results. F-29 AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. On January 23, 2004, NeoMedia filed a patent infringement lawsuit against AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern District of Illinois, claiming that each of the parties has manufactured, or has manufactured for it, and has used, or actively induced others to use, technology which allows customers to use a built-in UPC bar code scanner to scan individual items and access information, thereby infringing NeoMedia's patents. The complaint stated that on information and belief, AirClic, Scanbuy and LScan had actual and constructive notice of the existence of the patents-in-suit, and, despite such notice, failed to cease and desist their acts of infringement, and continue to engage in acts of infringement of the patents-in-suit. On April 15, 2004, the court dismissed the suit against AirClic and Scanbuy for lack of personal jurisdiction. On April 19, 2004, AirClic filed a declaratory judgment action against NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June 10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in Pennsylvania for patent infringement. AirClic answered and counterclaimed on May 13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004. NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims was filed on August 3, 2004. NeoMedia voluntarily dismissed the suit against LScan in the Northern District of Illinois and re-filed the suit on May 26, 2004, in the Eastern District of Pennsylvania. After LScan failed to answer, NeoMedia filed and served its motion for default judgment on July 6, 2004. On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern District of New York alleging that NeoMedia infringed Scanbuy's copyrights, violated the Lanham Act and committed deceptive trade practices and tortious interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District of New York alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. Virgin Entertainment Group On January 2, 2004, NeoMedia filed a patent infringement lawsuit against Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin Megastore ("Virgin"). The complaint for Patent Infringement and Damages was filed in the United States District Court for the Northern District of Illinois, by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The complaint claims that Virgin has infringed four of NeoMedia's patents - U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint alleges that the Virgin Megaplay Stations located in Virgin's Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to allow customers to scan UPC codes from in-store CDs and DVDs to access Internet-based product information, such as music and movie previews, and album and video art. The complaint also alleges that Virgin had notice of NeoMedia's patents since the latter part of 2002 or before, yet it continued with its infringing activities. The complaint seeks compensatory damages for Virgin's infringement, with those damages to be trebled due to the willful and wanton nature of the infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin from its infringing activities. Virgin answered NeoMedia's complaint on March 1, 2004. F-30 Other Litigation On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against NeoMedia seeking payment of approximately $170,000 in past due legal services. The amount in question is subject to an unsecured promissory note that matured unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash payments totaling approximately $196,000, to be paid at a rate of $30,000 per quarter until the balance is satisfied. NeoMedia had a remaining liability of approximately $33,000 relating to this matter as of December 31, 2004, which was included in accrued expenses. On December 7, 2004, Reitler Brown & Rosenblatt LLC, filed a complaint against NeoMedia seeking payment of approximately $422,000 in past due legal services and accrued interest. NeoMedia had a remaining liability of approximately $422,000 relating to this matter as of December 31, 2004, which was included in accounts payable and accrued expenses. 18. DEFINED CONTRIBUTION SAVINGS PLAN NeoMedia maintains a defined contribution 401(k) savings plan. Participants may make elective contributions up to established limits. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The plan provides for matching and discretionary contributions by NeoMedia, although no such contributions to the plan have been made to date. 19. STOCK OPTIONS AND WARRANTS Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 1,500,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price shall be equal to or in excess of the fair market value per share of NeoMedia's common stock on the date of grant. These options granted expired ten years from the date of grant. These options vest 100% one year from the date of grant. Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 8,000,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant. Options generally vest 20% upon grant and 20% per year thereafter. The options expire ten years from the date of grant. Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The 2002 Stock Option Plan provides for authority for the stock option committee of the board of directors to grant non-qualified stock options with respect to a maximum of 10,000,000 shares of common stock. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant, and may be granted with any vesting schedule as approved by the stock option committee. Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan. The 2003 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 150,000,000 shares of common stock. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant, and may be granted with any vesting schedule as approved by the stock option committee. On October 17, 2003, NeoMedia filed a Form S-8 to register all 150,000,000 shares underlying the options in the 2003 Stock Option Plan. F-31 The following table summarizes the status of NeoMedia's 2003, 2002, 1998 and 1996 stock option plans as of and for the years ended December 31, 2004 and 2003:
2004 2003 ---------------------------- ---------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------ ------------ ------------ ------------ (In thousands) (In thousands) Outstanding at beginning of year 33,512 $ 0.23 10,801 $ 1.11 Granted 32,752 $ 0.09 39,018 $ 0.01 Exercised (12,860) $ 0.23 (15,605) $ 0.01 Forfeited (600) $ 0.09 (702) $ 1.26 ------------ ------------ ------------ ------------ Outstanding at end of year 52,804 $ 0.06 33,512 $ 0.23* ============ ============ ============ ============ Options exercisable at year-end 34,680 33,512 Weighted-average fair value of options granted during the year $ 0.10 $ 0.10 Available for grant at the end of the year 81,873 114,025
* - Includes 3,644,382 options that had a restated exercise price of $0.01 under option repricing program that was in place as of December 31, 2004. For purposes of this table, options subject to repricing are shown at their original exercise price. The following table summarizes information about NeoMedia's stock options outstanding as of December 31, 2004:
Options Outstanding ------------------------------------------------------------------------------------------------ Weighted- Weighted- Average Average Range of Number Remaining Exercise Exercise Prices Outstanding Contractual Life Price ------------------------- -------------------- ----------------- ------------ (In thousands) $-- to $0.010 26,568 8.8 years $0.01 0.011 to 0.087 4,640 9.4 years $0.07 0.088 to 0.160 21,575 9.1 years $0.11 0.170 to 7.000 21 4.8 years $6.89 ------------------------- -------------------- ----------------- ------------ $-- to $7.000 52,804 9.0 years $0.06 ========================= ==================== ================= ============
Options Exercisable --------------------------------------- Weighted- Average Number Exercise Exercisable Price --------------------- ----------- (In thousands) 26,568 $0.01 3,516 $0.07 4,575 $0.11 21 $6.89 --------------------- ----------- 34,680 $0.03 ===================== ===========
F-32 During the years ended December 31, 2004 and 2003, NeoMedia made the following option grants:
2004 2003 ---------------------------------- ----------------------------------- Range of Options Range of Options Exercise Granted Exercise Granted Recipients Prices (In thousands) Prices (In thousands) - ----------------------------- -------------------- ---------- -------------------- ----------- Employees $0.062 to $0.128 23,290 $0.010 to $0.010 31,725 Non-employee directors $0.010 to $0.075 3,357 $0.010 to $0.010 3,000 Non-employees $0.025 to $0.100 6,105 $0.010 to $0.160 4,293 -------------------- ---------- -------------------- ----------- Total $0.010 to $0.128 32,752 $0.010 to $0.160 39,018 -------------------- ---------- -------------------- -----------
Option-Related Expense In June 2003, the Company issued 375,000 options to buy shares of the Company's common stock to two outside consultants at a price of $0.01 per share for consulting services rendered. The Company recognized approximately $13,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In October 2003, the Company issued 125,000 options to buy shares of the Company's common stock to two outside consultants at a price of $0.01 per share for consulting services rendered. The Company recognized approximately $13,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In October 2003, the Company issued 1,000,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.01 per share for consulting to be provided over a period of one year. The options were valued at approximately $102,000, of which the Company recognized approximately $20,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In October 2003, the Company issued 500,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.01 per share for consulting to be provided over a period of one year. The options were valued at approximately $51,000, of which the Company recognized approximately $10,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In November 2003, the Company issued 50,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.06 per share for consulting services rendered. The Company recognized approximately $7,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In November 2003, the Company issued 150,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.16 per share for consulting services rendered. The Company recognized approximately $3,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In December 2003, the Company issued 50,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.052 per share for consulting services rendered. The Company recognized approximately $7,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. F-33 In December 2003, the Company issued 43,125 options to buy shares of the Company's common stock to an outside consultant at a price of $0.01 per share for consulting services rendered. The Company recognized approximately $6,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2003. In January 2004, the Company issued 50,000 options to buy shares of the Company's common stock to an outside consultant at a price of $0.025 per share for consulting services rendered to the Company. The Company recognized $7,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2004. During the period January through June 2004, the Company issued 106,674 options to buy shares of the Company's common stock to James J. Keil, an outside director, at a price of $0.01 per share for consulting services rendered to the Company during that time. The Company recognized $9,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2004. In February 2004, the Company issued 5,555,556 options to buy shares of the Company's common stock to an outside consultant, at a price of $0.01 per share for consulting services rendered to the Company's Micro Paint Repair business over a period of three years from the date of issuance. The Company recorded $550,000 as deferred stock compensation at the time of issuance, and is recognizing this amount over the period of the contract. Accordingly, the Company recognized $182,000 in general and administrative expense in the accompanying consolidated financial statements for the year ended December 31, 2004. Warrants Warrant activity as of December 31, 2004 and 2003 was as follows: Warrants Outstanding as of December 31, 2002 7,433,758 Warrants issued 48,060,000 Warrants exercised (28,904,900) Warrants expired (393,858) ------------- Warrants Outstanding as of December 31, 2003 26,195,000 Warrants issued 44,150,000 Warrants exercised (51,510,000) Warrants expired (10,000) ------------- Warrants Outstanding as of December 31, 2004 18,825,000 ============= The following table summarizes information about warrants outstanding at December 31, 2004, all of which are exercisable: Weighted-Average Range of Warrants Remaining Exercise Exercise Prices Outstanding Contractual Life Price (In thousands) $--- to $0.05 13,050 3.5 years $0.01 0.06 to 3.56 4,375 4.2 years $0.28 3.57 to 6.00 1,400 0.8 years $6.00 - --------------------- -------------- ------- ------------ ------------ $--- to $6.00 18,825 3.4 years $0.52 ===================== ============== ======= ============ ============ F-34 During January 2003, the Company granted 40,000, 10,000, and 10,000 warrants with an exercise price of $0.03 per share to William E Fritz, Charles W. Fritz, and James J. Keil, respectively, in connection with funding provided to the Company by these individuals during November 2002. During February 2003, the Company granted 500,000 warrants to GE Access, its primary equipment supplier, as payment of interest relating to a commercial credit agreement between GE Access and NeoMedia. The Company recognized approximately $7,000 in interest expense in the 2003 consolidated financial statements relating to the warrant issuance. The warrants were exercised during 2004 During April 2003, the Company granted 25,000,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.01 per share to William E. Fritz, an outside director, in connection with financing provided to the Company by Mr. Fritz. The warrants were exercised during the year ended December 31, 2003. During July 2003, the Company granted 2,500,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.01 per share to William E. Fritz, an outside director, in connection with financing provided to the Company by Mr. Fritz. The warrants were not exercised as of December 31, 2004. During September 2003, the Company granted 10,000,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.01 per share to an outside consultant for consulting, advisory, and financing services performed during the third and fourth quarters of 2003. The Company recognized approximately $93,000 in expense in the 2003 consolidated financial statements relating to the warrant issuance. The warrants were not exercised as of December 31, 2003. During October 2003, the Company granted to Cornell 10,000,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.05 per share, in connection with the $20 million Standby Equity Distribution Agreement entered into between the Company and Cornell. The warrants were not exercised as of December 