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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2002
Commission File Number: 1-12401
ACTIVE IQ TECHNOLOGIES, INC.
------------------------------------------------
(Exact Name of Issuer as Specified in its Charter)
MINNESOTA 41-2004369
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5720 SMETANA DRIVE, SUITE 101, MINNETONKA, MINNESOTA 55343
----------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number including area code: (952) 345-6600
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of Active IQ Technologies, Inc.'s Common Stock held
by non-affiliates on June 28 2002 (the last business day of Active IQ
Technologies, Inc.'s most recently completed second fiscal quarter), based on
the closing price per share sales price of Active IQ Technologies, Inc.'s Common
Stock on The Nasdaq SmallCap Market on June 28, 2002, was $10,200,000.
At March 26, 2003, 13,057,181 shares of Common Stock (the Registrant's only
class of voting stock) were outstanding. The aggregate market value of the
Common Stock on that date held by non-affiliates was approximately $706,000.
ACTIVE IQ TECHNOLOGIES, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2002
Table of Contents
PART I Page
Item 1. Business..................................................... 4
Item 2. Properties................................................... 10
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters....................................... 12
Item 6. Selected Financial Data...................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 23
Item 8. Consolidated Financial Statements and Supplementary Data..... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 59
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant................................. 61
Item 11. Executive Compensation....................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 70
Item 13. Certain Relationships and Related Transactions............... 71
Item 14. Controls and Procedures...................................... 72
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 73
Signatures................................................................. 76
Certifications............................................................. 77
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended) and information relating to us that
is based on the current beliefs of our management as well as assumptions made by
and information currently available to management, including statements related
to the markets for our products, general trends in our operations or financial
results, plans, expectations, estimates and beliefs. In addition, when used in
this Annual Report, the words "may," "could," "should," "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to us or our management, may identify
forward-looking statements. These statements reflect our judgment as of the date
of this Annual Report with respect to future events, the outcome of which is
subject to risks, which may have a significant impact on our business, operating
results or financial condition. Readers are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein. We
undertake no obligation to update forward-looking statements. The risks
identified in the section of Item 1 entitled "RISK FACTORS," among others, may
impact forward-looking statements contained in this Annual Report.
3
PART I
ITEM 1. BUSINESS
OVERVIEW
During fiscal 2002, Active IQ Technologies, Inc. ("we," "us," "our" or the
"Company") provided industry-specific eBusiness software solutions for selling,
managing, sharing and collaborating on business information via the Web and
accounting software. In order to offer the foregoing solutions, we completed
four acquisitions in fiscal 2001. In April 2001, we completed our merger
privately held activeIQ Technologies Inc., a Minnesota corporation ("Old AIQ").
In June 2001, we completed our acquisition of Red Wing Business Systems, Inc., a
Minnesota corporation ("Red Wing"). In September 2001, we completed our merger
with privately held Champion Business Systems, Inc., a Colorado corporation
("Champion"). And in October 2001, we acquired all of the outstanding capital
stock of FMS Marketing, Inc., an Illinois corporation ("FMS/Harvest"). FMS
Marketing, Inc. did business as FMS/Harvest, and as of December 31, 2001, we
merged FMS/Harvest with and into Red Wing.
Until April 2001, we were engaged in the distribution of oil, gas and other
refined petroleum products. On April 30, 2001, however, we completed a series of
significant transactions resulting in the disposition of our historical
operating assets and adoption of the business plan of Old AIQ. Old AIQ's main
focus was providing software and solutions as part of its Epoxy Network. The
Epoxy Network offered an Internet merchandising system called "Storefront" and a
tool set for managing customer information named "Account Management." In March
2002, we sold the customer base of the Epoxy Network, thereby allowing us to
focus our efforts on developing a hosted solutions model. In August 2002, we
sold all of our remaining rights and interests of the Epoxy Network.
