As filed with the Securities and Exchange Commission on April 5, 2005
SEC Registration No. ___________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Delaware NEOMEDIA TECHNOLOGIES, INC. 36-3680347
(State or other jurisdiction of (Name of issuer in its charter) (I.R.S. Employer
incorporation or organization) Identification No.)
2201 Second Street, Suite 402 7373 Charles T. Jensen
Fort Myers, Florida 33901 (Primary Standard Industrial 2201 Second Street, Suite 402
(239) 337-3434 Classification Code Number) (239) 337-3434 Fort
(Address and telephone number Myers, Florida 33901-3083
of Registrant's principal Telecopier No.: (239) 337-3668
executive offices) (Name, address, and telephone
number of agent for service)
With copies to:
Clayton E. Parker, Esq. Christopher J. DeLise, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Blvd., Suite 2000 201 S. Biscayne Blvd., Suite 2000
Miami, FL 33131 Miami, FL 33131
Telephone No.: (305) 539-3305 Telephone No.: (305) 539-3319
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
Proposed
Plus Estimated Maximum
Amount to be Proposed Maximum Cash Aggregate
Title of each class of Registered Offering Price Consideration Offering Amount of
Securities to be Registered (1) Per Share (2) (2) Price (2) Registration Fee
-----------------------------------------------------------------------------------------------------------------
Common Stock, par value 20,000,000 $0.227 $5.00 $4,530,005 $533.18
$0.01 per share
-----------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of NeoMedia shares issuable in the merger,
assuming no adjustment to the exchange ratio of 1.00 share of BSD common
stock exchanged for NeoMedia common stock equivalent to .07 divided by the
volume-weighted average price of NeoMedia stock for the five business days
preceding the effective date of the merger.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1), based on 20,000,000 shares of NeoMedia common stock
being exchanged for 100% of BSD's common shares, using the average of the
closing bid and ask prices of NeoMedia's common stock of $0.227 per share
as reported in the Over-the-Counter Bulletin Board on April 1, 2005, which
is a date within five business days of the date of this filing. Cash
consideration is estimated at $0.05 per shareholder, times an estimated
100 shareholders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to Completion or Amendment.
Dated April 4, 2005
20,000,000 Shares
NEOMEDIA TECHNOLOGIES, INC.
Exchange of Common Stock
--------------------------------------------------------------------------------
20,000,000 Shares of Common Stock of NeoMedia Technologies, Inc.
Are Being Exchanged For All of the Outstanding Common Stock of
BSD Software, Inc.
--------------------------------------------------------------------------------
The common stock of NeoMedia Technologies, Inc. ("NeoMedia") is traded on the
Over-the-Counter Bulletin Board under the symbol "NEOM". The common stock of BSD
Software, Inc. ("BSD") is quoted on the Over-the-Counter Bulletin Board under
the symbol "BSDS". After consummation of the merger described in this
information statement/prospectus, shares of NeoMedia will continue to be traded
on the Over-the-Counter Bulletin Board; however, shares of BSD's common stock
will no longer be traded or listed on any exchange.
Please pay careful attention to all of the information in this information
statement/prospectus. In particular, you should carefully consider the
discussion in the section entitled "Risk Factors" beginning on page 9 of this
information statement/prospectus.
--------------------------------------------------------------------------------
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE
DISTRIBUTED UNDER THIS INFORMATION STATEMENT /PROSPECTUS OR DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
This prospectus is dated ________, 2005, and is first being mailed to
stockholders of NeoMedia and BSD on or about _____, 2005.
The information in this information statement/prospectus is not complete and may
be changed. NeoMedia may not distribute these securities until the registration
statement filed with the United States Securities and Exchange Commission is
declared effective. The information statement/prospectus is not and shall not
constitute an offer to sell and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
This information statement/prospectus incorporates important business
information about NeoMedia and BSD that is not included in or delivered with the
information statement/prospectus. NeoMedia will provide you with copies of this
information statement/prospectus, as well as exhibits filed with the information
statement/prospectus, upon written or oral request to:
--------------------------------------------------------------------------------
If a NeoMedia Stockholder: If A BSD Shareholder:
--------------------------------------------------------------------------------
NeoMedia Technologies, Inc. BSD Software, Inc.
2201 Second Street, Suite 402 5824 Second Street SW, Suite 300
Ft. Myers, Florida 33901 Calgary, Alberta, Canada, T2H-0H2
(239) 337-3434 (403) 257-7090
--------------------------------------------------------------------------------
If you would like to request any documents from NeoMedia, please do so by
_______, 2005.
NeoMedia Technologies, Inc.
2201 Second Street, Suite 402
Fort Myers, Florida 33901
_____________, 2005
Dear BSD Shareholders:
As you may be aware, BSD Software, Inc. has entered into an agreement and plan
of merger with NeoMedia Technologies, Inc. which provides for NeoMedia to
acquire from you and the other BSD shareholders 100% of BSD's common stock. When
the merger is completed, BSD will become a wholly-owned subsidiary of NeoMedia.
Upon completion of the merger, 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. NeoMedia common stock is publicly traded on the
Over-the-Counter Bulletin Board exchange under the symbol "NEOM". On March 29,
2005, the closing price of NeoMedia common stock was $0.232. In 2004, NeoMedia's
common stock traded between a low of $0.05 and a high of $0.299.
Following the merger, based on 31,810,897 outstanding shares of BSD common stock
and 432,525,053 outstanding shares of NeoMedia common stock as of December 31,
2004, and assuming a NeoMedia stock price of $0.25, BSD shareholders would hold
approximately 2% of the outstanding shares of NeoMedia and existing NeoMedia
shareholders would hold the remaining 98% of NeoMedia's outstanding shares. The
actual exchange ratio will vary due to changes in NeoMedia's stock price and any
additional issuances of common stock by BSD prior to the effective time of the
merger.
Shareholders holding approximately 62.7% of the outstanding shares of BSD common
stock have each entered into an agreement with NeoMedia to vote to approve and
adopt the Merger Agreement and the merger. BSD's Board of Directors has also
approved the Merger Agreement.
On behalf of the BSD Board of Directors, I thank you for your support.
Sincerely,
/s/ Guy Fietz
------------------------------
Guy Fietz
President
BSD SOFTWARE, INC.
TABLE OF CONTENTS
SUMMARY OF INFORMATION STATEMENT/PROSPECTUS.........................................3
The Companies....................................................................3
The Merger.......................................................................4
What You Will Receive In The Merger; Merger Consideration;
Fractional Shares..............................................................4
NeoMedia's Board of Directors after the Merger...................................5
BSD Approval Of The Merger.......................................................5
BSD's Reasons for the Merger; Recommendation of BSD's
Board of Directors.............................................................5
NeoMedia's Reasons for the Merger; Recommendation of NeoMedia's
Board of Directors..................................... .......................5
Conditions to the Merger.........................................................5
Restrictions on Solicitation......................................................
Termination......................................................................6
Fees.............................................................................6
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................6
Comparison of Rights of NeoMedia Shareholders and BSD Shareholders...............6
Comparative Market Price Information.............................................6
Listing and Trading of NeoMedia Common Stock.....................................7
Interest of Directors and Officers of BSD in the Merger..........................7
Interest of Directors and Officers of NeoMedia in the Merger.....................7
Risks Related to the Merger......................................................7
Dissenters' Rights...............................................................7
RISK FACTORS........................................................................8
Risks Related to the Merger......................................................8
Risks Related to NeoMedia's Business............................................10
Risks Relating To NeoMedia's Industry...........................................15
Risks Specific To This Offering.................................................18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.........................21
SELECTED HISTORICAL FINANCIAL DATA OF NEOMEDIA.....................................22
SELECTED HISTORICAL FINANCIAL DATA OF BSD..........................................23
COMPARATIVE PER SHARE DATA.........................................................24
COMPARATIVE STOCK PRICE DATA.......................................................25
THE MERGER.........................................................................26
BSD's Reasons for the Merger....................................................26
Interests of Certain Persons in the Merger; Conflicts of Interest...............27
Anticipated Accounting Treatment................................................27
Material United States and Canadian Federal Income
Tax Consequences of the Merger................................................27
Material Canadian Federal Income Tax Consequences of the Merger.................28
Dissenters' Rights..............................................................29
Federal or State Regulatory Requirements and Approvals..........................30
Description of NeoMedia's and BSD's Securities..................................30
Material Differences Between Rights of Holders of NeoMedia Common
Stock Compared to BSD Common Stock............................................30
THE MERGER AGREEMENT...............................................................31
General; Structure of Transaction; Distribution of Common Stock.................31
Representations and Warranties..................................................32
Conduct of Business Prior to the Effective Time of the Merger...................33
No Solicitation.................................................................34
Additional Covenants............................................................34
Conditions to Completion of the Merger..........................................35
Expenses and Termination Fees...................................................38
Amendment; Extension and Waiver of the Merger Agreement.........................38
COMPARATIVE RIGHTS OF NEOMEDIA AND BSD SHAREHOLDERS................................39
NEOMEDIA'S BUSINESS................................................................44
Company History.................................................................44
Recent Developments.............................................................44
i
Industry Overview...............................................................47
Products/Services...............................................................49
Strategic Relationships.........................................................52
Sales and Marketing.............................................................52
Customers.......................................................................53
Research and Development........................................................53
Intellectual Property Rights....................................................54
Competition.....................................................................54
Employees.......................................................................55
Properties......................................................................55
Dividend Policy.................................................................55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................56
Overview........................................................................56
Critical Accounting Policies....................................................59
Results of Operations for the Year Ended December 31, 2004 as
Compared to the Year Ended December 31, 2003..................................61
Liquidity and Capital Resources.................................................62
NEOMEDIA'S MANAGEMENT..............................................................64
Directors and Executive Officers................................................64
Election Of Directors And Officers..............................................65
Meetings Of The Board Of Directors..............................................65
Committees Of The Board Of Directors............................................65
Director Compensation...........................................................66
Section 16(a) Beneficial Ownership Reporting Compliance.........................66
NeoMedia's Executive Compensation...............................................66
Employment Agreements...........................................................67
Incentive Plan for Management...................................................67
NeoMedia's Stock Option Plans...................................................67
401(k) Plan.....................................................................68
Options And Warrants Granted In NeoMedia's Last Fiscal Year.....................68
Option And Warrant Exercises In Last Fiscal Year And
Fiscal Year-End Values........................................................68
Security Ownership of Certain Beneficial Owners and
Management of NeoMedia........................................................69
Certain Relationships and Related Transactions of NeoMedia......................70
Section 16(a) Beneficial Ownership Reporting Compliance.........................71
Code of Ethics..................................................................71
Limitations on Director's Liability and Indemnification.........................71
DESCRIPTION OF NEOMEDIA'S CAPITAL STOCK............................................73
Common Stock....................................................................73
Preferred Stock.................................................................73
Warrants And Options of NeoMedia................................................75
Registration Rights.............................................................76
Anti-Takeover Provisions Under bylaws and Laws..................................76
Transfer Agent..................................................................77
DESCRIPTION OF BSD'S BUSINESS......................................................78
Business Development............................................................78
BSD's/Triton's Business.........................................................78
Triton Recent Developments......................................................78
Triton's Products & Services....................................................79
Triton's Strategic Technology Alliances.........................................79
Sales and Marketing Approach....................................................80
Competitive Analysis............................................................81
Triton/BSD Legal Matters........................................................82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................83
Overview........................................................................83
Background Of Triton............................................................84
Products and Services...........................................................84
Results of Operations For The Three Months Ended January 31, 2005...............86
Results of Operations For The Six Months Ended January 31, 2005.................87
Results of Operations for the Year Ended July 31, 2004 as Compared
to the Period Ended July 31, 2003.............................................88
Critical Accounting Policies....................................................89
BSD's Liquidity and Capital Resources...........................................90
BSD'S MANAGEMENT...................................................................92
Directors and Executive Officers................................................92
Summary Compensation Table......................................................94
Employment Agreements.............................................................
Stock Option Plan...............................................................94
Options And Warrants Granted In BSD's Last Fiscal Year..........................94
Option And Warrant Exercises In Last Fiscal Year And
Fiscal Year end Values........................................................95
Security Ownership of Certain Beneficial Owners and Management of BSD...........95
Section 16(a) Beneficial Ownership Reporting Compliance.........................96
Code of Ethics..................................................................96
Limitations on Director's Liability and Indemnification.........................96
DESCRIPTION OF BSD'S CAPITAL STOCK.................................................98
Common Stock....................................................................98
Preferred Stock.................................................................98
Warrants And Options............................................................98
Registration Rights.............................................................98
Anti-Takeover Provisions Under bylaws and Laws..................................98
Transfer Agent..................................................................99
LEGAL MATTERS.....................................................................100
EXPERTS...........................................................................100
WHERE YOU CAN FIND MORE INFORMATION...............................................101
INDEX TO FINANCIAL STATEMENTS.....................................................F-1
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS.................................II-1
Item 20. Indemnification of Directors and Officers............................II-1
Item 21. Exhibits and Financial Statement Schedules...........................II-1
Item 22. Undertakings.........................................................II-9
SIGNATURES......................................................................II-10
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following are some questions that you, as a stockholder of BSD or NeoMedia,
may have regarding the merger. BSD and NeoMedia urge you to read carefully the
remainder of this information statement/prospectus because the information in
this section does not provide all of the information that might be important to
you with respect to the merger. Additionally, important information is also
contained in the annexes to, and the documents incorporated by reference into,
this information statement/prospectus.
Q: What is the proposed transaction?
A: The Board of Directors of BSD, as well as a majority of BSD shareholders,
have voted to adopt an agreement and plan of merger among NeoMedia Technologies,
Inc., NeoMedia Telecom Services, Inc., and BSD Software, Inc., and the merger
contemplated thereby. In this information statement/prospectus, we refer to the
agreement and plan of merger as the "Merger Agreement." In the merger, BSD will
be merged into NeoMedia Telecom Services, Inc., a newly formed, wholly-owned
subsidiary of NeoMedia Technologies. After the merger, NeoMedia Telecom Services
will be the "Surviving Corporation" and will remain a wholly-owned subsidiary of
NeoMedia Technologies.
Q: Why are NeoMedia and BSD proposing to merge?
A: NeoMedia and BSD are merging because they believe the resulting combination
will create a stronger, more competitive company capable of achieving greater
financial strength, administrative efficiencies, growth potential, and
shareholder value than either company would have on its own.
Q: What will I receive in exchange for my BSD stock in the merger?
A: In the merger, each share of your BSD common 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. In
this prospectus, we refer to the ratio of NeoMedia common stock to be issued for
each share of BSD common stock as the "exchange ratio." The ratio of .07 divided
by the volume-weighted average price of NeoMedia stock for the five days prior
to the effective time of the merger that you will receive for each BSD share
will not change. However, the number of NeoMedia shares you will receive at
closing will change depending on NeoMedia's stock price at the time of closing.
NeoMedia's shares will be valued using a 5-day volume-weighted average closing
price for the five days prior to closing. You will not receive any fractional
shares of NeoMedia common stock. Instead of any fractional shares, you will be
paid cash for such fraction at a rate of $0.07 per share. The following table
illustrates how many shares of NeoMedia you would receive at different price
levels of NeoMedia stock at the time of closing:
------------------------------------------------------------------------------------------
Shares of BSD owned 1,000 1,000 1,000 1,000
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
NeoMedia volume-weighted average prices $0.07 $0.20 $0.30 $0.50
------------------------------------------------------------------------------------------
NeoMedia shares issued in merger 1,000 350 233 140
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Additional cash consideration received
in lieu of receipt of fractional shares $0.00 $0.00 $0.02 $0.00
------------------------------------------------------------------------------------------
Q: What will be the effect of the merger on the stockholders of NeoMedia and
BSD?
A: Based on the number of NeoMedia and BSD shares outstanding as of March 29,
2005, and the closing stock price of NeoMedia stock of $0.232 on March 29, 2005,
upon completion of the merger the current stockholders of NeoMedia would own
approximately 98% of NeoMedia and the former stockholders of BSD would own
approximately 2% of NeoMedia. Actual ownership percentages could change between
the date of this information statements/prospectus and closing due to any
additional issuances of shares by NeoMedia and/or BSD, or fluctuations in the
price of NeoMedia stock. NeoMedia and BSD currently estimate that they each will
incur costs of approximately $50,000 ($100,000 in total) related to the merger.
Q: What Are The Federal Income Tax Consequences Of The Merger To BSD
Shareholders?
A: Assuming that the merger is completed as currently contemplated, you will not
recognize any gain or loss for United States or Canadian federal income tax
purposes. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
Q: Am I entitled to dissenters' rights?
A: Under Florida law, holders of BSD common stock outstanding immediately prior
to the effective time of the merger who have not voted in favor of the merger
have the right to exercise their dissenters' rights and obtain payment in cash
for the fair value of their shares of common stock, rather than receive shares
of NeoMedia common stock as described in this information statement/prospectus
and the attached Merger Agreement. To exercise dissenters' rights, BSD
stockholders must strictly follow the procedures described under Section
607.1301 et seq. of the Florida Business Corporation Act. These procedures are
summarized under the section of this information statement/prospectus entitled
"The Merger-Dissenters' Rights" beginning on page 29. In addition, the text of
the applicable provisions of Florida Business Corporation Act, together with
BSD's initial notice to potential dissenters, and a Dissenters' Demand Notice
Form is attached as Annex A to this information statement/prospectus.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger promptly after we receive all necessary
regulatory approvals. We currently expect this to occur during the first-half of
2005. Satisfying some of the conditions to closing the merger, such as receiving
certain governmental clearances or approvals, is not entirely within our
control. If all the conditions to completion of the merger are not satisfied
during the first-half of 2005, we expect to complete the merger as soon as
practicable once the conditions are satisfied.
Q: Will I be able to sell the shares of NeoMedia common stock I receive in the
merger?
A: Yes. All of the shares of NeoMedia common stock received by BSD stockholders
in connection with the merger will be freely transferable unless the holder is
considered an affiliate of either BSD or NeoMedia under the Securities Act of
1933, as amended. Shares of NeoMedia acquired in the merger by BSD affiliates
may only be sold pursuant to a registration statement or an exemption from the
registration requirements of the Securities Act. The price at which the NeoMedia
common stock will trade after the merger is unknown.
Q: What do I need to do now?
A: After the merger is completed, you will receive written instructions for
exchanging your stock certificates.
Q: Will BSD continue as a public company?
A: No. If the merger occurs, BSD will no longer be publicly owned.
Q: Who can help answer my questions?
A: If you have any questions about the merger, or need additional copies of this
prospectus, you should contact BSD Software, Inc. at (403) 257-7090, if you are
a stockholder of BSD; or NeoMedia at (239) 337-3434 if you are stockholder of
NeoMedia.
2
SUMMARY OF INFORMATION STATEMENT/PROSPECTUS
The following is a summary that highlights certain information contained in this
information statement/prospectus. This summary may not contain all of the
information that may be important to you. For a more complete description of the
Merger Agreement and the merger contemplated by the Merger Agreement, we
encourage you to read carefully this entire information statement/prospectus,
including the attached exhibits and annexes hereto. In addition, we encourage
you to ready the information incorporated by reference into this information
statement/prospectus, which includes important business and financial
information about BSD and NeoMedia that has been filed with the United States
Securities and Exchange Commission. You may obtain the information incorporated
by reference into this information statement/prospectus by following the
instructions in the section of this information statement/prospectus entitled
"Additional Information Where You Can Find More Information" beginning on page
103.
--------------------------------------------------------------------------------
The Companies
NeoMedia Technologies, Inc.
2201 Second Street, Suite 402
Ft. Myers, FL 33901
(239) 337-3434
NeoMedia develops proprietary technologies that link physical information
and objects to the Internet marketed under its PaperClickTM brand name.
NeoMedia is structured as three business units: NeoMedia Internet Software
Service ("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 our physical world to Internet core technology, including our linking
"switch" and NeoMedia's application platforms. NISS also manages our
intellectual property portfolio, including the identification and execution of
licensing opportunities surrounding the patents.
NCIS 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 our products and services. These
operations are based in Lisle, Illinois.
NMPR is the business unit encompassing the recently-acquired CSI
International chemical line. NMPR is attempting to commercialize its micro-paint
repair offerings and solutions.
--------------------------------------------------------------------------------
NeoMedia Telecom Services, Inc.
2201 Second Street, Suite 402
Ft. Myers, FL 33901
(239) 337-3434
NeoMedia Telecom Services, Inc. is a Nevada corporation and a wholly-owned
subsidiary of NeoMedia Technologies. NeoMedia Telecom Services was incorporated
during October 2004 solely for the purposes of effecting the merger with BSD. It
has not carried on any activities other than in connection with the Merger
Agreement. Following the merger, NeoMedia Telecom Services, Inc. will continue
the business of BSD.
--------------------------------------------------------------------------------
3
BSD Software, Inc.
5824 Second Street SW, Suite 300
Calgary, Alberta, Canada, T2H-0H2
(403) 257-7090
BSD was incorporated in Florida on February 7, 1989 under the name "Park
Avenue Marketing, Inc." On February 2, 1998, as a result of its acquisition of
100% of the common stock of two commonly controlled entities, Respiratory Care
Services, Inc. ("RCS") and RCS Subacute, Inc. ("RCSS"), that were engaged in the
healthcare industry, the name was changed from "Park Avenue Marketing, Inc." to
"BSD Healthcare Industries, Inc." Prior to these acquisitions, BSD did not
conduct any operations.
BSD acquired RCS and RCSS because BSD perceived increasing demand for
respiratory care services in long-term healthcare facilities. On July 1, 1999,
principally as a result of a change in Medicare reimbursement rates for
respiratory services, BSD sold RCS and RCSS. On December 17, 2001 BSD changed
its name to "BSD Software, Inc."
As a result of the sale of RCS and RCSS, BSD had no operations until its
acquisition of 90% of Triton Global Business Services Inc. ("TGBSI") on November
4, 2002. TGBSI is the 100% owner of Triton Global Communications Inc. ("Triton")
through which it conducts its business operations. The details of the
acquisition are contained in Note 4 to the attached Financial Statements.
Triton was incorporated in April 1998 as a next generation Internet
protocol ("IP") enabled provider of live and automated operator calling
services, e-business support, billing and clearinghouse functions and
information management services to telecommunications, Internet and e-business
service providers.
Triton focuses on helping its clients improve profitability by enabling
them to quickly deploy new services, streamline operations and make quicker,
more informed business decisions. Triton is a customer service oriented
organization providing service to direct customers and service providers, both
within North America and internationally.
Triton was the first fully implemented alternate billing agent within the
Local Exchange Carriers ("LECs") billing system in Canada. Triton's vision is to
continue expanding its live and automated operator service capability focusing
on making emerging web-based information and transaction services easier to
access and pay for.
BSD's management and staff are trained to assist and provide clients with
solutions for their business. Triton is currently operating with eight
employees.
The Merger
The Board of Directors of BSD, as well as a majority of BSD shareholders,
have voted to adopt an agreement and plan of merger among NeoMedia Technologies,
Inc., NeoMedia Telecom Services, Inc., and BSD Software, Inc., and the merger
contemplated thereby. In the merger, BSD will be merged into NeoMedia Telecom
Services, Inc., a newly formed, wholly-owned subsidiary of NeoMedia
Technologies. After the merger, NeoMedia Telecom Services will be the "Surviving
Corporation" and will remain a wholly-owned subsidiary of NeoMedia Technologies.
NeoMedia and BSD are merging because they believe the resulting
combination will create a stronger, more competitive company capable of
achieving greater financial strength, administrative efficiencies, growth
potential, and shareholder value than either company would have on its own.
What You Will Receive In The Merger; Merger Consideration; Fractional Shares
In the merger, each share of BSD common 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. You
will not receive any fractional shares of NeoMedia common stock. Instead of any
fractional shares, you will be paid cash for such fraction at a rate of $0.07
per share.
4
NeoMedia's Board of Directors after the Merger
NeoMedia's Board of Directors will not change due to the acquisition of
BSD.
BSD Approval Of The Merger
BSD's Board of Directors approved the merger by written consent on
November 29, 2004. In addition, holders of 62.7% of BSD's outstanding shares
approved the merger by signing a Voting Rights Agreement on or before signing
the Merger Agreement.
BSD's Reasons for the Merger; Recommendation of BSD's Board of Directors
BSD's Board of Directors, as well as holders of 62.7% of BSD's outstanding
shares, has approved the Merger Agreement. BSD's board and the approving
majority shareholders believe that the Merger Agreement is advisable, fair to
and in the best interest of BSD and its shareholders. In reaching its decision,
the BSD board and majority shareholders considered a number of factors, which
are described in more detail in the section of this information/registration
statement entitled "BSD's Reasons for the Merger." The BSD Board of Directors
and majority shareholders did not assign relative weights to the factors
described in that section or the other factors considered by it. In addition,
the BSD board and majority shareholders did not reach any specific conclusion on
each factor considered, but conducted an overall analysis of these factors.
BSD's board and majority shareholders may have given different weight to
different factors.
NeoMedia's Reasons for the Merger; Recommendation of NeoMedia's Board of
Directors
The Board of Directors of NeoMedia approved the merger on August 18, 2004,
after NeoMedia's senior management discussed with them the business, assets,
liabilities, actual and projected results of operations and financial
performance of BSD, the complementary nature of certain of BSD's products and
capabilities and the products of NeoMedia, the expectation that BSD could be
readily integrated with NeoMedia, and the potential benefits that could be
realized as a result of such integration.
Conditions to the Merger
The obligations of NeoMedia and BSD to complete the merger are conditioned
upon the other party's representations and warranties being true and correct,
except as has not had or would not reasonably be expected to have a material
adverse effect, and the other party having complied in all material respects
with such party's covenants. In addition, NeoMedia's and BSD's obligations are
further conditioned on:
o the absence of any statute, rule, order, decree, regulation or
injunction of any United States or Canadian court, United States or
Canadian governmental authority or any governmental authority
pursuant to foreign antitrust laws that precludes, prohibits,
restrains or enjoins the consummation of the merger or makes the
consummation of the merger illegal;
o the termination or expiration of the waiting periods or receipt of
approvals pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act; and
o the continuing effectiveness of the registration statement of which
this information statement/prospectus forms a part, and the material
compliance with all other applicable material state securities laws.
Restrictions on Solicitation
Subject to certain exceptions, the Merger Agreement precludes BSD, its
subsidiaries, officers, directors, employees, investment bankers, attorneys,
accountants and other representatives from directly or indirectly soliciting,
knowingly encouraging, participating in any discussions regarding, furnishing
any non-public information with respect to, or assisting or facilitating any
proposal for any third party to acquire more than 20% ownership of BSD, its
subsidiaries, or its assets.
5
Termination
The Merger Agreement may be terminated by the mutual consent of NeoMedia
and BSD. Additionally, either NeoMedia or BSD may terminate the Merger Agreement
if:
o both companies' boards of directors mutually agree to terminate;
o the party seeking termination is not in material breach of the
Merger Agreement and the other party has materially breached a
representation, warranty, covenant or agreement of that party
contained in the Merger Agreement and such breach is either not
capable of being cured or, with respect to a covenant or agreement
that is capable of being cured, has not been cured or satisfied
within 30 days of notice of the breach; and
o the merger has not closed by July 31, 2005, which date may be
extended by mutual consent of NeoMedia and BSD.
The Merger Agreement may be terminated by NeoMedia if, at the time of
closing, BSD has:
o less than $850,000 in assets;
o more than $5,000,000 in liabilities, or
o more than 35,000,000 shares of common stock outstanding.
The merger may be terminated by BSD if the holders of more than 5% of
BSD's outstanding shares dissent to the merger.
Fees
Each side will bear its own fees in connection with the proposed merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
IF THE MERGER IS COMPLETED AS CURRENTLY CONTEMPLATED, THEN, IN GENERAL, A
SHAREHOLDER WHO EXCHANGES SHARES OF BSD COMMON STOCK SOLELY FOR SHARES OF
NEOMEDIA COMMON STOCK WILL NOT RECOGNIZE ANY GAIN OR LOSS EXCEPT WITH RESPECT TO
CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE OF NEOMEDIA COMMON STOCK.
Certain exceptions and/or other considerations may apply to the foregoing
statement. See the section of this information statement/prospectus entitled
"The Merger--Material Federal Income Tax Consequences."
Comparison of Rights of NeoMedia Shareholders and BSD Shareholders
After the merger, BSD shareholders who receive NeoMedia common stock in
the merger will become NeoMedia shareholders and their rights as shareholders
will be governed by the Certificate of Incorporation and bylaws of NeoMedia and
Delaware General Corporation Law ("DGCL"). There are a number of differences
between the Certificate of Incorporation and bylaws of NeoMedia and the DGCL,
and the Articles of Incorporation and bylaws of BSD and the Florida Business
Corporations Act (the "FBCA") by which BSD is governed. These differences are
summarized under the section of this information statement/prospectus entitled
"Comparative Rights of NeoMedia and BSD Shareholders."
Comparative Market Price Information
Shares of NeoMedia common stock are listed under the Symbol "NEOM" on the
Over-the-Counter Bulletin Board, and shares of BSD common stock are listed under
the trading symbol "BSDS" on the Over-the-Counter Bulletin Board. On December
20, 2004, the last full trading day prior to the public announcement of the
Merger Agreement, the last sales price of BSD common stock was $0.15 per share
and the last sales price of NeoMedia common stock was $0.18 per share. On March
29, 2005, the most recent practicable date prior to the printing of this
information statement/prospectus, the last sales price of BSD common stock was
$0.07 per share and the last sales price of NeoMedia common stock was $0.232 per
share. You are urged to obtain current market quotations.
6
Listing and Trading of NeoMedia Common Stock
Shares of NeoMedia common stock received by BSD shareholders in the merger
will be listed on the Over-the-Counter Bulletin Board. After completion of the
merger, shares of NeoMedia common stock will continue to be traded on the
Over-the-Counter Bulletin Board, but shares of BSD common stock will no longer
be listed or traded.
Interest of Directors and Officers of BSD in the Merger
As of March 2, 2005, the directors and officers of BSD, in the aggregate,
own approximately 28.9% of the outstanding common stock of BSD.
Interest of Directors and Officers of NeoMedia in the Merger
As of March 2, 2005, the directors and officers of NeoMedia, in the
aggregate, own approximately 29.5% of the outstanding common stock of NeoMedia.
Risks Related to the Merger
You should refer to the section of this information statement/prospectus
entitled "Risk Factors" beginning on page 9 for a detailed discussions of the
risks associated with the merger, the offering described hereunder, and the
businesses of NeoMedia and BSD.
Dissenters' Rights
Under Florida law, holders of BSD common stock outstanding immediately
prior to the effective date of the merger who have not voted in favor of the
merger have the right to exercise their dissenters' rights and obtain payment in
cash for the fair value of their shares of common stock, rather than receive
shares of NeoMedia common stock as described in this information
statement/prospectus and the attached Merger Agreement. To exercise dissenters'
rights, BSD stockholders must strictly follow the procedures described under
Section 607.1301 et seq. of the Florida Business Corporation Act. These
procedures are summarized under the section of this information
statement/prospectus entitled "The Merger-Dissenters' Rights" beginning on page
29. In addition, the text of the applicable provisions of Florida Business
Corporation Act, together with BSD's initial notice to dissenting shareholders,
and a Dissenter's Demand Notice Form is attached as Annex A to this information
statement/prospectus.
7
RISK FACTORS
In addition to the other information included in this information
statement/prospectus, including the matters addressed in "Cautionary Statement
Concerning Forward-Looking Statements," you should carefully consider the
following risks before deciding whether to assert your right to dissent to the
proposed merger. In the case of BSD stockholders, if you do not exercise your
dissenters' rights as discussed on page 29, you will become a stockholder of
NeoMedia. In addition, you should read and consider the risks associated with
the business of NeoMedia because these will affect the combined entity.
Risks Related to the Merger
The value of shares of NeoMedia common stock to be received by BSD stockholders
in the merger is fixed and will not be adjusted for changes in the price of BSD
or NeoMedia common stock.
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
number of shares each BSD shareholder will receive will change based on the
number of shares of both BSD and NeoMedia common shares outstanding and the
price of NeoMedia common stock at the effective time of the merger. However, the
ratio of .07 to the price of NeoMedia common stock will not be adjusted for
changes in the market price of BSD or NeoMedia common stock, meaning an increase
in NeoMedia's stock price prior to the effective time of the merger would result
in fewer shares of NeoMedia stock being exchanged for each share of BSD stock.
The price at which the NeoMedia common stock will trade after the merger is
unknown.
The market price of NeoMedia common stock at the effective time of the
merger will likely be different from the current market price of NeoMedia common
stock for a variety of reasons, including market reactions to the merger. For
example, between January 1, 2004 and December 31, 2004, the market price of the
NeoMedia common stock ranged from a low of $0.05 per share to a high of $0.299
per share. Stockholders of NeoMedia and BSD are urged to obtain current market
quotations for the NeoMedia common stock.
The market price and trading volume of the NeoMedia common stock may be volatile
and the holders of BSD common stock may not be able to sell their shares at or
above the initial market price of the NeoMedia common stock following the
merger.
The market price of the NeoMedia common stock could fluctuate
significantly for many reasons, including in response to the risk factors listed
in this prospectus or for reasons unrelated to NeoMedia's performance, such as
reports by industry analysts, investor perceptions, or announcements by
NeoMedia's customers, competitors or suppliers regarding their own performance,
as well as general economic and industry conditions. For example, to the extent
that other companies within NeoMedia's industry experience declines in their
stock price, NeoMedia's stock price may decline as well.
NeoMedia may face significant challenges in integrating NeoMedia and BSD and, as
a result, may not realize the expected benefits of the merger.
The merger involves the integration of two companies that have previously
operated independently. Combining the operations of NeoMedia and BSD will be a
complex process that will require, among other things, integration of various
functional areas, such as finance, human resources and sales and marketing
groups, and coordination of development efforts. NeoMedia cannot be certain that
the integration will be completed in a timely manner, if at all, or that it will
be able to achieve the anticipated benefits of the merger. For example, the
companies may experience difficulties in harmonizing employee benefit policies,
the relocation of certain job functions may result in the loss of personnel with
critical corporate knowledge and upgrading financial reporting systems to
operate as a single system may lead to interruptions in tracking financial or
sales information. Failure to adequately manage the integration process and to
coordinate the joint efforts of the two companies may have a material adverse
effect on the business of the combined company. There can be no assurance that
the employees of BSD will be willing to continue their employment with NeoMedia
after the merger. There is no assurance that after the merger NeoMedia will be
able to maintain all of the existing commercial relationships of BSD or
NeoMedia.
8
NeoMedia and BSD may suffer negative consequences if the merger is not
completed.
If the merger is not completed for any reason, NeoMedia and BSD will be
subject to a number of material risks, including:
o the market price of NeoMedia and BSD common stock may decline to the
extent that the current market price of such shares reflects a
market assumption that the merger will be completed;
o costs related to the merger, such as legal and accounting fees, must
be paid even if the merger is not completed;
o the diversion of management attention from the day-to-day business
of the companies and the unavoidable disruption to their employees
during the period before the completion of the merger may make it
difficult for NeoMedia and BSD to regain their financial position if
the merger does not occur; and
o if the merger is terminated and BSD's Board of Directors seeks
another merger or business combination, BSD's stockholders cannot be
certain that BSD will be able to find a partner willing to pay an
equivalent or more attractive price than the price to be paid by
NeoMedia in the merger
9
Risks Related to NeoMedia's Business
NeoMedia has Historically Lost Money and Losses May Continue
NeoMedia has incurred substantial losses since its inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
NeoMedia 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. NeoMedia's accumulated losses
were approximately $83,377,000 as of December 31, 2004. As of December 31, 2004
and 2003, NeoMedia had a working capital (deficit) of approximately ($2,597,000)
and ($6,526,000), respectively. NeoMedia had stockholders' equity (deficit) of
$4,392,000 and ($3,203,000) at December 31, 2004 and 2003, respectively.