31, 2003. Cornell exercised the warrants during January 2004. During January 2004, the Company granted to Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an exercise price of $0.05 per share, as consideration for the issuance of two promissory notes by Cornell to NeoMedia. The first note was for a face amount of $4 million and was issued in January 2004; the second was for a face amount of $1 million issued in April 2004. The fair value of the warrants using the Black/Scholes pricing model was $5 million. In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", the Company compared the relative fair values of the warrants and the face value of the notes, and allocated a value of $2.5 million to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million note issued in January 2004 and $0.5 million against the $1 million note in April 2004. The $2.5 million was recorded as a discount against the carrying value of the note. The $2.5 million that was allocated to the notes is considered a discount on the promissory notes, and therefore was amortized over the life of the notes using the effective interest method, in accordance with Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141, "Business Combinations". Accordingly, the Company recorded an amortization of discount of $2,500,000 related to the warrants during the year ended December 31, 2004. The warrants were subsequently assigned by Cornell to Stone Street Asset Management LLC. Stone Street Asset Management LLC exercised the warrants during November 2004, resulting in net funds to NeoMedia of $2 million. During February 2004, the Company granted 150,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.102 per share to an outside consultant. The Company recognized approximately $15,000 in expense in the 2004 consolidated financial statements relating to the warrant issuance. The warrants were not exercised as of December 31, 2004. F-35 During March 2004, the Company granted 4,000,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.11 per share to an outside consultant as a finder fee related to financing received by NeoMedia. The Company charged the fair value of the warrants of $440,000 as a reduction to capital accounts. The warrants were not exercised as of December 31, 2004. Option and Warrant Repricing Programs During April 2003, the Company repriced approximately 1.9 million warrants held by Thornhill Capital LLC, an outside consultant to the Company. Of the 1.9 million warrants, 1.5 million had an exercise price of $0.05 per share, and approximately 0.4 million had an exercise price of $2.09 per share. All 1.9 million warrants were repriced to $0.00 per share. The Company recognized an expense of approximately $27,000 related to this transaction during the second quarter of 2003. These warrants were exercised immediately after the repricing. During May 2003, NeoMedia re-priced approximately 8.0 million stock options under a repricing program. Under the terms of the program, the exercise price for outstanding options under NeoMedia's 2002, 1998, and 1996 Stock Option Plans was restated to $0.01 per share for an original period of 6 months. The program was subsequently extended through December 31, 2004. In accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock Transactions, the award was accounted for as variable from May 19, 2003 through the period ended December 31, 2004. Accordingly, NeoMedia recognized approximately $104,000 and $746,000 as compensation in general and administrative expense during the years ended December 31, 2004 and 2003, respectively. Approximately 3.5 million and 4.4 million options were exercised under the program during the years ended December 31, 2004 and 2003, respectively. The repricing program expired on December 31, 2004. 20. SEGMENT AND GEOGRAPHICAL INFORMATION Beginning with the year ended December 31, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that business enterprises report information about operating segments in annual financial statements. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. NeoMedia is structured as three distinct business units: NeoMedia Internet Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS), and NeoMedia Micro Paint Repair (NMPR). Performance is evaluated and resources allocated based on specific segment requirements and measurable factors. Management uses the Company's internal income statements to evaluate each business unit's performance. F-36 Operational results for the three segments for the years ended December 31, 2004 and 2003 are presented below: (in thousands) -------------------------- Years Ended December 31, -------------------------- 2004 2003 ---- ---- Net Sales: NeoMedia Consulting & Integration Services $ 910 $ 2,354 NeoMedia Internet Switching Service 62 46 NeoMedia Micro Paint Repair 728 --- -------------------------- $ 1,700 $ 2,400 -------------------------- Net Loss: NeoMedia Consulting & Integration Services $ (1,862) $ (4,331) NeoMedia Internet Switching Service (2,755) (1,051) NeoMedia Micro Paint Repair (2,613) --- -------------------------- $ (7,230) $ (5,382) -------------------------- Identifiable Assets NeoMedia Consulting & Integration Services $ 274 NeoMedia Internet Switching Service 2,423 NeoMedia Micro Paint Repair 3,183 Corporate 4,526 ----------- $ 10,406 ----------- Net revenues, loss, and identifiable assets by geographic area are presented based upon the country of destination. During 2004, NeoMedia had operations and assets in the United States and Canada. During 2003, NeoMedia operated within the United States only. No other foreign country represented 10% or more of net revenues for the years ended December 31, 2004 or 2003. Net revenues, loss, and identifiable assets by geographic area were as follows: (in thousands) -------------------- Years Ended December 31, -------------------- 2004 2003 -------- -------- Net Sales: United States $ 1,063 $ 2,400 Canada 637 -- -------------------- $ 1,700 $ 2,400 -------------------- Net Loss: United States $ (6,516) $ (5,382) Canada (714) -- -------------------- $ (7,230) $ (5,382) -------------------- Identifiable Assets United States $ 7,272 $ 3,876 Canada 3,134 -- -------------------- $ 10,406 $ 3,876 -------------------- F-37 21. COMMON STOCK Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Holders of the common stock do not have cumulative voting rights, which means that the holders of more than one half of NeoMedia's outstanding shares of common stock, subject to the rights of the holders of preferred stock, can elect all of NeoMedia's directors, if they choose to do so. In this event, the holders of the remaining shares of common stock would not be able to elect any directors. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of common stock are entitled to receive ratably, dividends when, as, and if declared by the Board of Directors out of funds legally available for that purpose and, upon NeoMedia's liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is duly authorized and validly issued, fully-paid, and nonassessable. On September 24, 2003, the Company's shareholders voted to increase the number of shares of common stock, par value $0.01 per share, that the Company is authorized to issue from 200,000,000 to 1,000,000,000. On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of Credit Agreement under which Cornell agreed to purchase up to $10 million of NeoMedia's common stock over a two-year period, with the timing and amount of the purchase at the Company's discretion. The maximum amount of each purchase was $150,000 with a minimum of seven days between purchases. The shares were valued at 98% of the lowest closing bid price during the five-day period following the delivery of a notice of purchase by NeoMedia. The Company paid 5% of the gross proceeds of each purchase to Cornell. On October 27, 2003, the Company and Cornell entered into a $20 million Standby Equity Distribution Agreement. The terms of the agreement are identical to the terms of the previous Equity Line of Credit, except that the maximum "draw" under the new agreement is $280,000 per week, not to exceed $840,000 in any 30-day period, and Cornell will purchase up to $20 million of the Company's common stock over a two-year period. As a consideration fee for Cornell to enter into the agreement, the Company issued 10 million warrants to Cornell with an exercise price of $0.05 per share, and a term of five years. Cornell exercised the warrants in January 2004, resulting in $500,000 cash receipts to the Company. 22. PREFERRED STOCK The Company's Preferred Stock is currently comprised of 25,000,000 shares, par value $0.01 per share, of which 200,000 shares are designated as Series A Preferred Stock, none of which are issued or outstanding. Additionally, 47,511 shares are designated as Series A Convertible Preferred Stock, none of which are issued and outstanding, and 100,000 shares are designated as Series B 12% Convertible Redeemable Preferred Stock, none of which are issued and outstanding. The Company has no present agreements relating to or requiring the designation or issuance of additional shares of preferred stock. 23. SUBSEQUENT EVENTS During January 2005, NeoMedia introduced the newest PaperClick(R) Mobile Go Window(TM) for Nokia(R) Series 60 cell phones and other cell phones which use Series 60 software. This introduction became the fifth Go Window from NeoMedia, making the product line available across five mobile operating environments, on over 35 models of cell phones. During January 2005, NeoMedia signed a reseller agreement with Jorge Christen & Partners LLP of Mexico. The reseller agreement gives Jorge Christen & Partners LLP the rights to resell PaperClick(R) products in Mexico and Latin America. F-38 During January 2005, NeoMedia signed a reseller agreement with Deusto Sistemas of Bilbao, Spain. The reseller agreement gives Deusto Sistemas the rights to resell PaperClick(R) products in Europe. During January 2005, NeoMedia signed a reseller agreement with E&I Marketing and Consulting Co. of Taipei, Taiwan. The reseller agreement gives E&I Marketing and Consulting Co. the rights to resell PaperClick(R) products in Asia. During January 2005, NeoMedia signed a Letter of Intent to enter into a licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of mobile marketing products to be used with Shelron's ActivShopper comparison shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell phones and PDA's. ActivShopper is a free software download designed to automatically scan, locate and compare prices for items a consumer selects at an e-commerce site. In February 2005, NeoMedia was awarded a patent in Mexico from the Instituto Mexicano de la Propiedad Industrial, the patent office in Mexico, for the process invented by NeoMedia for "automatic access of electronic information through secure machine readable codes on printed documents." The patent recognizes NeoMedia's innovation in creating a secure link between printed documents and the Internet using an obfuscated bar code and its technology. The U.S. Patent and Trademark Office had previously awarded patent No. 5,933,829 to NeoMedia for the same technology. In February 2005, NeoMedia was awarded an allowance for another new patent in the U.S. from the U.S. Patent and Trademark Office. The application is serial no. 09/821,677 which covers 44 claims and is an adaptation of NeoMedia's U.S. Patent 6,542,933, applying to technology that accesses Internet content from wireless devices. NeoMedia expects the patent to be issued shortly. On February 22, 2005, NeoMedia and IT-Global signed a one-year renewable agreement giving IT-Global rights to sell and license PaperClick(R) products, including client and server software, code activation and integration services. IT-Global will focus on the New York tri-state area, where it is based, as well as other areas, domestically and internationally, it serves. On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS is a retail operator and franchiser of retail automotive parts and accessories stores catering to the light truck market, and also provides new vehicle preparation, environmental protection packages, detailing and reconditioning products and services. On February 25, 2005, NeoMedia signed two non-binding letters of intent to acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of automotive paint and accessory products, from AP's parent company, PUPS. The first LOI calls for NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in cash, $554,000 in shares of NeoMedia restricted common stock, and $446,000 through the assumption of AP debt by NeoMedia. Under the second LOI, upon completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia would have the option to acquire an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted common stock. The second LOI also gives NeoMedia the option to purchase the final 40% of AP for either: (i) $2,200,000, payable in shares of NeoMedia restricted common stock, if NeoMedia exercises this right within 12 months of acquiring the second 30% of AP, or (ii) a price equivalent to AP's previous quarter EBITDA multiplied by 8, payable in shares of NeoMedia restricted common stock. Both LOIs are non-binding and subject to due diligence by NeoMedia and AP. F-39 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 January 24, 2005, NeoMedia's directors and executive officers were: Name Age Position Charles W. Fritz 48 Chairman of the Board of Directors Charles T. Jensen 61 President, Chief Executive Officer, Chief Operating Officer, and Director David A. Dodge 29 Vice-President, Chief Financial Officer and Controller William E. Fritz 74 Director James J. Keil 77 Director A. Hayes Barclay 73 Director The following is certain summary information with respect to the directors and executive officers of NeoMedia: Charles W. Fritz is a founder of NeoMedia and has served as an officer and as a Director of NeoMedia since our inception. On August 6, 1996, Mr. Fritz was appointed Chief Executive Officer and Chairman of the Board of Directors. On April 2, 2001, Mr. Fritz was appointed as President where he served until June 2002. Mr. Fritz is currently a member of the Compensation Committee. Prior to founding NeoMedia, Mr. Fritz was an account executive with IBM Corporation from January 1986 to January 1988, and Director of Marketing and Strategic Alliances for the information consulting group from February 1988 to January 1989. Mr. Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the University of Florida. Mr. Fritz is the son of William E. Fritz, a Director of NeoMedia. Charles T. Jensen was Chief Financial Officer, Treasurer and Vice-President of NeoMedia from 1996 through 2002. Mr. Jensen has been a Director since 1996, and currently is a member of the Compensation Committee. During 2002, Mr. Jensen was promoted to President, Chief Operating Officer, and Acting Chief Executive Officer. During August 2004, Mr. Jensen was made permanent Chief Executive Officer. Prior to joining NeoMedia in November 1995, Mr. Jensen was Chief Financial Officer of Jack M. Berry, Inc., a Florida corporation which grows and processes citrus products, from December 1994 to October 1995, and at Viking Range Corporation, a Mississippi corporation which manufactures gas ranges, from November 1993 to December 1994. From December 1992 to February 1994, Mr. Jensen was Treasurer of Lin Jensen, Inc., a Virginia corporation specializing in ladies clothing and accessories. Prior to that, from January 1982 to March 1993, Mr. Jensen was Controller and Vice-President of Finance of The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a B.B.A. in accounting from Western Michigan University and is a Certified Public Accountant. David A. Dodge joined NeoMedia in 1999 as the Financial Reporting Manager. Since then, Mr. Dodge has acted as NeoMedia's Director of Financial Planning and Controller, and currently holds the title of Vice President, Chief Financial III-1 Officer and Controller. Prior to joining NeoMedia in 1999, Mr. Dodge was an auditor with Ernst & Young LLP for 2 years. Mr. Dodge holds a B.A. in economics from Yale University and an M.S. in accounting from the University of Hartford, and is also a Certified Public Accountant. William E. Fritz is a founder of NeoMedia and has served as a Director of NeoMedia since its inception. Mr. Fritz also served as Treasurer of NeoMedia from its inception until May 1, 1996. Since February 1981, Mr. Fritz has been an officer and either the sole stockholder or a majority stockholder of G.T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark, Inc.) and EDSCO, three railroad freight car equipment manufacturing companies. Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's former Chief Executive Officer and Chairman of the Board of Directors. James J. Keil has been a Director of NeoMedia since August 6, 1996. Mr. Keil currently is a member of the Compensation Committee, the Stock Option Committee and the Audit Committee. He is founder and President of Keil & Keil Associates, a business and marketing consulting firm located in Washington, D.C., specializing in marketing, sales, document application strategies, recruiting and electronic commerce projects. Prior to forming Keil & Keil Associates in 1990, Mr. Keil worked for 38 years at IBM Corporation and Xerox Corporation in various marketing, sales and senior executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of Elixir Technologies Corporation (a non-public corporation), and from 1990-1992 was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S. degree from the University of Dayton and did Masters level studies at the Harvard Business School and the University of Chicago in 1961/62. A. Hayes Barclay has been a Director of NeoMedia since August 6, 1996, and currently is a member of the Stock Option Committee and the Audit Committee. Mr. Barclay has practiced law for approximately 37 years and, since 1967, has been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd. and its predecessor, with offices in Chicago, Wheaton and Arlington Heights, Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the University of Illinois and a J.D. from the Illinois Institute of Technology - Chicago Kent College of Law. Election Of Directors And Officers Directors are elected at each annual meeting of stockholders and hold office until the next succeeding annual meeting and the election and qualification of their respective successors. Officers are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. NeoMedia's By-Laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of shareholders and the due election and qualification of his successor. Meetings Of The Board Of Directors During the year ended December 31, 2004, NeoMedia held 5 directors' meetings and each incumbent director attended more than seventy-five percent of the total of meetings of the Board of Directors and the Committees of which he is a member. The Board of Directors also acted 20 times by unanimous written consent. III-2 Committees Of The Board Of Directors NeoMedia's Board of Directors has an Audit Committee, Compensation Committee and a Stock Option Committee. The Board of Directors does not have a standing Nominating Committee. Audit Committee. The Audit Committee is responsible for nominating NeoMedia's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit with NeoMedia's independent accountants, and reviewing the financial statements, audit practices and internal controls of NeoMedia. During 2004, members of the Audit Committee were non-employee directors James J. Keil and A. Hayes Barclay. During 2004, the Audit Committee held 4 meetings. Due to financial constraints, the Company does not currently have an audit committee financial expert serving on its audit committee. 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, A. Hayes Barclay and James J. Keil, were members of NeoMedia's Compensation Committee during 2004. The Compensation Committee acted by unanimous written consent 2 times during 2004. Stock Option Committee. The Stock Option Committee, which is comprised of non-employee directors, is responsible for administering NeoMedia's Stock Option Plans. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's Stock Option Committee. During 2004, the Stock Option Committee met once and acted by unanimous written consent 6 times. Director Compensation Outside directors are currently compensated through the issuance of stock options from the Company's 2003 Stock Option Plan. During May 2004, each outside director received 1,000,000 options with an exercise price of $0.075 per share, and the audit and compensation committee chairperson received and additional 500,000 options with an exercise price of $0.075 per share. NeoMedia does not have a written compensation policy for its outside directors at this time. Code of Ethics The Company has adopted a code of ethics, as required by the rules of the SEC (attached as exhibit 10.55 hereto). This code of ethics applies to all of the Company's directors, officers and employees. The code of ethics, and any amendments to, or waivers from, the code of ethics, is available in print, at no charge, to any stockholder who requests such information. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's officers and directors, and persons who own more than ten percent of a registered class of NeoMedia's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish NeoMedia with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to NeoMedia, NeoMedia believes that during 2003 all Section 16(a) filing requirements applicable to NeoMedia's officers, directors and ten percent beneficial owners were complied with. III-3 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 other executive officers who received aggregate cash compensation in excess of $100,000 for services rendered to NeoMedia (collectively, "the Named Executive Officers") during the years ended December 31, 2004 and 2003:
Annual Compensation ----------------------------------------------------------------------- Other Annual Compens- Name and Salary Bonus ation Principal Position Year ($) ($) ($) - ---------------------------------- --------- ------------ ---------- --------------- - ------------------------------------------------------------------------------------------------------------------------ Charles T. Jensen 2004 175,000 -- -- President and Chief 2003 162,000 92,000 (2) -- Executive Officer - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Charles W. Fritz 2004 $175,000 -- -- Chairman of the Board 2003 145,000 110,000 (2) $60,000 (3) - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ David A. Dodge 2004 122,000 -- -- Vice President and 2003 90,000 7,000 (2) -- Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------------
Long-term Compensation ------------------------------------------------------------------------------ Securities Restricted Underlying All other Stock Options/ LTIP Compens- Name and Award(s) SARs (1) Payouts ation Principal Position ($) (#) ($) ($) - ---------------------------------- --------------- ---------------- ------------ -------------- - ------------------------------------------------------------------------------------------------------------------------------- Charles T. Jensen -- 4,000,000 -- -- President and Chief -- 10,000,000 -- 1,000 (4) Executive Officer - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Charles W. Fritz -- 4,000,000 -- -- Chairman of the Board -- 10,000,000 -- 1,000 (4) - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- David A. Dodge -- 2,000,000 -- -- Vice President and -- 2,300,000 -- -- Chief Financial Officer - -------------------------------------------------------------------------------------------------------------------------------
- ------------------------ (1) Represents options granted under NeoMedia's 2003, 2002 and 1998 Stock Option Plans and warrants granted at the discretion of the Stock Option Committee of NeoMedia's Board of Directors. (2) During 2003, the Company paid past due Year 2000 Executive Incentive liability through the issuance of shares of its common stock. The amounts reported in this table represent the market value of the shares on the date of issuance. (3) During 2003, the Company paid Charles W. Fritz unpaid salary from 2002 through the issuance of shares of its common stock. The amounts reported in this table represent the market value of the shares on the date of issuance. (4) Includes automobile expenses attributable to personal use and the corresponding income tax effects. Employment Agreements No employment agreements are currently in place for any employees of the Company. Incentive Plan for Management Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan for Management ("Incentive Plan"), which provides for annual bonuses to eligible employees based upon the attainment of certain corporate and/or individual performance goals during the year. The Incentive Plan is designed to provide additional incentive to NeoMedia's management to achieve these growth and profitability goals. Participation in the Incentive Plan is limited to those employees holding positions assigned to incentive eligible salary grades and whose participation is authorized by NeoMedia's Compensation Committee which III-4 administers the Incentive Plan, including determination of employees eligible for participation or exclusion. The Board of Directors can amend, modify or terminate the Incentive Plan for the next plan year at any time prior to the commencement of such next plan year. To be eligible for consideration for inclusion in the Incentive Plan, an employee must be on NeoMedia's payroll for the last three months of the year involved. Death, total and permanent disability or retirement are exceptions to such minimum employment, and awards in such cases are granted on a pro-rata basis. In addition, where employment is terminated due to job elimination, a pro rata award may be considered. Employees who voluntarily terminate their employment, or who are terminated by NeoMedia for unacceptable performance, prior to the end of the year are not eligible to participate in the Incentive Plan. All awards are subject to any governmental regulations in effect at the time of payment. Performance goals are determined for both NeoMedia's and/or the employee's performance during the year, and if performance goals are attained, eligible employees are entitled to an award based upon a specified percentage of their base salary. The Company did not have a formal incentive plan for management in place for the year ended December 31, 2004. During the years ended December 31, 2004 and 2003, the Company paid $159,000 and $593,000, respectively, in past due incentive awards relating to its executive incentive plan for fiscal 2000, through the issuance of common stock. Stock Option Plans Effective February 1, 1996 (and amended and restated effective July 18, 1996 and further amended through November 18, 1996), NeoMedia adopted its 1996 Stock Option Plan ("1996 Stock Option Plan"). The 1996 Stock Option Plan provides for the granting of non-qualified stock options and "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and provides for the issuance of a maximum of 1,500,000 shares of common stock. All 1,500,000 options were granted under NeoMedia's 1996 Stock Option Plan. Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan ("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting of non-qualified stock options and provides for the issuance of a maximum of 8,000,000 shares of common stock. All 8,000,000 options were granted under NeoMedia's 1998 Stock Option Plan. Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan ("2002 Stock Option Plan"). The 2002 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 10,000,000 shares of common stock. All 10,000,000 options were granted under NeoMedia's 2002 Stock Option Plan Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan ("2003 Stock Option Plan"). The 2003 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 150,000,000 shares of common stock. On October 17, 2003, NeoMedia filed a Form S-8 to register all 150,000,000 shares underlying the options in the 2003 Stock Option Plan. As of December 31, 2004, the Company had issued approximately 69 million shares under the 2003 Stock Option Plan III-5 Stock Incentive Plan Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan. Under the terms of the Plan, NeoMedia has set aside up to 30,000,000 shares of common stock to be issued to pay compensation and other expenses related to employees, former employees, consultants, and non-employee directors. On November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares underlying the options in the 2003 Stock Incentive Plan. As of December 31, 2004, the Company had issued approximately 9.3 million shares under the 2003 Stock Incentive Plan. 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 $13,000 for 2004) to the 401(k) Plan, although the percentage elected by certain highly compensated participants may be required to be lower. All amounts contributed to the 401(k) Plan by employee participants and earnings on these contributions are fully vested at all times. The 401(k) Plan also provides for matching and discretionary contributions by NeoMedia. To date, NeoMedia has not made any such contributions. Options Granted in the Last Fiscal Year The following presents certain information on stock options for the Named Executive Officers for the year ended December 31, 2004:
Potential Realizable Percent of Value Number of Total at Assumed Annual Rates Securities Options/ of Stock Price Underlying SARs Appreciation Options Granted to Exercise or for option Term Named Granted Employees in Base Price Expiration ------------------------ Executive Officer (#) Fiscal Year ($/share) Date 5% ($) 10% ($) - ------------------- ------------ ------------- ------------ ---------------- ------------ ----------- Charles T. Jensen 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000 Charles W. Fritz 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000 David A. Dodge 2,000,000 2.6% $0.11 March 8, 2014 $138,000 $351,000
III-6 Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values The following table sets forth options exercised by NeoMedia Named Executive Officers during the year ended December 31, 2004, and the number and value of all unexercised options at fiscal year end.