In December 2001, we entered in an application service provider ("ASP") software
license agreement with Stellent, Inc. The agreement provided us with a
three-year worldwide exclusive license to be the hosted ASP solution for
Stellent's Content Management software in which we would develop and distribute
web-based content management solutions (our "Hosted Solutions Business"). Our
Hosted Solutions Business minimized implementation complexities by capturing
paper and electronic documents, transform them to Web-viewable formats,
personalize them based on security needs and deliver them over the Web to a
broad range of users. Subsequent to December 31, 2002, it became apparent to us
that, in light of current market conditions, it would be extremely unlikely for
us to secure the financing necessary to fund our Hosted Solutions Business
beyond the near term and thereby provide assurance to future customers of our
long-term viability. On March 13, 2003, our Board of Directors formally approved
the sale of the Hosted Solutions Business. On March 14, 2003, we executed a
definitive purchase agreement with Stellent, Inc. and completed the sale of the
Hosted Solutions Business. We received $650,000 in cash for the assets used in
the Hosted Solutions Business (including the ASP software license), plus we were
reimbursed $150,000 for expenses we incurred as a result of the transaction.
In addition to eBusiness applications and software solutions discussed above, we
offered traditional accounting and financial management software solutions
through Red Wing and Champion, our wholly owned subsidiaries, which have
collectively operated as our accounting software business ("Accounting Software
Business"). Our original reason for acquiring these companies was to be able to
utilize the businesses' customer base in order to market to those customers our
Epoxy Network products and services. We concluded that these customers would not
be prospects for any type of Web-based, hosted solution products or services.
Therefore, since we had already sold the Epoxy Network to focus on the Hosted
Solutions Business, the Accounting Software Business no longer fit our business
plan. In late 2002, we contacted various entities about purchasing the
Accounting Software Business and received no interested responses. In December
2002, our Board of Directors authorized a plan to sell the Accounting Software
Business and we began having preliminary discussions with key management
employees of the Accounting Software Business, about selling the assets of that
business to them or an entity controlled by them. As a result of the formal plan
to sell the Accounting Software Business, the results of operations for the
4
Accounting Software Business have been reported as discontinued operations (the
"Discontinued Operations") and previously reported consolidated financial
statements have been restated for the year ended December 31, 2002. (See
Footnote No. 2 of the Notes to the Consolidated Financial Statements included
elsewhere herein for further discussion and financial information regarding the
Discontinued Operations of Accounting Software Business.) On January 14, 2003,
we entered into a non-binding letter of intent with key management employees of
the Accounting Software Business, providing for the sale of all or substantially
all of the assets of the Accounting Software Business. On February 14, 2003, our
Board of Directors formally approved the transaction and authorized management
to enter into the definitive asset purchase agreement. The Board further
directed management to submit the proposed sale of the Accounting Software
Business to our shareholders for their approval. On February 17, 2003, we
executed a definitive purchase agreement. Subject to shareholder approval, we
expect to complete the transaction by April 30, 2003.
If the sale of our Accounting Software Business occurs as proposed, we will no
longer have any means of generating revenue (since we have sold our Hosted
Solutions Business, as discussed above), however, our Board of Directors is
actively searching for businesses or technologies to potentially acquire. There
can be no assurance that any acquisitions will be obtainable on terms acceptable
to us or on any terms whatsoever.
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. In April 2001, in conjunction with our merger with
Old AIQ, we reincorporated under Minnesota law. (Old AIQ was a development stage
company from its inception in April 1996 through its fiscal year ended December
31, 2000. For accounting purposes, however, Old AIQ was treated as the acquiring
company. Accordingly, in this Annual Report on Form 10-K, when we discuss or
refer to business and financial information relating to dates prior to the
merger, we are referring to Old AIQ's business and financial information, unless
otherwise indicated.)
Our principal office is located at 5720 Smetana Drive, Suite 101 Minnetonka,
Minnesota 55343. Our telephone number is (952) 345-6600 and our Internet address
is www.activeiq.com.
INDUSTRY BACKGROUND
Businesses today are increasingly seeking to leverage their existing information
technology infrastructures and to adopt new solutions to automate and improve
fundamental business processes within the organization. Legacy applications of
small to medium-sized businesses need to extend the reach of their existing
systems by linking customers, business partners, suppliers and employees.