NeoMedia 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, NeoMedia recorded negative cash flows from
operations of $4,650,000 and $2,979,000, respectively. To succeed, NeoMedia must
develop new client and customer relationships and substantially increase its
revenue derived from improved products and additional value-added services.
NeoMedia has expended, and to the extent it has available financing, NeoMedia
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, NeoMedia may not be able to
achieve or sustain profitability.
NeoMedia's Independent Registered Public Accounting Firm Have Added Going
Concern Language To Their Report On NeoMedia's Consolidated Financial
Statements, Which Means That NeoMedia May Not Be Able To Continue Operations
The report of Stonefield Josephson, Inc., NeoMedia's independent
registered public accounting firm, with respect to NeoMedia's consolidated
financial statements and the related notes for the years ended December 31, 2004
and 2003, indicates that, at the date of their report, NeoMedia had suffered
significant recurring losses from operations and its working capital deficit
raised substantial doubt about its ability to continue as a going concern.
NeoMedia's consolidated financial statements do not include any adjustments that
might result from this uncertainty.
There is Limited Information Upon Which Investors Can Evaluate NeoMedia's
Business Because The Physical-World-to-Internet Market Has Existed For Only A
Short Period Of Time
The physical-world-to-Internet market in which NeoMedia operates is a
recently developed market. Further, NeoMedia has conducted operations in this
market only since March 1996. Consequently, NeoMedia has a relatively limited
operating history upon which an investor may base an evaluation of NeoMedia's
primary business and determine NeoMedia's prospects for achieving its intended
business objectives. To date, NeoMedia has sold its physical-world-to-Internet
products to only 12 companies. NeoMedia 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 NeoMedia's
future success to be highly speculative in light of its 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 new and rapidly evolving markets, such as the
physical-world-to-Internet space. To address these risks, NeoMedia must, among
other things:
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 service offerings and features;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
NeoMedia may not be successful in addressing these risks. If NeoMedia is
unable to do so, its business, prospects, financial condition, and results of
operations would be materially and adversely affected.
10
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 and adversely affect NeoMedia's business.
NeoMedia'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
NeoMedia'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, as
amended. These requirements may reduce the potential market for NeoMedia's
common stock by reducing the number of potential investors. This may make it
more difficult for investors in NeoMedia's common stock to sell shares to third
parties or to otherwise dispose of them. This could cause NeoMedia'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 million (if the
issuer has been in continuous operation for at least three years) or
$10 million (if in continuous operation for less than three years),
or with average revenues of less than $6 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.
NeoMedia is Uncertain Of The Success Of Its Internet Switching Software Business
Unit And The Failure Of This Unit Would Negatively Affect The Price Of
NeoMedia's Stock
NeoMedia provides products and services that provide a link from physical
objects, including printed material, to the Internet. NeoMedia can provide no
assurance that:
o this Internet Switching Software business unit will ever achieve
profitability;
o its 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 NeoMedia develops will obtain market acceptance.
In the event that the Internet Switching Software business unit should
never achieve profitability, that NeoMedia's current product offerings should so
suffer, or that NeoMedia's products fail to obtain market acceptance, NeoMedia's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
A Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have
Little Or No Value If NeoMedia's Operations Are Unsuccessful
At December 31, 2004 and 2003, approximately 49% and 65%, respectively, of
NeoMedia's total assets were intangible assets, consisting primarily of rights
related to NeoMedia's patents, other intellectual property, and excess of
purchase price over fair market value paid for CSI International, Inc. (now
NeoMedia Micro Paint Repair). If NeoMedia's operations are unsuccessful, these
assets will have little or no value, which would materially adversely affect the
value of NeoMedia's stock and the ability of NeoMedia's stockholders to recoup
their investments in NeoMedia's capital stock.
11
NeoMedia's Physical-World-To-Internet Marketing Strategy Has Not Been Tested And
May Not Result In Success
To date, NeoMedia has conducted limited marketing efforts directly
relating to NeoMedia's NISS business unit. All of NeoMedia's marketing efforts
have been largely untested in the marketplace, and may not result in sales of
NeoMedia's products and services. To penetrate the markets in which it competes,
NeoMedia will have to exert significant efforts to create awareness of, and
demand for, its products and services. With respect to NeoMedia's marketing
efforts conducted directly, NeoMedia intends to expand its sales staff upon the
receipt of sufficient operating capital. NeoMedia's failure to further develop
NeoMedia's marketing capabilities and successfully market NeoMedia's products
and services would have a material adverse effect on NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia's Internally Developed Systems Are Inefficient And May Put NeoMedia At
A Competitive Disadvantage
NeoMedia 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 NeoMedia develops these systems in order to integrate
disparate systems and hardware on a case-by-case basis, these systems are
inefficient and require a significant amount of customization. Such client and
customer-specific customization is time consuming and costly and may place
NeoMedia at a competitive disadvantage when compared to competitors with more
efficient systems.
NeoMedia Could Fail to Attract Or Retain Key Personnel
NeoMedia'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 NeoMedia has. NeoMedia may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. NeoMedia's failure to attract and retain qualified
personnel could have a material adverse effect on its business, prospects,
financial condition, and results of operations.
NeoMedia Depends Upon Its Senior Management And Their Loss Or Unavailability
Could Put NeoMedia At A Competitive Disadvantage
NeoMedia's success depends largely on the skills of certain key management
and technical personnel, including Charles T. Jensen, NeoMedia's President,
Chief Executive Officer and Chief Operating Officer, and Charles W. Fritz,
NeoMedia's founder and Chairman of the Board of Directors. The loss of the
services of Messrs. Jensen or Fritz could materially harm NeoMedia'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.
NeoMedia does not presently maintain a key-man life insurance policy on Messrs.
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.
NeoMedia May Be Unable To Protect Its Intellectual Property Rights And May Be
Liable For Infringing The Intellectual Property Rights Of Others
NeoMedia'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 the ability to protect
proprietary technology and other intellectual property rights. In addition,
NeoMedia must conduct its operations without infringing on the proprietary
rights of third parties. NeoMedia 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, NeoMedia
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. NeoMedia has six patents
for its physical-world-to-Internet technology, and an additional six patents
acquired with the purchase of Secure Source Technologies related to document
security. NeoMedia also has several trademarks relating to its proprietary
products. Although NeoMedia 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 NeoMedia's proprietary
technology enter into confidentiality agreements, NeoMedia 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 NeoMedia's.
12
NeoMedia licenses from third parties certain software tools that are
included in NeoMedia's services and products. If any of these licenses were
terminated, NeoMedia could be required to seek licenses for similar software
from other third parties or develop these tools internally. NeoMedia may not be
able to obtain such licenses or develop such tools in a timely fashion, on
acceptable terms, or at all. Companies participating in the software and
Internet technology industries are frequently involved in disputes relating to
intellectual property. NeoMedia 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, NeoMedia. An adverse determination could
subject NeoMedia to significant liabilities to third parties, require NeoMedia
to seek licenses from, or pay royalties to, third parties, or require NeoMedia
to develop appropriate alternative technology. Some or all of these licenses may
not be available to NeoMedia on acceptable terms or at all, and NeoMedia 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 NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia Is Exposed To Product Liability Claims And An Uninsured Claim Could
Have A Material Adverse Effect On NeoMedia's Business, Prospects, Financial
Condition, And Results Of Operations, As Well As The Value Of NeoMedia's Stock
Many of NeoMedia'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 NeoMedia, regardless of NeoMedia's
responsibility for such failure. NeoMedia could, therefore, be subject to claims
in connection with the products and services that it sells. NeoMedia currently
maintains product liability insurance. There can be no assurance that:
o NeoMedia has contractually limited its liability for such claims
adequately or at all; or
o NeoMedia would have sufficient resources to satisfy any liability
resulting from any such claim.
The successful assertion of one or more large claims against NeoMedia
could have a material adverse effect on its business, prospects, financial
condition, and results of operations.
NeoMedia Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares
In Order To Realize Their Investment
NeoMedia has not paid any cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. NeoMedia intends to
retain future earnings, if any, for reinvestment in the development and
marketing of NeoMedia's products and services. As a result, investors may have
to sell their shares of common stock to realize their investment.
Some Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter
Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders To
Sell Their Shares At A Premium To The Then-Current Market Price
Some of the provisions of NeoMedia's Certificate of Incorporation and
bylaws could make it more difficult for a third party to acquire NeoMedia, even
if doing so might be beneficial to NeoMedia's stockholders by providing them
with the opportunity to sell their shares at a premium to the then-current
market price. On December 10, 1999, NeoMedia'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 NeoMedia's common stock to stockholders of record on
December 10, 1999 and each share of common stock issued thereafter until a
pre-defined hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure, commonly referred to as a "poison pill." The stockholder
rights plan was designed to enable all stockholders not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
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 NeoMedia'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 NeoMedia'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".
13
In addition, NeoMedia'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, redemption rights, and
sinking fund provisions.
NeoMedia is authorized to issue a total of 25,000,000 shares of Preferred
Stock, par value $0.01 per share. NeoMedia 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 NeoMedia's common stock,
and, therefore, could reduce the value of shares of NeoMedia'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 NeoMedia's 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 NeoMedia or a change in
NeoMedia's control thereby preserving control by the current stockholders.
14
Risks Relating To NeoMedia's Industry
The Security of the Internet Poses Risks To The Success Of NeoMedia'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
NeoMedia's physical-world-to-Internet business.
NeoMedia Will Only Be Able To Execute Its Physical-World-To-Internet Business
Plan If Internet Usage and Electronic Commerce Continue To Grow
NeoMedia's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet, cellular
telephones, and other online services as an effective medium of information and
commerce. If use of the Internet and other online services does not continue to
grow or grows more slowly than expected, or if the infrastructure for the
Internet and other online services does not effectively support the growth that
may occur, or if the Internet and other online services do not become a viable
commercial marketplace, NeoMedia's physical-world-to-Internet business, and
therefore NeoMedia's business, prospects, financial condition, and results of
operations, could be materially adversely affected. Rapid growth in the use of,
and interest in, the Internet, the World Wide Web (the "Web"), and online
services is a recent phenomenon, and may not continue on a lasting basis. In
addition, customers may not adopt, and continue to use, the Internet, the Web
and other online services as a medium of information retrieval or commerce.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and few services and
products have generated profits. For NeoMedia to be successful, consumers and
businesses must be willing to accept and use novel and cost efficient ways of
conducting business and exchanging information.
In addition, the public in general may not accept the Internet, the Web
and other online services as a viable commercial or information marketplace for
a number of reasons, including potentially inadequate development of the
necessary network infrastructure or delayed development of enabling technologies
and performance improvements. To the extent that the Internet, the Web and other
online networks continue to experience significant growth in the number of
users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the Internet, the Web, and online networks may be unable to
support the demands placed upon them. In addition, the Internet, the Web or
other online networks could lose their viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Significant issues concerning the commercial and informational use
of the Internet, the Web, and online networks technologies, including security,
reliability, cost, ease of use, and quality of service, remain unresolved and
may inhibit the growth of Internet business solutions that utilize these
technologies. Changes in, or insufficient availability of, telecommunications
services to support the Internet, the Web or other online services also could
result in slower response times and adversely affect usage of the Internet, the
Web and other online networks generally and NeoMedia's
physical-world-to-Internet product and networks in particular.
NeoMedia 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
NeoMedia may not be able to adapt as the Internet,
physical-world-to-Internet, equipment resales and systems integration markets,
and consumer demands continue to evolve. NeoMedia'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
15
o the emergence of new industry standards and practices that could
render proprietary technology and hardware and software
infrastructure obsolete.
NeoMedia's success will depend, in part, on its ability to:
o enhance and improve the responsiveness and functionality of its
products and services;
o license or develop technologies useful in its business on a timely
basis;
o enhance its existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of NeoMedia's 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.
NeoMedia 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 NeoMedia. NeoMedia believes that competition will intensify and
increase in the future. NeoMedia's target market is rapidly evolving and is
subject to continuous technological change. As a result, NeoMedia'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
NeoMedia's business, prospects, financial condition, and results of operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. NeoMedia 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 NeoMedia's control. Existing or future
competitors may develop or offer products or services that provide significant
technological, creative, performance, price, or other advantages over the
products and services offered by NeoMedia.
Many of NeoMedia'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, NeoMedia is significantly smaller
than its two largest competitors in the physical-world-to-Internet industry, the
primary focus of NeoMedia's business. Similarly, NeoMedia competes against
significantly larger and better-financed companies in the systems integration
and equipment resale businesses, including the manufacturers of the equipment
and technologies that NeoMedia integrates and resells. If NeoMedia competes with
its primary competitors for the same geographical or institutional markets,
their financial strength could prevent NeoMedia from capturing those markets.
NeoMedia may not successfully compete in any market in which it conducts or may
conduct operations. In addition, based on the increasing consolidation, price
competition and participation of equipment manufacturers in the systems
integration and equipment resales markets, NeoMedia believes that it may no
longer be able to compete effectively in these markets in the future. It is for
this reason, that NeoMedia has increasingly focused its business plan on
competing in the emerging market for physical-world-to-Internet products.
Many of NeoMedia's competitors in the Micro Paint Repair business have
access to more financial resources as well. NeoMedia may not be able to
penetrate markets or market its products as effectively as NeoMedia's
better-funded competitors.
16
In The Future There Could Be Government Regulations And Legal Uncertainties
Which Could Harm NeoMedia's Business
NeoMedia 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 NeoMedia's
business, or the application of existing laws and regulations to the Internet
and other online services, could have a material adverse effect on NeoMedia's
business, prospects, financial condition, and results of operations. Due to the
increasing popularity and use of the Internet, the Web 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, the Web
or other online services, which could, in turn, decrease the demand for
NeoMedia's services and increase NeoMedia's cost of doing business, or otherwise
have a material adverse effect on NeoMedia's business, prospects, financial
condition, and results of operations. Moreover, the relevant governmental
authorities have not resolved the applicability to the Internet, the Web 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 NeoMedia'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
NeoMedia's ability to collect and use information collected by NeoMedia'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. NeoMedia could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if NeoMedia's privacy practices are investigated.
Certain of NeoMedia's micro paint solutions could be subject to
environmental regulations.
17
Risks Specific To This Offering
As of December 31, 2004, NeoMedia had 432,525,053 shares of common stock
outstanding, and options and warrants to purchase up to an aggregate 71,629,121
shares of common stock. NeoMedia will also issue additional shares of common
stock in connection with the acquisition of BSD described herein, and up to an
additional 92,580,279 previously registered shares of common stock may be issued
under NeoMedia's Standby Equity Distribution Agreement with Cornell Capital
Partners, LP. On March 30, 2005, NeoMedia and Cornell entered into a new Standby
Equity Distribution Agreement under which Cornell agreed to purchase up to $100
million of NeoMedia's common stock over a two-year period, with the timing and
amount of the purchase at NeoMedia's discretion.
Current BSD Stockholders May Sell Their Shares Of NeoMedia Common Stock To Be
Received In the Merger In The Public Market, Which Sales May Cause NeoMedia's
Stock Price To Decline
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. Such
holders may sell the shares of common stock being registered in this offering in
the public market, which may cause NeoMedia's stock price to decline.
The Market Price Of NeoMedia's Securities May Be Volatile
As a result of the emerging and evolving nature of the markets in which
NeoMedia competes, as well as the current nature of the public markets and
NeoMedia's current financial condition, NeoMedia's operating results may
fluctuate materially, as a result of which quarter-to-quarter comparisons of
NeoMedia's results of operations may not be meaningful. If in some future
quarter, whether as a result of such a fluctuation or otherwise, NeoMedia's
results of operations fall below the expectations of securities analysts and
investors, the trading price of NeoMedia's common stock would likely be
materially and adversely affected. An investor should not rely on NeoMedia's
results of any interim period as an indication of NeoMedia's future performance.
Additionally, NeoMedia's quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside NeoMedia's control. Factors that may cause NeoMedia's quarterly
results to fluctuate include, among others:
o the ability to retain existing clients and customers;
o the ability to attract new clients and customers at a steady rate;
o the ability to maintain client satisfaction;
o the ability to motivate potential clients and customers to acquire
and implement new technologies;
o the extent to which NeoMedia'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 NeoMedia competes;
o the pricing of hardware and software that we resell or integrate
into NeoMedia's products;
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 ability to upgrade and develop NeoMedia's systems and
infrastructure in a timely and effective manner;
18
o the 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 NeoMedia'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.
NeoMedia's common stock has traded as low as $0.01 and as high as $0.299
between January 1, 2003 and December 31, 2004. From time to time after this
offering, the market price of NeoMedia's common stock may experience significant
volatility. NeoMedia's quarterly results, failure to meet analysts expectations,
announcements by us or NeoMedia's competitors regarding acquisitions or
dispositions, loss of existing clients, new procedures or technology, changes in
general conditions in the economy, and general market conditions could cause the
market price of the common stock to fluctuate substantially. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many technology
companies. These price and volume fluctuations often have been unrelated to the
operating performance of the affected companies.
You May Suffer Significant Additional Dilution If Outstanding Options And
Warrants Are Exercised
As of December 31, 2004, NeoMedia had outstanding stock options and
warrants to purchase 71,629,121 shares of common stock, some of which have
exercise prices at or below the price of NeoMedia's common shares on the public
market. To the extent such options or warrants are exercised, there will be
further dilution. In addition, in the event that any future financing should be
in the form of, be convertible into, or exchangeable for, equity securities, and
upon the exercise of options and warrants, investors may experience additional
dilution.
You May Suffer Significant Dilution As A Result Of NeoMedia's Standby Equity
Distribution Agreement With Cornell Capital Partner, LP
During the years ended December 31, 2004 and 2003, NeoMedia sold
112,743,417 and 98,933,244 shares, respectively, under its Standby Equity
Distribution Agreement (and the predecessor of the Standby Equity Distribution
Agreement called an Equity Line of Credit) with Cornell Capital Partners, LP. To
the extent that cash generated from operations does not meet NeoMedia's cash
needs, NeoMedia could continue to sell additional shares under the Standby
Equity Distribution Agreement.
On March 30, 2005, NeoMedia and Cornell entered into a new Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion.
Future Sales Of Common Stock By NeoMedia's Stockholders Could Adversely Affect
NeoMedia's Stock Price And NeoMedia's Ability To Raise Funds In New Stock
Offerings
The market price of NeoMedia's common stock could decline as a result of
sales of a large number of shares of NeoMedia's common stock in the market as a
result of this offering, or the perception that these sales could occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. Following the
acquisition of BSD (assuming a NeoMedia stock price at the effective time of the
merger of $0.18, which was the closing price on the last trading day prior to
announcement of the merger), if NeoMedia sold to Cornell Capital Partners, LP
the remainder of the 200,000,000 shares previously registered under its Standby
Equity Distribution Agreement, and if all options and warrants were exercised,
NeoMedia would have up to 609,056,241 shares outstanding.
19
Sales of NeoMedia's common stock in the public market following this
offering could lower the market price of NeoMedia's common stock. Sales may also
make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that NeoMedia's management deems
acceptable or at all. All 432,525,053 shares of common stock outstanding as of
December 31, 2004, are, or upon effectiveness of this registration statement
will be, freely tradable without restriction, unless held by NeoMedia's
"affiliates."
20
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information statement/prospectus contains or incorporates by
reference certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements are subject to risks and uncertainties, including
those described under the section of this information statement/prospectus
entitled "Risk Factors," many of which are beyond NeoMedia's control.
Accordingly, actual results may differ materially from those expressed or
implied in any such forward-looking statements. Words such as "estimate,"
"project," "plan," "believe," "expect," "anticipate," "intend" and similar
expressions may identify forward-looking statements.
All forward-looking statements are qualified by the risks described under
the section of this information statement/prospectus entitled "Risk Factors"
which, if they develop into actual events, could have a material adverse effect
on the merger or on NeoMedia's and/or BSD's business, financial condition or
results of operations. In addition, investors should consider the other
information contained in or incorporated by reference into this information
statement/ prospectus.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties. Factors that may cause actual results to differ from
those contemplated by the forward-looking statements include, among others, the
following possibilities:
o inability to protect intellectual property or license third party
patents;
o a significant increase in competitive pressures in the industries in
which NeoMedia and BSD compete;
o less favorable than expected general economic or business
conditions, both domestic and foreign, resulting in, among other
things, lower than expected revenues;
o greater than expected costs or difficulties related to the
integration of the businesses of NeoMedia and BSD;
o the impact of competitive products and pricing;
o the success of operating initiatives;
o availability of qualified personnel;
o changes in, or the failure to comply with, government regulations;
and
o adverse changes in the securities markets.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by forward-looking
statements. Stockholders are cautioned not to place undue reliance on these
statements, which speak only as of the date of this information statement/
prospectus or, in the case of documents incorporated by reference, the date of
such documents.
NeoMedia and BSD undertake no obligation and do not intend to make
publicly available any update or other revisions to any of the forward-looking
statements contained in this information statement/prospectus to reflect
circumstances existing after the date of this information statement/prospectus
or to reflect the occurrence of future events even if experience or future
events make it clear that any expected results expressed or implied by those
forward-looking statements will not be realized, except as may be required by
securities law.
21
SELECTED HISTORICAL FINANCIAL DATA OF NEOMEDIA
The following selected financial data for each of the five years in the
period ended December 31, 2004 have been derived from NeoMedia's audited
consolidated financial statements which include, in management's opinion, all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results of operations and financial position of NeoMedia for the
periods and dates presented. This data should be read in conjunction with the
respective audited consolidated financial statements of NeoMedia, including the
notes thereto, incorporated herein by reference and with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
NeoMedia contained in, or incorporated in, the Annual Reports and other
information that NeoMedia has filed with the United States Securities and
Exchange Commission. See the section of this information statement/prospectus
entitled "Where You Can Find More Information."
Years Ended December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- ---------- ---------
(in thousands, except for per share data)
Total net sales $ 1,700 $ 2,400 $ 9,399 $ 8,142 $ 27,565
Net loss ($ 7,230) ($ 5,382) ($ 7,421) ($ 25,469) ($ 5,409)
Net loss per share ($ 0.02) ($ 0.04) ($ 0.26) ($ 1.55) ($ 0.39)
Weighted average shares
outstanding during the period
(thousands) 329,362 125,030 22,330 16,410 13,931
Total assets $ 10,406 $ 3,876 $ 4,323 $ 9,039 $ 40,594
Long-term debt -- -- $ 226 $ 390 $ 539
22
SELECTED HISTORICAL FINANCIAL DATA OF BSD
The following selected financial data for each of the five years in the
period ended July 31, 2003 have been derived from BSD's audited consolidated
financial statements. The financial data as of January 31, 2005 and 2004, and
for each of the three and six-month periods then ended, have been derived from
BSD's unaudited condensed consolidated financial statements which include, in
management's opinion, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the results of operations and financial
position of BSD for the periods and dates presented. This data should be read in
conjunction with the respective audited and unaudited consolidated financial
statements of BSD, including the notes thereto, incorporated herein by reference
and with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of BSD contained in, or incorporated in, the Annual
Reports and other information that NeoMedia has filed with the United States
Securities and Exchange Commission. See the section of this information
statement/prospectus entitled "Where You Can Find More Information."
Six months ended
January 31, Year Ended July 31,
---------------------- -------------------------------------------------------------
2005 2004 2004(A) 2003(A) 2002(B) 2001(B) 2000(B)
--------- --------- --------- -------- -------- -------- ---------
(unaudited)
(in thousands, except for per share data)
---------------------------------------------------------------------------------------
Total net sales $3,258 $2,689 $6,091 $2,911 $5,382 $705 $210
Net income (loss) $149 $62 $45 ($4,860) $193 $29 $51
Net income (loss) per share $0.00 $0.00 $0.00 ($0.19) $193.00(C) $29.00(C) $51.00(C)
Weighted average shares
outstanding
during the period (thousands) 32,735 32,305 31,494 25,494 1(C) 1(C) 1(C)
Total assets $1,204 $1,440 $1,158 $886 $1,269 $260 $108
----------
(A) On November 2, 2002, BSD changed its fiscal year end from December 31 to
July 31. BSD was not required to file a transition report because it
adopted the fiscal year end of Triton Global Business Services, Inc., the
company it acquired on or about that date. Accordingly, financial
statements were not audited for the fiscal year ended July 31, 2002.
(B) BSD acquired Triton Global Business Services and Triton Global
Communications during November 2002. These business units represent 100%
of BSD's revenue since that date. Prior to the acquisition, BSD was an
inactive publicly traded "shell" corporation with little or no revenue. As
a result, the financial information shown above for the years ended July
31, 2002, 2001, and 2000, is the financial information of Triton Global
Communications, which is considered the acquirer of BSD for accounting
purposes.
(C) Prior to the business combination with BSD and Triton Global Business
Services, Triton Global Communications was a privately held company with
one share outstanding.
23
COMPARATIVE PER SHARE DATA
The following tables present historical per share data of BSD and NeoMedia
as of and for the 12 months ended July 31, 2004 and December 31, 2004,
respectively. The data presented below should be read in conjunction with the
historical financial statements of NeoMedia and BSD incorporated by reference in
this information statement/prospectus. Because the number of shares of NeoMedia
common stock to be issued in the merger will not be known until the completion
of the merger, pro forma per share data is presented below using the closing
sale price of a share of NeoMedia common stock on December 31, 2004 which was
$0.265.
Year Ended Year Ended
July 31, December 31,
2004 2004
------------ -------------
BSD Historical
Earnings per share $ 0.00 --
Book value per share (as of end of period)(1) ($ 0.10) --
NeoMedia Historical
Loss per share -- ($ 0.02)
Book value per share (as of end of period)(1) -- $ 0.01
Pro Forma Combined
Loss per combined company share(2) -- ($ 0.02)
Book value per combined company share
(as of end of period)(3) -- $ 0.02
----------
(1) The historical net book value per share of NeoMedia and BSD common stock
is computed by dividing common stockholders' equity at period end by the
number of shares of common stock outstanding at the period end.
(2) The pro forma combined net loss per share of the combined company's common
stock is computed by dividing the pro forma combined net loss by the pro
forma weighted number of shares of common stock outstanding at the period
end, assuming the merger had been completed on January 1, 2004.
(3) The pro forma combined net book value per share of the combined company's
common stock is computed by dividing the pro forma common stockholders'
equity (deficit) by the pro forma number of shares of common stock
outstanding at the period end, assuming the merger had been completed on
January 1, 2004.
24
COMPARATIVE STOCK PRICE DATA
NeoMedia common stock is listed and traded on the Over-the-Counter
Bulletin Board under the symbol "NEOM". BSD common stock and is listed and
traded on the Over-the-Counter Bulletin Board under the symbol "BSDS". The
following table sets forth, for the periods indicated, the high and low sales
prices per share of NeoMedia common stock and BSD common stock as reported on
the respective markets in which they are traded. Neither NeoMedia nor BSD has
paid dividends with respect to its common stock.
NeoMedia BSD
Common Stock Common Stock
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
2001
January 1 - March 31 $6.00 $5.69 $0.25 $0.25
April 1 - June 30 $4.50 $5.00 $0.25 $0.001
July 1 - September 30 $1.85 $4.12 $0.001 $0.001
October 1 - December 31 $0.24 $1.94 $7.25 $1.10
2002
January 1 - March 31 $0.41 $0.14 $7.05 $5.25
April 1 - June 30 $0.17 $0.05 $8.52 $6.00
July 1 - September 30 $0.10 $0.02 $8.52 $1.25
October 1 - December 31 $0.05 $0.01 $4.75 $0.33
2003
January 1 - March 31 $0.06 $0.01 $1.85 $0.64
April 1 - June 30 $0.04 $0.01 $1.28 $0.30
July 1 - September 30 $0.29 $0.01 $0.51 $0.22
October 1 - December 31 $0.23 $0.10 $0.44 $0.16
2004
January 1 - March 31 $0.16 $0.14 $0.25 $0.09
April 1 - June 30 $0.11 $0.05 $0.51 $0.09
July 1 - September 30 $0.12 $0.06 $0.85 $0.22
October 1 - December 31 $0.30 $0.06 $0.34 $0.12
2005
January 1 - March 29 $0.29 $0.22 $0.24 $0.07
On December 20, 2004, the last trading day prior to the public
announcement of the execution of the Merger Agreement, the closing price of BSD
common stock was $0.15 per share and the closing price of NeoMedia common stock
was $0.18 per share. On March 29, 2005, the most recent practicable trading day
prior to the printing of this information statement/prospectus, the closing
price of BSD common stock was $0.07 per share and the closing price of NeoMedia
common stock was $0.232 per share. The market prices of shares of BSD common
stock and NeoMedia common stock are subject to fluctuation. As a result, BSD
shareholders are urged to obtain current market quotations. On December 31,
2004, there were 31,810,897 shares of BSD common stock outstanding and
432,525,053 shares of NeoMedia common stock outstanding.
25
THE MERGER
On December 20, 2004, NeoMedia and BSD signed a definitive Merger
Agreement, the form of which is attached hereto as Exhibit 10.55.
BSD's Reasons for the Merger
On November 29, 2004, BSD's Board of Directors approved the Merger
Agreement, which provides for the acquisition by NeoMedia of BSD through a
merger of BSD with and into NeoMedia Telecom Services, a newly formed and
wholly-owned subsidiary of NeoMedia. In addition, holders of 62.7% of BSD's
outstanding shares approved the merger by signing a Voting Rights Agreement.
In reaching their decision to approve the merger and the other
transactions contemplated by the Merger Agreement, the BSD Board of Directors
and majority shareholders consulted with BSD's management and its legal and
financial advisors. BSD's board and majority shareholders considered a number of
factors and potential benefits of the merger including, without limitation, the
following:
o the enhanced potential for earnings and revenue growth that could be
attained through a combination of NeoMedia's PaperClickTM technology
with BSD's technology and telecommunications industry expertise (in
addition, both companies expect cost savings may be attained by
eliminating overlap of expenses);
o the significantly larger public float and trading volume of NeoMedia
common shares compared to the public float and trading volume of
shares of BSD common stock, which should provide BSD shareholders
who receive NeoMedia shares in the merger the opportunity to gain
greater liquidity in their investment;
o the results of the business and accounting due diligence review
conducted by BSD's management and directors;
o the potential benefits to BSD employees from a combination with
NeoMedia;
o BSD's business, current financial condition and results of operation
and future prospects and the belief of the board and majority
shareholders, based on its familiarity with these matters, that the
consideration to be received by BSD's shareholders in the
transaction fairly reflects BSD's intrinsic value, including its
prospects for future growth in line with historical growth rates;
o the recent evaluation by BSD's management of BSD's strategic plan
and projections and the risks related to achieving those projections
and the goals of that plan, compared to the risks and benefits of
the merger; and
o THE ABILITY OF BSD'S SHAREHOLDERS TO RECEIVE THE MERGER
CONSIDERATION ON A TAX-ADVANTAGED BASIS.
The BSD Board of Directors and majority shareholders also considered and
balanced against the potential benefits of the merger a number of potentially
adverse factors concerning the merger including, without limitation, the
following:
o the fact that the final number of NeoMedia shares to be issued in
exchange for each share of BSD is dependent upon the trading price
of NeoMedia's common stock at the time of closing, and that an
increase in NeoMedia's share price between the date of this
prospectus and closing will result in BSD shareholders receiving
fewer shares of NeoMedia common stock in the merger;
o the opportunities for growth and the potential for increased
shareholder value if BSD were to stay independent and realize its
strategic plan, financial projections and expected technological
advances over the next five years;
o the risk that the merger might not be completed in a timely manner
or at all;
26
o the risk of diverting management focus and resources from other
strategic opportunities and from operational matters while working
to implement the merger; and
o the possibility of management and employee disruption associated
with the merger.
After taking into account all of the factors set forth above, as well as
others, the BSD Board of Directors and majority shareholders agreed that the
benefits of the merger outweigh the risks and that the Merger Agreement and the
merger are advisable and fair and in the best interests of BSD and its
shareholders.
The BSD Board of Directors and majority shareholders did not assign
relative weights to the above factors or the other factors considered by it. In
addition, the BSD board and majority shareholders did not reach any specific
conclusion on each factor considered, but conducted an overall analysis of these
factors. Individual members of the BSD board may have given different weight to
different factors.
NeoMedia's Reasons for the Merger
The Board of Directors of NeoMedia approved the Merger Agreement on August
18, 2004 after NeoMedia's senior management discussed with the Board of
Directors the business, assets, liabilities, results of operations and financial
performance of BSD, the complementary nature of certain of BSD's products and
capabilities and the products of NeoMedia, the expectation that BSD could be
integrated with NeoMedia, and the potential benefits that could be realized as a
result of such integration.
Interests of Certain Persons in the Merger; Conflicts of Interest
BSD shareholders should be aware that some of BSD's directors and
executive officers have interests in the merger that are different from, or in
addition to, the interests of BSD shareholders generally. The Board of Directors
of BSD was aware of these interests and considered them in approving the merger
and the Merger Agreement.
Equity Plans. Upon the completion of the merger, BSD employees, including
senior management, will be eligible to participate in NeoMedia's stock option
plans and stock incentive plans. Any issuances of stock or stock options under
NeoMedia's various plans must be approved by either the Stock Option Committee
of NeoMedia's board, or the Board of Directors as a whole.
Insiders Who Are Debtholders of BSD. Two of BSD's majority shareholders
who approved the merger are also debtholders of BSD. The debt owed to these
individuals will become debt of NeoMedia Telecom Services upon completion of the
merger.
Anticipated Accounting Treatment
The total merger consideration paid by NeoMedia, together with the direct
costs of the merger, will be allocated to BSD's tangible and intangible assets
and liabilities based on their fair market values. The assets, liabilities and
results of operations of BSD will be consolidated into the assets, liabilities
and results of operations of NeoMedia after the merger.
Material United States and Canadian Federal Income Tax Consequences of the
Merger
The following is a material United States federal income tax consequence of the
merger. The following discussion is based on the United States Internal Revenue
Code of 1986, as amended (the "Code") and related regulations, existing
administrative interpretations and court decisions and any related laws, all of
which could change, possibly with retroactive effect. This discussion does not
address all aspects of United States federal income taxation that may be
important to you in light of your particular circumstances or special rules that
may apply to you, such as rules relating to:
o shareholders who are not citizens or residents of the United States;
o financial institutions;
27
o tax exempt organizations;
o insurance companies; or
o dealers in securities.
This discussion assumes you hold your shares of BSD capital stock as
capital assets within the meaning of Section 1221 of the Code.
It is expected that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a)(1)(B) of the
Code, and that BSD and NeoMedia will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. Accordingly, since BSD will no
longer exist as a result of its merging into and becoming one with NeoMedia as a
result of BSD shareholders exchanging their BSD voting stock solely for NeoMedia
voting stock, shareholders of BSD should not recognize any gain or loss for
United States federal income tax purposes.