Number of Unexercised Securities Underlying Value of Unexercised In- Shares Options/SARs at the-Money Options/SARs at Acquired Value December 31, 2004 December 31, 2004 (1) Named on Exercise Realized -------------------------------- -------------------------------- Executive Officer (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------- ------------ --------- ------------- --------------- ------------- --------------- Charles T. Jensen 1,505,386 $347,000 11,000,000 3,000,000 $2,705,000 $465,000 Charles W. Fritz 1,549,000 $156,000 12,510,000 3,000,000 $3,030,000 $465,000 David A. Dodge 100,000 $25,000 2,700,000 1,500,000 $639,000 $233,000
(1) Based on the difference between the closing price of $0.265 of NeoMedia's common stock as quoted on OTC Bulletin Board on December 31, 2004 and the exercise price of the option/SAR. III-7 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 January 31, 2005, (i) by each person or entity known by NeoMedia to own beneficially more than five percent of NeoMedia's Common Stock, (ii) by each of NeoMedia's directors and nominees, (iii) by each executive officer of NeoMedia named in the Summary Compensation Table, and (iv) by all executive officers and directors of NeoMedia as a group.
Amount and Nature of Percent of Beneficial Ownership (1) Class (1) -------------------------------- ------------- Charles W. Fritz (2)(3) 30,620,574 6.8% William Fritz(2)(4) 51,890,944 11.7% Charles T. Jensen(2)(5) 12,001,500 2.7% David A. Dodge(2)(6) 3,200,000 * A. Hayes Barclay(2)(7) 1,405,000 * James J. Keil(2)(8) 2,388,619 * -------------------------- ------------- Officers and Directors as a Group (9 Persons)(9) 101,506,637 22.3% -------------------------- -------------
- ------------------------- * - denotes ownership of less than one percent of issued and outstanding shares of NeoMedia's common stock. (1) Applicable percentage of ownership is based on 437,356,497 shares of common stock outstanding as of January 31, 2005, together with securities exercisable or convertible into shares of common stock within 60 days of January 31, 2005, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of January 31, 2005, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The common stock is the only outstanding class of equity securities of NeoMedia. (2) Address of the referenced individual is c/o NeoMedia Technologies, Inc., 2201 Second Street, Suite 402, Fort Myers, FL, 33901. (3) Charles W. Fritz is the Company's founder and the Chairman of the Board of Directors. Shares beneficially owned include 100 shares owned by each of Mr. Fritz's four children for an aggregate of 400 shares, 12,000,000 shares of common stock issuable upon exercise of options granted under the Company's 2003, 2002 and 1998 stock option plans, 1,510,000 shares issuable upon exercise of stock warrants, 15,567,605 shares of common stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of common stock held by the CW/LA II Family Limited Partnership, a family limited partnership for the benefit of Mr. Fritz's family. (4) William E. Fritz, a member of the board of directors, and his wife, Edna Fritz, are the general partners of the Fritz Family Limited Partnership and therefore each are deemed to be the beneficial owners 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 165,467 shares of NeoMedia held in these trusts. Additionally, Mr. Fritz is deemed to own: 45,923,735 shares held directly by Mr. Fritz or his spouse, 2,540,000 shares to be issued upon the exercise of warrants held by Mr. Fritz or his spouse, and 1,750,000 shares to be issued upon the exercise of options held by Mr. Fritz or his spouse. Mr. Fritz may be deemed to be a parent and promoter of NeoMedia, as those terms are defined in the Securities Act. (5) Charles T. Jensen is President, Chief Operating Officer, Acting Chief Executive Officer, and a member of the Board of Directors. Beneficial ownership includes 12,000,000 shares of common stock issuable upon exercise of options granted under NeoMedia's stock option plans, and 1,500 shares owned by Mr. Jensen's sons. (6) David A. Dodge is Vice President, Chief Financial Officer, and Controller. Beneficial ownership includes 3,200,000 shares of common stock issuable upon exercise of options granted under NeoMedia's stock option plans. (7) A. Hayes Barclay is a member of the Board of Directors. Ownership includes 1,400,000 shares of common stock issuable upon exercise of options granted under NeoMedia's stock option plans, and 5,000 shares owned by Mr. Barclay directly. (8) James J. Keil is a member of the Board of Directors. Shares beneficially owned includes 1,500,000 shares issuable upon exercise of options and 888,619 shares owned by Mr. Keil directly. (9) Includes an aggregate of 36,850,000 currently exercisable options to purchase shares of common stock granted under NeoMedia's stock option plans, 4,050,000 currently exercisable warrants to purchase shares of common stock, and 65,606,637 shares owned directly by NeoMedia's officers and directors. III-8 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During November 2002, NeoMedia issued Convertible Secured Promissory Notes with an aggregate face value of $60,000 to 3 separate parties, including Charles W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an outside director; and James J. Keil, an outside director. The notes bear interest at a rate of 15% per annum, and matured at the earlier of i.) four months, or ii.) the date the shares underlying the Cornell Equity Line of Credit were registered with the SEC. The notes were convertible, at the option of the holder, into either cash or shares of NeoMedia common stock at a 30% discount to either market price upon closing, or upon conversion, whichever is lower. NeoMedia also granted to the holders an additional 1,355,670 shares of its common stock and 60,000 warrants to purchase shares of its common stock at $0.03 per share, with a term of three years. The warrants and shares were issued in January 2003. In addition, since this debt is convertible into equity at the option of the note holder at beneficial conversion rates, an embedded beneficial conversion feature was recorded as a debt discount and amortized using the effective interest rate over the life of the debt in accordance with EITF 00-27. Total cost of beneficial conversion feature, fair value of the stock and cost of warrants issued exceed the face value of the notes payable, therefore, only $60,000, the face amount of the note, was recognizable as debt discount, and amortized over the life of the notes payable. The Company repaid Charles Fritz's note in full during March 2003, and repaid James J. Keil's note in full during April 2003. The Company paid $30,000 of the principal on William Fritz's note during April 2003, and entered into a new note with Mr. Fritz for the remaining $10,000. The new note also includes a provision under which, as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future revenue generated from the Company's intellectual property. The new note was paid in full during April 2004. During April 2003, the Board of Directors of the Company approved the payment in full of approximately $154,000 of liabilities owed by the Company to Charles W. Fritz, the Company's Founder and Chairman of the Board of Directors, through the issuance of 15,445,967 shares of common stock. The Company recognized a discount expense in general and administrative expenses of approximately $15,000 relating to this transaction with Mr. Fritz. During April 2003, the Company sold 25,000,000 shares of its common stock, par value $0.01, in a private placement at a price of $0.01 per share. The Company's stock price at the time of the sale was $0.012. In connection with the sale, the Company also granted the purchaser 25,000,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.01 per share. The warrants had a fair value of $298,000 and have been recorded as a cost of issuance. The purchaser was William E. Fritz, a member of the Company's Board of Directors. Proceeds to the Company from sale of the shares were $250,000. The Company recognized a discount expense in general and administrative expenses of approximately $50,000 relating to this transaction with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional shares of common stock at a price of $0.01 per share. During April 2003, the Company entered into a consulting agreement with William Fritz, an outside director, for consulting and advisement services relating to the merger with Loch Energy, Inc., and to the subsequent implementation of various management programs surrounding the business. The agreement called for total payments of $250,000 over a period of one year. During August 2003, the Company paid the consulting contract in full. During September 2003, the consulting contract was rescinded and the full $250,000 was returned to NeoMedia. During July 2003, the Company borrowed $25,000 from William E. Fritz, one of its outside directors. This amount was added to the principal of a $10,000 note payable to Mr. Fritz that matures in April 2004, with all other terms of the note remaining the same. As consideration for the loan, the Company granted Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at an exercise price of $0.01 per share. The warrants had a fair value of III-9 approximately $74,000. In accordance with EITF 00-27, the Company recorded the relative fair value of the warrants as a discount against the note, and amortized the discount over the life of the note. On August 29, 2003, the Company borrowed $50,000 from William E. Fritz, one of its outside directors, under an unsecured note payable. The note was paid in full during September 2003. III-10 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:
Exhibit No. Description Location - ----------- ----------- -------- 3.1 Articles of Incorporation of Dev-Tech Incorporated by reference to Exhibit 3.1 Associates, Inc. and amendment thereto to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.2 Bylaws of DevSys, Inc. Incorporated by reference to Exhibit 3.2 to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.3 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3.3 of DevSys, Inc. to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.4 By-laws of DevSys, Inc. Incorporated by reference to Exhibit 3.4 to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.5 Articles of Merger and Agreement and Incorporated by reference to Exhibit 3.5 Plan of Merger of DevSys, Inc and to Registrant's Registration Statement Dev-Tech Associates, Inc. No. 333-5534 as filed with the SEC on November 25, 1996 3.6 Certificate of Merger of Dev-Tech Incorporated by reference to Exhibit 3.6 Associates, Inc. into DevSys, Inc. to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.7 Articles of Incorporation of Dev-Tech Incorporated by reference to Exhibit 3.7 Migration, Inc. and amendment thereto to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.8 By-laws of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit 3.8 to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996
III-11
Exhibit No. Description Location - ----------- ----------- -------- 3.9 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3.9 of DevSys Migration, Inc. to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.10 Form of By-laws of DevSys Migration, Incorporated by reference to Exhibit 3.10 Inc. to Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 3.11 Form of Agreement and Plan of Merger of Incorporated by reference to Exhibit 3.11 Dev-Tech Migration, Inc. into DevSys to Registrant's Registration Statement Migration, Inc. No. 333-5534 as filed with the SEC on November 25, 1996 3.12 Form of Certificate of Merger of Incorporated by reference to Exhibit 3.12 Dev-Tech Migration, Inc. into DevSys to Registrant's Registration Statement Migration, Inc. No. 333-5534 as filed with the SEC on November 25, 1996 3.13 Certificate of Amendment to Certificate Incorporated by reference to Exhibit 3.13 of Incorporation of DevSys, Inc. to Registrant's Registration Statement changing its name to NeoMedia No. 333-5534 as filed with the SEC on Technologies, Inc. November 25, 1996 3.14 Form of Certificate of Amendment to Incorporated by reference to Exhibit 3.14 Certificate of Incorporation of to Registrant's Registration Statement NeoMedia Technologies, Inc. authorizing No. 333-5534 as filed with the SEC on a reverse stock split November 25, 1996 3.15 Form of Certificate of Amendment to Incorporated by reference to Exhibit 3.5 Restated Certificate of Incorporation to Registrant's Annual Report as filed of NeoMedia Technologies, Inc. with the SEC on November 2, 2001 increasing authorized capital and creating preferred stock 10.1 Dev-Tech Associates, Inc. 1996 Stock Incorporated by reference to Exhibit Option Plan 10.44 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.2 First Amendment and Restatement of Incorporated by reference to Exhibit Dev-Tech Associates, Inc. 1996 Stock 10.45 to the Registrant's Registration Option Plan Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.3 Form of Stock Option Agreement - Incorporated by reference to Exhibit Dev-Tech Associates, Inc. 10.46 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996