Historically, these advanced solutions were available only to large
enterprise-class software system users.
The rapid growth of the Internet, however, has leveled the playing field in many
respects. The requirements of the marketplace are driving purchasers to
accounting and management solutions that provide the functionality of an
enterprise Internet-capable system in a cost-effective manner.
Additionally, hosted software solutions help organizations increase productivity
and customer satisfaction, which results in increased profits. Hosted content
management solutions provide organizations in select vertical markets an
easy-to-use, affordable tool for publishing, managing, and sharing business
content via the Internet.
With Corporate America's overall slowdown on capital spending for IT
infrastructure and the collapse of many of the dot.coms, the availability of
ready funds for start-up concepts has become increasingly difficult to procure,
if at all. Combine that with what the market perceives as a weak balance sheet
or a going concern opinion and many of the larger, more established markets are
no longer willing to purchase products and/or services if any of their key
resources are at risk.
5
PRODUCTS AND SERVICES
During fiscal 2002, we offered three types of business software and solutions:
eBusiness solutions through our Epoxy Network; traditional business and
accounting software through our Red Wing and Champion subsidiaries; and hosted
ASP solutions in selected vertical markets. For fiscal 2003, with the already
completed sale of our Hosted Solutions Business and the anticipated completion
of the sale of our Accounting Software Business, we will no longer have any
means of generating revenue, however, an active search for businesses or
technologies to potentially acquire has been initiated.
EPOXY NETWORK
In January 2001, Old AIQ completed its merger with privately held Edge
Technologies, Incorporated, the creator of a fully integrated eBusiness website
service called Account Wizard, which was subsequently branded as the Epoxy
Network. The Epoxy Network, which was offered to customers on a monthly
subscription basis, included eCommerce, Account Management, customer service and
support, and trading partner connectivity. The Epoxy applications integrated
with a customer's existing accounting software to quickly help get the customer
online by accessing information that already exists in its accounting system.
Leveraging the power of the Internet, these applications allowed an organization
to extend beyond the traditional "four walls" of their enterprise to integrate
their operations with their customers, suppliers and partners. During the year
ended December 31, 2002, revenues from Epoxy Network were $53,599, or 10.7% of
our total sales from continuing operations.
In March 2002, we sold the customer base of the Epoxy Network, thereby allowing
us to focus our efforts on developing a hosted solutions model. In August 2002,
we sold all of our remaining rights and interests of the Epoxy Network.
ACCOUNTING SOFTWARE BUSINESS
We designed, developed, marketed and supported accounting software products
through our Accounting Software Business (Red Wing, Champion and FMS/Harvest)
subsidiaries during fiscal 2002. These products addressed the "gap market" -
companies that have outgrown inexpensive, ultra-simple "starter" accounting
software but did not require the significant complexity of high-end software.
These products offered a stable, secure and flexible base for growing small
business users.
Our original reason for acquiring these companies was to be able to utilize the
businesses' customer base in order to market to those customers our Epoxy
Network products and services. We concluded that these customers would not be
prospects for any type of Web-based, hosted solution products or services.
Therefore, since we had already sold the Epoxy Network to focus on the Hosted
Solutions Business, the Accounting Software Business no longer fit our business
plan. On February 17, 2003, we executed a definitive purchase agreement. We
expect to complete the transaction by April 30, 2003.
As a result of the plan to sell the Accounting Software Business, the results of
operations for the Accounting Software Business have been reported as
Discontinued Operations and previously reported financial statements have been
restated for the year ended December 31, 2001. During the year ended December
31, 2002, revenues from our Accounting Software Business were $4,179,547. See
Footnote No. 2 of the notes to the Consolidated Financial Statements included
elsewhere herein for further discussion and financial information regarding the
Discontinued Operations of Accounting Software Business.