This foregoing discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other consequences of the merger. In addition, this discussion does not
address tax consequences which may vary with, or are contingent on, your
individual circumstances. Moreover, this discussion does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
Accordingly, you are strongly urged to consult with your tax advisor to
determine the particular United States federal, state, local or foreign income
or other tax consequences to you of the merger.
Material Canadian Federal Income Tax Consequences of the Merger
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to BSD Stockholders who are resident in
Canada. This summary, which does not constitute a legal opinion, is restricted
in its scope to BSD Stockholders who are individuals (that is, taxpayers who are
persons and not corporations, trusts or other entities) resident in Canada for
the purposes of the Income Tax Act Canada (the "Tax Act") and who hold their
shares as capital property. This commentary assumes that the BSD Stockholder and
any person deemed to deal with him not at arm's-length for the purposes of the
Tax Act, will not after the exchange hold or have rights to acquire more than
one-half of the shares entitled to vote to elect directors in NeoMedia nor have
shares with a fair market value of more than 50% of all issued shares in
NeoMedia.
This summary is based upon NeoMedia's understanding of the Tax Act, the
regulations to it (the "Regulations") and the current administrative practices
of the Canada Revenue Agency ("CRA"). This summary also takes into account
proposals for specific amendments to the Tax Act publicly announced in writing
by the Minister of Finance of Canada as of the date of this information
statement/prospectus (the "Proposed Amendments"). There is no assurance that the
Proposed Amendments will be enacted into law in the manner proposed, or at all.
This summary does not take into account or anticipate any possible changes in
the law, whether by legislative, governmental or judicial action.
No advance income tax ruling has been applied for from CRA in connection
with the transactions contemplated by filing nor will one be sought.
This summary is not exhaustive of all possible federal income tax
considerations and does not deal with provincial or foreign income tax
considerations. This summary does not constitute, and should not be construed to
constitute, legal or tax advice to any particular person. BSD STOCKHOLDERS
RESIDENT IN CANADA ARE THEREFORE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
A BSD Stockholder who exchanges his/her or her shares for NeoMedia stock
will have a disposition of those shares for the purposes of the Tax Act. That
BSD Stockholder will be deemed to have disposed of BSD shares for an amount
equal to their cost base immediately prior to the exchange (thus realizing no
gain or loss) and will be deemed to have acquired the NeoMedia shares for that
same amount.
However, a Canadian resident BSD Stockholder can elect in his/her return
of income of the taxation year in which the exchange occurs to treat the
disposition not as a "rollover" or non-recognition transaction but as one which
may generate a capital gain (or loss). In that case, proceeds of disposition of
shares by the BSD Stockholder equal to the fair market value of the NeoMedia
shares received on the exchange will be deemed to have realized. To the extent
that the proceeds of disposition received or deemed to have been received in
respect of the BSD shares exceed the aggregate of the BSD Stockholder's adjusted
cost base and costs of disposition, the BSD Stockholder will realize a capital
gain for income tax purposes. A capital loss will generally be realized to the
extent that proceeds of disposition are exceeded by the BSD Stockholder's
adjusted cost base of the BSD shares and costs of disposition.
28
A Canadian resident must include one-half of the amount of any capital
gain realized into income which would then be taxed at ordinary marginal rates.
One-half of a capital loss, referred to in the Tax Act as an allowable capital
loss, may be utilized to offset taxable capital gains realized by the individual
in the current year. To the extent that allowable capital losses realized in the
year are not utilized to offset taxable capital gains for that year, such
allowable capital losses can be used to offset net taxable capital gains in
future years or in the three preceding years.
The cost base of the NeoMedia shares to that Canadian resident BSD
Stockholder will be their fair market value on the date of the transaction if
that BSD Stockholder elects out of the "rollover" treatment.
Dissenters' Rights
Under Florida law, holders of BSD common stock outstanding immediately
prior to the effective date of the merger who have not voted in favor of the
merger have the right to exercise their dissenters' rights and obtain payment in
cash for the fair value of their shares of common stock, rather than receive
shares of NeoMedia common stock as described in this information
statement/prospectus and the attached Merger Agreement. To exercise dissenters'
rights, BSD stockholders must strictly follow the procedures described under
Section 607.1301 et seq. of the Florida Business Corporation Act (the "FBCA").
The text of the applicable provisions of Florida Business Corporation Act,
together with BSD's initial notice to dissenters as required under the FBCA and
a Dissenter's Demand Notice Form, is attached as Annex A to this information
statement/prospectus. Instruction as to how to exercise dissenters' rights in
connection with the merger are included in Annex A. A BSD shareholder desiring
to exercise his/her dissenters' rights under the FBCA must execute and return to
BSD the Dissenter's Demand Notice Letter in Annex A.
Section 607.1302 of the FBCA provides in pertinent part that a shareholder
is entitled to appraisal (i.e., dissenters') rights, and to obtain payment of
the fair value of that shareholder's shares in the event of, among other things,
consummation of a merger to which the corporation is a party if shareholder
approval is required for the merger under Section 607.1103 of the FBCA, and the
shareholder is entitled to vote on the merger or exchange of shares in such
merger; provided that the shareholder has not voted in favor of the merger or
share exchange.
A shareholder may assert his/her/her dissenters' rights to all or fewer
than all shares he/she/she held as of the record date.
Under Section 607.1320, the corporation is required to provide the
stockholder with an initial notice of the corporate action giving rise to
dissenters' rights (e.g., a merger or share exchange) at the same time the
corporation provides notice of the meeting on which the proposed merger will be
put to a vote, or if no such meeting is to occur, on the date on which the
corporation first solicits consents for the proposed merger or share exchange
from any stockholder (the "Initial Notice"). The Initial Notice must also inform
the stockholder that the corporation has concluded that a stockholder may be,
is, or is not entitled to assert their dissenters' rights under the FBCA.
Within 20 days of receipt of the Initial Notice (or before a vote is taken
on the proposed merger), a stockholder who has not voted to approve the merger
and who wished to exercise his/her dissenters' rights, must so notify the
corporation in writing.
If the proposed merger is approved by the stockholders, then the
corporation must, within 10 days of the date on which the merger became
effective, send a second notice to the stockholders who previously provided
notice to the corporation of their intention to assert their dissenters' rights
informing such persons that the merger was approved and soliciting from them
certain information to be supplied on an enclosed form and returned to the
corporation, such as name, number of shares held, affirmative representation
that they did not vote for the merger, the corporation's estimate of the fair
value of the shares held by such person, a copy of the corporation's current
financial statements, and a copy of Sections 607.1301 through 607.1333 of the
FBCA (the "Second Notice"). "Fair value" is defined under the FBCA as the value
of the corporation's shares immediately prior to the proposed merger using
customary and current valuation concepts and techniques generally employed for
similar businesses in the context of the transaction requiring appraisals.
29
A stockholder wishing to exercise his/her dissenters' rights must then
execute the form enclosed in the Second Notice and return it to the corporation
within 20 days, and, if his shares are represented by certificates, deposit such
certificates in accordance with the terms contained in the Second Notice. Once
the shareholder has done the foregoing, he/she loses all rights as a shareholder
unless he/she withdraws his/her election to exercise his/her dissenters' rights.
If the shareholder states on such form that he/she accepts the corporation's
offer, then the corporation must tender payment to shareholder within 90 days.
However, if the shareholder indicates on such form that he/she does not accept
the corporation's offer, then he/she must provide his/her determination of the
fair value and note same on the form before returning it to the corporation.
The corporation then has 60 days in which to (a) accept the shareholders'
counter-offer/determination of fair value and thereafter pay such amount within
said 60-day period, or (b) negotiate with the shareholder toward a compromise
value and thereafter pay such amount within said 60-day period, or (c) reject
the shareholder's counter-offer/determination of fair value and thereafter
within said 60-day period commence a proceeding in the appropriate court in the
county in which the corporation's principal office is located for a judicial
determination of fair value. The corporation must tender payment of the fair
value determined by the court within 10 days of a final determination.
Under the FBCA, court costs, including costs of any third party appraisals
ordered by the court, are paid by the corporation. Additionally, if the court
finds that the corporation did not substantially comply with the FBCA with
regard to dissenters' rights, it can assess fees for the shareholder's counsel
against the corporation as well. However, if the court finds that the
shareholder acted arbitrarily or vexatiously, it can assess the corporation's
legal fees against the shareholder.
Federal or State Regulatory Requirements and Approvals
NeoMedia has consulted with its legal counsel and believes that it is not
required to obtain the consent of, or furnish prior notice to, any federal or
state governmental authority in connection with the consummation of the merger,
including any notice required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, 15 United States, Section 18a (Section 7A of the Clayton Act).
Description of NeoMedia's and BSD's Securities
A description of NeoMedia's and BSD's securities is provided on page 78
and page 100 of this information statement/prospectus, respectively.
Material Differences Between Rights of Holders of NeoMedia Common Stock Compared
to BSD Common Stock
A description of the material differences between rights of holders of
NeoMedia common stock compared to BSD common stock is provided on page 40 of
this information statement/prospectus.
30
THE MERGER AGREEMENT
This section of the information statement/ prospectus describes the Merger
Agreement. While NeoMedia and BSD believe that the description covers the
material terms of the Merger Agreement, this summary may not contain all of the
information that is important to you. The Merger Agreement is attached to this
prospectus as Exhibit 10.55. This document is incorporated herein by reference,
and NeoMedia and BSD urge you to read it carefully.
General; Structure of Transaction; Distribution of Common Stock
Following satisfaction or waiver of all of the conditions to the merger,
BSD will merge into NeoMedia Telecom Services, a wholly-owned subsidiary of
NeoMedia which is sometimes referred to as the "merger subsidiary." NeoMedia
Telecom Services will survive the merger as a wholly-owned subsidiary of
NeoMedia. If all conditions to the merger are satisfied or waived, the merger
will become effective at the time of the filing by the surviving corporation of
a duly executed certificate of merger with the Nevada Secretary of State.
The Exchange Ratio and Treatment of BSD Common Stock. 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 number of NeoMedia shares
each BSD shareholder will receive at closing will change depending on NeoMedia's
stock price at the time of closing. NeoMedia stock to be issued in the exchange
will be valued using a 5-day volume-weighted average closing price for the five
days prior to closing. No fractional shares will be issued. BSD common
stockholders that otherwise would receive fractional shares will instead receive
the nearest whole number of shares rounded down and an amount of cash (without
interest) equal to the product of such fraction multiplied by the
volume-weighted average closing price for the five days prior to closing of one
share of NeoMedia common stock as reported on the Over-the-Counter Bulletin
Board.
Treatment of BSD Stock Options and Warrants. NeoMedia will not assume any
outstanding stock options or warrants issued by BSD. All options and warrants to
purchase BSD stock will be converted or cancelled prior to the effective date.
Exchange of Certificates. After the effective date of the merger, BSD's
transfer agent, Florida Atlantic Stock Transfer, will mail to each record holder
of BSD common stock a letter of transmittal and instructions for surrendering
their certificates. Only those holders who properly surrender their certificates
in accordance with the instructions will receive a certificate or certificates
representing that number of whole shares of NeoMedia common stock, cash in lieu
of any fractional shares of NeoMedia common stock and any dividends or
distributions to which they are entitled. The surrendered certificates
representing shares of BSD common stock will be cancelled. After the effective
time of the merger, each certificate representing shares of BSD common stock
that has not been surrendered will only represent the right to receive common
stock of NeoMedia, cash in lieu of any fractional shares of NeoMedia common
stock and any dividends or distributions to which they are entitled. Following
the effective date of the merger, BSD will not register any transfers of BSD
common stock on its stock transfer books.
No dividends or other distributions declared or made with respect to
NeoMedia common stock with a record date after the closing date of the merger
will be paid to the holder of any unsurrendered BSD certificate until the holder
surrenders its BSD certificate in accordance with the letter of transmittal.
Upon surrender, the transfer agent will deliver to the record holder of the
certificate, without interest, any dividends or distributions with respect to
the NeoMedia common stock to which the holder is entitled which have a record
date after the closing date of the merger.
If any BSD common stock certificate is lost, stolen or destroyed, a BSD
stockholder must provide an appropriate affidavit of that fact. NeoMedia may
require a BSD stockholder to deliver a bond or indemnity agreement as security
against any claim that may be made against NeoMedia, the surviving corporation
or the transfer agent with respect to any lost, stolen or destroyed certificate.
31
Representations and Warranties
NeoMedia and BSD each made a number of representations and warranties in
the Merger Agreement regarding aspects of their respective businesses, financial
condition, structure and other facts pertinent to the merger.
BSD's representations and warranties include representations as to:
o Organization of BSD;
o Capitalization of BSD;
o Stockholders' Agreements, etc;
o Authorization;
o Officers and Directors;
o Bank Accounts;
o Subsidiaries;
o Real Property;
o Personal Property;
o Environmental Matters;
o Contracts;
o No Conflict or Violation;
o Consents;
o Permits;
o SEC Reports;
o Financial Statements;
o Books and Records;
o Absence of Certain Changes or Events;
o Liabilities;
o Litigation;
o Labor Matters;
o Employee Benefit Plans;
o Transactions with Related Parties;
o Compliance with Law;
o Intellectual Property;
o Tax Matters;
o Insurance;
o Brokers;
o Transaction Costs;
o No Other Agreements to Sell NeoMedia or its Assets;
o Accounts Receivable;
o Inventory;
o Product Warranty;
o Board Recommendation; and
o Material Misstatements or Omissions.
NeoMedia's representations and warranties include representations as to:
o Organization;
o Capitalization of NeoMedia and Merger Subsidiary;
o Authorization;
o SEC Reports;
o Financial Statements;
o Books and Records;
o No Conflicts;
o Approvals;
o Merger Consideration;
o Brokers' and Finders' Fees;
o Board Approval; and
o No Stockholder Approval Required.
32
The representations and warranties in the Merger Agreement are complicated
and not easily summarized. You are urged to carefully read the portions of the
Merger Agreement entitled "Representations and Warranties of NeoMedia and major
stockholders" relating to BSD and "Representations and Warranties of Buyer and
Merger Sub" relating to NeoMedia and the Merger Subsidiary.
Conduct of Business Prior to the Effective Time of the Merger
BSD and NeoMedia have agreed that, until the earlier of the completion of
the merger or termination of the Merger Agreement, except as contemplated by the
Merger Agreement or agreed to in writing, they will, and will cause their
respective subsidiaries to, operate their respective businesses solely in the
ordinary course of business and in accordance with past practice.
BSD and NeoMedia have also agreed that until the earlier of the completion
of the merger or termination of the Merger Agreement, BSD will not, and will not
permit any of its respective subsidiaries to, do any of the following without
NeoMedia's prior written consent, unless expressly contemplated by the Merger
Agreement and subject to certain exceptions:
o incur any indebtedness for borrowed money, or assume, guarantee,
endorse, or otherwise become responsible for obligations of any
other person;
o issue or commit to issue any shares of its capital stock or any
other securities or any securities convertible into shares of its
capital stock or any other securities;
o declare, pay or incur any obligation to pay any dividend or
distribution on its capital stock or declare, make or incur any
obligation to make any distribution or redemption with respect to
capital stock;
o make any changes to its Articles of Incorporation or bylaws or other
charter documents;
o mortgage, pledge or otherwise encumber any assets or sell, transfer,
license or otherwise dispose of any assets except for the sale or
disposition of inventory to customers in the ordinary course of
business and consistent with past practice;
o cancel, release or assign any indebtedness owed to it or any claims
or rights held by it;
o make any investment or commitment of a capital nature either by
purchase of stock or securities, contributions to capital, property
transfer or otherwise, or by the purchase of any property or assets
of any other person;
o terminate any contracts or make any change in any contract;
o enter into or modify any employment contract;
o pay any compensation to or for any employee, officer or director
other than in the ordinary course of business and pursuant to
employment arrangements existing as of the date of the Merger
Agreement;
o pay or agree to pay any bonus, incentive compensation, service
award, severance, "stay bonus" or other like benefit;
o enter into or modify any other material employee plan;
o enter into or modify any contract or other arrangement with a
related party;
o make any change in any method of accounting or accounting practice;
o fail to comply with all material laws applicable to the assets of
BSD or BSD's subsidiaries and business consistent with past
practices;
33
o fail to use its commercially reasonable efforts to (i) maintain its
business, (ii) maintain existing relationships with material
suppliers and customers of BSD and others having business dealings
with BSD, and (iii) otherwise preserve the goodwill of its business
so that such relationships and goodwill will be preserved on and
after the closing date;
o make or change any election in respect of taxes, adopt or change any
material accounting method in respect of taxes, enter into any tax
allocation agreement, tax sharing agreement, tax indemnity agreement
or closing agreement, settle or compromise any claim, notice, audit
report or assessment in respect of taxes, or consent to any
extension or waiver of the limitation period applicable to any claim
or assessment in respect of taxes; or
o commence any legal action or proceeding.
The agreements related to the conduct of business in the Merger Agreement
are complicated and not easily summarized. You are urged to carefully read the
section of the Merger Agreement entitled "Conduct Prior to the Effective Time."
No Solicitation
Until the merger is completed or the Merger Agreement is terminated, BSD
has agreed not to, and agreed to direct their respective officers, directors,
employees, representatives and other agents not to:
o take any action to solicit, initiate or encourage the making of, any
acquisition proposal, or
o subject to the discussion below, engage in any negotiations with, or
provide any nonpublic information or data to, or afford any access
to its properties, books or records any person relating to any
acquisition proposal.
BSD may, without breaching the Merger Agreement, respond to an unsolicited
acquisition proposal by discussing the proposal with, and furnishing information
to the party making the proposal, if the board determines in good faith with
advice from its financial advisor that the potential acquirer submitting such
acquisition proposal is reasonably capable of consummating the acquisition, and
the board determines in good faith after receiving advice from its financial
advisor, that such acquisition proposal is reasonably likely to lead to a
superior proposal.
BSD has agreed to promptly notify NeoMedia of any acquisition proposal, or
any request for information or access to properties, books or records by any
person who has advised that it may be considering making, or that has made, an
acquisition proposal.
Additional Covenants
BSD has also agreed to the following covenants:
o The major stockholders shall have entered into voting agreements
with NeoMedia with respect to the voting of their BSD common stock
and which voting agreements prohibit the major stockholders from
selling or transferring their BSD common stock prior to the
effective time of the merger;
o BSD will give NeoMedia and its officers, employees, accountants,
counsel, financing sources and other agents and representatives
reasonable access to all buildings, offices, and other facilities
and to all books and records of BSD and all BSD subsidiaries,
whether located on the premises of BSD or at another location;
o BSD will permit NeoMedia to make such inspections as it may
reasonably require;
o BSD will cause its officers to furnish NeoMedia such financial,
operating, technical and product data and other information with
respect to the business and assets of BSD as NeoMedia from time to
time may request, including without limitation, financial statements
and schedules;
34
o BSD will allow NeoMedia the opportunity to interview such employees
and other personnel and affiliates of BSD as NeoMedia may reasonably
request;
o BSD will assist and cooperate with NeoMedia in the development of
integration plans for implementation by NeoMedia and the Surviving
Corporation following the effective date of the merger;
o BSD will exercise any rights that mature between the date hereof and
the effective date of the merger to repurchase any outstanding
shares of BSD common stock at the price at which such shares were
issued;
o BSD will make reasonable efforts to maintain its proprietary rights;
and
o BSD will deliver to NeoMedia all SEC filings it makes prior to the
closing date.
BSD and NeoMedia have mutually agreed to the following covenants:
o BSD and NeoMedia will keep the information or knowledge obtained
pursuant to the negotiation and execution of the Merger Agreement or
the effectuation of the merger transaction confidential;
o Both sides will bear their own expenses relating to the merger;
o Except as required by law (including federal and state securities
laws), or as may be reasonably necessary to complete the merger,
neither BSD nor NeoMedia will disclose the existence of, or any
subject matter of, or the terms and conditions of, the Merger
Agreement to any third party without the prior written consent of
the other;
o BSD and NeoMedia will use commercially reasonable efforts to take,
or cause to be taken, all actions under the Merger Agreement;
o BSD and NeoMedia will notify one another of (a) the occurrence of
any event, the occurrence of which is likely to cause any
representation or warranty of BSD or NeoMedia to be untrue or
inaccurate at or prior to the closing date, and (b) any failure of
the BSD or NeoMedia to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under
the Merger Agreement;
o BSD will be responsible for all tax returns and related liabilities
until the closing date, and NeoMedia will be responsible for all tax
returns and related liabilities after the closing date;
o BSD and NeoMedia agree that in connection with any third party or
derivative litigation which may be brought against BSD relating to
the merger, BSD will keep NeoMedia informed of the course of such
litigation, and BSD agrees that it will consult with NeoMedia prior
to entering into settlement or compromise of any such litigation;
and
o The Certificate of Incorporation and bylaws of the Surviving
Corporation shall contain the provisions with respect to
indemnification set forth in the Certificate of Incorporation and
bylaws of BSD as of the date of the Merger Agreement.
Conditions to Completion of the Merger
The obligations of NeoMedia and BSD to complete the merger and the other
transactions contemplated by the Merger Agreement are subject to the
satisfaction or waiver, to the extent legally permissible, of each of the
following conditions before completion of the merger:
o the registration statement on Form S-4 of which this information
statement/prospectus is a part shall have been declared effective by
the United States Securities and Exchange Commission (the "SEC") and
shall not be the subject of any stop order or proceeding by the SEC
seeking a stop order, and no similar proceeding shall have been
initiated in respect of the information statement/prospectus;
o no temporary restraining order or injunction, law, regulation, order
or proceeding by a governmental entity, that could prevent the
merger or make the merger illegal, has been entered or begun; and
35
o each of BSD, NeoMedia and the Surviving Corporation shall have
timely obtained from each governmental entity all necessary
approvals, waivers or consents.
BSD's obligations to complete the merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
in writing of each of the following additional conditions before completion of
the merger:
o The representations and warranties of NeoMedia contained in the
Merger Agreement shall have been accurate in all respects as of the
date of the Merger Agreement and shall be accurate in all respects
as of the closing date as if made on and as of the closing date;
o NeoMedia shall have performed and complied with in all material
respects of each agreement, covenant and obligation required by the
Merger Agreement to be so performed or complied with by NeoMedia at
or before the closing date; and
o NeoMedia shall have delivered to BSD a buyer certificate, dated the
closing date and executed by an authorized officer of NeoMedia.
BSD's representations and warranties must be true and correct as of the
date the merger is to be completed as if made at and as of such time except:
o The representations and warranties of BSD contained in the Merger
Agreement shall have been accurate in all respects as of the date of
the Merger Agreement and shall be accurate in all respects as of the
closing date as if made on and as of the closing date;
o BSD shall have performed and complied with in all material respects
each agreement, covenant and obligation required by the Merger
Agreement to be so performed or complied with by BSD on or before
the closing date;
o BSD shall have delivered to NeoMedia a seller certificate, dated the
closing date and executed by the President and Chief Executive
Officer of BSD;
o The adoption of the Merger Agreement by the requisite holders of the
outstanding shares of BSD common stock shall have been obtained by
BSD at a special meeting or by written consent as permitted by law;
o BSD shall not have liabilities in an amount greater than $5 million
as of July 31, 2004, and as of the closing date;
o BSD shall have assets in an amount equal to or greater than $850,000
as of July 31, 2004, and as of the closing date;
o BSD shall not have in excess of 35 million shares of common stock
issued and outstanding as of the closing date;
o BSD shall have terminated prior to the closing date any and all
employment agreements, severance agreements, "golden parachute"
provisions of any agreements, and/or any other agreements that would
entitle any person compensation or payment pursuant to the
termination of such person's employment or a change of control in
BSD;
o All required consents, approvals, notifications, disclosures,
filings and registrations shall have been obtained or made;
o No action shall be pending or threatened relating in any way to the
Merger Agreement or the transactions contemplated in the Merger
Agreement;
36
o The holders of not more than 5% of the issued and outstanding shares
of BSD common stock shall have dissented to the merger;
o Each of the key employees defined in the Merger Agreement shall
remain continuously employed by BSD on substantially the same terms
and with substantially the same responsibilities as on the date of
the Merger Agreement and BSD shall have no knowledge that any of the
key employees has any intention to terminate their employment with
the Surviving Corporation;
o Each required employee shall have executed and delivered to NeoMedia
an employment agreement;
o All BSD stock option and warrant agreements shall be converted or
cancelled prior to the effective time of the merger;
o BSD, BSD Stockholders and any person who is a "disqualified
individual" (as defined in Section 280G(c) of the United States
Internal Revenue Code, as amended (the "Code") and the proposed
Treasury Regulations promulgated thereunder) with respect to BSD
shall have taken any and all actions necessary to provide that no
payment or acceleration of any right to benefits or payment pursuant
to the Merger Agreement, any employee plan, contract or any other
plan or arrangement shall constitute an "excess parachute payment"
within the meaning of Code Section 280G(b)(1) (NeoMedia and BSD each
acknowledge and agree that such actions may include, but are not
necessarily limited to, the approval by BSD stockholders of the
right to receive or retain such payments or benefits, which approval
satisfies the requirements of Code Section 280G(b)(5)(B) of and the
proposed Treasury Regulations promulgated thereunder); and
o NeoMedia shall have no actual knowledge and shall not have received
a notice pursuant to Treasury Regulations Section 1.445-4 that the
statement delivered by BSD pursuant to Code Section 6.11(g) is
false.
Termination of the Merger Agreement
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by either NeoMedia or BSD, if:
o the merger shall not have been consummated on or before July 31,
2005, which date may be extended by mutual consent of NeoMedia and
BSD;
o any law shall have been enacted, entered or promulgated prohibiting
the consummation of the Merger substantially on the terms
contemplated in the Merger Agreement; or
o a court of competent jurisdiction or other government entity shall
have issued an order, decree, ruling or injunction, or taken any
other action, having the effect of permanently restraining,
enjoining or otherwise prohibiting the merger substantially on the
terms contemplated hereby, and such order, decree, ruling,
injunction or other action shall have become final.
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by NeoMedia, if:
o BSD shall have failed to comply in any material respect with any of
the covenants or agreements contained in the Merger Agreement;
o there exists a breach or breaches of any representation or warranty
of BSD contained in the Merger Agreement; or
o (i) the Board of Directors of BSD fails to adopt the Merger
Agreement, or withdraws, amends or modifies in a manner adverse to
NeoMedia its adoption of the Merger Agreement, (ii) a tender offer
(to which Rule 14e-2(a) under the Securities Exchange Act of 1934,
as amended (the "1934 Act") applies) for any of the outstanding
shares of capital stock of BSD is commenced prior to BSD the closing
date, and within the time required by Rule 14e-2(a) under the
Exchange Act the Board of Directors of BSD fails to recommend
against acceptance of such tender offer, or takes no position with
respect to such tender offer, or states its inability to take a
position with respect to such tender offer, (iii) BSD or its Board
of Directors takes any position (including making no recommendation
or stating an inability to make a recommendation) with respect to
any acquisition proposal other than a recommendation to reject such
acquisition proposal, (iv) the Board of Directors of BSD resolves to
accept, accepts or recommends to the stockholders of BSD a superior
proposal, or (v) the Board of Directors of BSD resolves to take any
of the foregoing actions.
37
The Merger Agreement may be terminated and the merger may be abandoned any
time prior to the effective time by BSD, if:
o NeoMedia or the Surviving Corporation shall have failed to comply in
any material respect with any of the covenants or agreements
contained in any section of the merger;
o there exists a breach or breaches of any representation or warranty
of NeoMedia or the Surviving Corporation contained in the Merger
Agreement; or
o the Board of Directors of BSD accepts or recommends to the
stockholders of BSD a superior proposal or resolves to do so,
provided that BSD has given written notice of such superior proposal
and NeoMedia has not made a proposal which is reasonably equivalent
from the perspective of the stockholders of BSD within 72 hours of
such written notice.
Expenses and Termination Fees
Each side shall pay their own expenses relating to the merger. Neither
party is subject to a termination fee in the event the merger is not completed.
Amendment; Extension and Waiver of the Merger Agreement
Amendment. The Merger Agreement may be amended by the mutual written
agreement of NeoMedia and BSD at any time prior to the closing of the merger.
Extension and Waiver. At any time prior to the effective time of the
merger any party may, to the extent legally allowed:
o extend the time for the performance of any of the obligations or
other acts of the other parties under the Merger Agreement;
o waive any inaccuracies in the representations and warranties made to
such party contained in the Merger Agreement or in any document
delivered pursuant to the Merger Agreement; or
o waive compliance with any of the agreements or conditions for the
benefit of such party contained in the Merger Agreement.
38
COMPARATIVE RIGHTS OF NEOMEDIA AND BSD SHAREHOLDERS
NeoMedia is incorporated under the laws of the State of Delaware, whereas
BSD is incorporated under the laws of the State of Florida. BSD shareholders'
rights are currently governed by the Florida Business Corporation Act ("FBCA"),
the Articles of Incorporation of BSD and the bylaws of BSD; however, if the
merger is completed, BSD shareholders who receive shares of NeoMedia common
stock in the merger will become shareholders of NeoMedia, and their rights as
such will be governed by the Delaware General Corporation Law ("DGCL"),
NeoMedia's Certificate of Incorporation and bylaws. The material differences
between the rights of holders of BSD common stock and the rights of holders of
NeoMedia common stock, resulting from the differences in their governing
documents, are summarized below.
The following summary does not purport to be a complete statement of the
rights of holders of NeoMedia common stock or the rights of the holders of BSD
common stock. This summary contains a list of the material differences but is
not meant to be relied upon as an exhaustive list or a detailed description of
the provisions discussed and is qualified in its entirety by reference to the
DGCL, the FBCA, and the governing corporate documents of NeoMedia and BSD, to
which the holders of BSD common stock are referred. Copies of such governing
corporate documents of NeoMedia and BSD are available, without charge, to any
person, including any beneficial owner to whom this information
statement/prospectus is delivered, by following the instructions listed under
"Where You Can Find More Information."
-------------------------------------------------------------------------------------------------------
BSD Software, Inc. NeoMedia
-------------------------------------------------------------------------------------------------------
Authorized BSD's authorized capital stock NeoMedia's authorized capital
capital stock consists of 5,000,000 shares of stock consists of 25,000,000
preferred stock, $0.001 par value shares of preferred stock, par
per share, and 50,000,000 shares of value $0.01 per share; and
common stock, $0.001 par value per 1,000,000,000 shares of common
share. stock, par value $0.01 per share.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Payment of The Board of Directors of BSD may, Under the DGCL, NeoMedia may
dividends from time to time, declare and the declare and pay cash dividends out
corporation may pay dividends on of its surplus or, if it has no
its shares in cash, property or its surplus, out of any net profits
own shares, except when the for the current or preceding
corporation is insolvent or when fiscal year, provided that the
the payment thereof would render payment will not reduce the
the corporation insolvent subject capital of the corporation below
to the provisions of the Florida the aggregate liquidation
Statutes. BSD has never paid a preference of the corporation's
dividend. stock having a preference upon the
distribution of assets. NeoMedia has
never paid a cash dividend.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Election and Elected annually with a minimum of The number of directors which
size of Board one and no more than seven. BSD shall constitute the whole board
of Directors currently has one director. shall be not less than one nor
more than nine. NeoMedia
currently has five board members
who are elected annually.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
39
-------------------------------------------------------------------------------------------------------
BSD Software, Inc. NeoMedia
-------------------------------------------------------------------------------------------------------
Removal of A director may resign at any time A director may resign at any time
directors or may be removed at a meeting of upon written notice to the Board
shareholders called expressly for of Directors. A director may be
that purpose. Any director or the removed with or without cause, by
entire Board of Directors may be a majority of stockholders if the
removed, with or without cause, by notice of the meeting names the
a vote of the holders of a majority director or directors to be
of the shares then entitled to vote removed at said meeting.
at an election of directors.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Vacancies on Any vacancy occurring in the Board Any vacancy on the Board of
the board of Directors, including any vacancy Directors may be filled by
created by reason of an increase in election at the next annual or
the number of directors, may be special meeting of stockholders.
filled by the affirmative vote of a A majority of the Board of
majority of the remaining directors Directors may fill any vacancy
though less than a quorum of the prior to such annual or special
Board of Directors. A director meeting of stockholders.
elected to fill a vacancy shall
hold office only until the next
election of directors by the
shareholders.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Vote on Shareholders: Special meetings of Stockholders: Special meetings of
extraordinary the shareholders shall be held when the stockholders may be called
corporate directed by the president or the either by the chairman, president or
transactions Board of Directors, or when secretary at the request, in writing
requested in writing by the holders of a majority of the Board of
of no less than 10% of all the Directors or at the request in
shares entitled to vote at the writing of stockholders owning
meeting. A meeting requested by shares of capital stock equal to 50%
shareholders shall be called for a of the entire capital stock of the
date not less than 3 nor more than corporation issued and outstanding
30 days after the request is made, and entitled to vote.
unless the shareholders requesting
the meeting designate a later date. Directors: The authority of the
The call for the meeting shall be Board of Directors may be exercised
issued by the secretary, unless the without a meeting if a consent in
president, the Board of Directors, writing, setting for the action
or the shareholders requesting the taken, is signed by all of the
meeting shall designate another directors entitled to vote.
person to do so.
Directors: Written notice of the
time and place of special meetings
of the Board of Directors shall be
given to each director by either
personal delivery, telegram, or
cablegram at least three days before
the meeting or by notice mailed to
the director at least 3 days before
the meeting. Members of the Board of
Directors may participate in a
meeting of such board by means of a
conference telephone or similar
communications equipment by means of
which all persons participating in
the meeting can hear each other at
the same time. Participation by such
means shall constitute presence in
person at the meeting.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
40
-------------------------------------------------------------------------------------------------------
BSD Software, Inc. NeoMedia
-------------------------------------------------------------------------------------------------------
Amendment of May be amended by the affirmative NeoMedia reserves the right to
certificate or vote of a majority of the Board of amend, alter, change or repeal any
Articles of Directors and by the affirmative provision contained in the
Incorporation vote of the holders of not less Certificate of Incorporation, in
than two-thirds of the then the manner now or hereafter
outstanding stock of the prescribed by statute, and all
corporation. rights conferred upon the
stockholders herein are granted
subject to this right.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Amendment of bylaws may be altered, amended, or In furtherance and not in
bylaws repealed, and new bylaws may be limitation of the powers conferred
adopted by the majority vote of by statute, the Board of Directors
directors of the corporation. is expressly authorized to make,
alter or repeal the bylaws of
NeoMedia.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Indemnification The corporation may indemnify the NeoMedia's Certificate of
officers and directors against any Incorporation and bylaws limit or
contingency or peril and in eliminate the liability of
conjunction therewith to procure, directors to the fullest extent
at the corporation's expense, permitted by Delaware law and
policies of insurance. require indemnification to the
maximum extent permitted by
Delaware law.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Appraisal Under Florida law, a shareholder is Under Delaware law, no appraisal
rights entitled to appraisal (i.e. rights are available for the
dissenters') rights, and to obtain stockholders of the surviving
payment of the fair value of that corporation if no vote of the
shareholder's shares in the event surviving corporation is required
of, among other things, to approve the merger
consummation of a merger to which
the corporation is a party if
shareholder approval is required
for the merger, and the shareholder
is entitled to vote on the merger
or the exchange of shares in such
merger, provided that the
shareholder has not voted in favor
of the merger or share exchange. A
shareholder may assert his/her
dissenters' rights to all or fewer
than all shares he/she held as of
the record date. For a more
detailed description of the timing
and procedures to be associated
with a BSD's shareholder's exercise
of his/her dissenter's rights,
please refer to page 29 of this
Statement entitled "Dissenters'
Rights."