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Exhibit No. Description Location - ----------- ----------- -------- 10.4 Dev-Tech Migration, Inc. 1996 Stock Incorporated by reference to Exhibit Option Plan 10.47 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.5 First Amendment and Restatement of Incorporated by reference to Exhibit Dev-Tech Migration, Inc. 10.48 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.6 Form of Stock Option Agreement - Incorporated by reference to Exhibit Dev-Tech Migration, Inc. 10.49 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.7 Dev-Tech Associates, Inc. 401(k) Plan Incorporated by reference to Exhibit and amendments 10.50 to the Registrant's Registration Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.8 First Amendment and Restatement of Incorporated by reference to Exhibit NeoMedia Technologies, Inc. 1996 Stock 10.60 to the Registrant's Registration Option Plan Statement No. 333-5534 as filed with the SEC on November 25, 1996 10.9 NeoMedia Technologies, Inc. 1998 Stock Incorporated by reference to Exhibit 10.9 Option Plan to the Registrant's Form 10-KSB as filed on March 9, 2004 10.10 Amendment to NeoMedia Technologies 1998 Incorporated by reference to Form 14A as Stock Option Plan filed with the SEC on July 2, 1999 10.11 Sale and Purchase Agreement between Incorporated by reference to Exhibit Qode.com, Inc. and NeoMedia 10.48 to the Registrant's Current Report Technologies, Inc. on Form 8-K as filed with the SEC on March 15, 2001 10.12 Warrant repricing letter dated March Incorporated by reference to Exhibit 1.2 19, 2002 to the Registrant's Current Report on Form 8-K as filed with the SEC on April 2, 2002 10.13 Option repricing letter dated April 3, Incorporated by reference to Exhibit 1.2 2002 to the Registrant's Current Report on Form 8-K as filed with the SEC on April 15, 2002
III-13
Exhibit No. Description Location - ----------- ----------- -------- 10.14 Intellectual Property licensing Incorporated by reference to Exhibit agreement between NeoMedia and A.T. 10.18 to the Registrant's Form S-1/A as Cross Company filed with the SEC on April 24, 2002 10.15 Intellectual Property licensing Incorporated by reference to Exhibit agreement between NeoMedia and Symbol 10.19 to the Registrant's Form S-1/A as Technologies, Inc. filed with the SEC on April 24, 2002 10.16 Sponsorship and Advertising Agreement Incorporated by reference to Exhibit between NeoMedia and About.com, Inc. 10.20 to the Registrant's Form S-1/A as filed with the SEC on April 24, 2002 10.17 Letter of Intent regarding proposed Incorporated by reference to Exhibit strategic transaction between NeoMedia 10.21 to the Registrant's Form S-1/A as and AirClic, Inc. filed with the SEC on April 24, 2002 10.18 Form of Promissory Note issued to Incorporated by reference to Exhibit AirClic, Inc. 10.22 to the Registrant's Form S-1/A as filed with the SEC on April 24, 2002 10.19 Form of Limited Recourse Promissory Incorporated by reference to Exhibit Note issued in exchange for 19 Million 10.23 to the Registrant's Form S-1/A as Shares of Common Stock filed with the SEC on April 24, 2002 10.20 Nasdaq Staff Determination Letter with Incorporated by reference to Exhibit respect to de-listing of NeoMedia 10.24 to the Registrant's Form S-1/A as securities from the Nasdaq SmallCap filed with the SEC on April 24, 2002 market 10.21 Revised warrant repricing letter dated Incorporated by reference to Exhibit April 3, 2002 10.25 to the Registrant's Form S-1/A as filed with the SEC on April 24, 2002 10.22 Equity Line of Credit Agreement, dated Incorporated by reference to Exhibit May 6, 2002, between NeoMedia 10.17 to the Registrant's Quarterly Technologies and Cornell Capital Report on Form 10-Q as filed with the SEC Partners, LP on August 14, 2002 10.23 Nasdaq Staff delisting notification Incorporated by reference to Exhibit letter dated May 16, 2002 10.18 to the Registrant's Quarterly Report on Form 10-Q as filed with the SEC on August 14, 2002 10.24 Settlement Agreement relating to Incorporated by reference to Exhibit wrongful termination lawsuit brought by 10.19 to the Registrant's Form 10-Q as former president and Chief Operating filed with the SEC on August 14, 2002 Officer 10.25 Mutual settlement agreement by and Incorporated by reference to Exhibit between NeoMedia Technologies and 2150 10.20 to the Registrants Form 10-Q as Western Court Company, LLC filed on November 14, 2002
III-14
Exhibit No. Description Location - ----------- ----------- -------- 10.26 Mutual settlement agreement by and Incorporated by reference to Exhibit between NeoMedia Technologies and 10.21 to the Registrants Form 10-Q as Ripfire, Inc. filed on November 14, 2002 10.27 Mutual settlement agreement by and Incorporated by reference to Exhibit between NeoMedia Technologies and 10.22 to the Registrants Form 10-Q as Wachovia Bank, N.A. filed on November 14, 2002 10.28 Mutual settlement agreement by and Incorporated by reference to Exhibit between NeoMedia Technologies and 10.23 to the Registrants Form 10-Q as Marianne LePera, NeoMedia Technologies' filed on November 14, 2002 former General Counsel 10.29 Equity Line of Credit Agreement, dated Incorporated by reference to Exhibit February 11, 2003, between NeoMedia 10.80 to the Registrants Form S-1/A as Technologies and Cornell Capital filed on February 14, 2003 Partners 10.30 Form of Placement Agent Agreement, Incorporated by reference to Exhibit dated November 2002, between NeoMedia 10.84 to the Registrant's Form S-1 as Technologies and Westrock Advisors, Inc. filed on February 12, 2003 10.31 Form of Escrow Agreement, dated Incorporated by reference to Exhibit November 2002, between NeoMedia 10.85 to the Registrant's Form S-1 as Technologies and Cornell Capital filed on February 12, 2003 Partners 10.32 Form of Registration Rights Agreement, Incorporated by reference to Exhibit dated November 2002, between NeoMedia 10.86 to the Registrant's Form S-1 as Technologies and Cornell Capital filed on February 12, 2003 Partners 10.33 Promissory Note, dated February 23, Incorporated by reference to Exhibit 2001, between Digital Convergence 10.87 to the Registrant's Form S-1 as Corporation and NeoMedia filed on February 12, 2003 10.34 Termination Agreement, dated August 21, Incorporated by reference to Exhibit 2001, between About.com and NeoMedia 10.88 to the Registrant's Form S-1 as filed on February 12, 2003 10.35 Memorandum of Terms to merge, dated Incorporated by reference to Exhibit 3.1 March 7, 2003, between NeoMedia and to the Registrant's Form 8-K as filed on Loch Energy, Inc. March 19, 2003 10.36 Binding Letter of Intent to merge, Incorporated by reference to Exhibit 99.5 dated July 25, 2003, between NeoMedia to the Registrant's Form 10-QSB as filed and Secure Source Technologies, Inc. on August 14, 2003 10.37 Definitive Merger Agreement, dated Incorporated by reference to Exhibit 99.1 October 3, 2003, between NeoMedia and to the Registrant's Form 8-K as filed on Secure Source Technologies, Inc October 8, 2003
III-15
Exhibit No. Description Location - ----------- ----------- -------- 10.38 Standby Equity Distribution Agreement, Incorporated by reference to Exhibit dated October 27, 2003, between 10.91 to the Registrant's Form SB-2/A as NeoMedia and Cornell Capital Partners filed on December 19, 2003 10.39 Form of Placement Agent Agreement, Incorporated by reference to Exhibit dated October 27, 2003, between 10.92 to the Registrant's Form SB-2/A as NeoMedia and Newbridge Securities filed on December 19, 2003 Corporation 10.40 Form of Registration Rights Agreement, Incorporated by reference to Exhibit dated October 27, 2003, between 10.93 to the Registrant's Form SB-2/A as NeoMedia and Cornell Capital Partners filed on December 19, 2003 10.41 Form of Escrow Agreement, dated October Incorporated by reference to Exhibit 27, 2003, between NeoMedia and Cornell 10.94 to the Registrant's Form SB-2/A as Capital Partners filed on December 19, 2003 10.42 2003 Stock Compensation Plan Incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 as filed on October 31, 2003 10.43 Letter of Intent to acquire CSI Incorporated by reference to Exhibit 3.1 International, Inc., dated November 8, to the Registrant's Form 8-K as filed on 2003 November 13, 2003 10.44 Letter of Intent to acquire BSD Incorporated by reference to Exhibit 3.1 Software, Inc., dated December 9, 2003 to the Registrant's Form 8-K as filed on December 11, 2003 10.45 Definitive Merger Agreement, dated Incorporated by reference to Exhibit 3.1 February 6, 2004, between NeoMedia and to the Registrant's Form 8-K as filed on CSI International, Inc. February 10, 2004 10.46 $4 million Promissory note payable to Incorporated by reference to Exhibit Cornell Capital Partners, dated January 10.49 to the Registrant's Form 10-KSB as 15, 2004 filed on March 9, 2004 10.47 Form of Business Development Agreement Incorporated by reference to Exhibit 2.2 between NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on September 17, 2004 10.48 Form of Investment Agreement between Incorporated by reference to Exhibit 2.3 NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on September 17, 2004 10.49 Form of Registration Rights Agreement Incorporated by reference to Exhibit 2.4 between NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on September 17, 2004 10.50 Form of Indemnification Agreement Incorporated by reference to Exhibit 2.5 between NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on September 17, 2004
III-16
Exhibit No. Description Location - ----------- ----------- -------- 10.51 Form of Merger Agreement among NeoMedia Incorporated by reference to Exhibit 16.1 Technologies, Inc., NeoMedia Telecom to the Registrant's Form 8-K as filed on Services, Inc., and BSD Software, Inc. December 22, 2004 10.52 Form of Letters of Intent With Pickups Incorporated by reference to Exhibits Plus, Inc. 16.1 and 16.2 to the Registrant's Form 8-K as filed on March 1, 2005 10.53 Form of NeoMedia's Policy Statement on Provided Herewith Ethical Behavior 10.54 Form of Term Sheet with Nextcode Provided Herewith Corporation 10.55 Form of Letter of Intent With Shelron Provided Herewith Group, Inc. 23.1 Consent of Stonefield Josephson, Inc., Provided Herewith independent auditors 31.1 - 31.4 Certifications Provided Herewith
(b) Reports on Form 8-K NeoMedia filed a Form 8-K on December 22, 2004, disclosing that it had entered into an agreement to acquire and merge with BSD Software, Inc. NeoMedia filed a Form 8-K on March 1, 2005, disclosing that it had entered into 2 letters of intent to acquire up to 100% interest in Automotive Preservation, Inc. NeoMedia also invested $250,000 in common stock of Pickups, Plus, Inc., the parent company of Automotive Preservation, Inc. III-17 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's independent auditors, for the audit of NeoMedia's annual consolidated financial statements and reviews of quarterly financial statements for the years ended December 31, 2004 and 2003 were $137,000 and $119,000, respectively. Audit-related Fees The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's independent auditors, for assurance and related services for the years ended December 31, 2004 and 2003 were $0 and $0, respectively. Tax Fees The aggregate fees billed by Wiltshire, Whitley, Richardson & English, NeoMedia's principal accountants for tax compliance, advice, and planning, were $9,000 for each of the years ended December 31, 2004 and 2003. All Other Fees The aggregate fees billed by Stonefield Josephson, Inc., for other products and services during the years ended December 31, 2004 and 2003 were $0 and $0, respectively. Audit Committee Pre-approval The audit committee of NeoMedia's board of directors approves all non-audit services provided by NeoMedia's primary accountants. III-18 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 4th day of March, 2005. NEOMEDIA TECHNOLOGIES, INC. Registrant By: -------------------------------------- /s/ Charles T. Jensen, President, Chief Executive Officer, and Director In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 4, 2005.