HOSTED SOLUTIONS BUSINESS
As a result of a December 2001 agreement with Stellent, Inc., we had an
exclusive worldwide license to distribute Stellent's enterprise content
management software solutions to customers on a hosted basis. With this license,
we offered Web-based content management solutions designed to improve the
efficiency of business operations within selected vertical markets. By linking
an organization's customers, partners, suppliers and employees, these hosted
solutions were designed to enable an organization to improve its
6
operational efficiency and maximize the potential of its content resources.
Also, by focusing on industry-specific solutions, we believed we would be more
able to closely meet the particular needs of potential customers in those
markets. Further, we believed a hosted solutions model would be attractive to
customers in specific markets who demand quicker deployment of new applications
and more predictable costs with less financial risk. During the year ended
December 31, 2002, revenues from our Hosted Solutions Business were $445,779, or
89.3% of our total sales (including continuing and discontinued operations
sales).
Subsequent to December 31, 2002, we came to the conclusion that due to current
market conditions for capital funding, it would be extremely unlikely for us to
secure the financing necessary to fund our Hosted Solutions Business beyond the
near term and thereby provide assurance to future customers of our long-term
viability. On March 13, 2003, our Board of Directors formally approved the sale
of the Hosted Solutions Business. On March 14, 2003, we executed a definitive
purchase agreement with Stellent, Inc. and completed the sale of the Hosted
Solutions Business. We received $650,000 in cash for the assets used in the
Hosted Solutions Business (including the exclusive worldwide license), plus we
were reimbursed $150,000 for expenses we incurred as a result of the
transaction.
SALES AND MARKETING
Accounting Business Solutions
Distribution of our Red Wing software applications is managed through a reseller
partner organization. The Red Wing partners are the retail distribution arm for
software applications to the customers. Along with the distribution of the
software, our partners provide implementation and ongoing consulting services to
the customers. Red Wing supports this partner organization by providing sales
leads generated by our direct marketing efforts. Red Wings marketing and
internal account management staff work with our partners to customize a unique
marketing plan around the partners business and geographic area.
See Footnote No. 2 of the notes to the Consolidated Financial Statements
included elsewhere herein for further discussion and financial information
regarding the Discontinued Operations of Accounting Software Business.
Hosted Solutions Business
Our primary marketing objectives were to build awareness and continue to gain
market share in select verticals. Accordingly, we did utilize a balanced mix of
on and offline advertising and marketing efforts. On-line efforts did include
website, affiliate partner links, product demos and industry specific on-line
advertising. Offline efforts did include industry specific tradeshows,
conferences, publications and vertically specific direct mail campaigns.
INTELLECTUAL PROPERTY
Since we sold our rights and interests of the Epoxy Network in August 2002, and
already for fiscal 2003, we sold our Hosted Solutions Business, combined with
the anticipate sale of our Accounting Software Business, we will not have any
intellectual property at risk
RESEARCH AND DEVELOPMENT
Since inception, we made substantial investments in research and software
product development. We believed that the timely development of additional
services and enhancements to existing software products and the acquisition of
rights to sell or incorporate complementary technologies and products into our
software product offerings were essential to maintaining and increasing our
competitive position in our market. The software services market is
characterized by rapid technological change, frequent introductions
7
of new products, changes in customer demands and rapidly evolving industry
standards. Our total research and development expense was $134,217 and $562,762
in fiscal 2002 and 2001, respectively.
EMPLOYEES
As of March 26, 2003, we employ 45 people, (approximately 96% full time status)
including 43 employees of the Accounting Software Business. None of our
employees are represented by a labor union and we consider our employee
relations to be good.
FINANCIAL INFORMATION IN INDUSTRY SEGMENTS
During the year ended December 31, 2002, our continuing operations included one
reportable segment: our Hosted Solutions Business.
See Footnote No. 1 of the notes to the Consolidated Financial Statements
included elsewhere herein for financial information regarding this segment.
AVAILABLE INFORMATION
The Company's web site address is www.activeiq.com.
We make available free of charge through our Internet web site, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material, or furnish it to the Securities and Exchange
Commission. You can also request a free copy of the above filings by writing or
calling us at:
Active IQ Technologies, Inc.