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
41
-------------------------------------------------------------------------------------------------------
BSD Software, Inc. NeoMedia
-------------------------------------------------------------------------------------------------------
Preemptive Under Florida law, the shareholders Under Delaware law, absent express
rights of a corporation do not have a provision in a corporation's
preemptive right to acquire the Certificate of Incorporation, a
corporation's unissued shares or stockholder does not, by operation
the corporation's treasury shares, of law, possess preemptive rights
except in each case to the extent to subscribe to additional
that the corporation's Articles of issuances of the corporation's
Incorporation so provide. BSD's stock. NeoMedia's Certificate of
Articles of Incorporation do not Incorporation does not provide for
provide for its shareholders to its stockholders to have any
have any preemptive rights with preemptive rights with respect to
respect to any shares of its any shares of its capital stock.
capital stock.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Meetings of An annual meeting of the An annual meeting of the
shareholders shareholders at such time and place stockholders shall be held at such
as designated by the Board of time as the Board of Directors may
Directors. Business transacted at designate for the purpose of
the annual meeting shall include electing directors and for the
the election of directors of the transaction of such other business
corporation. as may properly come before the
meeting.
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
42
-------------------------------------------------------------------------------------------------------
BSD Software, Inc. NeoMedia
-------------------------------------------------------------------------------------------------------
Consent of Any action required to be taken at Any action required to be taken at a
shareholders in an annual or special meeting of meeting of the stockholders, or any
lieu of meeting shareholders, may be taken without other action which may be taken at a
a meeting, without prior notice and meeting of the stockholders, may be
without a vote, if a consent in taken without a meeting and without
writing, setting forth the action a vote, if a consent in writing,
so taken, shall be signed by the setting forth the action so taken
holders of outstanding stock having shall be signed (a) if five days
not less than the minimum number of prior notice of the proposed action
votes that would be necessary to is given in writing to all of the
authorize such action at a meeting stockholders entitled to vote with
at which all shares entitled to respect to the subject matter,
vote thereon were present and hereof, by the holders of
voted. A majority of the shares outstanding shares having not less
entitled to vote, represented in than the minimum number of votes
person or by proxy, shall that would be necessary to authorize
constitute a quorum at a meeting of or take such action at a meeting at
shareholders. If a quorum is which all shares entitled to vote
present, the affirmative vote of a thereon were present and voting; or
majority of the shares represented (b) by all of the stockholders
at the meeting and entitled to vote entitled to vote with respect to the
on the subject matter shall be the subject matter thereof. Prompt
act of the shareholders unless notice of the taking of the
otherwise provided by law. corporate action without a meeting
by less than unanimous written
consent shall be given in writing to
those stockholders who have not
consented in writing. In the event
that the action which is consented
to is such as would have required
the filing of a certificate under
any section of the DGCL if such
action had been voted on by the
stockholders at a meeting thereof,
the certificate filed under such
section shall state, in lieu of any
statement required by such section
concerning any vote of stockholders,
that written consent has been given
in accordance with the DGCL and that
written notice has been given as
provided in the DGCL.
-------------------------------------------------------------------------------------------------------
43
NEOMEDIA'S BUSINESS
Company History
NeoMedia Technology, Inc. ("NeoMedia") was incorporated under the laws of
the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech
Associates, Inc., 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. of Calgary, Alberta, Canada ("BSD").
Recent Developments
$100 Million Standby Equity Distribution Agreement with Cornell Capital
Partners LP
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. The shares
would be valued at 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia, and NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment
fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also paid a cash commitment fee of $1 million. NeoMedia also issued 4
million warrants with an exercise price of $0.229 to an independent third party
as a fee for negotiating and structuring the Standby Equity Distribution
Agreement. NeoMedia expects to file a registration statement with the US
Securities and Exchange Commission during 2005 to register the shares underlying
the $100 million Standby Equity Distribution Agreement. The new Standby Equity
Distribution Agreement would become active at the time the SEC declares
effective a registration statement containing such shares.
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 issued 7,000,000 shares of NeoMedia's common
stock, plus $2.5 million cash in exchange for all outstanding shares of CSI.
NeoMedia have centralized the administrative functions in its Fort Myers,
Florida headquarters, and maintain 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. 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 when all regulatory approvals have been granted, including
effectiveness of a registration statement on Form S-4 whereby the NeoMedia
shares to be granted in the transaction are registered. 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.
44
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
United States Securities and Exchange Commission declares iPoint-media's
registration statement on Form SB-2 effective.
Pickups Plus / Automotive Preservation, Inc.
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.
Also on February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") 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
PaperClick(R) Developments
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team for co-marketing and sales efforts in the U.S., as well as in Europe, the
Middle East, Africa and Latin America.
On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of
Check 21 software products and solutions for the small- to medium-sized
financial institution market, entered into a business development agreement
under which the two companies will develop a database lookup system for
validating codes printed on negotiable instruments (checks). In addition,
NeoMedia invested $250,000 in Intactis convertible preferred stock and warrants
to own up to 25% of Intactis. Intactis also placed an order for an initial 100
copies of NeoMedia's PaperClick Print Encoder software.
45
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.
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
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, develop and promote NeoMedia's PaperClick(R) line of products.
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 PalmTM Tungsten C PDA, the HandspringTM Treo 270 and 600
Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent Device Profile)
standard, Microsoft Windows Mobile(TM)-based Smartphones, Nokia(R) 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 (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed
with systems integrator SAIC, 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.
46
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 and discussing settlement opportunities.
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 (collectively, "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:
United States 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 and
discussing settlement opportunities.
Industry Overview
NeoMedia Internet Switching Software
The goal of NeoMedia's Internet Switching Software business segment is to
promote mass adoption of NeoMedia's switch and background computer process to
link physical world objects to the Internet. NeoMedia'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.
47
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
NeoMedia 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 NeoMedia's NCIS business. 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
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. NeoMedia 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.
48
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 (e.g., 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.
PaperClick(R) links a unique identifier (e.g., barcode or word) to a specific
URL (i.e., Webpage) 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; and
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 is the official repository
for PaperClick(R) Words;
2. Bid on non-trademarked words. Non-trademarked words (e.g.,
cola, burger, car) will be auctioned to the highest bidder via
the PaperClick(R) WordRegistryTM; and
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:
49
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; and
Basic Reporting. Allows product owner to track the number of consumer
"hits" by code, date and time.
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; and
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.
Mobile Marketing 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.
Server Software. 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.
NeoMedia currently holds six United States 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. NeoMedia's core physical-world-to-Internet patent portfolio (Patent
Nos. 5,933,829, 5,978,773, 6,108,656, 6,199,048, 6,434,561, and 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. NeoMedia intends to license this intellectual property portfolio to
companies endeavoring to tap the potential of this emerging market. To date,
NeoMedia has entered into such agreements with Digital:Convergence, A.T. Cross
Company, Symbol Technologies, and Brandkey Systems Corporation. During 2002,
NeoMedia 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.
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 and 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.
1. 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:
50
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; and
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.
2. 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.
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
automobile 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 icocyanates.
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.
51
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, NeoMedia engaged Baniak Pine and Gannon, a Chicago
law firm specializing in intellectual property licensing and litigation. The
firm assists NeoMedia 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, NeoMedia granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey paid NeoMedia 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.
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.
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 (United States), AURA
Digital Communications (Australia), Relyco (United States), E&I Marketing
(Taiwan), Deusto Sistemas (Spain), and Jorge Christen and Partners LLP (Mexico).
NeoMedia Consulting and Integration Services
Through this segment, NeoMedia provides services and products to a
spectrum of customers, ranging from closely held companies to large
corporations.
NeoMedia Micro Paint Repair
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
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 Co-Auto Ltd. ("MDA Co-Auto") 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
52
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 eight 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
NeoMedia, 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
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 and agents. 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, NeoMedia has entered into IP
licensing agreements with Digital:Convergence Corporation, A.T. Cross Company,
Symbol Technologies, and Brandkey Systems Corporation. NeoMedia 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, NeoMedia is party to distribution arrangements with several
organizations, including MDA Co-Auto and Novus in Canada, and Micro Paint
Systems Australasia in New Zealand.
Research and Development
NeoMedia Internet Switching Software
53
NISS employed three 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 one 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
NeoMedia'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, NeoMedia must conduct its operations without infringing on the
proprietary rights of third parties. NeoMedia 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, NeoMedia
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. NeoMedia has six United
States patents for its physical-world-to-Internet technology, an additional
patent for which NeoMedia received a notification of issuance from the United
States Patent and Trademark Office in 2005, an additional patent in Mexico for
which NeoMedia 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. NeoMedia
also has several trademarks relating to its proprietary software products.
Competition
NeoMedia Internet Switching Software
Although NeoMedia 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
and other companies in this space will raise consumer awareness of this
technology, resulting in a larger, and more rapidly-developing market. NeoMedia
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, NeoMedia, in acting as a re-marketer,
may compete with the original manufacturer.
54
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.
Employees
As of December 31, 2004, NeoMedia employed 34 persons, of which 16 are
located at NeoMedia's headquarters in Fort Myers, Florida, eight at NeoMedia's
Lisle, Illinois office, eight at NeoMedia's Calgary, Alberta, Canada office, and
two remote employees. None of NeoMedia's employees are represented by a labor
union or bound by a collective bargaining agreement. NeoMedia believes that its
employee relations are good.
NeoMedia's success depends 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. NeoMedia's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
NeoMedia's business.
Properties
NeoMedia's principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. NeoMedia
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.
NeoMedia 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.
NeoMedia 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, NeoMedia signed a least 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.
NeoMedia believes that existing office space is adequate to meet current
and short-term requirements.
Dividend Policy
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.
55
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 PaperClickTM technology that enables users to link
directly from the physical to the digital world, as well as the patents
surrounding certain physical-world-to-Internet 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(R) 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 technology and software. The PaperClick(R)
Mobile Go-WindowTM currently works with PalmTM Tungsten C PDA, the HandspringTM
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 (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed
with systems integrator SAIC, 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. On March 10,
2005, NeoMedia and Intactis Software, Inc., (IPSO's successor), entered into a
business development agreement under which the two companies will develop a
database lookup system for validating codes printed on negotiable instruments
(checks). In addition, NeoMedia invested $250,000 in Intactis convertible
preferred stock and warrants to own up to 25% of Intactis. Intactis also placed
an order for an initial 100 copies of NeoMedia's PaperClick Print Encoder
software.
During October 2004, NeoMedia entered into a marketing alliance with
Science Applications International Corporation ("SAIC") to jointly establish,
launch, develop and promote NeoMedia's PaperClick(R) line of products.
During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick's(R) 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 PDAs. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.
56
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 Co-Auto Ltd. ("MDA Co-Auto"), 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.
On December 29, 2004, NeoMedia received a $290,000 order for proprietary
paints and related materials from Micro Paint Systems (Australasia) Limited of
New Zealand, which holds distribution rights to NeoMedia's micro paint repair
products in Australia and New Zealand. Micro Paint Systems (Australasia) Limited
of New Zealand is offering NeoMedia's proprietary paint and systems under its
label in that market. The order was shipped during the first quarter of 2005.
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.
Also on February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") 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.
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
NCIS (Systems Integration) Business Unit Developments.
57
NCIS 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.
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 Fort Myers, Florida headquarters, and
maintains a sales office in Calgary, Alberta, Canada.
BSD Software, Inc. On December 21, 2004, NeoMedia and BSD 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 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
of Directors. NeoMedia and BSD expect to file a joint
registration/information statement with the United States Securities and
Exchange Commission (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 SEC.
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 first 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 registration
statement on Form SB-2 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.
58
Critical Accounting Policies
The United States Securities and Exchange Commission (the "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. NeoMedia 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 option pricing model 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.
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.
59
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see the section of this
information statement/prospectus entitled "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
SAB 104, which was effective upon issuance. The adoption of SAB 104
did not impact NeoMedia's consolidated financial statements.
60
(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.
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 NeoMedia's Micro Paint Repair
business acquired during February 2004. NeoMedia could realize an increase in
license fees over the next 12 months if NeoMedia 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 NeoMedia 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 NeoMedia 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 NeoMedia 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 NeoMedia continues its roll-out of this business unit.
61
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 NeoMedia'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.
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 NeoMedia'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, LP 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.
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, an increase of $2,573,000.
62
NeoMedia's 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.
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 NeoMedia'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 NeoMedia's
Standby Equity Distribution Agreement with Cornell Capital Partners, LP 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.
NeoMedia may obtain up to $20 million through its Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. 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. On March 30, 2005, NeoMedia
and Cornell entered into a Standby Equity Distribution Agreement under which
Cornell agreed to purchase up to $100 million of NeoMedia's common stock over a
two-year period, with the timing and amount of the purchase at NeoMedia's
discretion. The maximum amount of each purchase would be $2,000,000 with a
minimum of five business days between advances. NeoMedia expects to file a
registration statement with the US Securities and Exchange Commission during
2005 to register the shares underlying the $100 million Standby Equity
Distribution Agreement. The Standby Equity Distribution Agreement would become
active at the time the SEC declares effective a registration statement
containing such shares.
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.
63
NEOMEDIA'S MANAGEMENT
Directors and Executive Officers
As of December 31, 2004, 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 Secretary and 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
Mr. 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/she served until
June 2002. Mr. Fritz is currently a member of NeoMedia's 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
Mr. 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 NeoMedia's Compensation Committee. During 2002, Mr.
Jensen was promoted to NeoMedia's 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
Mr. 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
Officer and Controller. Prior to joining NeoMedia in 1999, Mr. Dodge was an
auditor with Ernst & Young LLP for two 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
Mr. Fritz is a founder of NeoMedia and has served as a Director of
NeoMedia since our inception. Mr. Fritz also served as Treasurer of NeoMedia
from its inception until May 1, 1996. Since February 1981, Mr. Fritz has been an
officer and either the sole stockholder or a majority stockholder of G.T.
Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark,
Inc.) and EDSCO, three railroad freight car equipment manufacturing companies.
Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the
University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's
former Chief Executive Officer and Chairman of the Board of Directors.
64
James J. Keil
Mr. Keil has been a Director of NeoMedia since August 6, 1996. Mr. Keil
currently is a member of NeoMedia's Compensation Committee, Stock Option
Committee and 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
Mr. Barclay has been a Director of NeoMedia since August 6, 1996, and
currently is a member of NeoMedia's Stock Option Committee and 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 bylaws 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/her successor.
Meetings Of The Board Of Directors
During the year ended December 31, 2004, NeoMedia held five directors'
meetings and each incumbent director attended more than 75% 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.
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 Registered Public Accounting Firm 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 four meetings.
Due to financial constraints, NeoMedia 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 twice during 2004.
65
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 six times.
Director Compensation
Outside directors are currently compensated through the issuance of stock
options from NeoMedia's 2003 Stock Option Plan. During May 2004, each outside
director received one million 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
NeoMedia's officers and directors, and persons who own more than 10% of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the United States Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% 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 10% beneficial
owners were complied with.
NeoMedia's 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 $100,000 for services rendered to NeoMedia (collectively, the "Named
Executive Officers") during the years ended December 31, 2004 and 2003:
Annual Compensation Long-term Compensation
------------------------------------------- ------------------------------------------------
Other Securities All
Annual Restricted Underlying other
Compens- Stock Options/ LTIP Compens-
Name and Salary Bonus ation Award(s) SARs (1) Payouts ation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------- ------ -------- -------- --------- --------- --------- -------- ---------
---------------------------------------------------------------------------------------------------------------------------
Charles T. Jensen 2004 175,000 -- -- -- 4,000,000 -- --
President and
Chief 2003 162,000 92,000 (2) -- -- 10,000,000 -- 1,000(4)
Executive Officer
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Charles W. Fritz 2004 $175,000 -- -- -- 4,000,000 -- --
Chairman of the
Board 2003 145,000 110,000 (2) $60,000 (3) -- 10,000,000 -- 1,000(4)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
David A. Dodge 2004 122,000 -- -- -- 2,000,000 -- --
Vice President and 2003 90,000 7,000 (2) -- -- 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, NeoMedia 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, NeoMedia 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.
66
Employment Agreements
No employment agreements are currently in place for any of NeoMedia's
employees.
Incentive Plan for Management
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive Plan
for Management (the "Incentive Plan"), which provides for annual bonuses to
eligible employees based upon the attainment of certain corporate and/or
individual performance goals during the year. The Incentive Plan is designed to
provide additional incentive to NeoMedia's management to achieve these growth
and profitability goals. Participation in the Incentive Plan is limited to those
employees holding positions assigned to incentive eligible salary grades and
whose participation is authorized by NeoMedia's Compensation Committee which
administers the Incentive Plan, including determination of employees eligible
for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.
To be eligible for consideration for inclusion in the Incentive Plan, an
employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and/or the employee's
performance during the year, and if performance goals are attained, eligible
employees are entitled to an award based upon a specified percentage of their
base salary.
NeoMedia 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, NeoMedia 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.
NeoMedia's 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 (the "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 1.5 million shares of
common stock. All 1.5 million options were granted under NeoMedia's 1996 Stock
Option Plan.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan (the
"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
million shares of common stock. All 8 million options were granted under
NeoMedia's 1998 Stock Option Plan.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan (the
"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 million shares of common stock. All 10 million options were
granted under NeoMedia's 2002 Stock Option Plan
Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan
(the "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 million shares of common stock. On October 17,
2003, NeoMedia filed a registration statement on Form S-8 to register all 150
million shares underlying the options in the 2003 Stock Option Plan. As of
December 31, 2004, NeoMedia had issued approximately 69 million shares under the
2003 Stock Option Plan
67
NeoMedia's Stock Incentive Plan
Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan
(the "2003 Stock Plan"). Under the terms of the 2003 Stock Plan, NeoMedia has
set aside up to 30 million 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
registration statement on Form S-8 to register all 30 million shares in the 2003
Stock Plan. As of December 31, 2004, NeoMedia had issued approximately 9.3
million shares under the 2003 Stock 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 or older 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 $13,000 for 2004) to the 401(k)
Plan, although the percentage elected by certain highly compensated participants
may be required to be lower. All amounts contributed to the 401(k) Plan by
employee participants and earnings on these contributions are fully vested at
all times. The 401(k) Plan also provides for matching and discretionary
contributions by NeoMedia. To date, NeoMedia has not made any such
contributions.
Options And Warrants Granted In NeoMedia's Last Fiscal Year
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 2004:
Potential Realizable
Percent of Value
Number of Total at Assumed Annual Rates
Securities Options/ of Stock Price
Underlying SARs Appreciation
Options Granted to Exercise or for option Term
Named Granted Employees in Base Price Expiration -----------------------
Executive Officer (#) Fiscal Year ($/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 $351,000
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year-End Values
The following table sets forth options exercised by NeoMedia Named
Executive Officers during the year ended December 31, 2004, and the number and
value of all unexercised options at fiscal year end.
68
Number of Unexercised
Securities Underlying Value of Unexercised In-
Shares Options/SARs at the-Money Options/SARs at
Acquired Value December 31, 2004 December 31, 2004 (1)
Named on Exercise Realized -------------------------------- --------------------------------
Executive Officer (#) ($) 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 Over-the-Counter Bulletin Board on December 31,
2004 and the exercise price of the option/SAR.
Security Ownership of Certain Beneficial Owners and Management of NeoMedia
The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of March 2, 2005, (i) by each person or
entity known by NeoMedia to own beneficially more than 5% 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
Name and Address of Beneficial Percent of
Class Beneficial Owner Ownership (1) Class (1)
--------------------- --------------------------------------------------------------
Common Stock Charles W. Fritz (2)(3) 36,620,574 8.0%
Common Stock William Fritz(2)(4) 52,890,944 11.9%
Common Stock Charles T. Jensen(2)(5) 18,001,500 3.9%
Common Stock David A. Dodge(2)(6) 6,700,000 1.5%
Common Stock A. Hayes Barclay(2)(7) 2,405,000 *
Common Stock James J. Keil(2)(8) 4,388,619 *
----------------------------
Officers and Directors as a
Common Stock Group (9 Persons)(9) 121,006,637 24.4%
--------------------
* - 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 439,538,529 shares of
common stock outstanding as of March 2, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
March 2, 2005, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the United States 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 March 2, 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, Florida, 33901.
(3) Charles W. Fritz is NeoMedia'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, 18,000,000
shares of common stock issuable upon exercise of options granted under
NeoMedia'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.
69
(4) William E. Fritz, an outside director, and his/her 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/her
spouse, 2,540,000 shares to be issued upon the exercise of warrants held
by Mr. Fritz or his/her spouse, and 2,750,000 shares to be issued upon the
exercise of options held by Mr. Fritz or his/her spouse. Mr. William E.
Fritz may be deemed to be a parent and promoter of NeoMedia, as those
terms are defined in the Securities Act.
(5) Charles T. Jensen is President, Chief Operating Officer, Acting Chief
Executive Officer, and a member of the Board of Directors. Beneficial
ownership includes 18,000,000 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 6,700,000 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
2,400,000 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 3,500,000 shares issuable upon exercise of options and
888,619 shares owned by Mr. Keil directly.
(9) Includes an aggregate of 51,350,000 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.
Certain Relationships and Related Transactions of NeoMedia
During February 2002, NeoMedia 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 during April 2003.
During March 2002, NeoMedia 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 April 2002, NeoMedia 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 during April 2003..
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to three 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 Capital Partners, LP
Equity Line of Credit were registered with the United States Securities and
Exchange Commission. 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. NeoMedia repaid Charles Fritz's note in full
during March 2003, and repaid James J. Keil's note in full during April 2003.
NeoMedia 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
NeoMedia's intellectual property. The new note was paid in full during April
2004.
During April 2003, NeoMedia's Board of Directors approved the payment in
full of approximately $154,000 of liabilities owed by NeoMedia to Charles W.
Fritz, NeoMedia's Founder and Chairman of the Board of Directors, through the
issuance of 15,445,967 shares of common stock. NeoMedia recognized a discount
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.
During April 2003, NeoMedia 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. In
connection with the sale, NeoMedia also granted the purchaser 25,000,000
warrants to purchase shares of NeoMedia'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
NeoMedia's Board of Directors. Proceeds to NeoMedia from sale of the shares were
$250,000. NeoMedia 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/her warrants and purchased 25,000,000
additional shares of common stock at a price of $0.01 per share.
70
During April 2003, NeoMedia 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, NeoMedia 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, NeoMedia 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 matured in April 2004, with all other terms of the
note remaining the same. As consideration for the loan, NeoMedia granted Mr.
Fritz 2,500,000 warrants to purchase shares of NeoMedia'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, NeoMedia 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, NeoMedia 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
NeoMedia's officers and directors, and persons who own more than 10% of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the United States Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% 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 2004 all Section 16(a) filing
requirements applicable to NeoMedia's officers, directors and 10% beneficial
owners were complied with.
Code of Ethics
NeoMedia has adopted a code of ethics that applies to its senior executive
and financial officers. NeoMedia's Code of Ethics seeks to promote (1) honest
and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships, (2) full,
fair, accurate, timely and understandable disclosure of information to the SEC,
(3) compliance with applicable governmental laws, rules and regulations, (4)
prompt internal reporting of violations of the Code of Ethics to predesignated
persons, and (5) accountability for adherence to the Code of Ethics. A copy of
the NeoMedia's Code of Ethics is attached to this information
statement/prospectus as Exhibit 10.52.
Limitations on Director's Liability and Indemnification
As permitted by the Delaware General Corporation Law (the "DGCL"),
NeoMedia has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, except for
liability (i) for any breach of the director's duty of loyalty to NeoMedia or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of this provision is
to eliminate the rights of NeoMedia and its stockholders (through stockholders'
derivative suits on behalf of NeoMedia) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director except in the
situations described in clauses (i) through (iv) above. This provision does not
limit nor eliminate the rights of NeoMedia or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
71
The Certificate of Incorporation and the bylaws of NeoMedia provide that
NeoMedia is required and permitted to indemnify its officers and directors,
employees and agents under certain circumstances. In addition, if permitted by
law, NeoMedia is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, NeoMedia is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
NeoMedia in which indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers
or controlling persons of NeoMedia pursuant to the foregoing provisions, or
otherwise, NeoMedia has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable.
72
DESCRIPTION OF NEOMEDIA'S CAPITAL STOCK
The following description of NeoMedia's capital stock and certain
provisions of NeoMedia's Certificate of Incorporation and bylaws is a summary
and is qualified in its entirety by the provisions of NeoMedia's Certificate of
Incorporation and bylaws, which have been filed as exhibits to NeoMedia's
registration statement of which this prospectus is a part.
On September 24, 2003, NeoMedia's shareholders voted to (i) increase the
number of shares of common stock, par value $0.01 per share, that NeoMedia is
authorized to issue from 200 million to 1 billion; and (ii) implement the 2003
Stock Option Plan, under which NeoMedia is authorized to grant to employeees,
directors, and consultants up to 150 million options to purchase shares of its
common stock. On October, 30, 2003, NeoMedia's board of diretors approved the
2003 Stock Incentive Plan, under which NeoMedia can issue up to 30 million
shares of stock to employees, non-employee directors, consultants for incentive
purposes.
As of December 31, 2004, NeoMedia had 432,525,053 shares of common stock
outstanding, and no shares of preferred stock were outstanding.
Common Stock
Holders of NeoMedia's 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. In the event NeoMedia were to
elect to sell additional shares of common stock following this offering,
investors in this offering would have no right to purchase additional shares. As
a result, their percentage equity interest in us would be diluted.
The shares of NeoMedia's common stock offered in this offering will be,
when issued and paid for, fully paid and not liable for further call and
assessment. Except as otherwise permitted by Delaware law, and subject to the
rights of the holders of preferred stock, all stockholder action is taken by the
vote of a majority of the outstanding shares of common stock voted as a single
class present at a meeting of stockholders at which a quorum consisting of a
majority of the outstanding shares of common stock is present in person or
proxy.
Preferred Stock
NeoMedia may issue preferred stock in one or more series and having the
rights, privileges, and limitations, including voting rights, conversion rights,
liquidation preferences, dividend rights and preferences and redemption rights,
as may, from time to time, be determined by the Board of Directors. Preferred
stock may be issued in the future in connection with acquisitions, financings,
or other matters, as the Board of Directors deems appropriate. In the event that
NeoMedia determines to issue any shares of preferred stock, a certificate of
designation containing the rights, privileges, and limitations of this series of
preferred stock shall be filed with the Delaware Secretary of State. The effect
of this preferred stock designation power is that NeoMedia's Board of Directors
alone, subject to federal securities laws, applicable blue sky laws, and
Delaware law, may be able to authorize the issuance of preferred stock which
could have the effect of delaying, deferring, or preventing a change in control
of NeoMedia without further action by NeoMedia's stockholders, and may adversely
affect the voting and other rights of the holders of NeoMedia's common stock.
The issuance of preferred stock with voting and conversion rights may also
adversely affect the voting power of the holders of NeoMedia's common stock,
including the loss of voting control to others.
73
During December 1999, NeoMedia's Board of Directors approved a Certificate
of Resolutions Designating Rights and Preferences of Preferred Stock, filed with
the Delaware Secretary of State on December 20, 1999. By this approval and
filing, 200,000 shares of Series A Preferred Stock were designated. Series A
Preferred Stock carries the following rights:
o The right to receive mandatory cash dividends equal to the greater
of $0.001 per share or 100 times the amount of all dividends (cash
or non-cash, other than dividends of shares of common stock) paid to
holders of the common stock, which dividend is payable 30 days after
the conclusion of each calendar quarter and immediately following
the declaration of a dividend on common stock;
o 100 votes per each share of Series A Preferred on each matter
submitted to a vote of NeoMedia's stockholders;
o The right to elect two directors at any meeting at which directors
are to be elected, and to fill any vacancy on the Board of Directors
previously filled by a director appointed by the Series A Preferred
Stockholders;
o The right to receive an amount, in preference to the holders of
common stock, equal to the amount per share payable to holders of
common stock, plus all accrued and unpaid dividends, and following
payment of 1/100th of this liquidation preference to the holders of
each share of common stock, an additional amount per share equal to
100 times the per share amount paid to the holders of common stock;
o The right to exchange each share of Series A Preferred for 100 times
the consideration received per share of common stock in connection
with any merger, consolidation, combination or other transaction in
which shares of common stock are exchanged for or converted into
cash, securities or other property; and
o The right to be redeemed in accordance with NeoMedia's stockholders
rights plan.
While accrued mandatory dividends are unpaid, NeoMedia may not declare or
pay dividends or distributions on, or redeem, repurchase or reacquire, shares of
any class or series of junior or parity stock.
The Series A Preferred was created to be issued in connection with
NeoMedia's stockholders rights plan, described below. No shares of Series A
Preferred have been issued to date.
On June 19, 2001, NeoMedia's Board of Directors approved a Certificate of
Designations to Create a Class of Series A Convertible Preferred Stock for
NeoMedia Technologies, Inc., filed with the Delaware Secretary of State on June
20, 2001. By this approval and filing, 47,511 shares are designated as Series A
Convertible Preferred Stock. NeoMedia's Series A Convertible Preferred Stock,
par value $0.01 per share, has the following rights:
o Series A Convertible Preferred is convertible into shares of
NeoMedia's common stock at a one-to-one ratio, subject to
proportional adjustments in the event of stock splits or
combinations, and dividends or distributions of shares of common
stock, at the option of the holder; shares are subject to automatic
conversion as determined in each agreement relating to the purchase
of shares of Series A Convertible Preferred;
o Each share of Series A Convertible Preferred is entitled to receive
a liquidation preference equal to the original purchase price of
such share in the event of liquidation, dissolution, or winding up;
o Upon merger or consolidation, or the sale, lease or other conveyance
of all or substantially all of NeoMedia's assets, shares of Series A
Convertible Preferred are automatically convertible into the number
of shares of stock or other securities or property (including cash)
to which the common stock into which it is convertible would have
been entitled; and
74
o Shares of Series A Convertible Preferred are entitled to one vote
per share, and vote together with holders of common stock.
In June 2001, 452,489 shares of Series A Convertible Preferred were issued
to About.com, Inc. pursuant to a certain Agreement for Payment in Common Stock,
in lieu of cash payment to About.com for online advertising services. On January
2, 2002, such shares were converted into 452,489 shares of common stock.
On January 16, 2002, NeoMedia's Board of Directors approved a Certificate
of Designation, Preferences, Rights and Limitations of Series B 12% Convertible
Redeemable Preferred Stock of NeoMedia Technologies, Inc., filed with the
Delaware Secretary of State on February 28, 2002. By this approval and filing,
100,000 shares are designated as Series B 12% Convertible Redeemable Preferred
Stock. NeoMedia's Series B 12% Convertible Redeemable Preferred Stock, par value
$0.01 per share, has the following rights:
o Series B Preferred shares accrue dividends at a rate of 12% per
annum, or $1.20 per share, between the date of issuance and the
first anniversary of issuance;
o Series B Preferred is redeemed to the maximum extent permitted by
law (based on NeoMedia's funds legally available for redemption) at
a price per share of $15.00, plus accrued dividends (a total of
$16.20 per share) on the first anniversary of issuance;
o Series B Preferred receive proceeds of $12.00 per share upon
NeoMedia's liquidation, dissolution or winding up;
o To the extent, not redeemed on the first anniversary of issuance,
Series B Preferred is automatically convertible into NeoMedia's then
existing general class of common stock on the first anniversary of
issuance at a price equal to $16.20 divided by the greater of $0.20
and the lowest publicly-sold share price during the 90 day period
preceding the conversion date, but in no event more than 19.9% of
NeoMedia's outstanding capital stock as of the date immediately
prior to conversion.
o Upon merger or consolidation, or the sale, lease or other conveyance
of all or substantially all of NeoMedia's assets, shares of Series B
Preferred are automatically convertible into the number of shares of
stock or other securities or property (including cash) to which the
common stock into which it is convertible would have been entitled;
and
o Shares of Series B Preferred are entitled to one vote per share and
vote with common stock, except where the proposed action would
adversely affect the Series B Preferred or where the non-waivable
provisions of applicable law mandate that the Series B Preferred
vote separately, in which case Series B Preferred vote separately as
a class, with one vote per share.
NeoMedia's Preferred Stock is currently comprised of 25 million shares,
par value $0.01 per share, of which 200,000 shares are designated as Series A
Preferred Stock, none of which are issued or outstanding, and, following the
conversion into common stock of 452,489 shares of Series A Convertible Preferred
Stock issued to About.com, of which 47,511 shares are designated as Series A
Convertible Preferred Stock, none of which are issued and outstanding, and of
which 100,000 shares of Series B 12% Convertible Redeemable Preferred Stock,
none of which are issued and outstanding. NeoMedia has no present agreements
relating to or requiring the designation or issuance of additional shares of
preferred stock.
Warrants And Options of NeoMedia
As of December 31, 2004, NeoMedia had outstanding options and warrants to
purchase 52,804,121 and 18,825,000, shares of NeoMedia's common stock,
respectively, with exercise prices ranging from $0.01 to $6.00. The number of
shares issuable upon exercise and the exercise prices of the warrants are
subject to adjustment in the event of certain events such as stock dividends,
splits and combinations, capital reorganization and with respect to certain
warrants, issuance of shares of common stock at prices below the then exercise
price of the warrants.
75
On March 30, 2005, NeoMedia issued 50 million warrants to Cornell Capital
Partners with an exercise price of $0.20 per share, and a term of three years,
as a commitment fee for Cornell to enter into a $100 million Standby Equity
Distribution Agreement with NeoMedia. NeoMedia also issued 4 million warrants
with an exercise price of $0.229 to an independent third party as a fee for
negotiating and structuring the Standby Equity Distribution Agreement.
On September 24, 2003, NeoMedia's shareholders approved the 2003 Stock
Option Plan. Under this plan, NeoMedia is authorized to grant to employees,
directors, and consultants up to 150,000,000 options to share of common stock.
As of December 31, 2004, NeoMedia had issued approximately 69 million options
under the 2003 Stock Option Plan, of which approximately 15 million had been
exercised.
During May 2003, NeoMedia re-priced approximately 8 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.
During April 2003, NeoMedia repriced approximately 1.9 million warrants
held by Thornhill Capital LLC, an outside consultant. 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. NeoMedia 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.
In June 2002, NeoMedia repriced 3 million of NeoMedia's common stock
warrants from $0.12 to $0.05 per share. All of the warrants were exercised
immediately. NeoMedia recognized an expense of $132,000 related to this
repricing during the year ended December 31, 2002.
In April 2002, in order to encourage the exercise of options, NeoMedia's
Board of Directors adopted an option repricing program. Under the program, those
persons holding options granted under the 1996, 1998 and 2002 Stock Option
Plans, to the extent their options were exercisable during the period ending
October 9, 2002, were allowed to exercise the option at a price which is the
greater of $0.12 per share or 50% of the last sale price of a share of
NeoMedia's common stock on the Over-the-Counter Bulletin Board on the trading
date immediately preceding the date of exercise. No options were exercised under
the program and no expense was recognized relating to the program.