Signatures Title Date - ---------- ----- ---- - ------------------------ President, Chief Executive Officer, and /s/ Charles T. Jensen Director March 4, 2005 Director March 4, 2005 - ------------------------ /s/ William E. Fritz - ------------------------ Chairman of the Board /s/ Charles W. Fritz March 4, 2005 - ------------------------ Vice-President, Chief Financial /s/ David A. Dodge Officer and Controller March 4, 2005 - ------------------------ Director March 4, 2005 /s/ Hayes Barclay - ------------------------ Director March 4, 2005 /s/ James J. Keil
III-19 EX-10.53 2 v013795_ex10-53.txt EXHIBIT 10.53 NEOMEDIA TECHNOLOGIES, INC POLICY STATEMENT ON ETHICAL BEHAVIOR A. PURPOSE It is the policy of NeoMedia Technologies, Inc. (the "Company") to do business in compliance with all applicable laws, rules and regulations and accepted community ethical and moral standards. It has been the Company's longstanding policy to maintain the highest ethical standards in the conduct of its affairs and in its relationship with customers, suppliers, employees, advisors and the communities and countries in which its operations are located. As an integral member of the Company team, you are expected to accept certain responsibilities, adhere to acceptable business principles in matters of personal conduct, and exhibit a high degree of personal integrity at all times. This not only involves sincere respect for the rights and feelings of others, but also demands that in both your business and personal life, you refrain from any behavior that might be harmful to you, your co-workers, or the Company, or that might be viewed unfavorably by current or potential customers, or by the public at large. Whether you are on duty or off, your conduct reflects on the Company. You are, therefore, encouraged to observe the highest standards of professionalism at all times. It would be virtually impossible to cite examples of every type of activity which might give rise to a question of unethical conduct. Therefore, it is important that each of us rely on our own good judgment in the performance of our duties and responsibilities. When those situations occur where the proper course of action is unclear, request advice and counsel from an officer of the Company. The reputation and good name of the Company depends entirely upon the honesty and integrity of each one of us. Employees should read this Policy Statement with the following in mind: 1. The Company requires every employee to comply with these standards. 2. This list is not comprehensive. The Company encourages employees who have questions about these standards and their application to employee conduct to discuss them with their manager, the Company's counsel, or with the manager in charge of human resources or the Chief Financial Officer. 3. An employee who knows or has reason to know of any activity that violates or could violate these standards must promptly report the matter to the President or the Chief Financial Officer. 4. Each employee will be given a copy of this Policy Statement and be asked to sign an Employee Acknowledgement Form. B. RESPONSIBILITY FOR POLICY ENFORCEMENT These principles set forth in this Policy Statement are to be strictly observed. Each manager should insure that appropriate procedures are in place such that at the time of employment or promotion into a management, supervisory, sales or purchasing position an acknowledged copy of this Policy Statement is obtained for permanent retention in the employees' personnel file. In January of each year, 1. each Corporate officer and senior management personnel will be asked to reaffirm this Policy Statement by signing and returning to the Corporate office a copy of this Policy Statement, and 2. each manager will ask all employees to reaffirm this Policy Statement by reviewing the statements with each employee, obtaining 10.53-1 two signed copies on the attached form, one copy of which will be retained in the employee's personnel file. Each manager will notify the President or the Chief Financial Officer in writing of refusals to sign, or any exceptions requested to, this requirement. Because violations are serious matters, any infraction of this Policy Statement will subject an employee, without regard to position, to disciplinary action, which may include reprimand, probation, suspension, reduction in salary, demotion or discharge depending on the seriousness of the offense. Claims of ignorance, overzealousness, good intentions or lack of injury cannot excuse or justify acts which violate this Policy Statement. In addition, similar disciplinary measures will apply to any employee who directs, orders or approves of such prohibited activities, or has knowledge of them and does not act promptly to correct them in accordance with this Policy Statement. Appropriate disciplinary measures will be imposed on any employee who fails to carry out the management responsibility to insure that subordinates are adequately informed about this Policy Statement. The Company's attorneys will advise management concerning the legality of corporate conduct and, upon approval from an officer of the Company, should be called upon for guidance and counsel if any questions arise regarding Company policy or concerning any proposed activities that raise any question of possible conflict with this Policy Statement. As used in this Policy Statement, the term "Company" means and refers to NeoMedia Technologies, Inc. and all of its divisions and subsidiaries, domestic and foreign, and the term "employee" means and refers to the directors, officers and employees of NeoMedia Technologies, Inc. and all of its divisions and subsidiaries. C. COMPLIANCE WITH LAWS AND REGULATIONS All activities of the Company and its employees shall be conducted in compliance with all federal, state and other laws, rules, regulations, orders and judicial decrees. An officer or employee having any question as to the validity of any action proposed to be taken on behalf of the Company shall submit it to the President for opinion. No claim of business exigency, increased sales or profits or business opportunity shall excuse any violation of this Policy Statement. In addition to literal compliance with legal requirements, each officer and employee must adhere to and comply with the overriding moral and ethical standards of our society in the conduct of business. The Company's interests are not served by unethical practices and activities even though not in technical violation of the law. D. GIFTS OF ALL KINDS. The purpose of the policy relating to entertainment, gifts, favors and gratuities is to avoid any implication that unfair or preferential treatment will be granted or received by the Company's employees in their course of dealing on behalf of the Company. A basic consideration should be that public disclosure would not be embarrassing to the Company or the recipient. The following guidelines are provided for the applications of this policy: 1. Gifts of cash, or cash equivalents, are never permissible regardless of amount; 2. An especially strict standard is imposed on gifts, services, or considerations of any kind from suppliers. Only those considerations which are deemed common business courtesies and are of an insignificant or nominal value to the recipient will be permitted; 3. Gifts, favors, and entertainment may be given to others at the Company's expense only if they are consistent with accepted business practices and are of such limited value that they cannot be considered as a bribe or payoff. E. FAVORS. Employees may not give or receive any gifts or favors to or from any customer, supplier, competitor (other than a gift of nominal value) without the prior consent of a manager. In no event shall an employee give or receive a gift in the form of cash, stocks, bonds, options, or similar types of items. It is impermissible and may be unlawful to give, offer, or promise anything of value for the purpose of influencing someone in connection 10.53-2 with Company business or a Company transaction. Similarly, it is impermissible and may be unlawful to solicit, demand, or accept anything of value with the intent of being influenced or rewarded in connection with any Company business or transaction. Therefore, no employee may give or receive any gift it could reasonably be viewed as being done to gain a business advantage. Employees are not prevented from incurring normal business-related expenses for entertainment or from accepting personal mementos of minimal value. It is acceptable to occasionally allow a supplier or customer to pay for a business meal. F. BRIBES. The Company will pay only those agents with whom it has a formal written agreement and from whom it has an invoice detailing the amount to be paid. Employees must insure that vouchers properly identify commissions. An employee may make payment to an agent for only the amount that constitutes the proper remuneration for the service rendered by the agent. An employee may not make a commission or any other payment if that employee knows or has reason to know the payment will be used as a bribe. G. ANTITRUST LAWS AND TRADE REGULATIONS The antitrust laws and regulations shall be observed at all times, in all situations, by all employees of the Company. At the heart of these laws, price-fixing, including the exchange of pricing information with competitors, and bid-rigging acts or arrangements with competitors to divide or allocate markets or customers or exclude others from the market, are absolutely prohibited. Jail sentences, fines and heavy damages have been imposed on individuals and corporations violating the antitrust laws. It is expected that employees whose activities are significantly affected by the antitrust laws will have a working knowledge of permissible and impermissible activities involved in their work and will consult with their superiors and the Company's attorneys, through appropriate channels, concerning any matter on which there is any question. It is the responsibility of all officers and managers to make this policy known to, and regularly stress its importance to, employees over whom they have supervision, and to administer and execute this policy. They shall continue to call upon the Company's attorneys, after having obtained proper authorization, for such assistance and reviews of compliance procedures as they and the Company's attorneys deem advisable to insure the effectiveness of this policy. H. ELECTION CAMPAIGN LAWS Federal law prohibits a corporation from making a contribution or expenditure in connection with any election at which Presidential and Vice-Presidential electors, or a Senator or Representative to Congress, are to be voted for, or in connection with any primary election or political convention or caucus held to select candidates for any of these offices. Most states of the United States and many foreign countries have similar laws prohibiting corporate political contributions in connection with elections to political office. It is the policy of the Company that such laws shall be observed by all officers and employees and that no corporate funds shall be contributed, expended or reimbursed, directly or indirectly, for any purpose contrary to such laws. Any officer or employee asked to contribute corporate funds, or to contribute funds in such a manner or amount leading to the belief that corporate funds would be used in connection with any political campaign, shall immediately notify the President or the Chief Financial Officer. This policy, it is emphasized, relates not only to direct disbursement of Company funds but also to indirect contributions or payments made in any form or through any means, such as through consultants, suppliers, 10.53-3 customers or other third parties or by reimbursement to employees for personal contributions or payments. Even where political contributions are permitted by law, no Company funds in excess of $100.00 in each case shall be used for such purposes unless authorized by the President or Chief Financial Officer. Each manager is responsible; 1. for disseminating this policy and stressing its importance to employees over whom they have supervision who are in a position to make a contribution of corporate funds or obtain reimbursements from the Company therefore, 2. for reviewing with the Company's attorneys any questions as to the propriety of any contribution or expenditure which could possibly violate this policy before such contribution or expenditure is made, and 3. for reporting directly to the President or Chief Financial Officer of the Company any violation or apparent violation of this policy. This policy does not prohibit or discourage any officers or employees from engaging in political activities in an individual capacity on their own time at their own expense, or during an unpaid leave of absence, or from making political contributions or expenditures of their personal funds, or from expressing views and taking appropriate action as Company officers or employees with respect to legislative or political matters affecting the Company. I. RELATIONSHIP WITH GOVERNMENTAL AGENCIES AND OFFICIALS Payments, regardless of amount, or gifts or entertainment of more than nominal value to employees of the United States and any other domestic or foreign jurisdiction, regardless of motive, are viewed by the Company as improper and they are not to be permitted. In addition federal law imposes criminal penalties on Corporations and individuals violating these laws. It is important that all Company personnel realize that our relationship with agencies and public officials should in all respects be of such a nature that the integrity and reputation of the officials and the Company will not be impugned in the event the full details of the relationship, including any gifts or entertainment, become a matter of public record. J. PROPER ACCOUNTING FOR FUNDS, ASSETS AND DISBURSEMENTS Employees are forbidden to use, directly or indirectly, corporate funds and assets for any unlawful purpose or to accomplish any unlawful goal. The Company also prohibits the establishment or maintenance of undisclosed or unrecorded funds and assets. All reporting information should be accurate and timely. Employees may not make any false or misleading entries in any books and records. It is essential that at all times there be full and accurate accounting for funds and other assets of the Company by those entrusted with control over them and that all disbursements or uses of Company funds be legal and be fully documented, and be accurately recorded in its accounts. To this end, these standards must be observed: 1. The use of assets of the Company for any personal, unlawful or improper purpose is strictly prohibited. 2. No undisclosed or unrecorded fund or asset of the Company shall be established for any purpose. 3. No false or misleading entries shall be made in the books and records of the Company for any reason, and no employee shall engage in any arrangement that results in such prohibited acts. 4. No payment on behalf of the Company shall be approved without adequate supporting documentation or made with the intention or understanding that any part of such payment is to be used for any purpose other than that described by the documents supporting the payment. 5. No employee shall accept any bribes or kickbacks or make or offer any bribe to anyone within or outside the Company for any purpose of advantage to the Company or to any individual. 10.53-4 6. All employees having management, supervisory, auditing, accounting, bookkeeping, and other similar and related responsibilities shall be familiar with the accounting responsibilities of the Foreign Corrupt Practices Act, and regulations thereunder and shall observe its provisions. 