Attention: Mark D. Dacko, Secretary
5720 Smetana Drive, Suite 101
Minnetonka, Minnesota 55343
(952) 345-6600
RISK FACTORS
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALL CAP MARKET.
One of Nasdaq's continued listing rules required us to maintain a minimum
closing bid price of $1 for our common stock. We were notified in August 2002
that, since the minimum bid price of our common stock was less than $1, we had
until February 10, 2003 in order to achieve compliance. On March 18, 2003, we
received further notification from Nasdaq on this matter.
Nasdaq has informed us that since we had not regained compliance with the
minimum $1 closing bid price per common share and we also were not eligible for
an additional 180 calendar day grace period since we did not meet the initial
inclusion requirements as specified by The Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(2)(A) (the "Rule"), our common stock was delisted
effective with the opening of business on March 27, 2003. Specifically, for
initial inclusion, the Rule requires meeting one of following requirements: a
$5,000,000 shareholders' equity; a $50,000,000 market value of our listed
securities; or $750,000 net income from continuing operations for certain fiscal
years. We did not meet any of these requirements.
8
Since our common stock has been delisted from the Nasdaq SmallCap Market,
trading, if any, in our common stock will be conducted in the over-the-counter
markets in the so-called "pink sheets" or the "OTC Bulletin Board."
Consequently, the liquidity of our common stock is impaired, not only in the
number of shares which could be bought and sold, but also through delays in the
timing of the transactions, reduction in the coverage of our securities by
security analysts and the news media, and lower prices for our securities than
might otherwise prevail. In addition, our common stock has become subject to
certain rules of the Securities and Exchange Commission relating to "penny
stocks." These rules require broker-dealers to make special suitability
determinations for purchasers other than established customers and certain
institutional investors and to receive the purchasers' prior written consent for
a purchase transaction prior to sale. Consequently, these "penny stock rules"
may adversely affect the ability of broker-dealers to sell our common stock and
may adversely affect your ability to sell shares of our common stock in the
secondary market.
WE HAVE SOLD OUR ONLY CONTINUING OPERATIONS REVENUE SOURCE.
During the year ended December 31, 2002, our continuing operations included one
reportable segment: our Hosted Solutions Business. Subsequent to December 31,
2002, it became apparent to us that, in light of current market conditions, it
would be extremely unlikely for us to secure the financing necessary to fund our
Hosted Solutions Business beyond the near term. On March 13, 2003, our Board of
Directors formally approved the sale of the Hosted Solutions Business. On March
14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and
completed the sale of the Hosted Solutions Business. We received $650,000 in
cash for the assets used in the Hosted Solutions Business, plus we were
reimbursed $150,000 for expenses we incurred as a result of the transaction.
WE ARE PROPOSING TO SELL SUBSTANTIALLY ALL OF OUR REMAINING ASETS.
For the year ended December 31, 2002, the Accounting Software Business was
responsible for $4,179,547 in revenue, or approximately 89 percent of our
consolidated revenues (including continuing and discontinued operations sales).
Our original reason for acquiring these companies was to be able to utilize the
businesses' customer base in order to market to those customers our Epoxy
Network products and services. We concluded that these customers would not be
prospects for any type of Web-based, hosted solution products or services.
Therefore, since we had already sold the Epoxy Network to focus on the Hosted
Solutions Business, the Accounting Software Business no longer fit our business
plan. On February 17, 2003, we executed a definitive purchase agreement.
Accordingly, following completion of the proposed transaction, we will no longer
have any ongoing business operations and no significant means of generating any
revenue.
See Footnote No. 2 of the notes to the Consolidated Financial Statements
included elsewhere herein for further discussion and financial information
regarding the Discontinued Operations of Accounting Software Business.
WE ARE CURRENTLY IN DEFAULT OF OUR OBLIGATIONS TO REPAY THE DEBT WE INCURRED IN
CONNECTION WITH OUR ACQUISITION OF THE ACCOUNTING SOFTWARE BUSINESS.