During March 2002, NeoMedia repriced approximately 1.2 million of
NeoMedia's common stock warrants for a period of six months. During the term of
the warrant repricing program, participating holders were entitled to exercise
qualified warrants at an exercise price per share equal to the greater of (1)
$0.12 or (2) 50% of the last sale price of shares of common stock on the
Over-the-Counter Bulletin Board, on the trading date immediately preceding the
date of exercise. Approximately 370,000 warrants were exercised in connection
with the program, and NeoMedia recognized approximately $63,000 in expense
relating to the repricing during the year ended December 31, 2002.
Registration Rights
None.
Anti-Takeover Provisions Under bylaws and Laws
On December 10, 1999, NeoMedia's Board of Directors adopted a stockholders
rights plan and declared a non-taxable dividend of one right on each outstanding
share of NeoMedia common stock to stockholders of record on December 10, 1999
and each share of common stock issued prior to the rights plan trigger date. The
stockholder rights plan was adopted as an anti-takeover measure, commonly
referred to as a "poison pill." The stockholder rights plan was designed to
enable all stockholders to receive fair and equal treatment in any proposed
takeover of
76
the corporation and to guard against partial or two-tiered tender offers, open
market accumulations and other hostile takeover tactics to gain control of
NeoMedia. The stockholders rights plan, which is similar to plans adopted by
many public companies, was not adopted in response to any effort to acquire
control of NeoMedia at the time of adoption. Certain of NeoMedia'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 NeoMedia's poison pill plan, as a result of the fact
that, as of the plans adoption, their holdings might have otherwise triggered
the poison pill.
Transfer Agent
NeoMedia's stock transfer agent is American Stock Transfer & Trust
Company, 59 Maiden Lane, Plaza Level, New York, NY 10038.
77
DESCRIPTION OF BSD'S BUSINESS
Business Development
BSD was incorporated in Florida on February 7, 1989 under the name "Park
Avenue Marketing, Inc." On February 2, 1998, as a result of its acquisition of
100% of the common stock of two commonly controlled entities, Respiratory Care
Services, Inc. ("RCS") and RCS Subacute, Inc. ("RCSS"), that were engaged in the
respiratory care industry the name was changed to BSD Healthcare Industries,
Inc. Prior to these acquisitions, BSD did not conduct any operations.
On July 1, 1999, principally as a result of a change in Medicare
reimbursement rates for respiratory services, BSD Healthcare Industries sold RCS
and RCSS.
On December 17, 2001 BSD changed its name to BSD Software, Inc.
As a result of the sale of RCS and RCSS, BSD had no operations until
its acquisition of 90% of Triton Global Business Services Inc. ("TGBSI") on
November 4, 2002. TGBSI is the 100% owner of Triton Global Communications Inc.
("Triton") through which it conducts its business operations. The details of the
acquisition are contained in Note 4 to the attached Financial Statements
attached.
BSD's/Triton's Business
Triton was incorporated in April 1998 as a next generation Internet
protocol ("IP") enabled provider of live and automated operator calling
services, e-business support, billing and clearinghouse functions and
information management services to telecommunications, Internet and e-business
service providers.
Triton focuses on helping its clients improve profitability by enabling
them to quickly deploy new services, streamline operations and make quicker,
more informed business decisions. Triton has aligned itself with strategic
partners allowing BSD to offer advanced services in the telecom industry. Triton
is a customer service oriented organization providing service to direct
customers and service providers, both within North America and internationally.
Triton was the first fully implemented alternate billing agent within the
Local Exchange Carriers ("LECs") billing system in Canada. Triton's business
plan is to continue expanding its live and automated operator service
capability, focusing on making emerging web based information and transaction
services easier to access and pay for.
BSD's management and staff are trained to assist and provide clients with
the best solutions for their business. Triton is currently operating with eight
employees.
BSD does not have any patents, trademarks, licenses, franchises,
concessions, royalty agreements. The business of BSD is not subject to
government approval or special regulation and BSD is not aware of any probable
or proposed regulations that would affect BSD's operations. BSD has two major
customers that account for 73% of its accounts receivable at July 31, 2004.
Triton's technology platforms are capable of providing its customers with
the ability to integrate traditional telecommunication services, internet
information and subscriptions services and e-commerce transactions and place the
charges on the billing medium of the end users choice. Given the recent general
increase in overall demand for these services by consumers, Triton has
positioned itself with the intent of becoming a significant provider of these
services in the future.
Triton Recent Developments
Audio Text
On September 23, 2003, BSD announced that its' majority owned subsidiary
TGBSI has signed an exclusive contract to provide new customer activation and
billing services for a leading global provider of audio-text services and has
divested itself of its Canadian hotel operations. On November 18, 2003 BSD
announced signing of an exclusive contract with a leading global provider of
audio-text services and subsequently announced that expected revenues would
increase from $100,000 per month to $200,000 per /month. Under the terms of the
agreement TGBSI will provide the underlying network, caller validation and
billing and collection services for new subscribers to various audio-text
services. BSD continues to provide services for these customers.
78
1010
On June 1, 2004, BSD announced signing of an agreement with Bell Canada
Inc. to become an inter-exchange carrier ("IXC"). As an IXC carrier, TGBSI is
able to offer multiple network service solutions to complement its core billing
capacity. On June 6, 2004 BSD announced that TGBSI signed an International
Termination and Call Record Management Agreement with a major LEC. Under the
terms of the three year Agreement, TGBSI will provide international termination,
billing and clearing, customer service and direct billing.
900
On February 23, 2004, BSD announced that it secured the ability to provide
900 Services to North America. On August 4, 2004 BSD announced that TGBSI signed
a new $3,000,000 yearly contract with a leading provider of International
audio-text services to providing National 900 Services in Canada. As well as
providing the National 900 network, TGBSI will also provide the LEC billing
services, bad debt management and handle all customer service inquiries. BSD
continues to perform its contracted services.
Billing & Collections
On December 3, 2003, BSD announced the signing of 18 independent LECs to
Billing and Collection Agreements. On April 4, 2004, BSD announced that TGBSI
has completed an agreement with one of the largest United States providers of
operator services to provide customized billing and clearing for Canadian-billed
collect and third party calls. The potential aggregate value of this contract is
in excess of $800,000 per year. BSD continues to streamline its offerings to
remain competitive in the industry.
Triton's Products & Services
Triton has sophisticated proprietary software and hardware services that
are capable of processing call records for telecommunications companies
worldwide. They track and process bills for a wide range of services, from local
and long distance operator services as well as paging, voice mail, caller ID,
phone cards and other "ease of access" 0+Plus dialing solutions. Triton has also
developed flat-fee billing solutions that it believes will benefit Internet
content and service providers. With the addition of services for the Internet
community, Triton anticipates that it will be able to meet the needs of an even
broader range of communications companies.
Triton's products and services include, in the operator/agent service
field: global and domestic origination, hospitality providers, payphone
providers, directory assistance, North America service, international service,
enhanced information services, e-business support services, e-commerce
transaction support, "Click-2-Talk" web-based voice routing, and call center ASP
solutions
Triton's billing services include: North American LEC billing, online
subscription based billing, and web-based transaction billing (e-commerce).
Triton's Strategic Technology Alliances
Triton has developed and secured strategic alliances within the industry
that Triton believes are key to the successful service and maintenance of its
client support systems and the delivery of advanced features. The strategic
partnerships are expected to promote global solutions with billing as the core
function or source of revenue. Triton continually enhances and streamlines its
service offerings to remain competitive in an evolving marketplace. Triton has
completed the development of a state of the art IP e-commerce platform described
below for future deployment.
Next Generation IP-Enabled Operator Services Platform
Triton's International Operator Services Platform, which is not yet
deployed, has been created by integrating hardware and software applications
from Cisco's IP Gateway, CosmoCom's IP-based Next Generation CosmoCall Universe
Platform, and the Enhanced Operator Services ("EOS") from Intelis.
79
Triton is currently formulating its plan of implementation and the
required marketing strategies and service offerings.
CosmoCall Universe is a multimedia, multi-channel call center system that
goes far beyond the capabilities of traditional call center technology.
Traditional call centers are based on circuit-switched automatic call
distributors ("ACDs"), and support only voice telephone calls. CosmoCall has all
the capabilities of a modern telephone call center, but as a multimedia,
multi-channel interaction center, CosmoCall supports not only voice telephone
calls, but also live multimedia communication sessions via the Internet. It
manages and distributes not only live calls, but also messages, including voice,
fax, and e-mail messages. CosmoCall supports remote agents and multiple site
operation transparently via a managed IP WAN. Agents are location-independent,
and multiple call center sites can be managed as a single entity capable of
distributing calls to any agent in any site or location.
The Intelis EOS software is fully integrated on top of the CosmoCall
Universe Platform and inspects incoming calls on a call-by-call basis to
determine how a call should be processed. The system uses all data presented by
the switch to determine call treatment, including: ANI, Ingress Trunk Group,
Info Digit, State of the ANI, NPA NXX of the ANI and DNIS.
Based upon the incoming characteristics of a call, the system determines
what application is used to process the call and the carrier for that
application. For example, the application may be Enhanced EOS or prepaid whereas
the carrier defines characteristics of that application such as branding
information, rating information, and validation rules.
Integrated together these products provide Triton the capability to launch
web-based services as well as support for traditional telephony including
collect, third party and calling card supported calls.
Triton's Telco Grade Billing Platform
Highland Lakes Software ("Highland") is an independent global service
provider for core billing services for competitive LECs ("CLECs") and LECs.
Triton has been able to achieve continued market penetration by employing
Highlands' core billing software at the root of its billing infrastructure.
Highland will continue to provide billing solutions to Triton as the industry
matures and demands more technically enhanced functionality. Triton works
closely with Highland to provide extended electronic billing services to meet
the demands of service providers and the Internet end-user. With the
coordination of Highland engineers, Triton has developed proprietary modules to
enhance allowable billing types and to provide an effective direct billing
service as well as an aggressive revenue recovery service for our customers.
Sales and Marketing Approach
Direct sales and strategic sales alliances are used as the business
strategy for Triton as it continues to grow.
As a provider of billing, clearinghouse and information management
services to the telecommunications industry, Triton has attempted to position
itself to take advantage of the current disarray in the telecommunications
sector. Historically many of the international collect calling and international
billing and clearing contracts have been controlled by intermediary agents.
Triton's sales team will be segmented between target customer segments and
over the long-term by geography (domestic and international).
Triton anticipates that initially, incremental business development
representatives will be added to target North American carriers including
clearing houses, alternative operator service providers, local exchange
carriers, long distance voice and data providers, wireless carriers and internet
and e-business service providers. While this will involve primarily direct
marketing and selling, it is anticipated that alliances can be established where
Triton's products and services can be positioned as part of a bundled offering
in conjunction with other complementary services.
80
Competitive Analysis
Third Party Billing Companies
The majority of clearinghouse competitors are United States-based or are
part of an incumbent LEC. Triton believes that its position as an independent
Canadian operation makes it unique among those in the third party billing market
in North America.
Triton may not be able to compete with large telecommunication providers
on a revenue scale, but Triton believes that it does have the ability to meet
the evolving telecom market's needs quickly and efficiently.
Most of these competitors are restricted from entering the Canadian
marketplace due to regulatory issues. This means that these competitors can also
become Triton customers in certain segments of their business, particularly when
it comes to providing services to all outside competitors who wish to bill for
Canadian Services.
Alternative Operator Services Providers ("AOSPs")
In addition to providing sophisticated billing and clearing, the
technology platform currently being developed will allow Triton to compete with
carriers and companies providing live and automated operator services both
domestically and, with multi-language capabilities, on an international basis.
In addition to specific AOSPs, the majority of the LECs in the United
States and Canada provide operator services as part of their core offerings. In
1997, the Federal Communications Commission ruled that in order to be an
eligible telecommunications carrier a service provider would have to provide the
basic universal services as laid out in the Telecommunications Act of 1996,
including: voice grade access to the PSTN, single party service, access to
emergency service (i.e., 911), and access to both operator services and
directory assistance (i.e., 411).
While telecommunication carriers are mandated to provide these services,
they do not have to providing it themselves. Triton believes that this provides
opportunity for Triton to look to these competitors as prospective customers for
its AOSP and future IP-enabled service offerings.
Triton's Canadian-based low cost infrastructure, fewer regulatory
encumbrances than United States-based carriers and the ability to provide a
fully-bundled suite of services on a single IP enabled platform allows it to
compete for both traditional services as well as future services.
Triton's E-Business/Commerce Support Services "Click-2-Talk" and Virtual Call
Centers
Platform Advantages
Triton's Click-2-Talk operator services platform has been created by
integrating hardware and software applications from Cisco's IP Gateway, an
IP-based next generation universal CRM platform, and EOS functionality. Triton
believes that the market advantages inherent with a 100% IP platform include,
but are not limited to:
o Intelligent multi-media routing to and from the Internet.
Click-2-Talk enables a computer user to connect or conference using
voice over internet protocol ("VOIP") to communicate with a live
agent. By connecting the consumer's computer to a live agent, the
Triton IP platform will minimize fraud risk and anxiety associated
with inputting personal credit card information on the Internet.
o Due to the fact that Triton's platform is fully IP-enabled, "Virtual
Agents" can be supported via a simple internet connection. This
means that Triton can eliminate the cost and challenges associated
with traditional brick-and-mortar call centers. Agents can be
located virtually anywhere in the world including a customer's
existing contact center or specific geographic regions, providing
24x7 coverage and an understanding of local language and cultures.
o Triton's platform supports multiple "live agents" as well as
fully-automated billing methods including credit card, calling card,
collect, person to person and bill to third party. Call accepts or
"voice prints" are stored for billing and collection audit purposes.
o The platform provides fully integrated multi-language support,
removing the barriers of communication that impede international
e-business, telecommunications and emerging IP service transactions.
81
o Cost of operation is significantly reduced by utilizing least cost
routing ("LCR") and commodity priced VOIP transport inbound and
outbound without the traditional requirement of changing protocols
from IP to time division multiplexing ("TDM") and back again.
o Carrier grade quality is guaranteed by using dedicated bandwidth,
redundant architecture and by co-locating technology within a robust
data center facility. o Support for ASP deployment of customer
applications.
Triton/BSD Legal Matters
BSD or its subsidiaries are aware of the following legal proceedings:
In December 2002, Triton Global Communications sued CanTalk for breach of
contract. The action was brought before the Court of Queen's Bench, Winnipeg,
Canada. The case is styled "Triton Global Communications v. CanTalk." The action
alleges that CanTalk failed to perform under an outsource agreement pursuant to
which CanTalk was to provide support for Triton's entry into the international
operator service market. In response to the suit, CanTalk filed a counterclaim
against Triton for $10,000 alleging breach of contract. Triton believes that
CanTalk's counterclaim is without merit and it intends to defend the
counterclaim; however, there is no certainty that Triton/BSD will be successful
in their defense of this action.
82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
BSD Software, Inc. (the "Company") entered into a Share Exchange Agreement (the
"Agreement") dated October 23, 2002 with Triton Global Business Services, Inc.
("TGBSI") and four stockholders of TGBSI, who owned approximately 90% of the
issued and outstanding shares (the "TGBSI Shareholders"). TGBSI is the sole
shareholder of Triton Global Communications Inc. ("TGCI"), which is a provider
of billings, clearing house and information management services to the
telecommunications industry. Pursuant to the Agreement, on November 4, 2002, the
TGBSI Shareholders exchanged their shares for an aggregate of 26,613,891 common
shares of BSD at a par value $0.001 per share. In addition, an aggregate of
1,615,760 common shares were issued for nominal consideration to certain
persons, principally shareholders of BSD, who owned shares of BSD prior to the
share exchange.
As a result of these transactions, TGBSI became a majority-owned subsidiary of
BSD and the TGBSI Shareholders became the holders of 88.3% of the 30,123,251
common shares of BSD issued and outstanding immediately subsequent to the Share
Exchange transaction. Accordingly, financial information included herein for
prior years is that of TGBSI, consolidated with BSD from November 4, 2002, the
date of completion of the arrangement.
In connection with the share exchange, Jeffrey Spanier, the President and sole
employee and director of BSD, surrendered 4,000,000 shares of common stock,
constituting 67.9% of the common stock which was issued and outstanding prior to
the share exchange.
BSD will seek to acquire the remaining TGBSI common shares as soon as is
practical. After such additional exchange a total of 34,154,946 common shares
will be issued and outstanding, of which 29,084,240 shares will have been issued
to the former shareholders of TGBSI and the former shareholders of TGBSI will
own 85.15% of the issued and outstanding common shares. In connection with the
contemplated additional exchange of shares, the four majority shareholders of
TGBSI have agreed to return to BSD for cancellation, on a pro rata basis, that
number of common shares as may be necessary such that when all shares of TGBSI
are exchanged, the total number of common shares outstanding shall equal
32,593,600 shares plus any issuances of common shares after November 4, 2002. As
the TGBSI shareholders ultimately control BSD, TGBSI has been designated as the
acquirer in the transaction. The fair value of the assets and liabilities
acquired are as follows:
Investments and marketable securities $ 404
Accounts payable and accrued liabilities (2,040)
-------
Working capital deficiency assumed $(1,636)
=======
The above deficiency has been charged to BSD's deficit account and the financial
statements reflect the financial position and results of TGBSI from the date of
its incorporation on May 28, 2002 forward. Additional paid-in capital reflects
the increase in share capital attributable to the carrying value of TGBSI's
share capital.
TGBSI acquired TGCI effective October 31, 2002. The acquisition was accounted
for using the purchase method with the results of operations being included from
the date of acquisition. Details of the acquisition are as follows:
NET DEFICIENCY ACQUIRED:
Current liabilities $ 2,655,306
Current assets (1,008,743)
Property, plant and equipment (1,171,081)
-----------
475,482
CONSIDERATION PAID:
Note payable to Guy Fietz 401,250
Shares of TGBSI issued 1,248,750
Acquisition costs 486,197
-----------
Goodwill upon acquisition of TGCI $ 2,611,679
83
Subsequent to the acquisition the entire amount of goodwill has been written off
and charged to operations.
Although BSD currently owns 90% of TGBSI, operations have resulted in cumulative
losses to January 31, 2005 and as a result the entire amount of these losses
have been reflected in these financial statements and no minority interest has
been calculated. Until such time as operations recover the deficiency in
minority interest of $227,212 the full 100% of operating results will be
reported with no off-setting minority interest.
Background Of Triton
Triton was incorporated in April 1998 as a next generation Internet Protocol
(IP) enabled provider of live and automated operator calling services,
e-Business support, billing and clearinghouse functions and information
management services to telecommunications, internet and e-business service
providers.
Triton is a fully implemented alternate billing agent within the Local Exchange
Carriers (LEC's) billing system in Canada. BSD's vision is to continue expanding
its "live" and "automated" operator service capability focusing on making
emerging web based information and transaction services easier to access and pay
for.
Triton has aligned itself to provide globally accessible products, coupled with
sophisticated proprietary technology, allowing it to offer this global
marketplace fully-integrated or unbundled solutions. Triton's management
believes that the future growth of the industry is largely based upon the
ability of service providers to offer multiple billing options for consumer
services thus increasing market penetration.
Triton's technology platforms are capable of providing its customers with the
ability to integrate traditional telephony services, internet information and
subscription services and e-Commerce transactions and place the charges on the
billing medium of the end users choice.
Products and Services
Triton has sophisticated proprietary software and hardware services that are
capable of processing call records for telecommunications companies worldwide.
They track and process bills for a wide range of services, from local and long
distance operator services as well as paging, voice mail, caller ID, phone cards
and other "ease of access", 0+Plus dialing solutions. Triton has also developed
"flat-fee" billing solutions that are expected to benefit Internet content and
service providers. With the addition of services for the Internet community, we
believe Triton has moved to meeting the needs of an even broader range of
communications companies.
The following is a list of Triton's products and services:
OPERATOR/AGENT SERVICES
- Global and Domestic Origination
- Hospitality Providers
- Payphone Providers
- Directory Assistance
- North America
- International
- Enhanced Information Services
84
BILLING SERVICES
- North American Local Exchange Carrier (LEC) Billing
- Online Subscription Based Billing
- Web-Based Transaction Billing (e-Commerce)
PLANNED SERVICE OFFERINGS
- E-Business Support Services
- E-Commerce Transaction Support
- Click To Talk(TM)" Web-Based Voice Routing
- Call Centre "ASP" Solutions
Triton provides comprehensive billing and collection programs that help
inter-exchange carriers, operator service providers, and other
telecommunications providers' reach thousands of telecommunications consumers.
Triton acts as an agent for Incumbent Local Exchange Carriers (ILECs) and
Competitive Local Exchange Carriers (CLECs) across the nation. Throughout their
billing and collection programs, they have the ability to bill for an array of
telecommunication services on a customer's local telephone bill.
Next Generation Internet Protocol (IP) Enabled Operator Services Platform
Triton's International Operator Services Platform, which is not yet deployed,
has been created by integrating hardware and software applications from Cisco's
Internet Protocol (IP) Gateway, CosmoCom's IP based Next Generation CosmoCall
Universe Platform, and the Enhanced Operator Services (EOS) from Intelis.
Triton is currently formulating its plan of implementation and the required
marketing strategies and service offerings.
CosmoCall Universe is a multimedia, multi-channel call center system that goes
far beyond the capabilities of traditional call center technology. Traditional
call centers are based on circuit-switched Automatic Call Distributors (ACDs),
and support only voice telephone calls. CosmoCall has all the capabilities of a
modern telephone call center. But as a multimedia, multi-channel interaction
center, CosmoCall supports not only voice telephone calls, but also live
multimedia communication sessions via the Internet. It manages and distributes
not only live calls, but also messages, including voice, fax, and e-mail
messages. CosmoCall supports remote agents and multiple site operation
transparently via a managed IP WAN. Agents are location-independent, and
multiple call center sites can be managed as a single entity capable of
distributing calls to any agent in any site or location.
The Intelis Enhanced Operator Services (EOS) software is fully integrated on top
of the CosmoCall Universe Platform and inspects incoming calls on a call-by-call
basis to determine how a call should be processed. The system uses all data
presented by the switch to determine call treatment including ANI, Ingress Trunk
Group, Info Digit, State of the ANI, NPA NXX of the ANI and DNIS.
Based upon the incoming characteristics of a call, the system determines what
application is used to process the call and the Carrier for that application.
For example, the application may be Enhanced Operator Services or Prepaid
whereas the Carrier defines characteristics of that application such as branding
information, rating information, and validation rules.
Integrated together these products provide Triton with unique capabilities to
launch web-based services as well as support for traditional telephony including
collect, third party and calling card supported calls.
85
Results of Operations For The Three Months Ended January 31, 2005
Revenue
We had revenue of $1,679,000 for the three months ended January 31, 2005
compared to revenue of $1,663,000 in the comparable period in the prior year.
This lack of significant change is primarily attributable to marketing
activities resulting in new business in call records being offset by one of our
major accounts losing a significant amount of business that in turn affected the
amount of revenues derived from them. The weakness of the US dollar also
affected revenues. Our revenue consisted primarily of fees for processing
Canadian and U.S. terminated call records for telecommunications companies.
Revenue is recognized at the time that calls are transferred to the
clearinghouse for billing to customers. Provisions are recorded for management's
estimate of calls that cannot be billed or collected.
Cost Of Revenues
We had cost of revenues of $1,380,000, or 82.16% of revenue, for the three
months ended January 31, 2005 compared to $1,203,000 or 72.38% of revenue in the
comparable period in the prior year. In the three months ended January 31, 2005,
we had a gross margin of $300,000 or 17.84% of revenue, compared to a gross
margin of $459,000, or 27.62% of revenue, in the comparable period in the prior
year. Cost of goods sold, for the three months ended January 31, 2005, consists
of settlement fees to customers, carrier line charges and clearing costs levied
by the LEC's. The reason for the decrease in gross profit is due to rewriting
one of our contracts that resulted in lower margin of 10% on that contract, and
a change in contract mix that resulted in diminishing gross profits.
Operating Expenses
For the three months ended January 31, 2005, we had operating expenses of
$211,000 compared to $338,000 in the same period of the prior year. This
difference was primarily attributable to reduced legal fees and reduced rent
expense as BSD relocated into smaller premises at a lower lease rate and
subleased the previous premises for the full amount of the lease.
THREE MONTHS
ENDED
DESCRIPTION January 31, 2005
------------------------------------------------------------------
Administration $ 35,000
Professional Fees 18,000
Rent 16,000
Payroll 123,000
Depreciation and amortization 19,000
---------
TOTAL $ 211,000
=========
Rent expense consists of the rent paid for our administrative offices located in
Calgary, Canada. Payroll expense relates to the payroll of our 8 employees and
includes wages and benefits. Depreciation and amortization expense consists of
the depreciation and amortization of office furniture, computer equipment,
fixtures and leasehold improvements.
Net Income
The items specified above resulted in a net income of $49,000 for the three
months ended January 31, 2005 after recognizing other expenses including
interest expense of $30,000, and a loss on disposal of assets in the amount of
$9,000. In the comparable period in the prior year, BSD had net income of
$78,000 after recognizing interest expense of $43,000. This change is primarily
attributed to the reduced gross margin recognized on contracts in the current
period as well as reduced expenses in the current period.
86
Results of Operations For The Six Months Ended January 31, 2005
Revenue
We had revenue of $3,257,000 for the six months ended January 31, 2005 compared
to revenue of $2,689,000 in the comparable period in the prior year. This
increase is primarily attributable to marketing activities resulting in new
business in call records which more than offset the lost revenue from one of our
major accounts losing a significant amount of business that in turn affected the
amount of revenues derived from them. The change in the US dollar also affected
revenues. Our revenue consisted primarily of fees for processing Canadian and
U.S. terminated call records for telecommunications companies. Revenue is
recognized at the time that calls are transferred to the clearinghouse for
billing to customers. Provisions are recorded for management's estimate of calls
that cannot be billed or collected.
Cost Of Revenues
We had cost of revenues of $2,555,000, or 78.45% of revenue, for the six months
ended January 31, 2005 compared to $1,974,000 or 73.42% of revenue in the
comparable period in the prior year. In the six months ended January 31, 2005,
we had a gross margin of $702,000 or 21.55% of revenue, compared to a gross
margin of $715,000, or 26.58% of revenue, in the comparable period in the prior
year. Cost of goods sold, for the six months ended January 31, 2005, consists of
settlement fees to customers, carrier line charges and clearing costs levied by
the LEC's. The reason for the decrease in gross profit is due to rewriting one
of our contracts that resulted in lower margin of 10% on that contract, and a
change in contract mix that resulted in diminishing gross profits.
Operating Expenses
For the six months ended January 31, 2005, we had operating expenses of $483,000
compared to $529,000 in the same period of the prior year. This difference was
primarily attributable to, reduced legal fees and reduced rent expense as BSD
relocated into smaller premises at a lower lease rate and subleased the previous
premises for the full amount of the lease, as well as increased payroll costs
due to having 2 additional staff than in the comparative period.
SIX MONTHS
ENDED
DESCRIPTION January 31, 2005
---------------------------------------------------------------------
Administration $ 70,000
Professional Fees 98,000
Rent 31,000
Payroll 245,000
Depreciation and amortization 39,000
---------
TOTAL $ 483,000
=========
Rent expense consists of the rent paid for our administrative offices located in
Calgary, Canada. Payroll expense relates to the payroll of our 8 employees and
includes wages and benefits. Depreciation and amortization expense consists of
the depreciation and amortization of office furniture, computer equipment,
fixtures and leasehold improvements.
Net Income
The items specified above resulted in a net income of $149,000 for the six
months ended January 31, 2005 after recognizing other expenses including
interest expense of $61,000 and a loss on disposal of assets in the amount of
$9,000. In the comparable period in the prior year, we had a net income of
$62,000 after recognizing interest expense of $175,000 and recording a gain on
the sale of contracts in the amount of $51,000. This change is primarily
attributed to the reduced expenses in the current period.
87
Results of Operations for the Year Ended July 31, 2004 as Compared to the Period
Ended July 31, 2003
Revenue
BSD had revenue of $6,091,101 for year the ended July 31, 2004 as compared
with $2,910,883 for the period ended July 31, 2003, an increase of $3,180,218,
or 109%. This increase is primarily attributable to increased marketing
activities and new business in call records. The revenue consisted primarily of
fees for processing Canadian and United States terminated call records for
telecommunications companies. Revenue is recognized at the time that calls are
accepted by the clearinghouse for billing to customers. The increase in revenue
is due to recording revenue for a full year as opposed to nine months for the
comparative period as well as an increase in the volume of records processed.
Cost of Goods Sold
BSD had cost of goods sold of $4,618,371, or 75.8% of revenue, for the
year ended July 31, 2004 compared to $2,532,475 or 87% of revenue for the year
ended July 31, 2003, an increase of $2,085,896 or 82%. In the year ended July
31, 2004, BSD had a gross margin of $1,472,730, or 24.2% of revenue, compared to
a gross margin of $378,408, or 13.0% of revenue, for the year ended July 31,
2003, and increase of $1,094,322 or 289%. The improvement in BSD's gross margin
is primarily attributable to a change in product mix, as BSD began focusing on
its higher margin call records business as opposed to the hospitality business.
Cost of goods sold, for the year ended July 31, 2004, consists of settlement
fees to customers, carrier line charges and clearing costs levied by the LECs.
Expenses
For the year ended July 31, 2004, BSD had total expenses of $1,476,092
compared to total expenses of $1,793,465 before write downs for the period ended
July 31, 2003, a decrease of $317,373 or 18%. This difference was primarily
attributable to reduced administrative costs, reduced interest and finance
charges, reduced payroll costs, and reduced legal fees. Total expenses are
comprised of the following items:
YEAR
ENDED
JULY 31,
DESCRIPTION 2004
-------------------------------------------------------------
Administration $ 182,938
Interest and finance charges 253,328
Professional Fees 334,946
Rent 90,396
Payroll 537,391
Amortization 77,093
-------------------------------------------------------------
TOTAL $1,476,092
==========
Administration expenses decreased to $182,938 for the year ended July 31,
2004 from $315,055 for the year ended July 31, 2003, a decrease of $132,117 or
42%. The decrease resulted primarily from reduced travel ($60,737), and reduced
repair costs ($51,642). Professional fees consist of accounting and legal fees
incurred in the ordinary course of business. Rent expense consists of the rent
paid for our administrative offices located in Calgary, Canada. Payroll expense
relates to the payroll of eight employees and includes wages, bonuses,
commissions and benefits. Amortization expense consists primarily of the
amortization of office furniture, computer equipment, fixtures and leasehold
improvements.
88
Reduction in Carrying Value of Goodwill
BSD recorded $2,611,679 of goodwill in connection with the acquisition of
Triton in October 2002. Goodwill represents the amount by which the purchase
price of Triton exceeds the net tangible book value of the net identifiable
assets of Triton at the date of acquisition. During the year ended July 31,
2003, BSD wrote off and charged to operations the entire amount of goodwill due
to the impairment associated with losses experienced through our activities in
the international operator services market and the current working capital
deficiency, which losses and deficiency had not been anticipated at the date of
acquisition.
Impairment of Property, Plant and Equipment
Due to Triton's exit from the international operator services market BSD
wrote-off unrecoverable costs of $992,399 for the year ended July 31, 2003 for
the software and hardware related to the VOIP platform. Although Triton has
identified market opportunities for the application of the platform it currently
does not have a business plan developed for the platform's utilization, any
contracts in hand or the ability to generate cash flow from its use.
Net Profit
The net profit of $44,549 for the year ended July 31 2004 represented an
increase of $4,904,278, or 101% from the July 31, 2003 loss of $4,859,729. This
is due to the increase in sales while at the same time reducing expenses and not
incurring a write-off of goodwill nor a write-off of the software and hardware
related to the VOIP platform.
Critical Accounting Policies
Going Concern
The attached BSD financial statements have been prepared on a going
concern basis in accordance with United States generally accepted accounting
principles. The going concern basis of presentation assumes that BSD will
continue in operation for the foreseeable future and be able to realize its
assets and discharge its liabilities and commitments in the normal course of
business. There is significant doubt about the appropriateness of the use of the
going concern assumption because BSD has experienced operating losses and a
significant working capital deficiency during the period.
BSD's ability to continue as a going concern is dependent upon
management's ability to raise additional financing. During the period ended July
31, 2004, management continued to take actions to reduce operating losses and is
in the process of securing additional financing. There is no assurance that
additional financing will be obtained.
On December 21, 2004, BSD signed a definitive Agreement and Plan of Merger
with NeoMedia Technologies Inc. Pursuant to the Agreement and Plan of Merger,
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. Closing is
subject to the terms and conditions outlined in the Merger Agreement, as well as
this registration statement being declared effective by the United States
Securities and Exchange Commission. There is no assurance that the merger will
be completed.
The ability of BSD to continue as a going concern and to realize the
carrying value of its assets and discharge its liabilities when due is dependent
on the successful completion of the actions taken or planned, some of which are
described above, which management believes will mitigate the adverse conditions
and events which raise doubt about the validity of the "going concern"
assumption used in preparing the attached financial statements. There is no
certainty that these and other strategies will be sufficient to permit BSD to
continue beyond July 31, 2005.
Minority Interest in TGBSI
Although BSD currently owns 90% of TGBSI, operations have resulted in a
loss for the current period and as a result the entire amount of this loss has
been reflected in these financial statements and no reduction for the minority
interest therein has been calculated. Until such time as operations recover the
deficiency in minority interest of $239,939, the full 100% of operating results
will be reported in BSD's statement of operations.
Property Plant & Equipment
89
Property, plant and equipment are stated at cost. Amortization is provided
using the straight-line method at the following rates:
--------------------------------------------------------------------------------
Asset Method
--------------------------------------------------------------------------------
Office furniture and equipment Straight line 5 years
Computer equipment Straight line 5 years
Computer software Straight line 3 years
Leasehold improvements Straight line 5 years
--------------------------------------------------------------------------------
Property, plant and equipment are assessed for potential impairment when
triggering events occur that indicate the carrying value may not be recoverable.
If the undiscounted estimated future net cash flows are less than the carrying
value of the asset, the impairment loss is calculated as the amount by which the
carrying value of the asset exceeds its fair value. Fair value has been
calculated as the present value of estimated future net cash flows.
Revenue Recognition
Revenue is recognized at the time that calls are accepted by the clearing
house for billing to customers.
BSD's Liquidity and Capital Resources
At January 31, 2005, BSD had a cash balance of $ 45,000. Historically, BSD has
met cash needs through a combination of cash from operations and proceeds from
the sale of equity and debt securities, and loans from the former stockholders
of TGBSI. At January 31, 2005, BSD had negative working capital of $3,347,000.
BSD anticipates that its cash needs over the next 12 months will be for general
working capital needs of $1,400,000, consisting primarily of payroll,
administration (including the costs of defending the lawsuits discussed below)
and other miscellaneous expenses, and the satisfaction of a portion its current
liabilities of $4,430,000 as they come due. Of the total current liabilities,
BSD expects that a portion of the shareholder loans will be satisfied by
converting into equity. BSD expects that it will be able to satisfy its cash
needs over the next 12 months from cash generated by operations and by
negotiating to pay some of its commitments over time.