7. Employees dealing with or in foreign countries shall be familiar with the provisions of the Foreign Corrupt Practices Act, and regulations thereunder, and shall observe its provisions in all transactions with foreign nationals or companies. Any officer or employee having knowledge of any act or circumstance which is prohibited by the foregoing paragraphs shall immediately report the matter to the President or Chief Financial Officer of the Company. Any question as to the legality of any payment for consultants or other similar fees shall be submitted to the President or Chief Financial Officer of the Company for opinion. The Chief Financial Officer shall maintain procedures to preclude the accumulation of funds which are not recorded on the books and records of the Company. The internal accounting department shall maintain suitable written audit and other controls to monitor compliance and reveal any violations of these policies. K. CONFLICTS OF INTEREST - OUTSIDE ACTIVITIES If an employee is hired for a position that gives the employee the authority to spend Company funds or set Company policy, it is an implicit condition of his or her employment that the employee use the authority in the Company's interest. Every employee is prohibited from partaking in any activity or association that creates or appears to create a conflict between the employee's personal interest and the Company's business interests. In addition, no employee must allow any situation or personal interests to interfere with the exercise of independent judgment or with that employee's ability to act in the best interests of the Company. The term "conflict of interest" describes any circumstance that would cast doubt on an employee's ability to act with total objectivity with regard to the Company's interest. Each employee is expected to avoid any action or involvement which would in any way compromise his or her actions on behalf of the Company. Circumstances in which a conflict of interest on the part of any employee shall be deemed to exist include, but are not limited to, the following: 1. Relationships with suppliers, contractors or customers: (a) Ownership of a material interest in any supplier, contractor, subcontractor, customer or other entity (other than an affiliate of the Company) with which the Company does business. (b) Acting in any capacity - including director, officer, partner, consultant, employee, distributor, agent or the like - for suppliers, contractors, subcontractors, customers or other entities (other than an affiliate of the Company) with which the Company does business. (c) Acceptance of payments, services or loans from a supplier, contractor, subcontractor, customer or other entity (other than an affiliate of the Company) with which the Company does business. This includes gifts, trips, entertainment or other favors of more than nominal value. 2. Ownership of property affected by Company action: (a) Ownership or acquisition of property, the value of which is likely to be affected by any action of the Company or influenced by a decision or recommendation of the employee owning such property. (b) Ownership or acquisition of any property or interest where confidential or unpublished information obtained through the Company has in any way been considered in such ownership or acquisition. 10.53-5 3. Appropriation or diversion of corporate opportunity: (a) The appropriation by an officer or employee or the diversion to others of any business opportunity in which it is known or it could reasonably be anticipated that the Company would be interested. (b) The disclosure of any "insider" non-public information about the Company. 4. Interest in or position with competitor: (a) Ownership by an employee of a material interest in an enterprise in competition with the Company. (b) Acting as director, officer, partner, consultant, employee or agent of any enterprise which is in competition with the Company. These prohibitions and requirements are applicable to close relatives or members of the immediate family of any employee. An interest is "material" within the meaning of this policy when it is significant either by reference to the employee's financial position or in reference to the size of the entity involved. In case of doubt, materiality should be presumed. The legal form of ownership will be of no significance in determining whether a possible conflict of interest may exist except that ownership of an aggregate of less than one tenth of 1% of the securities of any corporation which has total assets of $50 million or more shall not be deemed to involve a conflict of interest under this policy and need not be reported. Employees shall not engage in any outside interest, activity or investment which may be adverse to the Company or conflict with its best interests. This includes engaging in an illegal or immoral enterprise, or accepting sales commissions, professional fees, or other forms of remuneration from outside the Company in connection with or resulting from duties or responsibilities as an employee of the Company; provided, however, that an employee may, with management approval, serve as a director of another company, whether or not an affiliate of the Company, give lectures, conduct seminars, publish articles and books, serve as a committee member, trustee, or regent or in other similar capacities, and retain any fees, honorariums, or similar compensation received therefor. Any outside interest or activities which have been fully disclosed to the Company, and approved in writing, either at the time of initial employment of subsequent thereto, may continue in the manner approved until and unless advised to the contrary. Any employee who has doubt as to the propriety of any outside interests or activities may obtain a clarification at any time by submitting a written request through the employee's manager and in cases where there is any doubt about the application of the policy to outside interests, the Company's attorneys, after receiving written authorization from the President or Chief Financial Officer to consult with the Company's attorneys. L. SECURITIES LAWS AND REGULATIONS United States securities regulations, which regulate transactions in corporate securities (such as stocks and bonds), impose severe sanctions against the use of "inside" information in the purchase and sale of securities by officers and employees of a company for their own benefit and profit. "Inside" information includes any important material fact which may affect the decision of anyone (including a speculator) to buy, sell or hold a particular security. Until released to the public, material information concerning Company plans, operations or financial results is considered "inside" information and, therefore, confidential. Such data does not belong to the individual employee who may handle it or otherwise come to know of it. For any person to use such information for personal benefit, especially in connection with the trading of any Company securities, or to disclose such information to others outside the Company, violates the law and is contrary to the Company's interests. Under the rules of the United States Securities and Exchange Commission, anyone who is in possession of material inside information is an "insider". This includes not only knowledgeable directors and officers but also non-management employees and persons outside the Company (wives, friends, brokers, printers and others) who may have acquired the information directly or indirectly from inside the Company. These rules 10.53-6 prohibit insiders from trading in or recommending the Company's securities while such inside information remains undisclosed to the general public. The securities include not only those of the Company, but also the securities of any company of which you have acquired important, non-public knowledge as a result of your employment. Specifically, you should not trade in the securities of any company which, to your knowledge, is under consideration as an acquisition by the Company. The insider is allowed to purchase, sell or recommend Company securities or the securities of another company only after the inside information has been publicly disclosed, and then only after a reasonable time has elapsed for the information to be absorbed by the general public. The Company has rigidly defined channels through which data proposed for public release must flow. No disclosure of inside information which could be material should be made without first consulting the Company's attorneys, after receiving written authorization from the President or Chief Financial Officer to consult with the Company's attorneys. Regulations which are designed to protect the investing public are strictly enforced, and both civil and criminal action can be taken against both the individual and company involved. If you have any doubts as to whether a contemplated securities transaction might be deemed a violation of the "insider" trading rule, you may, after receiving proper authorization, request an opinion of the Company's attorneys. Employees are prohibited from investing in any of the Company's customers, suppliers, or competitors unless the securities are publicly traded and the investments are on the same terms available to the general public and not based on any "inside information". This prohibition applies to all forms of investments and to all employees, directors, officers, and agents of the Company and their immediate families. In general, employees should not have any financial interest in a customer, supplier, or competitor that could cause divided loyalty, or even the appearance of a divided loyalty. M. DISCLOSING CONFIDENTIAL INFORMATION Employees have an ethical duty not to disclose confidential information gleaned from business transactions and to protect confidential relationships between the Company and its customers, suppliers, and shareholders. Business information that has not been made public (e.g., insider information) shall not be released to private individuals, organizations, or government bodies unless demanded by legal process such as a subpoena or court order. Employees shall not use confidential information obtained in the course of their employment for the purpose of advancing any private interest or otherwise for personal gain. Employees should refer any requests for information (reference checks, credit reporting, etc.) about present or former employees of the Company to the manager in charge of the human resources function or Chief Financial Officer for handling. N. CONFIDENTIALITY The Company possesses and will continue to possess information that has been created, discovered, and developed by the Company; has been disclosed to the Company under the obligation of confidentiality; or has otherwise become known to the Company or in which property rights have been assigned or conveyed to the Company, which information is confidential to the Company and which information has commercial value in the business of the Company. All such information, except such information as is known or becomes known to the public without violation of the terms of this paragraph, is hereafter called "Confidential and Proprietary Information". By way of illustration, but not limitation, Confidential and Proprietary Information includes customer lists, subscriptions lists, details of author or consultant contracts, pricing policies, financial statements, projections, marketing plans or strategies, new product developments or plans, business acquisition plans, new personnel acquisition plans, trade secrets, operation methods, software and computer programs. During the employee's employment with the Company and after termination (whether voluntary or involuntary) of the employee's employment with the Company or any of its affiliates, the employee shall keep secret and 10.53-7 retain in strictest confidence all such Confidential and Proprietary Information. Nothing contained in this paragraph shall be deemed to prevent the employee from utilizing his or her general knowledge, intellect, experience, and skills for gainful employment after termination of employment with the Company. O. DOCUMENTS All memoranda, notes, lists, records and other documents (and all copies thereof) made or complied by the employee or made available to the employee concerning the business of the Company or any of its affiliates shall be the Company's property and shall be delivered to the Company promptly upon the termination of the employee's employment with the Company or any of its affiliates or at any other time on request. P. OUTSIDE EMPLOYMENT No employee may serve as an employee, director, or officer of any supplier or customer without the prior written approval of the manager in charge of human resources or the Chief Financial Officer. An employee may never serve as an employee, director, or officer of a competitor but may serve as an adviser or consultant to a supplier or customer if that employee conducts business as a representative of the Company. Officers of the Company may not engage in any outside employment other than work as a volunteer, which is done on such individual's own time, and other than employment for an affiliated company of the Company which such employment has been approved by the Board of Directors of the Company. Any employee who does perform outside work has a special responsibility to avoid any conflict with the Company's business interests. Outside work cannot be performed on the Company's time other than any employment for an affiliated company of the Company which such employment has been approved by the Board of Directors of the Company. Q. DOING BUSINESS WITH FAMILY MEMBERS If an employee wishes to do business on behalf of the Company with a member of that employee's immediate family or other relative or with a company of which a relative is an officer, director, or principal, the employee must first disclose the relationship and obtain the prior written approval of the President or the Chief Financial Officer of the Company. R. PRODUCT INTEGRITY In connection with the design, development, testing, manufacture, advertising, sale or service of the Company's products, all employees are directed to adhere to engineering, manufacturing and ethical standards which provide proper design, performance, operation and maintenance of the Company's products. In connection with the sale of Company products, its advertising, sales promotions and customer presentations should accurately set forth any product specifications, capabilities or limitations. Representations of this type must be fully documented by sound engineering and testing. Any overstatement or misstatement either affirmatively or by omission is to be strictly avoided. At the time of its sale, each Company product should comply with all applicable industry standards, and all state, federal or foreign statutes, regulations or codes, then in existence. The individual or individuals having continuing design and manufacturing responsibility for a product shall be responsible for seeing that the product is in compliance with applicable standards, statutes, codes or regulations, and for certification of product compliance. Every such individual is expected to have and maintain a good working knowledge of the applicable standards, statutes, codes and regulations relating to the products over which they have supervisory responsibility. Managers who have any questions under this policy should call upon the President or the Chief Financial Officer for an opinion as to the proper course of action. Any employee who believes he has knowledge of any Company product not in conformity with these standards is expected to call it to the attention of the relevant management personnel so that appropriate corrective action can be taken. 