When we acquired the three businesses that collectively comprise our Accounting
Software Business we paid a combination of cash, stock and notes or other
obligations. The notes and other obligations are collectively secured by the
stock or assets of the companies we acquired. The current remaining indebtedness
incurred in connection with these acquisitions is $1.45 million and we are
currently in default of these obligations. If the proposed sale is not
completed, the beneficiaries of our obligations to repay this indebtedness may
commence foreclosure proceedings against the stock and/or assets of the
Accounting Software Business. If this were to occur, there is no assurance that
the proceeds from any such foreclosure sale would be sufficient to satisfy the
outstanding indebtedness.
9
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
For the year ended December 31, 2002, we had a net loss of $9,658,755, and since
our inception as Old AIQ in April 1996 through December 31, 2002, we have
incurred an aggregate net loss of $22,580,994. As of December 31, 2002, we had
total assets of $1,182,365. We expect operating losses to continue for the
foreseeable future and there can be no assurance that we will ever be able to
operate profitably.
WE WILL REQUIRE FUTURE FINANCING.
Further financing will be needed in order to potentially acquire other
businesses or technologies. And there is no precise way to predict when further
financing will be needed or how much will be needed. Moreover, we cannot
guarantee that the additional financing will be available when needed. If it is
not available, your investment in our securities may be lost. If the financing
is available only at a low valuation of our Company, your investment may be
substantially diluted
ITEM 2. PROPERTIES
As of December 31, 2002, our corporate office is located at 5720 Smetana Drive,
Suite 101, Minnetonka, Minnesota 55343, which we occupy pursuant to a lease
agreement that expires June 30, 2004. We occupy approximately 6,850 square feet
for a monthly payment of $11,670. With the sale of our Hosted Solutions Business
to Stellent, Inc. in March 2003, the aforementioned lease has been assigned to
Stellent and we will be moving to a new location on or about May 1, 2003.
We currently lease office space in Red Wing, Minnesota (Red Wing Business
Systems), Denver, Colorado (Champion Business Systems) and New Lenox, Illinois
(FMS/Harvest). With the anticipated sale of the Accounting Software Business,
the following property lease liabilities would be assigned to the Purchasers.
The Red Wing location is approximately 12,000 square feet. Current rentals of
$6,500 per month ($78,000 annually) are required under the lease, in addition to
real estate taxes and nominal charges for common area maintenance. The lease
expires October 1, 2008. The landlords were former shareholders in the privately
held Red Wing business and one is still a current employee of the Company.
At December 31, 2002, the Denver location was approximately 11,740 square feet
requiring rentals of $17,115 per month. The lease expired February 28, 2003,
although a one-month extension was granted at a reduced rate. We signed a new
lease commencing on March 15, 2003 for 2,040 square feet with a monthly payment
of $2,720 ($32,640 annually) in addition to real estate taxes and nominal
charges for common area maintenance, for the first twelve months. The subsequent
months of 13 through 24 and 25 through 39 require monthly payments of $2,805 and
$2,890, respectively. The lease expires June 2006.