Currently BSD has entered into debt for equity agreements or amortized payment
agreements with most of its creditors. BSD has the ability to perform on all of
its finalized agreements and will be able to perform on the commitments it
agrees to with its creditors. On June 9, 2004 BSD was relisted to the OTCBB and
consequently has the ability to execute formal agreements on the letters of
intent mentioned below.
On March 20, 2003, BSD entered into two letters of intent to raise cash from the
sale of securities pursuant to an equity line of credit and convertible
debenture. With respect to the equity line, the investor has agreed to fund BSD
up to $10 million from time to time over 24 months after BSD has registered the
resale of the common stock to be purchased under the equity line of credit.
Under the equity line, BSD may request advances of $420,000 every 30-days, with
a maximum of $140,000 per advance. The purchase price of the common stock to be
issued under the equity will be equal to 95% of the lowest closing bid price of
BSD's common stock during the 5 trading days preceding an advance notice. BSD
has agreed to pay the investor 5% of each advance, as well as a one-time
commitment fee equal to $400,000, payable by the issuance of common stock at the
closing bid price on the date the transaction is closed.
With respect to the debentures, the investor has agreed to fund BSD $500,000.
The debentures will be convertible into shares of common stock at a price equal
to either (i) an amount equal to 120% of the closing bid price of the common
stock as of the closing date or (ii) an amount equal to 80% of the lowest
closing bid price of the common stock for the five trading days immediately
preceding the conversion date. The convertible debenture accrues interest at a
rate of 5% per year and is convertible at the holder's option and has a term of
two years. At BSD's option, these debentures may be paid in cash at maturity or
redeemed at a 20% premium. Both the equity line and convertible debenture are
subject to a number of conditions, including filing all SEC reports required to
be filed prior to closing, entering into definitive contracts and, with respect
to the equity line, registering the shares of common stock to be issued under
the equity line with the Securities and Exchange Commission.
90
BSD has not utilized any portion of the financing described above.
BSD's consolidated financial statements have been prepared assuming BSD
will continue as a going concern. Accordingly, the consolidated financial
statements do not include any adjustments that might result from BSD's inability
to continue as a going concern.
Net Cash From Operations. Net cash provided from operations was $133,786
for the year ended July 31, 2004, an increase of $393,461, or 152%, compared
with net cash used in operations of $259,675 for the year ended July 31, 2003.
The use of cash by operations was principally the result of operations, an
increase in accounts payable of $225,666, amortization of $77,093, non-cash
financing costs of $98,550, a reduction of prepaid expenses in the amount of
$2,053 and an income tax recovery of 33,048 offset by an increase in accounts
receivable of $350,352.
Net cash used by operations was $1,000 for the six months ended January
31, 2005. The cash used by operations was principally the result of operations,
and a reduction of prepaid expenses in the amount of $9,000 offset by an
increase in accounts receivable of $191,000 and a reduction of accounts payable
of $16,000.
Net Cash Used in Financing. Net cash used in financing was $112,700 for
the year ended July 31, 2004, an increase of $968,137, or 113%, compared with
net cash provided by financing activities of $855,437 for the year ended July
31, 2003. This is entirely due to the paying down of notes payable, shareholder
loans and the amount owed to Wayside Solutions Inc.
Net cash used in financing was $100,000 for the six months ended January
31, 2005. This is entirely due to the paying down of notes payable, shareholder
loans and the amount due to Wayside Solutions Inc.
Net Cash From Investing. Net cash from investing was $32,929 for the year
ended July 31, 2004 , an increase of $553,761 or 106% compared with net cash
used in investing for the year ended July 31, 2003 of $520,832, resulting from
proceeds on sale of property, plant and equipment in the amount of $35,188
offset by the purchase of additional property, plant and equipment for a total
of $2,259.
Net cash from investing for the six months ended January 31, 2005 was the
result of selling excess office furnishings no longer needed due to us
relocating to smaller premises
91
BSD'S MANAGEMENT
Directors and Executive Officers
As of December 31, 2004, BSD's directors and executive officers were:
Name Age Position
---- --- --------
Guy Fietz 39 President, Director of BSD Software, Inc., Director of Triton
Global Business Services, Inc. (as of 5/29/02), Director of
Triton Global Communications, Inc. (as of 4/30/98)
Gordon Ellison 52 Chief Financial Officer of BSD Software, Inc., Director of
Triton Global Business Services Inc. (as of 4/26/04)
Robin Legg 60 Vice President of Business Development
Gordon McLeod 31 Vice President of Sales and Marketing
The following is certain summary information with respect to the directors
and executive officers of NeoMedia:
GUY FIETZ. Mr. Fietz has been in the telecommunications industry for over
five years. Since launching Triton, he has managed operations and lead growth.
Prior to his work in telecommunications, Mr. Fietz operated ventures in the
hospitality market. Prior to establishing Triton, Mr. Fietz was an entrepreneur.
His most recent ventures prior to Triton included establishing a restaurant in
1994-1998, a wholesale sportswear manufacturer, Ganz Enterprises Inc., from
1988-1994, as well as Ganz retail sportswear 1992-1994.
GORDON ELLISON. Mr. Ellison joined Triton in 2003 as the Chief Financial
Officer. Prior to this Mr. Ellison was employed for 18 months as controller for
a private company in the liquid storage industry. From 1994 to 2002, Mr. Ellison
was first the controller and subsequently the CFO for a private distribution
company with operations located in cities through out western Canada. Mr Ellison
is a graduate of the University of Calgary holding a Bachelor of Science degree
and subsequently received his designation as a Chartered Accountant and is a
member of the Institute of Chartered Accountants of Alberta. He has presented
seminars on various tax and management related topics throughout western Canada.
ROBIN LEGG. Mr. Legg has over 16 years of sales management experience in
the telecommunications industry. He has extensive expertise in team leadership,
business development, strategic sales planning, and contract negotiation.
Dedicated Mr. Legg has been instrumental in developing and implementing
strategies for Triton's ongoing customer relationships since joining BSD in
2002. Mr. Legg was Vice President of Sales at Telecom Cost Management, located
in Hamilton, Virginia. From 1999 to 2001, Mr. Legg was employed by Cantalk
Canada as the Vice President of Sales, North America. Prior to that, he was the
Vice President of Sales for BCI Commcor based in Chantilly, Virginia from 1992
to 1999.
GORDON F. MACLEOD. Mr. MacLeod joined Triton in 2003. From 1998 to 2003 he
was the Manager of National Accounts for Time iCR, an Ottawa-based speech
recognition application hosting and service provider. Mr. MacLeod has 10 years
of direct experience within the telecommunication sector specializing in complex
solution selling. Mr. MacLeod attended the University of Guelph from where he
graduated with an Honors degree in Business/Commerce. Mr. MacLeod is also a
graduate of numerous sales-focused business training schools, seminars and
conventions throughout North America. Mr. MacLeod is responsible for Triton's
overall corporate positioning, managing all customer communications, identifying
and opening new markets, ensuring the consistency, quality and performance of
channel partners, sales and customer representatives as well as the overall
growth of the business through strategic marketing initiatives.
BSD's Director Compensation
BSD directors are not currently compensated for their services as members
of BSD's Board of Directors. BSD does not have a written compensation policy for
its directors at this time.
92
Election Of BSD's Directors And Officers
BSD's 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. BSD's officers are appointed
annually by the Board of Directors and hold office at the discretion of the
Board of Directors. BSD's bylaws 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/her successor.
Meetings Of BSD's Board Of Directors
During the year ended July 31, 2004, BSD held nine directors' meetings and
each incumbent director attended all meetings of the Board of Directors. The
Board of Directors also acted once by unanimous written consent
Committees Of BSD's Board Of Directors
Messrs. Fietz and Ellison are the members of BSD's Audit Committee, which
reviews the internal accounting procedures of BSD and consult with and review
the services provided by BSD's independent registered public accounting firm.
BSD intends to establish an independent audit committee. BSD has no other
committees.
93
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the total
compensation earned by, or paid to, the person's serving as BSD's and its
subsidiaries President, Chief Executive Officer, Chief Financial Officer and
Vice-Presidents (collectively, the "Named Executive Officers") during 2004,
2003, and 2002. No other officer or employees of BSD or any of its subsidiaries
earned total salary and bonus in excess of $100,000 during 2004, 2003, and 2002.
Summary Compensation Table
Annual Compensation (2) Long-term Compensation
--------------------------------------- ----------------------------------------------
Other Securities
Annual Restricted Underlying
Compens- Stock Options/ LTIP All other
Name and Salary Bonus ation Award(s) SARs (1) Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------------------------------------------------------------- ----------------------------------------------
Guy Fietz, President, Chief
Executive Officer, Director;
President at Triton Global Business
Services, Inc. and Triton Global
Communications, Inc. (both
subsidiaries of BSD) 2004 144,285 116,362 -- -- -- -- --
2003 95,846 -- -- -- -- -- --
2002 58,333 -- 127,333 (1) -- -- -- --
Gordon Ellison, Chief Financial
Officer, Director; Chief Financial
Officer at Triton Global Business
Services, Inc. and Triton Global
Communications, Inc. (both
subsidiaries of BSD) 2004 24,129 -- -- -- -- -- --
Les Hammond, former CFO of BSD 2004 38,890 -- -- -- -- -- --
2003 17,084 -- -- -- -- -- --
Robin Legg, Vice President of
Business Development at Triton
Global Communications, Inc. (a
subsidiary of BSD) 2004 58,282 3,736 2,512 -- -- -- --
2003 46,270 -- -- -- -- -- --
2002 10,278 -- -- -- -- -- --
Gordon MacLeod, Vice President of
Sales and Marketing at Triton
Global Communications, Inc. (a
subsidiary of BSD) 2004 70,900 8,889 11,896 -- -- -- --
2003 12,813 -- --
------------------------
(1) These represent the payment of dividends by Triton Global Communications
Inc. prior to the acquisition by BSD.
(2) All amounts were paid through Triton Global Communications Inc. in
Canadian dollars. The amounts for the current year have been converted at
.74721 and previous years have been converted at a .711845 exchange rate.
Employment Agreements
Robin Legg has an employment agreement dated March 24, 2003 that pays a
base salary of $59,940. Gordon MacLeod has an employment agreement dated August
1, 2003 that pays a base salary of $59,020. The agreements allow for an annual
review of remuneration and do not have an expiry date. Both of the above
contracts allow for commissions and bonuses to be added to monthly remuneration
as described in BSD's polices and procedures. Both agreements may be terminated
with cause by BSD without notice.
Stock Option Plan
BSD does not currently have a stock option plan.
Options And Warrants Granted In BSD's Last Fiscal Year
BSD did not issue stock options to any of the Named Executive Officers for
the year ended July 31, 2004.
94
Option And Warrant Exercises In Last Fiscal Year And Fiscal Year end Values
None of BSD's Named Executive Officers exercised options during the year
ended July 31, 2004, or held any stock options as of July 31, 2004.
Security Ownership of Certain Beneficial Owners and Management of BSD
The following table sets forth, as of December 31, 2004, certain
information with respect to BSD's equity securities owned of record or
beneficially by (i) each officer and director of BSD and its subsidiaries; and
(ii) each person who owns beneficially more than 5% of each class of BSD's
outstanding equity securities.
Name and Address Of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership (1) Percent of Class
-----------------------------------------------------------------------------------------------------------------
Common Stock Guy Fietz (2)
90 Mt. Assiniboine Circle, S.E.
Calgary, Alberta
Canada T2Z 2N8 16,468,992 51.8%
Common Stock SunTzu Trust
ANZ House, P.O. Box 11
Rarotonga, Cook Islands 7,328,701 23.0%
Common Stock Trans Research International Trust (3)
ANZ House, P.O. Box 11
Rarotonga, Cook Islands 8,168,620 25.7%
Merlexis Trust (3)
ANZ House, P.O. Box 11
Rarotonga, Cook Islands 3,381,633 10.6%
Common Stock Blair J. McInnes (4)
78 Kinkora Drive
Winnipeg, Manitoba
Canada R3R 2L6 8,168,620 25.7%
Common Stock David Worrall (5)
58 Amalia Crescent
R.R. # 5 Belwood,
Ontario Canada N0B 1J0 3,381,622 10.6%
Robin Legg
16 Valley Ponds Place N.W.
Calgary, Alberta
Canada T3B 5T5 35,000 *
-----------------------------------------------------------------------------------------------------------------
-----------------------------------
* Denotes ownership of less than 1% of the issued and outstanding shares of
BSD's common stock.
(1) Based on 31,810,897 shares issued and outstanding at December 31, 2004.
Applicable percentage of ownership is based on 31,810,897 shares of common
stock outstanding as of December 31, 2004 for each stockholder. Beneficial
ownership is determined in accordance within the rules of the United
States Securities and Exchange Commission and generally includes voting of
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
December 31, 2004 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of
ownership of such persons, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Guy Fietz is the Protector of SunTzu Trust and has voting authority over
the stock held by the Trust. Consequently, the 7,328,701 shares owned by
the Trust are also included in the number of shares owned by Guy Fietz.
(3) Trans Research International Trust holds 1,405,354 shares in beneficial
trust for the Merlexis Trust and consequently Merlexis Trust also includes
the additional 1,405,354 shares.
(4) Blair McInnes is the Protector of Trans Research International Trust and
has voting authority over the stock held by the Trust. Consequently, the
8,168,620 shares owned by the Trust are also included in the number of
shares owned by Blair McInnes.
(5) David Worrall is the Protector of Merlexis Trust and has voting authority
over the stock held by the Trust. Consequently, the 3,381,633 shares owned
by the Trust are also included in the number of shares owned by David
Worrall.
95
Certain Relationships and Related Transactions
Wayside Solutions, Inc., which is controlled by the brother-in-law of the
President of BSD paid certain operating expenses and advanced cash to BSD during
the year ended July 31, 2003. The cost of these services, totaling $127,579 in
2004 and $140,896 in 2003, was charged to professional fees expense.
Accrued interest calculated at 10% on the amount owing to Guy Fietz has
been recorded at $34,119 for the year ended July 31, 2004 and an amount of
$26,575 was recorded in the year ended July 31, 2003.
For the year ended July 31, 2004, BSD paid $20,370 and for the year ended
July 31, 2003 BSD, recorded $14,000 for legal services rendered by Jeremy Fietz,
a brother of the President of BSD. The amount recorded in fiscal 2003 was paid
by issuing 35,000 common shares of BSD in 2004
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
BSD's officers and directors, and persons who own more than 10% of a registered
class of BSD's equity securities, to file reports of ownership and changes in
ownership with the United States Securities and Exchange Commission (the "SEC")
and with the NASDAQ Stock Market. Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish BSD with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to BSD, or
written representations received by BSD, BSD believes that during its fiscal
year ended July 31, 2004, all Section 16(a) filing requirements applicable to
the officers, directors and 10% beneficial owners were met.
Code of Ethics
BSD has adopted a code of ethics that applies to its senior executive and
financial officers. BSD's Code of Ethics seeks to promote: (1) honest and
ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships, (2) full, fair,
accurate, timely and understandable disclosure of information to the United
States Securities and Exchange Commission, (3) compliance with applicable
governmental laws, rules and regulations, (4) prompt internal reporting of
violations of the Code of Ethics to predesignated persons, and (5)
accountability for adherence to the Code of Ethics. A copy of BSD's Code of
Ethics is incorporated by reference to this information statement/prospectus.
Limitations on Director's Liability and Indemnification
Under Florida law, if directors, officers, employees or agents of a
Florida corporation are sued in their corporate capacities, the corporation must
indemnify them against their defense costs if they are successful on the merits
or otherwise.
Although BSD's bylaws do not contain additional mandatory director
indemnification provisions, Florida law states that Florida corporations have
the power to indemnify any person who was or is a party to any proceeding (other
than an action by, or in the right of, the corporation), by reason of the fact
that he/she is or was a director, officer, employee, or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise against liability incurred in connection with such proceeding,
including any appeal thereof, if he/she acted in good faith and in a manner
he/she reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his/her conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he/she reasonably
believed to be in, or not opposed to, the best interests of the corporation or,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his/her conduct was unlawful.
In addition, Florida corporations have power to indemnify any person, who
was or is a party to any proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or was
a director, officer, employee, or agent of the corporation or is or was serving
at the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the Board of Directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he/she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable unless, and only to the extent
that, the court in which such proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such courts shall deem proper.
96
Insofar as indemnification for liabilities arising under the United States
Securities Act of 1933, as amended (the "1933 Act") may be permitted to
directors, officers, and controlling persons of BSD pursuant to the foregoing
provisions of Florida law, or otherwise, the United States Securities and
Exchange Commission has nevertheless held that such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the corporation of expenses incurred or paid by a director,
officer, or controlling person of the corporation in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person connected with the securities being registered, the
corporation will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
97
DESCRIPTION OF BSD'S CAPITAL STOCK
The following description of BSD's capital stock and certain provisions of
BSD's Articles of Incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of BSD's Articles of Incorporation and bylaws, which
have been filed as exhibits to the Registration Statement on Form S-4, of which
this information statement/prospectus is a part.
As of December 31, 2004, BSD had 31,810,897 shares of common stock
outstanding, and no shares of preferred stock were outstanding.
Common Stock
Holders of BSD 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 BSD's outstanding shares of common stock, subject to
the rights of the holders of preferred stock, can elect all of BSD'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 BSD'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. In the event BSD were to elect to sell additional shares of
common stock following this offering, investors in this offering would have no
right to purchase additional shares. As a result, their percentage equity
interest in us would be diluted.
Preferred Stock
As of December 31, 2004, BSD had 5,000,000 shares of preferred stock
authorized, par value $0.001, none of which were issued or outstanding.
Warrants And Options
As of December 31, 2004, BSD had outstanding warrants to purchase
1,000,000 shares of BSD's common stock, and outstanding options to purchase
750,000 shares of BSD's common stock. All options and warrants will be converted
or cancelled prior to the effective time of the merger. The number of shares
issuable upon exercise and the exercise prices of the warrants are subject to
adjustment in the event of certain events such as stock dividends, splits and
combinations, capital reorganization and with respect to certain warrants,
issuance of shares of common stock at prices below the then exercise price of
the warrants.
Registration Rights
None.
Anti-Takeover Provisions Under bylaws and Laws
The Florida Control Share Act (the "FCSA") generally provides that shares
acquired in a control share acquisition will not possess any voting rights
unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an acquisition,
directly or indirectly, by any person of ownership of, or the power to direct
the exercise of voting power with respect to, issued and outstanding control
shares of a publicly held Florida corporation. "Control shares" are shares
which, except for the FCSA, would have voting power that, when added to all
other shares owned by a person or in respect to which such person may exercise
or direct the exercise of voting power, would entitle such person immediately
after acquisition of such shares, directly or indirectly, alone or as part of a
group, to exercise or direct the exercise of voting power in the election of
directors within any of the following ranges: (i) at least 20% but less than
33.33% of all voting power; (ii) at least 33.33% but less than a majority of all
voting power; or (iii) a majority or more of all voting power.
98
Under the FCSA, a Florida corporation may expressly opt out of the
application of the terms of the FCSA in its bylaws, in which case the shares
acquired in a control share acquisition will automatically possess full voting
rights without the requirement of the approval of a majority of the
corporation's disinterested shareholders. BSD has not opted out of the FCSA in
its bylaws.
Transfer Agent
BSD stock transfer agent is Florida Atlantic Stock Transfer, 7130 Nob Hill
Road, Tamarac, Florida, 33321.
99
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for
NeoMedia by Kirkpatrick & Lockhart Nicholson Graham LLP.
EXPERTS
The audited consolidated financial statements of NeoMedia Technologies,
Inc. and its subsidiaries for the years ended December 31, 2004 and 2003 have
been audited by Stonefield Josephson, Inc., independent registered public
accounting firm, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report. Reference is made to said report, which includes an explanatory
paragraph with respect to the uncertainty regarding NeoMedia's ability to
continue as a going concern, as discussed in Note 1 to the consolidated
financial statements.
The audited consolidated financial statements of BSD Software, Inc. and
its subsidiaries for the years ended July 31, 2004 and 2003 have been audited by
KPMG LLP, chartered accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. Reference is made to said report, which includes
an explanatory paragraph with respect to the uncertainty regarding BSD's ability
to continue as a going concern.
The audited consolidated financial statements of CSI International, Inc.
for the years ended August 31, 2003 and 2002 have been audited by Eisner LLP,
Independent Registered Public Accounting Firm, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
100
WHERE YOU CAN FIND MORE INFORMATION
NeoMedia and BSD file annual, quarterly and current reports, proxy
statements, and other documents with the United States Securities and Exchange
Commission (the "SEC"). You may read and copy any document NeoMedia or BSD files
at the SEC's public reference room at Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the operation of the Public Reference Room. The SEC maintains a
website at www.sec.gov where certain information regarding issuers, including
NeoMedia and BSD, may be found. NeoMedia's website is www.neom.com. BSD's
website is www.tritonglobal.ca.
This information statement/prospectus is part of a registration statement
filed with the SEC on Form S-4. The registration statement contains more
information than this information statement/prospectus regarding NeoMedia and
BSD and their common stock, including certain exhibits and schedules. You can
get a copy of the registration statement from the SEC at the address listed
above or from its website, www.sec.gov.
As allowed by SEC rules, this information statement/prospectus does not
contain all the information you can find in the registration statement on Form
S-4 filed by NeoMedia and BSD to register the shares of stock to be issued in
the merger and the exhibits to the registration statement. The SEC allows
NeoMedia and BSD to "incorporate by reference" information into this information
statement/prospectus, which means that NeoMedia and BSD can disclose important
information to you by referring you to other documents filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
information statement/prospectus, except for any information superseded by
information in this information statement/prospectus. This information
statement/prospectus incorporates by reference the documents set forth below
that NeoMedia and BSD have previously filed with the SEC. These documents
contain important information about the companies and their financial condition.
This information statement/prospectus incorporates important business and
financial information about NeoMedia and BSD from documents that are not
included in or delivered with this information statement/prospectus. This
information is available to you without charge upon your written or oral
request. You can obtain documents incorporated by reference in this information
statement/prospectus by requesting them in writing, by telephone or by e-mail
from the appropriate company at the following addresses:
If a NeoMedia Stockholder: If a BSD Shareholder:
NeoMedia Technologies, Inc. BSD Software, Inc.
2201 Second Street, Suite 402 5824 Second Street SW, Suite 300
Ft. Myers, FL 33901 Calgary, Alberta, Canada, T2H-0H2
Attention: CFO Attention: CFO
Telephone: (239) 337-3434 Telephone: (403) 259-7588
Telecopier: (239) 337-3668 Telecopier: (403) 257-6098
101
INDEX TO FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------- ------------------
Financial Statement Page
----------------------------------------------------------------------------------------- ------------------
NeoMedia Technologies, Inc. Consolidated Financial Statements For The Years Ended F-2
December 31, 2003 And 2002
----------------------------------------------------------------------------------------- ------------------
----------------------------------------------------------------------------------------- ------------------
BSD Software, Inc. Consolidated Financial Statements For The Three- And Six-Month F-40
Periods Ended January 31, 2005 And 2004
----------------------------------------------------------------------------------------- ------------------
----------------------------------------------------------------------------------------- ------------------
BSD Software, Inc. Consolidated Financial Statements For The Years Ended July 31, 2004 F-47
And 2003
----------------------------------------------------------------------------------------- ------------------
----------------------------------------------------------------------------------------- ------------------
Pro Forma Financial Information F-63
----------------------------------------------------------------------------------------- ------------------
----------------------------------------------------------------------------------------- ------------------
Financial Statements Of Acquired Business, CSI International, Inc., For The Years Ended F-69
August 31, 2003 And 2002
----------------------------------------------------------------------------------------- ------------------
Report of Independent Registered Public Accounting Firm
Board of Directors
NeoMedia Technologies, Inc.
We have audited the accompanying consolidated balance sheet 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
======= =======
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-4
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 Accumulated
Shares Amount Capital Compensation Loss Deficit
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
BALANCE, DECEMBER 31, 30,746,968 $307 $65,442 (231) $0 ($70,765)
2002
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
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 --- --- --- --- --- (5,382)
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
BALANCE, DECEMBER 31, 243,991,257 $2,440 $71,565 ($282) $0 ($76,147)
2003
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Shares issued to
Cornell Capital
Partners under ELOC
and SEDA 112,743,417 1,127 6,864 --- --- ---
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Exercise of stock 12,860,616 129 43 --- --- ---
options
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
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 2,406,388 24 242 --- --- ---
past due liabilities
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Stock issued in
connection with
acquisition of CSI
International 7,000,000 70 625 --- --- ---
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Expense associated --- --- 104 --- --- ---
with option repricing
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Fair value of --- --- 2,500 --- --- ---
warrants issued with
debt
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Change in Deferred
Stock Compensation --- --- --- (163) --- ---
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Comprehensive loss -
foreign currency
translation adjustment --- --- --- --- (60) ---
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
Net Loss --- --- --- --- --- (7,230)
----------------------- -------------- ---------- ------------ --------------- ---------------- --------------
BALANCE, DECEMBER 31, 432,525,053 $4,325 $84,728 (445) ($60) ($83,377)
2004
======================= ============== ========== ============ =============== ================ ==============
--------------------- --------------
Treasury Stock
---------------------
Total
Stockholders'
Shares Amount Equity
----------------------- ---------- ---------- --------------
BALANCE, DECEMBER 31, 201,230 ($779) ($6,026)
2002
----------------------- ---------- ---------- --------------
----------------------- ---------- ---------- --------------
Shares issued to --- --- 2,793
Cornell Capital
Partners under Equity
line of Credit
----------------------- ---------- ---------- --------------
Issuance of Common
Stock through private
Placement, Net of
$6,818 of issuance
costs --- --- 300
----------------------- ---------- ---------- --------------
Exercise of employee --- --- 156
options
----------------------- ---------- ---------- --------------
Exercise of Warrants --- --- 250
----------------------- ---------- ---------- --------------
Expense associated --- --- 774
with option & warrant
repricing
----------------------- ---------- ---------- --------------
Fair value stock, --- --- 425
options, & warrants
issued for
professional services
rendered
----------------------- ---------- ---------- --------------
Stock issued to pay --- --- 2,913
past due liabilities
----------------------- ---------- ---------- --------------
Issuance of warrants
and stock with debt --- --- 19
----------------------- ---------- ---------- --------------
Expense recognized --- --- 626
for options issued
with exercise price
below market price
----------------------- ---------- ---------- --------------
Change in Deferred --- --- (51)
Stock Compensation
----------------------- ---------- ---------- --------------
Net Loss --- --- (5,382)
----------------------- ---------- ---------- --------------
BALANCE, DECEMBER 31, 201,230 ($779) ($3,203)
2003
----------------------- ---------- ---------- --------------
----------------------- ---------- ---------- --------------
Shares issued to
Cornell Capital
Partners under ELOC
and SEDA --- --- 7,991
----------------------- ---------- ---------- --------------
Exercise of stock --- --- 172
options
----------------------- ---------- ---------- --------------
Exercise of stock
warrants --- --- 2,515
----------------------- ---------- ---------- --------------
Fair value stock, --- --- 805
options, & warrants
issued for
professional services
rendered
----------------------- ---------- ---------- --------------
Stock issued to pay --- --- 266
past due liabilities
----------------------- ---------- ---------- --------------
Stock issued in --- --- 695
connection with
acquisition of CSI
International
----------------------- ---------- ---------- --------------
Expense associated --- --- 104
with option repricing
----------------------- ---------- ---------- --------------
Fair value of --- --- 2,500
warrants issued with
debt
----------------------- ---------- ---------- --------------
Change in Deferred
Stock Compensation --- --- (163)
----------------------- ---------- ---------- --------------
Comprehensive loss -
foreign currency
translation adjustment --- --- (60)
----------------------- ---------- ---------- --------------
Net Loss --- --- (7,230)
----------------------- ---------- ---------- --------------
BALANCE, DECEMBER 31, 201,230 ($779) $4,392
2004
======================= ========== ========== ==============
The accompanying notes form an integral part
of these consolidated financial statements.
F-5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
Basis of Presentation
The consolidated financial statements include the financial statements of
NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia
Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A.
incorporated in Guatemala; 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-6
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.
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.
F-7
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.
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."
F-8
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.
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.
F-9
(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.
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)
======= =======
F-10
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
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-11
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
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.
F-12
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-13
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-14
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
=======
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.
F-15
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-16
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.
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.
F-17
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.
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.
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.
F-18
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)
-------
F-19
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:
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-20
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 July 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
----
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-21
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-22
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
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.
F-23
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.
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.
F-24
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.
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-25
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 Options Exercisable
----------------------------------------------------------------------------------------- ---------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ----------------- ----- ------------ -----
(In thousands) In thousands)
$-- to $0.010 26,568 8.8 years $0.01 26,568 $0.01
0.011 to 0.087 4,640 9.4 years $0.07 3,516 $0.07
0.088 to 0.160 21,575 9.1 years $0.11 4,575 $0.11
0.170 to 7.000 21 4.8 years $6.89 21 $6.89
--------------------- ------------------- -------- ---------- ---------------- ----------------- -----------------
$-- to $7.000 52,804 9.0 years $0.06 34,680 $0.03
===================== =================== ======== ========== ================ ================= =================
F-26
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.
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.
F-27
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- Weighted-
Average 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
============================ ================== ========== ================ ================
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.
F-28
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.
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-29
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-30
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.
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.
F-31
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.
24. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
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. The 8,333,333 shares represent approximately 6% of PUPS
outstanding shares (based on 125,249,954 PUPS shares outstanding as of September
30, 2004). Because the investment represents less than 20% of PUPS outstanding
shares, NeoMedia will record the investment at cost and analyze it for
impairment going foward.
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.
On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of
Check 21 software products and solutions for the small- to medium-sized
financial institution market, entered into a business development agreement
under which the two companies will develop a database lookup system for
validating codes printed on negotiable instruments (checks). In addition,
NeoMedia invested $250,000 in Intactis convertible preferred stock and warrants
to own up to 25% of Intactis. Intactis also placed an order for an initial 100
copies of NeoMedia's PaperClick Print Encoder software.
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team for co-marketing and sales efforts in the U.S., as well as in Europe, the
Middle East, Africa and Latin America.
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
On March 30, 2005, NeoMedia borrowed from Cornell the gross amount of
$10,000,000 before discounts and fees. Cornell withheld structuring and escrow
fees of $68,000 related to the note. As of March 28, 2005, NeoMedia had not made
any payments against the principal. The note is scheduled to be repaid at a rate
of $1,120,000 per month commencing May 1, 2005 and continuing until principal
and interest are paid in full. The note accrues interest at a rate of 8% per
annum on any unpaid principal. NeoMedia has the option to prepay any remaining
principal of the note in cash without penalty. In connection with the note,
NeoMedia and Cornell entered into a security agreement under which the note is
secured by all of NeoMedia's assets other than its patents and patent
applications. NeoMedia also escrowed 25,000,000 shares of its common stock as
security for the note.
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. The shares
would be valued at 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia. NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment
fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also paid a cash commitment fee of $1 million. NeoMedia also issued 4
million warrants with an exercise price of $0.229 to an independent third party
as a fee for negotiating and structuring the Standby Equity Distribution
Agreement. NeoMedia expects to file a registration statement with the US
Securities and Exchange Commission during 2005 to register the shares underlying
the $100 million Standby Equity Distribution Agreement. The Standby Equity
Distribution Agreement would become active at the time the SEC declares
effective a registration statement containing such shares.
F-32
BSD SOFTWARE, INC.
Consolidated Interim Balance Sheet (Unaudited)
January 31, 2005
-------------------------------------------------------------------------------------------------------
(U.S. dollars)
-------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash in bank $ 44,742
Accounts receivable 1,026,120
Prepaid expenses 12,281
-------------------------------------------------------------------------------------------------------
1,083,143
Property and equipment (net) 120,559
-------------------------------------------------------------------------------------------------------
$ 1,203,702
-------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 3,210,089
Shareholder loans 613,509
Due to Wayside Solutions Inc. 579,774
Notes Payable 26,598
-------------------------------------------------------------------------------------------------------
4,429,970
Stockholders' deficiency:
Share capital:
Authorized:
Preferred stock 5,000,000 shares at $.001 par value
Common stock 50,000,000 shares at $.001 par value
Issued and outstanding:
31,810,897 common shares 31,811
Additional paid-in capital 3,688,028
Accumulated Deficit (5,827,028)
Accumulated other comprehensive loss (1,119,079)
-------------------------------------------------------------------------------------------------------
(3,226,268)
Commitments and contingencies
-------------------------------------------------------------------------------------------------------
$ 1,203,702
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
BSD SOFTWARE, INC.
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended Six Months Ended
January 31 January 31
----------------------------------------------------------------------------------------------------------------------------------
(U.S. dollars) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------------------
Revenue $ 1,679,171 $ 1,662,519 $ 3,257,503 $ 2,688,700
Cost of revenues 1,379,583 1,203,332 2,555,498 1,974,037
----------------------------------------------------------------------------------------------------------------------------------
299,588 459,187 702,005 714,663
Operating expenses:
Administration 34,633 35,797 69,897 66,719
Professional fees 18,340 122,207 98,215 149,173
Rent 15,953 32,886 31,042 63,728
Payroll 122,621 127,683 245,019 210,613
Depreciation and amortization 19,094 19,586 38,623 38,474
----------------------------------------------------------------------------------------------------------------------------------
210,641 338,159 482,796 528,707
----------------------------------------------------------------------------------------------------------------------------------
Income from operations 88,947 121,028 219,209 185,956
Other income (expense)
Interest expense (30,317) (42,759) (61,178) (174,970)
Loss on sale of assets (9,167) -- (9,167) --
Gain on sale of contracts -- -- -- 51,090
----------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (39,484) (42,759) (70,345) (123,880)
Net income before provision for taxes 49,463 78,269 148,864 62,076
Income taxes -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Net income 49,463 78,269 148,864 62,076
Other comprehensive income (loss):
Foreign currency translation adjustment 125,499 27,318 (438,476) (353,307)
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) 174,962 105,587 (289,612) (291,231)
----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted
earnings (loss) per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding 32,784,813 32,648,891 32,734,705 32,305,492
----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
BSD SOFTWARE, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
January 31
----------------------------------------------------------------------------------------------------------
(U.S. dollars) 2005 2004
----------------------------------------------------------------------------------------------------------
Cash flows from (used in):
Operations:
Net income $ 148,864 $ 62,076
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash financing costs -- 98,550
Loss on sale of assets 9,167 --
Depreciation and amortization 38,623 38,474
Change in non-cash operating working capital:
Accounts receivable (191,183) (651,943)
Prepaid expenses 9,184 6,106
Accounts payable and accrued liabilities (15,560) 428,792
----------------------------------------------------------------------------------------------------------
(905) (17,945)
Investing:
Proceeds on sale of property and equipment 16,677 35,188
----------------------------------------------------------------------------------------------------------
16,677 35,188
Financing:
Repayment of shareholder loans (23,106) --
Repayment of notes payable (8,752) --
Repayment of due to Wayside Solutions Inc. (68,117) (52,838)
----------------------------------------------------------------------------------------------------------
(99,975) (52,838)
----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (84,203) (35,595)
Cash and cash equivalents, beginning of period 128,945 74,930
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 44,742 $ 39,335
----------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Non-cash investing and financing activities:
Reduction of accounts payable and accrued
liabilities in lieu of stock issuance $ 4,348 $ --
Reduction of shareholder loans in lieu of stock issuance $ 34,800 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
BSD SOFTWARE, INC,.