10.53-8 S. REPORTS AND ASSURANCES Officers and employees having responsibilities within the areas covered by this Policy Statement will be required to execute periodic written reports and assurances (under oath if deemed necessary) regarding compliance by them and by those under their supervision with the principles set forth in this Policy Statement. 10.53-9 EMPLOYEE ACKNOWLEDGEMENT I hereby certify that I have received and read copies of the Company's Policy Statement on Ethical Behavior and that I fully understand my obligations and responsibilities and agree to fully comply with these policies. Witness: ------------------------- ----------------------------------------- Signature Signature ------------------------- ----------------------------------------- Name Name ------------------------- ----------------------------------------- Date Division, Subsidiary or Branch ----------------------------------------- Title ----------------------------------------- Date 10.53-10 EX-10.54 3 v013795_ex10-54.txt EXHIBIT 10.54 TERM SHEET This term sheet summarizes the principal terms with respect to a potential transaction between NeoMedia Technologies, Inc. (the "Company") and NextCode Corporation ("Strategic Partner"). This Term Sheet is a statement of the present material intentions of the parties, and except that the parties agree to negotiate in good faith towards conclusion of the transactions referred to below and except as set forth under the headings "Confidential Information" below as to which the parties intend to be legally bound, no legally binding agreement or obligation of any party are covered by this Term Sheet. A binding commitment with respect to the transactions (other than as set forth under the heading "Confidential Information" below) will result only upon the execution of definitive agreement, if any. No oral modifications to this principle shall be valid. The Company and Strategic Partner are discussing a transaction on the following terms: Licensed Products: Strategic Partner and Company have mutual rights to resell the following licensed products ("Licensed Products"): PaperClick Client Software PaperClick Code Activation PaperClick Integration Services NextCode Application Router NextCode Barcode Decoder NextCode Code Activation Nature of Services: Company and Strategic Partner shall use commercially reasonable efforts to aggressively market the Licensed Product within the territory in a manner consistent with good business ethics. Sales Channels: Company and Strategic Partner will act as mutual non-exclusive channels to solicit orders for each parties Licensed Products from clients in the territory. Non-Exclusive Territory: Company and Strategic Partner are authorized to solicit orders for each others Licensed Products in the world wide market segment. The territory is non-exclusive. Independent Sales Efforts: Company and Strategic Partner shall, at all times, have the right to sell, lease, license, ship or otherwise distribute its own Licensed Product(s) to Licensees in the Territory, whether directly or indirectly through other distribution channels. Co-branded User Interface: Strategic Partner will utilize a Co-branded User Interface that when executed by the licensee shall display "Powered by PaperClick" to the user of the software in addition to Strategic Partner's own logos Product Enhancements: Company and Strategic Partner will work jointly to suggest technical modifications that will be used as input to future development of each parties product. Required Training: Each party will be trained on the other party's products within the first 60 days following the agreement. Commissions and Discount Rates: Each party will supply commission schedules and discount rates which are yet to be determined but to be completed within 30 days of the final agreement. 10.54-1 Term: Unless sooner terminated the term of the agreement shall commence as of the date last executed (the "Effective Date") by a party and shall continue in full force and effect for a period of one (1) year. This term is renewable within the period thirty (30) days prior to thirty (30) days after expiration of the current proposed agreement. Non-Compete: Strategic Partner has described three scenarios of opportunity relating to data input on a handheld device platform. The first area is where the input data is related to some Internet content. The second area is where the data input on the client is used locally by a native function on the handheld device. The third area is where the handheld device is used as a data collection tool to store successive inputs to be used at a later time, by another system. Strategic Partner agrees that, during the term of the proposed agreement, the Company's linking platform "PaperClick" is the exclusive Licensed Product and method to be used by Strategic Partner software and system for the purpose of linking to Internet content in any event, in the regions where NeoMedia has patent coverage issued or filed, and that it shall not offer or sell any goods which are competitive with, the same as, or similar in function to the Company's Licensed Products, or develop, promote or advertise any such goods. Company agrees to promote Strategic Partner Licensed Products as a premier created code and reader system, for those codes for which Strategic Partner has readers, to the mobile operator and other market spaces. Product Warranties: Company and Strategic Partner each warrants that the parties respective unmodified products as delivered to clients, when properly installed and used, will substantially achieve the functionality described in the product documentation. Property Rights: Company and Strategic Partner acknowledge and agree that each party owns all right, title, and interest in their respective Licensed Products. Company is the owner of products that link physical objects to the Internet, and Company has the right and authority to grant licenses to use and solicit orders for such products; Strategic Partner possesses barcode symbology and reading software for mobile devices. Exclusions: This agreement does not imply that any rights are licensed or otherwise transferred from Company to Strategic Partner or other party, in any form without expressed written consent by Company to that effect. Furthermore, this agreement in no way applies to pending litigation pertaining to any of the Virgin(R) companies. Independent Contractors: Company and Strategic Partner are independent contractors. Confidential Information: The recipient of any confidential information shall be used solely for implementing either party's obligations under this agreement. 10.54-2 Strategic Partner: Company: NextCode Corp. NeoMedia Technologies, Inc. - ------------------------------------ --------------------------------- Print Name: Print Name: Title: Title: Date: Date: 10.54-3 EX-10.55 4 v013795_ex10-55.txt EXHIBIT 10.55 TERM SHEET This term sheet summarizes the principal terms with respect to a potential transaction between NeoMedia Technologies, Inc. (the "Company") and the Shelron Group, Inc. ("Shelron"). This Term Sheet is a statement of the present material intentions of the parties, and except that the parties agree to negotiate in good faith towards conclusion of the transactions referred to below and except as set forth under the headings "Confidential Information" below as to which the parties intend to be legally bound, no legally binding agreement or obligation of any party are covered by this Term Sheet. A binding commitment with respect to the transactions (other than as set forth under the heading "Confidential Information" below) will result only upon the execution of definitive agreement, if any. No oral modifications to this principle shall be valid. The Company and Shelron are discussing a transaction on the following terms: Licensed Products: Shelron shall have a non-exclusive, worldwide license the following products ("Licensed Products"): PaperClick Barcode Decoder Client License PaperClick Maintenance and Software Updates PaperClick Integration Services PaperClick Barcode Decoder Client Training Nature of Services: Company and Shelron shall use commercially reasonable efforts to aggressively market the Licensed Product within the territory in a manner consistent with good business ethics. Co-branded User Shelron will utilize a Co-branded User Interface that Interface: when executed by the licensee shall display "Powered by PaperClick" to the user of the software in addition to Shelron's own logos. Joint Technical Company and Shelron will work jointly to suggest Cooperation: technical modifications that will be used as input to future development. Term: Unless sooner terminated the term of the agreement shall commence as of the date last executed (the "Effective Date") by a party and shall continue in full force and effect for a period of one (1) year. This term is renewable within the period thirty (30) days prior to thirty (30) days after expiration of the current proposed agreement. License Fees: Licensed Product shall be licensed on a per handset/device basis with a minimum number of handsets/devices to be determined. Shipping, handling and applicable taxes are billed separately. Maintenance and Company will provide standard telephone, e-mail Software Updates: support and software dot release updates, e.g. 3.1 to 3.4. The maintenance and software update fees will be 15% of the PaperClick Barcode Decoder Client License to be paid annually in advance. Applicable taxes are billed separately. Company will, in the future; add support for additional connectivity, devices, wireless connectivity options, handheld devices and operating systems. These updates to the Licensed Product will be provided as part the maintenance program. Any enhancements and updates that require Company to enter into royalty and/or licensing agreements with third parties shall be excluded from this scope. Integration Services: Shelron shall purchase PaperClick integration services delivered on a time and material basis with a minimum commitment. Company will evaluate the current infrastructure and processes of Shelron's ActivShopper Mobile Edition and scope effort to construct an appropriate integration model. Travel, expenses and applicable taxes are billed separately. 10.55-1 Required Training: Within 60 days of agreement Shelron shall attend training in the use and operation of the Licensed Product. Training shall be conducted at Company's offices during normal business hours. The training shall be conducted as reasonably necessary to educate the attendees in the use and operation of the each Licensed Product for the purposes of performing the obligations and duties described herein. Applicable expenses and taxes are billed separately. Shelron may request the training be conducted at some other mutually agreeable location, subject to Company availability, provided Shelron pays all travel expenses, including but not limited to airfare, meals and lodging, for any Company and Shelron personnel to attend. Any additional training deemed necessary by either party shall be provided at Company's then-current retail rates, or as otherwise mutually agreed in writing. Product Warranties: Company and Shelron each warrants that the parties' respective unmodified products as delivered to clients, when properly installed and used, will substantially achieve the functionality described in the product documentation. Property Rights: Company and Shelron acknowledge and agree that each party owns all right, title, and interest in their respective Licensed Products. Exclusions: This agreement does not imply that any intellectual property rights are licensed or otherwise transferred from Company to Shelron or other party, in any form without expressed written consent by Company to that effect. Independent Contractors: Company and Shelron are independent contractors. Confidential Information: The recipient of any confidential information shall be used solely for implementing either party's obligations under this agreement. Joint Marketing: Shelron and Company agree to issue a joint press release announcing a strategic relationship within 30 days of agreement. Company agrees to promote Shelron ActivShopper Product as the premier, revolutionary e-commerce engine that automatically scans, locates and compares prices for an item that a consumer selects to the mobile operator and other market spaces. Shelron and Company will jointly create a "success story" for marketing purposes, highlighting the use of the PaperClick and Shelron's ActivShopper Mobile Edition. Shelron and Company agree to jointly promote new market segments outside of mobile comparison shopping. Exclusivity: Company agrees that its relationship with Shelron related to the ActivShopper patented autopilot comparison shopping toolbar technology is exclusive. Shelron: Company: Shelron Group, Inc. NeoMedia Technologies, Inc. - ------------------------------------ ------------------------------ Print Name: Print Name Title: Title: Date: Date: 10.55-2 EX-23.1 5 v013795_ex23-1.txt EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm Board of Directors NeoMedia Technologies, Inc. We consent to the incorporation by reference of our Report of Independent Registered Public Accounting Firm dated February 11, 2005 on the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 2004 and 2003, included in this Form 10-KSB, into the Company's previously filed Registration Statements (File Nos.333-33738, 333-36098, 333-42477, 333-85422, 333-99183, 333-101588, 333-103172, 333-107239, 333-109778, 333-110189, 333-110329 and 333-114123). /s/ STONEFIELD JOSEPHSON, INC. - ------------------------------ CERTIFIED PUBLIC ACCOUNTANTS Irvine, California March 4, 2005 23.1 EX-31.1 6 v013795_ex31-1.txt EXHIBIT 31.1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, Charles T. Jensen, Chief Executive Officer , certify that: 1. I have reviewed this Form 10-KSB for the fiscal year ended December 31, 2004 of NeoMedia Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 4, 2005 By: /s/ Charles T. Jensen -------------- ------------------------------ Name: Charles T. Jensen Title: Chief Executive Officer 31.1-1 *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. 31.1-2 EX-31.2 7 v013795_ex31-2.txt EXHIBIT 31.2 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, David A. Dodge, Chief Financial Officer, certify that: 1. I have reviewed this Form 10-KSB for the fiscal year ended December 31, 2004 of NeoMedia Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 4, 2005 By: /s/ David A. Dodge -------------- ------------------------------- Name: David A. Dodge Title: Chief Financial Officer 31.2-1 *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. 31.2-2 EX-32.1 8 v013795_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NeoMedia Technologies, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: March 4, 2005 By: /s/ Charles T. Jensen -------------- ------------------------------ Name: Charles T. Jensen Title: Chief Executive Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NeoMedia Technologies, Inc. and will be retained by NeoMedia Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 32.1-1 EX-32.2 9 v013795_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of NeoMedia Technologies, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: March 4, 2005 By: /s/ David A. Dodge -------------- ------------------------------ Name: David A. Dodge Title: Chief Financial Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NeoMedia Technologies, Inc. and will be retained by NeoMedia Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 32.2-1 -----END PRIVACY-ENHANCED MESSAGE-----