Notes to Consolidated Interim Financial Statements
(U.S. Dollars)
Six month period ended January 31, 2005
(Unaudited)
1. Nature of business:
BSD Software, Inc. (the "Company") operates as a holding company for the
purposes of investing in Triton Global Communications Inc. ("TGCI"), which is a
provider of billings, clearing house and information management services to the
tele-communications industry .
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements and should be read in
conjunction with Notes to Financial Statements contained in the Company's
audited consolidated financial statements on Form 10-KSB for the period ended
July 31, 2004. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included in the consolidated financial position of the Company as of
January 31, 2005 and the operating results for the three and six month period
ended January 31, 2005 and 2004 and cash flows for the six month periods ended
January 31, 2005 and 2004 are not necessarily indicative of the results that may
be expected for the year ended July 31, 2005.
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
On December 21, 2004, NeoMedia Technologies, Inc. (NeoMedia) and the Company
signed a definitive Agreement and Plan of Merger. Upon the closing of the merger
transaction discussed therein, the Company's shareholders will receive, for each
share of the Company's stock owned, NeoMedia common stock equivalent to $0 .07
divided by the volume-weighted average price of NeoMedia common stock for the
five trading days immediately prior to the effective time of the merger. The
agreement has been approved by holders of approximately 63% of the Company's
outstanding shares and its Board. 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. Prior to closing, the merger can be terminated by the
Company if more than 5% of the Company's outstanding shares dissent to the
merger. The merger can be terminated prior to closing by NeoMedia if, at the
time of closing, the Company 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 July 31, 2005, which date may be extended by mutual consent of
NeoMedia and the Company. At the present time there have been no financial
transactions between the companies. There is no assurance that the merger will
be completed.
F-36
BSD SOFTWARE, INC.
Notes to Consolidated Interim Financial Statements
(U.S. Dollars)
Six month period ended January 31, 2005
(Unaudited)
2. Significant accounting policies:
(a) Principles of consolidation:
The unaudited consolidated interim financial statements include the accounts of
Triton Global Communications Inc. ("TGCI") and Triton Global Business Services
Inc. ("TGBSI"). All significant inter-company balances and transactions have
been eliminated upon consolidation.
(b) Translation of foreign currency:
The functional currency of the operations is the Canadian dollar. The financial
statements are reported in United States dollars and 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.
Revenue and expense transactions originating in U.S. dollars are translated to
Canadian dollars at rates in effect at the time of the transaction. Foreign
exchange gains and losses are included in income.
(c) Revenue recognition:
Revenue is recognized at the time that calls are transferred to the clearing
house for billing to customers.
(d) Stock-based compensation:
Under the fair value based method, stock-based payments to non-employees are
measured at the fair value of the consideration received, or the fair value of
the equity instruments issued, or liabilities incurred, whichever is more
reliably measurable. The fair value of stock-based payments to non-employees is
periodically re-measured until counterparty performance is complete, and any
change therein is recognized over the period and in the same manner as if the
Company had paid cash instead of paying with or using equity instruments. The
cost of stock-based payments to non-employees that are fully vested and
non-forfeitable at the grant date is measured and recognized at that date. No
stock based compensation has been issued to employees during the six month
period ended January 31, 2005.
(e) Earnings (loss) per common share:
Basic earnings (loss) per common share is calculated by dividing the net
earnings (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per common share is calculated by
dividing the applicable net earnings (loss) by the sum of the weighted average
number of common shares outstanding and all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued
during the period. The treasury stock method is used to compute the dilutive
effect of options, warrants and similar instruments.
F-37
BSD SOFTWARE, INC.
Notes to Consolidated Interim Financial Statements
(U.S. Dollars)
Six month period ended January 31, 2005
(Unaudited)
2. Significant accounting policies (continued):
(f) Deferred Income Taxes
The company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, 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. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment. To the
extent that realization of deferred tax assets is not considered to be "more
likely than not", a valuation allowance is provided.
(g) Minority Interest in TGBSI
Although the Company currently owns 90% of TGBSI, operations have resulted in
cumulative losses to January 31, 2005 and as a result the entire amount of these
losses have been reflected in these financial statements and no minority
interest has been calculated. Until such time as operations recover the
deficiency in minority interest of $227,000, the full 100% of operating results
will be reported with no off-setting minority interest.
3. Share capital:
The following reflects the number of issued common shares at their stated
capital of $0.001 per share.
--------------------------------------------------------------------------------------
Number of
Shares Paid-up capital
--------------------------------------------------------------------------------------
Balance, July 31, 2004 31,684,597 $ 31,685
Issued November 1, 2004 to January 31, 2005 126,300 126
--------------------------------------------------------------------------------------
Balance, January 31, 2005 31,810,897 $ 31,811
--------------------------------------------------------------------------------------
In November of 2004, 126,300 shares were issued to retire debt owed to certain
creditor's of the Company. The total amount of the debt retired was $ 39,153.
As well, stock options to purchase 600,000 shares at a strike price of $0.01 per
share, expiring August 2, 2005 were approved by the Board of Directors on August
2, 2003. On December 19, 2003 the Board of Directors approved stock options to
purchase 150,000 shares at a strike price of $0.01 per share with no expiry
date. As of February 16, 2005 these options had not been issued. All stock
options issued to July 31, 2004 have been issued to non-employees.
F-38
BSD SOFTWARE, INC.
Notes to Consolidated Interim Financial Statements
(U.S. Dollars)
Six month period ended January 31, 2005
(Unaudited)
4. Commitments and contingencies:
In December 2002, TGCI sued CanTalk for breach of contract. The action was
brought before the Court of Queen's Bench, Winnipeg, Canada. The case is styled
"Triton Global Communications v. CanTalk." The action alleges that CanTalk
failed to perform under an outsource agreement pursuant to which CanTalk was to
provide support for Triton's entry into the international operator service
market. In response to the suit, CanTalk filed a counterclaim against TGCI for
$10,000 alleging breach of contract. TGCI believes that CanTalk's counterclaim
is without merit and it intends to defend the counterclaim.
5. Related party transactions:
Wayside Solutions, Inc., a Corporation affiliated with the Company, provided
financing services to the Company. Accrued interest relating to these services
is included in interest and finance charges, aggregating $32,572 in the current
6 month period (2004 - $36,122).
Included in interest and finance charges for the current 6 month period is
accrued interest of $17,721 (2004 - $17,728) due to Guy Fietz, the President of
the company and a major shareholder.
These transactions are in the normal course of operations and are measured at
the exchange amount of consideration established and agreed to by the related
parties.
6. Financial instruments:
Accounts receivable with two customers represent approximately 75% (2004 - 75%)
of the balance of accounts receivable as at January 31, 2005. It is the opinion
of management that these accounts do not represent a significant credit risk.
A majority of the Company's purchases are from four (2004 - three) specific
vendors.
The Company has significant sales and purchases denominated in U.S. currency,
and is therefore exposed to financial risk resulting from fluctuations in
exchange rates and the degree of volatility of these rates.
The fair value of the following financial assets and financial liabilities
approximates fair value due to their immediate or short-term maturity or for
related party amounts due to their lack of a ready market:
o cash in bank;
o accounts receivable;
o accounts payable and accrued liabilities;
o shareholder loans;
o due to Guy Fietz;
o due to Wayside Solutions Inc., and
o notes payable.
F-39
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the Board of Directors of BSD Software, Inc.
We have audited the accompanying consolidated balance sheets of BSD Software,
Inc. (the "Company") as at July 31, 2004 and July 31, 2003, and the related
statements of operations and deficit and cash flows for the periods then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
July 31, 2004 and July 31, 2003, and the results of its operations and its cash
flows for the periods then ended 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 2 to the
consolidated financial statements, the Company has experienced operating losses
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
Chartered Accountants
Regina, Canada
September 24, 2004
F-40
BSD SOFTWARE, INC.
Consolidated Balance Sheets
July 31, 2004 and 2003
------------------------------------------------------------------------------------------------------------
(U.S. dollars) 2004 2003
------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash in bank $ 128,945 $ 74,930
Accounts receivable 834,937 484,585
Income taxes recoverable -- 31,484
Prepaid expenses 21,465 23,518
------------------------------------------------------------------------------------------------------------
985,347 614,517
Property, plant and equipment (note 5) 172,976 271,852
------------------------------------------------------------------------------------------------------------
$ 1,158,323 $ 886,369
------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 3,002,563 $ 2,725,598
Shareholder loans (note 6) 305,781 296,146
Due to Guy Fietz (note 7) 329,946 333,865
Due to Wayside Solutions Inc. (note 8) 666,433 726,366
Advances from investors (note 9) -- 929,983
Notes payable (note 10) 45,285 --
------------------------------------------------------------------------------------------------------------
4,350,008 5,011,958
Stockholders' deficiency:
Share capital (note 11):
Authorized:
Preferred stock 5,000,000 shares at $.001 par value Common
stock 50,000,000 shares at $.001 par value
Issued and outstanding:
31,684,597 common shares (July 31, 2003 - 30,710,427) 31,685 30,711
Additional paid-in capital 3,433,125 2,213,161
Deficit (5,975,892) (6,020,441)
Accumulated other comprehensive loss (note 12) (680,603) (349,020)
------------------------------------------------------------------------------------------------------------
(3,191,685) (4,125,589)
Going concern (note 2)
Commitments and contingencies (note 14)
------------------------------------------------------------------------------------------------------------
$ 1,158,323 $ 886,369
============================================================================================================
See accompanying notes to consolidated financial statements.
F-41
BSD SOFTWARE, INC.
Consolidated Statement of Operations and Deficit
For the periods ended July 31, 2004 and July 31, 2003
-------------------------------------------------------------------------------------------
(U.S. dollars) 2004 2003
-------------------------------------------------------------------------------------------
Revenue $ 6,091,101 $ 2,910,883
Cost of goods sold 4,618,371 2,532,475
-------------------------------------------------------------------------------------------
1,472,730 378,408
Expenses:
Administration 182,938 315,055
Interest and finance charges 253,328 298,463
Professional fees 334,946 458,842
Rent 90,396 54,274
Payroll 537,391 604,231
Amortization 77,093 62,600
Reduction in carrying value of goodwill (note 4) -- 2,611,679
Impairment of property, plant and equipment -- 992,399
-------------------------------------------------------------------------------------------
1,476,092 5,397,543
-------------------------------------------------------------------------------------------
Loss before the undernoted (3,362) (5,019,135)
Loss on disposal of property, plant and equipment (3,179) --
Gain on sale of contracts 51,090 159,406
-------------------------------------------------------------------------------------------
Net income (loss) 44,549 (4,859,729)
Deficit, beginning of period (6,020,441) (1,160,712)
-------------------------------------------------------------------------------------------
Deficit, end of period $ (5,975,892) $ (6,020,441)
===========================================================================================
Basic and diluted earnings (loss) per share $ 0.00 $ (0.19)
===========================================================================================
Weighted average shares outstanding 31,494,009 25,494,457
===========================================================================================
See accompanying notes to consolidated financial statements.
F-42
BSD SOFTWARE, INC.
Consolidated Statement of Cash Flows
For the periods ended July 31, 2004 and July 31, 2003
--------------------------------------------------------------------------------------------------------------
(U.S. dollars) 2004 2003
--------------------------------------------------------------------------------------------------------------
Cash flows from (used in):
Operations:
Net income (loss) $ 44,549 $(4,859,729)
Items not involving cash:
Non-cash financing costs 98,550 242,148
Amortization 77,093 62,600
Loss on disposal of property, plant and equipment 3,179 --
Reduction in carrying value of goodwill -- 2,611,679
Impairment of property, plant and equipment -- 992,399
Change in non-cash operating working capital:
Accounts receivable (350,352) 207,012
Income taxes recoverable 33,048
Short term investments -- 54,579
Prepaid expenses 2,053 37,932
Accounts payable and accrued liabilities 225,666 391,705
--------------------------------------------------------------------------------------------------------------
133,786 (259,675)
Financing:
Increase (decrease) in shareholder loans (15,717) 296,146
Decrease in note payable (10,599) (317,559)
Increase (decrease)in due to Wayside Solutions Inc. (63,706) 394,714
Increase in advances from investors -- 580,990
Decrease in due to Guy Fietz (22,678) (50,537)
Share issue costs -- (48,317)
--------------------------------------------------------------------------------------------------------------
(112,700) 855,437
Investing:
Proceeds on sale of property, plant and equipment 35,188 --
Purchase of property, plant and equipment (2,259) (17,222)
Advances to Triton Global Communications Inc. prior to acquisition -- (487,411)
Investment acquisition costs -- (265,823)
Advances receivable -- 93,934
Cash acquired on acquisition of Triton Global Communications Inc. -- 155,690
--------------------------------------------------------------------------------------------------------------
32,929 (520,832)
--------------------------------------------------------------------------------------------------------------
Increase in cash position 54,015 74,930
Cash position, beginning of period 74,930 --
--------------------------------------------------------------------------------------------------------------
Cash position, end of period $ 128,945 $ 4,930
==============================================================================================================
See accompanying notes to consolidated financial statements.
F-43
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
1. Nature of business:
BSD Software, Inc. (the "Company") operates as a holding company for the
purposes of investing in Triton Global Communications Inc. ("TGCI"), which is a
provider of billings, clearing house and information management services to the
tele-communications industry (note 4).
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for financial information and with the instructions to Form 10-KSB and
Regulation S-B of the Securities and Exchange Commission.
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. Going concern:
These financial statements have been prepared on a going concern basis in
accordance with United States generally accepted accounting principles. The
going concern basis of presentation assumes that the Company will continue in
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities and commitments in the normal course of business.
There is significant doubt about the appropriateness of the use of the going
concern assumption because the Company has experienced operating losses and has
a significant working capital deficiency.
The Company's ability to continue as a going concern is dependent upon
management's ability to raise additional financing and restore profitable
operations. During the year ended July 31, 2004, management continued to take
actions to reduce operating losses and is in the process of securing additional
financing. There is no assurance that additional financing will be obtained.
On December 9, 2003, the Company signed a letter of intent (LOI) to merge with
NeoMedia Technologies Inc. Pursuant to the LOI, it is anticipated that each
shareholder of the Company would receive one share of Neomedia's common stock
for each share of the Company's common stock held, up to a total of 40 million
shares. However, the LOI states that the final exchange rate for the shares will
be determined within ten business days of the date of the approval of the
merger. The transaction is subject to the parties entering into definitive
agreements, shareholder approval and other conditions. At the present time there
have been no financial transactions between the companies. There is no assurance
that the merger will be completed.
The ability of the Company to continue as a going concern and to realize the
carrying value of its assets and discharge its liabilities when due is dependent
on the successful completion of the actions taken or planned, some of which are
described above, which management believes will mitigate the adverse conditions
and events which raise doubt about the validity of the "going concern"
assumption used in preparing these financial statements. There is no certainty
that these and other strategies will be sufficient to permit the Company to
continue beyond July 31, 2005.
F-44
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
2. Going concern (continued):
The financial statements do not reflect adjustments that would be necessary if
the "going concern" assumption were not appropriate. If the "going concern"
basis was not appropriate for these financial statements, adjustments would be
necessary to the carrying value of assets and liabilities, the reported revenues
and expenses, and the balance sheet classifications used.
3. Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial statements include the accounts of Triton
Global Communications Inc. ("TGCI") and Triton Global Business
Services Inc. ("TGBSI"). TGCI was acquired by TGBSI on October 22,
2002 and these financial statements reflect the results of
operations for TGCI from that date forward. TGBSI acquired the
Company in a reverse takeover transaction effective November 4,
2002. As a result the Company changed its year end to July 31, 2003.
These statements reflect the consolidated operations of TGBSI from
August 1, 2002 forward consolidated with the Company from November
4, 2002. All significant inter-company balances and transactions
have been eliminated upon consolidation.
(b) Property, plant and equipment
Property, plant and equipment are stated at cost. Amortization is
provided using the straight-line method at the following rates:
--------------------------------------------------------------------------------
Asset Method
--------------------------------------------------------------------------------
Office furniture and equipment Straight line 5 years
Computer equipment Straight line 5 years
Computer software Straight line 3 years
Leasehold improvements Straight line 5 years
--------------------------------------------------------------------------------
Property, plant and equipment are assessed for potential impairment
when triggering events occur that indicate the carrying value may
not be recoverable. If the undiscounted estimated future net cash
flows are less than the carrying value of the asset, the impairment
loss is calculated as the amount by which the carrying value of the
asset exceeds its fair value. Fair value has been calculated as the
present value of estimated future net cash flows.
(c) Translation of foreign currency:
The functional currency of the operations is the Canadian dollar.
The financial statements are reported in United States dollars and
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 (note 12).
F-45
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
3. Significant accounting policies (continued):
(c) Translation of foreign currency (continued):
Revenue and expense transactions originating in U.S. dollars are
translated to Canadian dollars at rates in effect at the time of the
transaction. Foreign exchange gains and losses are included in
income.
(d) Revenue recognition:
Revenue is recognized at the time that calls are accepted by the
clearing house for billing to customers.
(e) Stock-based compensation:
Under the fair value based method, stock-based payments to
non-employees are measured at the fair value of the consideration
received, or the fair value of the equity instruments issued, or
liabilities incurred, whichever is more reliably measurable. The
fair value of stock-based payments to non-employees is periodically
re-measured until counterparty performance is complete, and any
change therein is recognized over the period and in the same manner
as if the Company had paid cash instead of paying with or using
equity instruments. The cost of stock-based payments to
non-employees that are fully vested and non-forfeitable at the grant
date is measured and recognized at that date.
(f) Earnings (loss) per common share:
Basic earnings (loss) per common share is calculated by dividing the
net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common
share is calculated by dividing the applicable net earnings (loss)
by the sum of the weighted average number of common shares
outstanding and all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued
during the period. The treasury stock method is used to compute the
dilutive effect of options, warrants and similar instruments.
(g) Deferred Income Taxes
The company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, 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. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the date of enactment. To the extent that
realization of deferred tax assets is not considered to be "more
likely than not", a valuation allowance is provided.
(h) Goodwill:
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Goodwill acquired in a purchase business
combination and determined to have an indefinite useful life is not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142.
F-46
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
4. Change in control and acquisitions:
The Company entered into a Share Exchange Agreement (the "Agreement")
dated October 23, 2002 with Triton Global Business Services, Inc.
("TGBSI") and four stockholders of TGBSI, who owned approximately 90% of
the issued and outstanding shares of TGBSI (the "TGBSI Shareholders").
TGBSI was the sole shareholder of Triton Global Communications Inc.
("TGCI"), which is a provider of billings, clearing house and information
management services to the tele-communications industry. Pursuant to the
Agreement, on November 4, 2002, the TGBSI Shareholders exchanged their
shares for an aggregate of 26,613,891 common shares of the Company at a
par value $0.001 per share. In addition, an aggregate of 1,615,760 common
shares were issued for nominal consideration to certain persons,
principally shareholders of the Company, who owned shares of the Company
prior to the share exchange.
As a result of these transactions, TGBSI became a majority-owned
subsidiary of the Company and the TGBSI Shareholders became the holders of
88.3% of the then issued 30,123,251 common shares of the Company. For
accounting purposes, as the Company was not an active business at the
time, the TGBSI transaction is accounted for as a recapitalization.
In connection with the share exchange, Jeffrey Spanier, the President and
sole employee and director of the Company, surrendered 4,000,000 shares of
common stock, constituting 67.9% of the common stock which was issued and
outstanding prior to the share exchange.
As a result of this recapitalization whereby TGBSI acquired the Company,
the holders of certain TGBSI common shares were offered the opportunity to
exchange their shares for up to an additional 2,470,349 common shares of
the Company. As a result, after such additional exchange a total of
34,154,946 common shares will be issued and outstanding, of which
29,084,240 shares will have been issued to the former shareholders of
TGBSI and the former shareholders of TGBSI will own 85.15% of the issued
and outstanding common shares of the Company. In connection with the
additional exchange of shares, the four majority shareholders of TGBSI
have agreed to return to the Company for cancellation, on a pro rata
basis, that number of common shares as may be necessary such that when all
shares of TGBSI are exchanged, the total number of common shares
outstanding shall equal 32,593,600 shares plus any issuances of common
shares after November 4, 2002. As of September 24, 2004 these share
transactions have not occurred.
As the TGBSI Shareholders ultimately control the Company, TGBSI was
designated as the acquirer in the transaction. The fair value of the
assets and liabilities acquired are as follows:
Investments and marketable securities $ 404
Accounts payable and accrued liabilities (2,040)
--------------------------------------------------------------------------------
Working capital deficiency assumed $(1,636)
--------------------------------------------------------------------------------
The above deficiency was charged to the Company's deficit account and the
financial statements reflect the financial position and results of TGBSI
from the date of its incorporation on May 28, 2002 forward. Additional
paid-in capital reflects the increase in share capital attributable to the
carrying value of TGBSI's share capital. The continuity of the Company's
issued share capital is outlined in note 11.
F-47
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
4. Change in control and acquisitions (continued):
TGBSI acquired TGCI effective October 31, 2002. The acquisition was
accounted for using the purchase method with the results of operations
being included from the date of acquisition. Details of the acquisition
are as follows:
Net deficiency acquired:
Current liabilities $ 2,655,306
Current assets (1,008,743)
Property, plant and equipment (1,171,081)
--------------------------------------------------------------------------------
475,482
Consideration paid:
Note payable to Guy Fietz 401,250
Shares of TGBSI issued 1,248,750
Acquisition costs 486,197
--------------------------------------------------------------------------------
2,136,197
--------------------------------------------------------------------------------
Goodwill upon acquisition of TGC $ 2,611,679
================================================================================
$149,002 of the above acquisition costs were included in accounts payable
at July 31, 2004. Subsequent to the acquisition of TGCI, the Company
conducted the goodwill impairment test, based upon a combination of
present value of cash flows and asset valuation methods, and determined
the entire amount of goodwill to be impaired as significant operating
losses had occurred and TGCI had a significant working capital deficiency.
As a result, the entire amount of goodwill was written off and charged to
operations during the year ended July 31, 2003.
Although the Company currently owns only 90% of TGBSI, operations have
resulted in cumulative losses to July 31, 2004 and as a result the entire
amount of these losses have been reflected in these financial statements
and no minority interest has been calculated. Until such time as
operations recover the deficiency in minority interest of $239,939 the
full 100% of operating results will be reported with no off-setting
minority interest.
F-48
5. Property, plant and equipment:
2004
-----------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-----------------------------------------------------------------------------
Office furniture and equipment $126,306 $ 65,578 $ 60,728
Computer equipment 165,020 85,413 79,607
Computer software 95,003 71,317 23,686
Leasehold improvements 16,553 7,598 8,955
-----------------------------------------------------------------------------
$402,882 $229,906 $172,976
-----------------------------------------------------------------------------
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
5. Property, plant and equipment (continued):
--------------------------------------------------------------------------------
2003
--------------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
--------------------------------------------------------------------------------
Office furniture and equipment $119,821 $ 34,807 $ 85,014
Computer equipment 204,134 68,763 135,371
Computer software 89,912 47,913 41,999
Leasehold improvements 13,526 4,058 9,468
--------------------------------------------------------------------------------
$427,393 $155,541 $271,852
================================================================================
6. Shareholder loans:
Amounts due to shareholders bear interest at rates varying from 8%-10% per
annum, are unsecured and due on demand.
7. Due to Guy Fietz:
Amounts due to Guy Fietz, a shareholder, bear interest at 10% annum, are
unsecured and due on demand.
8. Due to Wayside Solutions Inc.:
Amounts due to Wayside Solutions Inc., bear interest at 10% per annum and
are due on demand. A general security agreement has been provided by TGBSI
to Wayside Solutions Inc. as collateral.
9. Advances from investors:
During 2003, the Company received $929,983 from investors for the purchase
of common shares of TGBSI. Pursuant to Board of Directors resolutions on
January 30, 2004 and March 29, 2004 the advances from investors were
converted to shares in TGBSI resulting in an $887,001 charge to additional
paid-in capital. The remaining $42,982 was recorded as notes payable.
10. Notes payable:
Notes payable bear interest at rates varying from 5%-7%, are unsecured and
due on demand.
F-49
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
11. Share capital:
The following reflects the number of issued common shares at their stated
capital of $0.001 per share.
Number of Shares Assigned Value
Balance, August 1, 2002 1,893,600 $ 1,894
Issued to TGBSI shareholders (note 4) 26,613,891 26,614
Issued to BSD shareholders (note 4) 1,615,760 1,616
Issued November 4, 2002 to January 31, 2003 5,632,778 5,632
Issued February 1 to April 30, 2003 190,000 190
Shares cancelled (5,235,602) (5,235)
--------------------------------------------------------------------------------
Balance, July 31, 2003 30,710,427 30,711
Issued August 1 to October 31, 2003 317,170 317
Issued November 1, 2003 to January 31, 2004 657,000 657
--------------------------------------------------------------------------------
Balance, July 31, 2004 31,684,597 $ 31,685
================================================================================
The 5,632,778 shares issued from November 4, 2002 to January 31, 2003 were
issued as compensation for services rendered and for anticipated debt financing.
As the debt financing did not occur 5,235,602 shares related to this were
cancelled.
The 190,000 shares issued from February 1 to April 30, 2003 were issued as
compensation related to loans advanced to the Company on the basis of one share
for each dollar advanced. An expense of $38,000 has been recorded at a rate of
$0.20 per share as a financing cost included in interest and finance charges.
The 317,170 shares were issued as compensation related to loans advanced to the
Company on the basis of one share for each dollar advanced and as compensation
for legal fees of $14,000 and payroll costs of $12,000. An expense of $100,868
had been recorded at a rate of $0.40 per share as a financing cost included in
interest and finance charges for the year ended July 31, 2003. The legal fees
and payroll costs were also recorded for the year ended July 31, 2003.
On May 14, 2003 the Company entered into an agreement to issue warrants for
1,000,000 common shares, at an exercise price of $0.25 to a corporation as
consideration for consulting services. The right to exercise the warrants
expires August 31, 2005. These warrants were issued on August 20, 2003.
Management's best estimate of the fair value of the shares at the time of the
Agreement was approximately $0.40, as a result a charge for $150,000 was
recorded as professional fees expense for the year ended July 31, 2003.
In November of 2002, certain shareholders of the Company entered into
Accommodation Agreements with the Company to assist with financing corporate
operations. Under those Accommodation Agreements the Company issued 657,000
shares in the period ended January 31, 2004. Management's best estimate of the
fair value of the shares at the time the Company determined it was obligated to
issue the shares was approximately $0.15, as a result an expense of $98,550 has
been recorded as financing fees during the period ended October 31, 2003.
F-50
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
11. Share capital (continued):
As well, stock options to purchase 600,000 shares at a strike price of
$0.01 per share, expiring August 2, 2005 were approved by the Board of
Directors on August 2, 2003. On December 19, 2003 the Board of Directors
approved stock options to purchase 150,000 shares at a strike price of
$0.01 per share with no expiry date. As of September 24, 2004 these
options had not been issued. All stock options issued to July 31, 2004
have been issued to non-employees.
12. Comprehensive loss:
Comprehensive loss consists of net income (loss) and other gains and
losses affecting shareholders' investment that, under United States
generally accepted accounting principles, are excluded from net income.
Changes in the components of other comprehensive loss are as follows:
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Net income (loss) $ 44,549 $(4,859,729)
Other comprehensive loss:
Foreign currency translation adjustments (331,583) (349,020)
--------------------------------------------------------------------------------
Total comprehensive loss $ (287,034) $(5,208,749)
================================================================================
Accumulated other comprehensive loss of $(680,603) (July 31, 2003 -
$(349,020)) consists solely of foreign currency translation adjustments.
13. Income taxes:
Income tax recovery differs from the amount that would be computed by
applying the statutory income tax rate of 35% (2003 - 35%) for the
following reasons:
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Computed income tax (recovery) $ 15,592 $(1,608,202)
Non taxable items and other differences (305,289) 457,044
Adjustment to future tax assets for enacted
changes in tax losses and rates 20,038 --
Change in valuation allowance (269,659) 1,151,158
--------------------------------------------------------------------------------
$ -- $ --
================================================================================
F-51
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
13. Income taxes (continued):
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
-------------------------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------------------------
Deferred tax assets:
Non-capital losses carried forward $ 788,659 $ 324,864
Property, plant and equipment - difference in net book value
and undepreciated capital cost 181,537 369,250
Tax value of investment greater than accounting 450,621 457,044
-------------------------------------------------------------------------------------------------
1,420,817 1,151,158
Less valuation allowance (1,420,817) (1,151,158)
-------------------------------------------------------------------------------------------------
Deferred tax liabilities -- --
-------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
=================================================================================================
The Corporation had approximately $2,345,803 of non-capital losses
available at July 31, 2004 to reduce taxable income of future years. These
losses expire in periods from 2005 through 2014.
14. Commitments and contingencies:
The Company leases its business premises and certain office equipment
under operating leases. Total lease payments during the current period
totaled $90,396 (2003 - $138,353), net of sublease revenue of $109,817
(2003 - $32,097). Future lease payments will aggregate $265,592 as
follows:
2005 $ 63,759
2006 61,604
2007 58,242
2008 51,781
2009 30,206
-----------
$ 265,592
-----------
In addition, the Company leases premises with future lease payments of
approximately: 2005 - $136,667; 2006 - $132,317; 2007 - $113,165; 2008 -
$105,435 which are subleased for corresponding amounts over corresponding
lease terms.
In the normal course of operations the Company is subject to claims and
lawsuits. The Company is currently involved in various claims and
litigation, which they are defending. The Company or its subsidiaries are
aware of the following legal proceedings:
In December 2002, TGCI sued CanTalk for breach of contract. The action was
brought before the Court of Queen's Bench, Winnipeg, Canada. The case is
styled "Triton Global Communications v. CanTalk." The action alleges that
CanTalk failed to perform under an outsource agreement pursuant to which
CanTalk was to provide support for Triton's entry into the international
operator service market. In response to the suit, CanTalk filed a
counterclaim against TGCI for $10,000 alleging breach of contract. TGCI
believes that CanTalk's counterclaim is without merit and it intends to
defend the counterclaim.
F-52
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
14. Commitments and contingencies (continued):
In June 2003, PBJ Holdings Inc. filed a Statement of Claim against TGBSI
in the Court of Queen's Bench of Alberta for breach of contract alleging
that TGBSI failed to pay $125,000 for the introduction of TGBSI to BSD
Software, Inc. TGBSI believes the claim is without merit and intends to
defend the claim.
As of July 31, 2004 management has accrued a provision based upon their
best estimate as to the likely outcome of these claims. This provision was
charged to administration expense during the year ended July 31, 2003 and
adjusted in the current period for legal actions settled.
15. Related party transactions:
Wayside Solutions, Inc., a Corporation affiliated with the Company,
provided financing services to the Company. The cost of these services,
aggregating $127,579 (2003 - $140,896), was charged to professional fees
expenses.
Included in interest and finance charges is accrued interest of $34,119
(2003 - $26,575) due to Guy Fietz, the President of the company and a
major shareholder.
Jeremy Fietz, the brother of Guy Fietz, provided professional services to
the Company aggregating $20,370 (2003 - $14,000), which has been charged
to professional fees. The amount recorded during 2003 was paid through the
issuance of 35,000 common shares of the Company (note 11).
These transactions are in the normal course of operations and are measured
at the exchange amount of consideration established and agreed to by the
related parties.
16. Financial instruments:
Accounts receivable with two customers represent approximately 73% (2003 -
72%) of the balance of accounts receivable as at July 31, 2004. It is the
opinion of management that these accounts do not represent a significant
credit risk.
A majority of the Company's purchases are from three (2003 - one) specific
vendors.
The Company has significant sales and purchases denominated in U.S.
currency, and is therefore exposed to financial risk resulting from
fluctuations in exchange rates and the degree of volatility of these
rates.
The fair value of the following financial assets and financial liabilities
approximates fair value due to their immediate or short-term maturity or
for related party amounts due to their lack of a ready market:
o cash in bank;
o accounts receivable;
o income taxes recoverable;
o accounts payable and accrued liabilities;
o shareholder loans;
o due to Guy Fietz;
o due to Wayside Solutions Inc.;
o advances from investors; and
o notes payable.
F-53
BSD SOFTWARE, INC.
Notes to Consolidated Financial Statements
(U. S. Dollars)
Periods ended July 31, 2004 and July 31, 2003
17. Comparative figures:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current period.
F-54
PRO FORMA FINANCIAL INFORMATION
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)
1. Basis of Presentation
Acquisition of CSI International
On February 6, 2004, NeoMedia acquired CSI International, Inc., of Calgary,
Alberta, Canada ("CSI"), 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 have centralized the administrative functions in its Ft. Myers, Florida
headquarters, and maintain 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
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.
The pro forma condensed combined historical statement of operations gives effect
to the acquisitions of BSD and CSI as if they had occurred as of January 1,
2004, combining the historical results of NeoMedia for the year ended December
31, 2004 with the historical results of the same period for BSD and CSI.
The pro forma condensed combined balance sheet gives effect to the acquisitions
of BSD and CSI as if they had occurred as of December 31, 2004.
The pro forma combined financial statements included in this filing have been
prepared by the managements of NeoMedia, BSD and CSI without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, the managements of NeoMedia, BSD and CSI
believe that the disclosures are adequate to make the information not
misleading.
The pro forma adjustments are based on currently available information and upon
estimates and assumptions that we believe are reasonable under the
circumstances. The pro forma financial data do not purport to represent what
NeoMedia's financial position or results of operations would actually have been
if such transactions had occurred on those dates and are not necessarily
representative of NeoMedia's financial position or results of operations for any
future period. The pro forma financial statements should be read in conjunction
with the separate historical financial statements and footnotes of NeoMedia
included in Form 10-KSB for the year ended December 31, 2004 (included herein),
with the separate historical financial statements and footnotes of BSD included
in Form 10-KSB for the year ended July 31, 2004 (included herein), and CSI.
2. Preliminary Purchase Price Allocation
A final determination of the allocation of the purchase price to the assets
acquired and liabilities assumed has not been made, and the allocation reflected
in the unaudited pro forma combined financial statements should be considered
preliminary and is subject to the completion of a more comprehensive valuation
of the assets acquired and liabilities assumed. The final allocation of purchase
price could differ materially from the pro forma allocation included herein.
3. Pro forma Net Loss Per Share
The pro forma basis and dilutive net loss per share are based on the weighted
average number of shares of pro forma NeoMedia's common stock as if the shares
issued to acquire BSD had taken place at the beginning of each of the reporting
periods. Dilutive shares are not included in the computation of pro forma
dilutive net loss per share as their effect would be anti-dilutive.
F-55
NeoMedia Technologies, Inc.
Pro-forma Condensed Combined Balance Sheet
December 31, 2004
(In thousands of US Dollars)
(Unaudited)
Pro-forma Pro-forma
ASSETS NeoMedia BSD Adjustments Combined
-------- -------- ----------- --------
Current assets:
Cash and cash equivalents $ 2,634 $ 46 -- $ 2,680
Trade accounts receivable, net 282 948 -- 1,230
Inventories, net 115 -- -- 115
Loans receivable -- -- -- --
Prepaid expenses and other current assets 386 13 -- 399
-------- -------- -------- --------
Total current assets 3,417 1,007 -- 4,424
Property and equipment, net 110 130 -- 240
Capitalized patents, net 2,174 -- -- 2,174
Micro paint repair chemical formulations
and proprietary process 1,630 -- -- 1,630
Goodwill 1,099 -- 5,584(A) 6,683
Other intangible assets 221 -- -- 221
Investment in iPoint-media, Ltd. 1,000 -- -- 1,000
Cash surrender value of life insurance policy 728 -- -- 728
Other long-term assets 27 -- -- 27
-------- -------- -------- --------
Total assets $ 10,406 $ 1,137 $ 5,584 $ 17,127
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,911 $ 3,174 -- $ 5,085
Amounts payable under settlement agreements 103 -- -- 103
Liabilities in excess of assets of
discontinued business unit 676 -- -- 676
Income taxes payable -- -- -- --
Sales taxes payable 108 -- -- 108
Accrued expenses 1,566 -- -- 1,566
Deferred revenues and other 514 -- -- 514
Shareholder loans 276 276 --
Due to Guy Fietz -- 365 -- 365
Due to Wayside Solutions, Inc. -- 599 -- 599
Bonuses payable -- 33 -- 33
Notes payable 1,136 30 -- 1,166
-------- -------- -------- --------
Total liabilities 6,014 4,477 -- 10,491
-------- -------- -------- --------
Shareholders' deficit:
Preferred stock -- -- -- --
Common stock (B) 4,325 32 53(A) 4,410
Additional paid-in capital 84,728 3,794 (1,634)(A) 86,888
Deferred stock-based compensation (445) -- -- (445)
Accumulated other comprehensive -- -- --
income (loss) - currency translation adjustment (60) (1,064) 1,064(A) (60)
Retained earnings (accumulated deficit) (83,377) (6,102) 6,102(A) (83,377)
Treasury stock (779) -- -- (779)
-------- -------- -------- --------
Total shareholders' deficit 4,392 (3,340) 5,584 6,636
-------- -------- -------- --------
Total liabilities and shareholders' deficit $ 10,406 $ 1,137 $ 5,584 $ 17,127
======== ======== ======== ========
Pro-forma Adjustments
(A) - Adjustment for stock and cash issued to acquire BSD Software, Inc.,
assuming acquisition occurred as of December 31, 2004. Purchase price is
calculated as:(Number of BSD shares outstanding) x (0.07) / (NeoMedia
stock price at the time of acquisition). Pro-forma purchase price is
calculated using NeoMedia's closing stock price on December 31, 2004 of
$0.265, and is subject to final allocation upon consummation of the
merger, which is equal to the fair value of common stock issued in the
amount of $2,244 plus negative equity of BSD in the amount of $3,340
totaling $5,584. The accumulated deficit and accumulated other
comprehensive income of BSD have been eliminated in the proforma
adjustment.
(B) - NeoMedia's $0.01 par value common stock consists of 1,000,000,000
authorized shares, 436,746,758 shares historical and 445,215,674 shares
pro forma issued; and 432,525,053 historical and 440,993,969 pro forma
outstanding as of December 31, 2004.
F-56
NeoMedia Technologies, Inc.
Pro-forma Combined Condensed Statement of Operations
For the Twelve Months Ended December 31, 2004
(In thousands of US Dollars, except per share data)
(Unaudited)
Pro-forma
CSI Adjust- Pro-forma
NeoMedia(A) BSD Int'l(B) ments Consolidated
-------------- -------------- -------------- -------------- --------------
NET SALES:
License fees $ 343 -- -- -- $ 343
Resale of software and
technology equipment
and service fees 630 -- -- -- 630
Micro paint revenue 727 -- 64 -- 791
Telecom services revenue -- 6,511 -- -- 6,511
-------------- -------------- -------------- -------------- --------------
Total net sales 1,700 6,511 64 -- 8,275
-------------- -------------- -------------- -------------- --------------
COST OF SALES:
License fees 324 -- -- -- 324
Resale of software and
technology equipment and
service fees 604 -- -- -- 604
Micro paint direct cost of revenue 541 -- 35 -- 576
Telecom services direct cost
of revenue -- 5,068 -- -- 5,068
-------------- -------------- -------------- -------------- --------------
Total cost of sales 1,469 5,068 35 -- 6,572
-------------- -------------- -------------- -------------- --------------
GROSS PROFIT 231 1,443 29 -- 1,703
Selling, general and
administrative expenses 4,261 1,218 55 -- 5,534
Research and development costs 651 -- -- -- 651
-------------- -------------- -------------- -------------- --------------
Income (loss) from operations (4,681) 225 (26) -- (4,482)
Gain on extinguishment
of debt, net 140 -- -- -- 140
Loss on sale of assets -- (12) -- -- (12)
Amortization of debt discount (2,500) -- -- -- (2,500)
Interest expense, net (189) (144) -- -- (333)
-------------- -------------- -------------- -------------- --------------
Income (loss) before provision
for income taxes (7,230) 69 (26) -- (7,187)
Provision for income taxes -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Net income (loss) (7,230) 69 (26) -- (7,187)
Other comprehensive income (loss):
Foreign currency translation
adjustment (60) -- -- -- (60)
-------------- -------------- -------------- -------------- --------------
Comprehensive income (loss) ($ 7,290) $ 69 ($ 26) $-- ($ 7,247)
============== ============== ============== ============== ==============
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED ($ 0.02) ($ 0.02)
============== ==============
COMPREHENSIVE INCOME (LOSS)
PER SHARE--BASIC AND DILUTED ($ 0.02) ($ 0.02)
============== ==============
Weighted average number of common
shares-basic and diluted 329,362,127 16,879,621(C) 346,241,748
============== ============== ==============
Pro-forma Adjustments
(A) - NeoMedia results include operations of CSI International for the period
February 6, 2004 (the date of acquisition) through December 31, 2004
(B) - Results of CSI International, Inc. are for the period January 1, 2004
through February 6, 2004 (the date of acquisition)
(C) - Adjustment for: (i) 7,000,000 shares issued in connection with CSI
acquisition as if shares were issued on January 1, 2004; and (ii)
16,189,210 shares that would have been issued in connection with BSD
acquisition if it had occurred on January 1, 2004 and been based on the
price of NeoMedia common stock at that time.
F-57
INDEPENDENT AUDITORS' REPORT
Board of Directors
CSI International Inc.
Calgary, Alberta Canada
We have audited the accompanying balance sheets of CSI International Inc. as of
August 31, 2003 and 2002, and the related statements of income and comprehensive
income, changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
respects, the financial position of CSI International Inc. as of August 31, 2003
and 2002, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Eisner LLP
New York, New York
January 23, 2004
F-58
CSI INTERNATIONAL INC.
Balance Sheets
(in U.S. dollars)
August 31,
-----------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 136,000 $ 126,000
Accounts receivable, net of allowance for doubtful
accounts of $13,000 for 2003
and $9,000 for 2002 60,000 38,000 60,000 38,000
Inventories 13,000 10,000
Other current assets 1,000 1,000
--------- ---------
Total current assets 210,000 175,000
Investments 51,000
Property and equipment, net 7,000 2,000
--------- ---------
$ 268,000 $ 177,000
========= =========
LIABILITIES
Current liabilities:
Accounts payables $ 22,000 $ 17,000
Accrued expenses 36,000 12,000
Income taxes payable 12,000 8,000
Due to stockholder 14,000
--------- ---------
Total current liabilities 70,000 51,000
--------- ---------
Commitments (Note F)
STOCKHOLDERS' EQUITY
Common stock - no par value: 20,000 shares authorized; 100 shares
issued and outstanding in 2003 and 2002, respectively
Accumulated other comprehensive income (loss) - currency translation adjustment 7,000 (7,000)
Retained earnings 191,000 133,000
--------- ---------
198,000 126,000
--------- ---------
$ 268,000 $ 177,000
========= =========
See notes to financial statements
F-59
CSI INTERNATIONAL INC.
Statements of Income and Comprehensive Income
(in U.S. dollars)
August 31,
------------------------
2003 2002
--------- ---------
Revenue $ 544,000 $ 438,000
Direct cost of revenue 338,000 283,000
--------- ---------
Gross profit 206,000 155,000
--------- ---------
Operating costs and expenses:
Selling, general and administrative 148,000 122,000
Depreciation and amortization 2,000 1,000
--------- ---------
150,000 123,000
--------- ---------
Income from operations 56,000 32,000
Gain on equity securities received in connection with advances (net) 13,000
Interest expense (4,000)
Loss on sale of assets (19,000)
--------- ---------
Income before provision for income taxes 69,000 9,000
Provision for income taxes (11,000) (6,000)
--------- ---------
Net income 58,000 3,000
Other comprehensive income:
Foreign currency translation adjustment 14,000 6,000
--------- ---------
Comprehensive income $ 72,000 $ 9,000
========= =========
See notes to financial statements
F-60
CSI INTERNATIONAL INC.
Statements of Changes in Stockholders' Equity
(in U.S. dollars)
Accumulated
Other
Comprehensive
Number of Retained (Loss) Stockholders'
Shares Amount Earnings Income Equity
-------- -------- -------- -------- --------
Balance - September 1, 2001 100 $ -- $130,000 ($13,000) $117,000
Net income -- 3,000 3,000
Translation adjustment -- 6,000 6,000
-------- -------- -------- -------- --------
Balance - August 31, 2002 100 -- 133,000 (7,000) 126,000
Net income -- 58,000 58,000
Translation adjustment -- 14,000 14,000
-------- -------- -------- -------- --------
Balance - August 31, 2003 100 $ -- $191,000 $ 7,000 $198,000
======== ======== ======== ======== ========
See notes to financial statements
F-61
CSI INTERNATIONAL INC.
Statement of Cash Flows
(in U.S. dollars)
Year Ended August 31,
------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 58,000 $ 3,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,000 1,000
Loss on disposal of assets 19,000
Gain on equity securities received in connection with advances (13,000)
Changes in:
Accounts receivable (22,000) 11,000
Inventories (3,000) 2,000
Other current assets (1,000)
Accounts payable and accrued expenses 29,000 12,000
Income taxes payable 4,000 8,000
--------- ---------
Net cash provided by operating activities 55,000 55,000
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (7,000)
Investment in equity securities (6,000)
Proceeds from disposal of property 120,000
Advances to third party (45,000)
Repayments from third party 13,000
--------- ---------
Net cash (used in) provided by investing activities (45,000) 120,000
--------- ---------
Cash flows from financing activities:
Repayment of mortgage payable (82,000)
Repayments of amounts due to stockholder (14,000) (72,000)
--------- ---------
Net cash used in financing activities (14,000) (154,000)
--------- ---------
Effect of exchange rate changes on cash 14,000 31,000
--------- ---------
Net increase in cash and cash equivalents 10,000 52,000
Cash and cash equivalents, beginning of year 126,000 74,000
--------- ---------
Cash and cash equivalents, end of year $ 136,000 $ 126,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Income taxes $ 7,000
Interest $ 4,000
Supplemental disclosure of noncash financing information:
Reduction in due to stockholder in lieu of payment from sale of building $ 41,000
See notes to financial statements
F-62
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) COMPANY:
CSI International Inc. (the "Company") was incorporated in Calgary, Alberta
Canada in 1992 under the name Chip Repair Systems of Canada, Inc. In 1993, the
Company changed its name to Chip Repair Systems International Inc. and in 1996,
the Company changed its name to CSI International Inc.
The Company licenses a technology developed by its founder and significant
stockholder. The technology provides for a more efficient and economical method
to repair paint related damage to vehicles.
The Company conducts its business primarily in the province of Alberta.
(2) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
The financial position and results of operations of the Company are determined
using local currency as the functional currency (Canadian dollar). Assets and
liabilities are translated at the prevailing exchange rate in effect at each
year end. Investments, property and equipment, due to stockholder and
contributed capital accounts are translated using the historical rates of
exchange when the transaction is completed. Income statement amounts are
translated at the average exchange rate during the year. Translation adjustments
arising from the use of different exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders equity
under comprehensive income. Gains and losses resulting from foreign currency
transactions are included in operations. There were no gains or losses from
foreign currency transactions in 2003 or 2002.
(3) REVENUE RECOGNITION:
Revenue related to product sales is recognized when the products are shipped to
customers and collection is reasonably assured. Revenue related to service
repairs is recognized upon customer acceptance.
(4) CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(5) INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined on a
first-in, first-out method.
(6) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 7 years. Leasehold
improvements are amortized on a straight-line basis over the useful lives or the
term of the related lease, whichever is shorter.
F-63
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(7) LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
records impairment losses on long-lived assets used in operations or expected to
be disposed of when indicators of impairment exist and the cash flows expected
to be derived from those assets are less than carrying amounts of those assets.
No such indicators existed and the Company did not record any impairment charge
for the years ended August 31, 2003 and 2002.
(8) INCOME TAXES:
Deferred income taxes are determined based upon enacted tax laws in Canada and
rates applied to the differences between the financial statements and tax basis
of assets and liabilities.
(9) USE OF ESTIMATES:
The preparation of 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 and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any adjustments when necessary.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, accounts receivable, investments, accounts payable
and accrued expenses approximate fair value due to the short-term nature of
those instruments.
(11) ADVERTISING COSTS:
Advertising costs incurred during the years ended August 31, 2003 and 2002 were
$5,000 and $3,000, respectively.
NOTE B - INVESTMENTS
In fiscal 2003, the Company invested $6,000 in exchange for 4,257 shares of
common stock of Triton Global Business Services, Inc. ("Triton"), an unrelated
third party. These shares are restricted and are recorded at cost as of August
31, 2003. The Company's ownership percentage in Triton is de minimis.
During fiscal 2003, the Company advanced $45,000 to Triton, a subsidiary of BSD
Software, Inc. ("BSDS"), a public company. The general terms of the advances
included repayment within 30 days with interest at a rate of 8% per annum. In
connection with these advances, the Company received 61, 684 restricted common
shares of BSDS. In addition, the Company received an additional 48,160 shares of
BSDS as consideration for extending the notes. As of the advance dates, the
Company ascribed no value to the notes. The Company accredited the value of the
notes as interest income over the repayment period (30 days). The Company
received payment of $13,000 during fiscal 2003 and wrote the remaining balance
($32,000) off as noncollectible.
F-64
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE B - INVESTMENTS (CONTINUED)
The Company ascribed a value of $45,000 in connection with the advances based
upon the share price at the date of each advance limited to the amounts advanced
to the third party. In addition, the Company ascribed a value of $53,000 and a
corresponding increase to interest income for the additional shares recieved as
consideration for extending the repayment date of the advances. As of August 31,
2003, the Company determined that a decline in the market value of such shares
was other than temporary and recorded a loss of $53,000 to reduce the recorded
value to its then market value.
NOTE C - PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows:
August 31,
-------------------
2003 2002
------- -------
Computers $ 8,000 $ 8,000
Equipment 33,000 33,000
Leasehold improvements 7,000
------- -------
48,000 41,000
Less accumulated depreciation and amortization 41,000 39,000
------- -------
$ 7,000 $ 2,000
======= =======
Depreciation and amortization expense for the years ended August 31, 2003 and
2002 was $2,000 and $1,000, respectively.
NOTE D - RELATED PARTY
A stockholder and a founder had advanced funds to the Company prior to fiscal
2002 for working capital purposes. The advances were noninterest bearing and due
on demand. The amount due to stockholder was repaid in fiscal 2003.
The Company leases its facility from a stockholder and founder (see Note G).
NOTE E - INCOME TAXES
Provision for income taxes for the years ended August 31, 2003 and 2002 consists
of the following:
Year Ended August 31,
-----------------------------------
2003 2002
--------------- ---------------
Current $11,000 $6,000
=============== ===============
F-65
CSI INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2003 AND 2002
NOTE F - COMMITMENTS
The Company leases premises under a long-term operating lease (as extended in
September 2003) from a rleated party (see Note D) expiring August 31, 2008.
Under this lease, the Company has the following obligations for annual rentals:
2004 $21,000
2005 21,000
2006 21,000
2007 21,000
2008 21,000
---------------
$105,000
===============
Rent expense for the years ended August 31, 2003 and 2002 amounted to
approximately $14,000 and $4,000, respectively.
NOTE G - LOSS ON DISPOSAL OF ASSETS
(1) BUILDING:
During fiscal 2002, the Company sold the building it occupied to a stockholder
and founder. The sale price of the building was $161,000. The sales price
consisted of $120,000 of cash and a reduction of $41,000 in amount due to
stockholder. The net book value of the building at the date of sale was $139,000
resulting in a gain of $22,000.
(2) MARKETABLE SECURITIES:
During fiscal 2002, the Company recorded a loss on marketable securities of
$41,000 as such securities expired worthless.
NOTE H - CONCENTRATION OF CREDIT RISK
As of August 31, 2003, two customers accounted for 24% and 12% of total accounts
receivable.
As of August 31, 2003, one vendor accounted for 37% of accounts payable.
NOTE I - SUBSEQUENT EVENTS
(1) LETTER OF INTENT:
The Company has entered into a letter of intent as of November 2, 2003 to enter
into a merger agreement with Neomedia Technologies, Inc. ("Neomedia"), a public
company, located in Florida, USA, in which the Company would become a wholly
owned subsidiary of Neomedia. Consideration for this transaction will consist of
$2,500,000 in cash and 7 million newly issued shares of common stock of
Neomedia.
(2) LEASE:
The Company leased a new automobile in December 2003. The lease is for a term of
4 years with a monthly rental of $1,000.
(3) INVESTMENTS:
As of January 23, 2004, the closing price of BSDS of common stock was $.22 per
share, resulting in a decrease in market value of such shares of $21,000.
F-66
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
As permitted by the Delaware General Corporation Law (the "DGCL"),
NeoMedia has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, except for
liability (i) for any breach of the director's duty of loyalty to NeoMedia or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of this provision is
to eliminate the rights of NeoMedia and its stockholders (through stockholders'
derivative suits on behalf of NeoMedia) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director except in the
situations described in clauses (i) through (iv) above. This provision does not
limit nor eliminate the rights of NeoMedia or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
The Certificate of Incorporation and the bylaws of NeoMedia provide that
it is required and permitted to indemnify our officers and directors, employees
and agents under certain circumstances. In addition, if permitted by law,
NeoMedia is required to advance expenses to our officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, NeoMedia is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
NeoMedia in which indemnification would be required or permitted.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers
or controlling persons of NeoMedia pursuant to the foregoing provisions, or
otherwise, NeoMedia has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith or incorporated herein by
reference:
Exhibit No. Description Location
----------- ----------------------------- --------------------------
3.1 Articles of Incorporation of Incorporated by reference
Dev-Tech Associates, Inc. to Exhibit 3.1 to
and amendment thereto 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
II-1
Exhibit No. Description Location
----------- ----------------------------- --------------------------
3.3 Restated Certificate of Incorporated by reference
Incorporation of DevSys, Inc. to Exhibit 3.3 to
Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.4 Bylaws 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 Incorporated by reference
Agreement and Plan of Merger to Exhibit 3.5 to
of DevSys, Inc and Dev-Tech Registrant's Registration
Associates, Inc. Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.6 Certificate of Merger of Incorporated by reference
Dev-Tech Associates, Inc. to Exhibit 3.6 to
into DevSys, Inc. Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.7 Articles of Incorporation of Incorporated by reference
Dev-Tech Migration, Inc. and to Exhibit 3.7 to
amendment thereto Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.8 Bylaws of Dev-Tech Incorporated by reference
Migration, Inc. to Exhibit 3.8 to
Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.9 Restated Certificate of Incorporated by reference
Incorporation of DevSys to Exhibit 3.9 to
Migration, Inc. Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.10 Form of Bylaws of DevSys Incorporated by reference
Migration, Inc. to Exhibit 3.10 to
Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.11 Form of Agreement and Plan Incorporated by reference
of Merger of Dev-Tech to Exhibit 3.11 to
Migration, Inc. into DevSys Registrant's Registration
Migration, Inc. Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
3.12 Form of Certificate of Incorporated by reference
Merger of Dev-Tech to Exhibit 3.12 to
Migration, Inc. into DevSys Registrant's Registration
Migration, Inc. Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
II-2
Exhibit No. Description Location
----------- ----------------------------- --------------------------
3.13 Certificate of Amendment to Incorporated by reference
Certificate of Incorporation to Exhibit 3.13 to
of DevSys, Inc. changing its Registrant's Registration
name to NeoMedia Statement No. 333-5534 as
Technologies, Inc. filed with the SEC on
November 25, 1996
3.14 Form of Certificate of Incorporated by reference
Amendment to Certificate of to Exhibit 3.14 to
Incorporation of NeoMedia Registrant's Registration
Technologies, Inc. Statement No. 333-5534 as
authorizing a reverse stock filed with the SEC on
split November 25, 1996
3.15 Form of Certificate of Incorporated by reference
Amendment to Restated to Exhibit 3.5 to
Certificate of Incorporation Registrant's Annual
of NeoMedia Technologies, Report as filed with the
Inc. increasing authorized SEC on November 2, 2001
capital and creating
preferred stock
5.1 Opinion re: legality To Be Filed By Amendment
10.1 Dev-Tech Associates, Inc. Incorporated by reference
1996 Stock Option Plan to Exhibit 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 Incorporated by reference
Restatement of Dev-Tech to Exhibit 10.45 to the
Associates, Inc. 1996 Stock Registrant's Registration
Option Plan Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
10.3 Form of Stock Option Incorporated by reference
Agreement - Dev-Tech to Exhibit 10.46 to the
Associates, Inc. Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
10.4 Dev-Tech Migration, Inc. Incorporated by reference
1996 Stock Option Plan to Exhibit 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 Incorporated by reference
Restatement of Dev-Tech to Exhibit 10.48 to the
Migration, Inc. Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
10.6 Form of Stock Option Incorporated by reference
Agreement - Dev-Tech to Exhibit 10.49 to the
Migration, Inc. Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
10.7 Dev-Tech Associates, Inc. Incorporated by reference
401(k) Plan and amendments to Exhibit 10.50 to the
Registrant's Registration
Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
II-3
Exhibit No. Description Location
----------- ----------------------------- --------------------------
10.8 First Amendment and Incorporated by reference
Restatement of NeoMedia to Exhibit 10.60 to the
Technologies, Inc. 1996 Registrant's Registration
Stock Option Plan Statement No. 333-5534 as
filed with the SEC on
November 25, 1996
10.9 NeoMedia Technologies, Inc. Incorporated by reference
1998 Stock Option Plan to Exhibit 10.9 to the
Registrant's Form 10-KSB
as filed on March 9, 2004
10.10 Amendment to NeoMedia Incorporated by reference
Technologies 1998 Stock to Form 14A as filed with
Option Plan the SEC on July 2, 1999
10.11 Sale and Purchase Agreement Incorporated by reference
between Qode.com, Inc. and to Exhibit 10.48 to the
NeoMedia Technologies, Inc. Registrant's Current
Report on Form 8-K as
filed with the SEC on
March 15, 2001
10.12 Warrant repricing letter Incorporated by reference
dated March 19, 2002 to Exhibit 1.2 to the
Registrant's Current
Report on Form 8-K as
filed with the SEC on
April 2, 2002
10.13 Option repricing letter Incorporated by reference
dated April 3, 2002 to Exhibit 1.2 to the
Registrant's Current
Report on Form 8-K as
filed with the SEC on
April 15, 2002
10.14 Intellectual Property Incorporated by reference
licensing agreement between to Exhibit 10.18 to the
NeoMedia and A.T. Cross Registrant's Form S-1/A
Company as filed with the SEC on
April 24, 2002
10.15 Intellectual Property Incorporated by reference
licensing agreement between to Exhibit 10.19 to the
NeoMedia and Symbol Registrant's Form S-1/A
Technologies, Inc. as filed with the SEC on
April 24, 2002
10.16 Sponsorship and Advertising Incorporated by reference
Agreement between NeoMedia to Exhibit 10.20 to the
and About.com, Inc. Registrant's Form S-1/A
as filed with the SEC on
April 24, 2002
10.17 Letter of Intent regarding Incorporated by reference
proposed strategic to Exhibit 10.21 to the
transaction between NeoMedia Registrant's Form S-1/A
and AirClic, Inc. as filed with the SEC on
April 24, 2002
10.18 Form of Promissory Note Incorporated by reference
issued to AirClic, Inc. to Exhibit 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 Incorporated by reference
Promissory Note issued in to Exhibit 10.23 to the
exchange for 19 Million Registrant's Form S-1/A
Shares of Common Stock as filed with the SEC on
April 24, 2002
II-4
Exhibit No. Description Location
----------- ----------------------------- --------------------------
10.20 Nasdaq Staff Determination Incorporated by reference
Letter with respect to to Exhibit 10.24 to the
de-listing of NeoMedia Registrant's Form S-1/A
securities from the Nasdaq as filed with the SEC on
SmallCap market April 24, 2002
10.21 Revised warrant repricing Incorporated by reference
letter dated April 3, 2002 to Exhibit 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 Incorporated by reference
Agreement, dated May 6, to Exhibit 10.17 to the
2002, between NeoMedia Registrant's Quarterly
Technologies and Cornell Report on Form 10-Q as
Capital Partners, LP filed with the SEC on
August 14, 2002
10.23 Nasdaq Staff delisting Incorporated by reference
notification letter dated to Exhibit 10.18 to the
May 16, 2002 Registrant's Quarterly
Report on Form 10-Q as
filed with the SEC on
August 14, 2002
10.24 Settlement Agreement Incorporated by reference
relating to wrongful to Exhibit 10.19 to the
termination lawsuit brought Registrant's Form 10-Q as
by former president and filed with the SEC on
Chief Operating Officer August 14, 2002
10.25 Mutual settlement agreement Incorporated by reference
by and between NeoMedia to Exhibit 10.20 to the
Technologies and 2150 Registrants Form 10-Q as
Western Court Company, LLC filed on November 14, 2002
10.26 Mutual settlement agreement Incorporated by reference
by and between NeoMedia to Exhibit 10.21 to the
Technologies and Ripfire, Registrants Form 10-Q as
Inc. filed on November 14, 2002
10.27 Mutual settlement agreement Incorporated by reference
by and between NeoMedia to Exhibit 10.22 to the
Technologies and Wachovia Registrants Form 10-Q as
Bank, N.A. filed on November 14, 2002
10.28 Mutual settlement agreement Incorporated by reference
by and between NeoMedia to Exhibit 10.23 to the
Technologies and Marianne Registrants Form 10-Q as
LePera, NeoMedia filed on November 14, 2002
Technologies' former General
Counsel
10.29 Equity Line of Credit Incorporated by reference
Agreement, dated February to Exhibit 10.80 to the
11, 2003, between NeoMedia Registrants Form S-1/A as
Technologies and Cornell filed on February 14, 2003
Capital Partners
10.30 Form of Placement Agent Incorporated by reference
Agreement, dated November to Exhibit 10.84 to the
2002, between NeoMedia Registrant's Form S-1 as
Technologies and Westrock filed on February 12, 2003
Advisors, Inc.
10.31 Form of Escrow Agreement, Incorporated by reference
dated November 2002, between to Exhibit 10.85 to the
NeoMedia Technologies and Registrant's Form S-1 as
Cornell Capital Partners filed on February 12, 2003
II-5
Exhibit No. Description Location
----------- ----------------------------- --------------------------
10.32 Form of Registration Rights Incorporated by reference
Agreement, dated November to Exhibit 10.86 to the
2002, between NeoMedia Registrant's Form S-1 as
Technologies and Cornell filed on February 12, 2003
Capital Partners
10.33 Promissory Note, dated Incorporated by reference
February 23, 2001, between to Exhibit 10.87 to the
Digital Convergence Registrant's Form S-1 as
Corporation and NeoMedia filed on February 12, 2003
10.34 Termination Agreement, dated Incorporated by reference
August 21, 2001, between to Exhibit 10.88 to the
About.com and NeoMedia Registrant's Form S-1 as
filed on February 12, 2003
10.35 Memorandum of Terms to Incorporated by reference
merge, dated March 7, 2003, to Exhibit 3.1 to the
between NeoMedia and Loch Registrant's Form 8-K as
Energy, Inc. filed on March 19, 2003
10.36 Binding Letter of Intent to Incorporated by reference
merge, dated July 25, 2003, to Exhibit 99.5 to the
between NeoMedia and Secure Registrant's Form 10-QSB
Source Technologies, Inc. as filed on August 14,
2003
10.37 Definitive Merger Agreement, Incorporated by reference
dated October 3, 2003, to Exhibit 99.1 to the
between NeoMedia and Secure Registrant's Form 8-K as
Source Technologies, Inc filed on October 8, 2003
10.38 Standby Equity Distribution Incorporated by reference
Agreement, dated October 27, to Exhibit 10.91 to the
2003, between NeoMedia and Registrant's Form SB-2/A
Cornell Capital Partners as filed on December 19,
2003
10.39 Form of Placement Agent Incorporated by reference
Agreement, dated October 27, to Exhibit 10.92 to the
2003, between NeoMedia and Registrant's Form SB-2/A
Newbridge Securities as filed on December 19,
Corporation 2003
10.40 Form of Registration Rights Incorporated by reference
Agreement, dated October 27, to Exhibit 10.93 to the
2003, between NeoMedia and Registrant's Form SB-2/A
Cornell Capital Partners as filed on December 19,
2003
10.41 Form of Escrow Agreement, Incorporated by reference
dated October 27, 2003, to Exhibit 10.94 to the
between NeoMedia and Cornell Registrant's Form SB-2/A
Capital Partners as 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 Incorporated by reference
CSI International, Inc., to Exhibit 3.1 to the
dated November 8, 2003 Registrant's Form 8-K as
filed on November 13, 2003
10.44 Letter of Intent to acquire Incorporated by reference
BSD Software, Inc., dated to Exhibit 3.1 to the
December 9, 2003 Registrant's Form 8-K as
filed on December 11, 2003
II-6
Exhibit No. Description Location
----------- ----------------------------- --------------------------
10.45 Definitive Merger Agreement, Incorporated by reference
dated February 6, 2004, to Exhibit 3.1 to the
between NeoMedia and CSI Registrant's Form 8-K as
International, Inc. filed on February 10, 2004
10.46 $4 million Promissory note Incorporated by reference
payable to Cornell Capital to Exhibit 10.49 to the
Partners, dated January 15, Registrant's Form 10-KSB
2004 as filed on March 9, 2004
10.47 Form of Business Development Incorporated by reference
Agreement between to Exhibit 2.2 to the
NeoMedia and iPoint-media Registrant's Form 8-K as
filed on September 17,
2004
10.48 Form of Investment Agreement Incorporated by reference
between NeoMedia and to Exhibit 2.3 to the
iPoint-media Registrant's Form 8-K as
filed on September 17,
2004
10.49 Form of Registration Rights Incorporated by reference
Agreement between NeoMedia to Exhibit 2.4 to the
and iPoint-media Registrant's Form 8-K as
filed on September 17,
2004
10.50 Form of Indemnification Incorporated by reference
Agreement between NeoMedia to Exhibit 2.5 to the
and iPoint-media Registrant's Form 8-K as
filed on September 17,
2004
10.51 Form of Merger Agreement Incorporated by reference
among NeoMedia Technologies, to Exhibit 16.1 to the
Inc., NeoMedia Telecom Registrant's Form 8-K as
Services, Inc., and BSD filed on December 22, 2004
Software, Inc.
10.52 Form of NeoMedia's Policy Provided Herewith
Statement on Ethical Behavior
10.53 Form of Term Sheet with Incorporated by reference
Nextcode Corporation to Exhibit 10.54 to the
Registrant's Form 10-KSB
as filed on March 7, 2005
10.54 Form of Letter of Intent Incorporated by reference
With Shelron Group, Inc. to Exhibit 10.55 to the
Registrant's Form 10-KSB
as filed on March 7, 2005
10.54 Form of Letters of Intent Incorporated by reference
With Pickups Plus, Inc. to Exhibits 16.1 and 16.2
to the Registrant's Form
8-K as filed on March 1,
2005
10.55 Form of Merger Agreement Provided Herewith
among NeoMedia Technologies,
Inc., NeoMedia Telecom
Services, Inc., and BSD
Software, Inc.
10.56 Letter of extension of Provided Herewith
outside date between NeoMedia
and BSD
II-7
Exhibit No. Description Location
----------- ----------------------------- --------------------------
10.57 Co-Marketing Partner Incorporated by reference
Agreement between NeoMedia to Exhibit 16.1 to the
Technologies, Inc. and Foote Registrant's Form 8-K as
Cone & Belding, a division filed on March 24, 2005
of FCB Worldwide L.L.C.
10.58 Standby Equity Distribution Incorporated by reference
Agreement, dated March to Exhibit 16.1 to the
30,2005, between NeoMedia Registrant's Form 8-K as
and Cornell filed on April 1, 2005
10.59 Placement Agent Agreement, Incorporated by reference
dated March 30, 2005, to Exhibit 16.2 to the
between NeoMedia and Cornell Registrant's Form 8-K as
filed on April 1, 2005
10.60 Escrow Agreement, dated Incorporated by reference
March 24, 2005, between to Exhibit 16.3 to the
NeoMedia and Cornell Registrant's Form 8-K as
filed on April 1, 2005
10.61 Registration Rights Incorporated by reference
Agreement, dated March to Exhibit 16.4 to the
24,2005, between NeoMedia Registrant's Form 8-K as
and Cornell filed on April 1, 2005
10.62 Promissory Note, dated March Incorporated by reference
24,2005, between NeoMedia to Exhibit 16.5 to the
and Cornell Registrant's Form 8-K as
filed on April 1, 2005
10.63 Security Agreement, dated Incorporated by reference
March 24,2005, between to Exhibit 16.6 to the
NeoMedia and Cornell Registrant's Form 8-K as
filed on April 1, 2005
23.1 Consent of Stonefield Provided Herewith
Josephson, Inc., independent
auditors of NeoMedia
Technologies, Inc.
23.2 Consent of KPMG, LLP, Provided Herewith
independent auditors of BSD
Software, Inc.
23.3 Consent of Eisner LLP, Provided Herewith
independent auditors of CSI
International, Inc.
Annex A BSD Initial Dissenters' Provided Herewith
Notice Letter, Dissenters'
Demand Notice Form, and
Copies of Sections 607.1301
through 607.1333 of the
Florida Business Corporation
Act Concerning Dissenters'
Rights
II-8
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933, as amended (the "1933 Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing this Registration Statement on Form
S-4 and authorized this Registration Statement to be signed on our behalf by the
undersigned, on April 1, 2005.
NEOMEDIA TECHNOLOGIES, INC.
By: /s/ Charles T. Jensen
------------------------------------
Charles T. Jensen
President, Chief Executive Officer,
Chief Operating Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
/s/ Charles T. Jensen President, Chief Executive Officer,
------------------------- and Director April 1, 2005
Charles T. Jensen
/s/ William E. Fritz Director April 1, 2005
-------------------------
William E. Fritz
/s/ Charles W. Fritz Chairman of the Board April 1, 2005
-------------------------
Charles W. Fritz
/s/ David A. Dodge Vice-President, Chief Financial
------------------------- Officer and Controller April 1, 2005
David A. Dodge
/s/ Hayes Barclay Director April 1, 2005
-------------------------
Hayes Barclay
/s/ James J. Keil Director April 1, 2005
-------------------------
James J. Keil
II-10