The New Lenox location is approximately 800 square feet with current rentals of
$600 per month. This is a month-to-month lease.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material litigation and are not aware of any
threatened litigation that would have a material adverse effect on our
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 12, 2002, the Company held its Annual Meeting of Shareholders. As of
November 8, 2002, the record date for determining the shares of the Company's
stock outstanding and entitled to vote at the meeting, there were 13,298,014
shares of common stock issued and outstanding. A total of 9,022,711 shares were
represented at the meeting. The following matters were voted:
10
(A) To elect six directors. All of the management's nominees for directors as
listed in the proxy statement were elected with the following:
Shares Voted For Withheld
---------------- --------
Kenneth W. Brimmer 8,899,434 123,277
Ronald E. Eibensteiner 8,773,634 249,077
Jack A. Johnson 8,899,434 123,277
Wayne W. Mills 8,899,434 123,277
Patrick L. Nelson 8,899,434 123,277
D. Bradly Olah 8,379,686 643,025
Brent Robbins 8,899,434 123,277
(B) Vote to approve an amendment to Active IQ Technologies 1999 Stock Option
Plan to increase the number of shares of common stock issuable thereunder
from 2,500,000 to 4,250,000 shares:
Shares Voted For Against Abstain Non-Vote
---------------- ------- ------- --------
5,400,002 964,214 206,500 2,451,995
(C) Vote to approve an amendment to Active IQ Technologies 2000 Director Stock
Option Plan to increase the number of shares of common stock issuable
thereunder from 250,000 to 550,000 shares:
Shares Voted For Against Abstain Non-Vote
---------------- ------- ------- --------
5,399,802 964,414 206,500 2,451,995
(D) Vote to approve an amendment to Active IQ Technologies 2001 Employee Stock
Option Plan to increase the number of shares of common stock issuable
thereunder from 700,000 to 1,450,000 shares:
Shares Voted For Against Abstain Non-Vote
---------------- ------- ------- --------
5,401,400 962,816 206,500 2,451,995
(E) Vote to approve an amendment to the Company's Articles of Incorporation to
increase the number of authorized shares of undesignated capital stock to
150,000,000 shares:
Shares Voted For Against Abstain Non-Vote
---------------- ------- ------- --------
5,508,189 856,027 206,500 2,451,995
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock was quoted on the Nasdaq SmallCap Market under the
symbol "AIQT" until March 26, 2003. (See Risk Factors in Item 1 for a further
discussion regarding our common stock being delisted from the Nasdaq SmallCap
Market.) Prior to May 1, 2001, our stock traded under the symbol "METR." As of
March 26, 2003 the last sale price of our common stock as reported by Nasdaq was
$0.08 per share. The following table sets forth for the periods indicated the
range of high and low bid prices of the common stock as reported by Nasdaq:
Bid
Period High Low
Quarter Ended March 31, 2002 $4.75 $1.66
Quarter Ended June 30, 2002 $2.00 $0.69
Quarter Ended September 30, 2002 $1.00 $0.25
Quarter Ended December 31, 2002 $0.75 $0.16
Quarter Ended March 31, 2001 $5.50 $2.38
Quarter Ended June 30, 2001 $6.00 $3.63
Quarter Ended September 30, 2001 $5.99 $1.75
Quarter Ended December 31, 2001 $4.71 $2.55
As of the March 26, 2003, there were approximately 600 record holders of our
common stock. Based on securities position listings, we believe that there are
approximately 900 beneficial holders of our common stock.
DIVIDENDS
We have paid no cash dividends on our common stock and have no present intention
of paying cash dividends in the foreseeable future. Rather, we intend to retain
all earnings to provide for the growth of our Company. Payment of cash dividends
in the future, if any, will depend, among other things, upon our future
earnings, requirements for capital improvements and financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
On March 14, 2002, the holder of a warrant issued as compensation to an
underwriter of the Company's 1998 offering, exercised the warrant for which he
was entitled to receive 54,000 units, each unit consisting of one share of
common stock and a warrant to purchase one share of common stock (the
"Warrant"). The Warrant was exercised at a price of $2.00 per unit. The Warrant
as originally issued, had an exercise price of $6.875. The new warrants issued
upon exercise of the Warrant, have an exercise price of $5.50. No commission was
paid in connection with this transaction. In connection with this issuance, we
relied upon the exemptions from registration provided by Sections 4(2) and 4(6)
of the Securities Act of 1933 and Rule 506 promulgated thereunder since this was
a private, isolated transaction, not constituting a public offering, and we had
a reasonable basis for concluding that the warrant holder met the definition of
"accredited investor."
In connection with our October 2001 acquisition of FMS Marketing, Inc., we were
required to pay to the 4 former shareholders of FMS Marketing an aggregate of
$300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In
May 2002 we re-negotiated the terms of those notes in order to provide that we
would immediately pay an aggregate of $30,000 and the remaining $270,000 would
be payable by December 15, 2002, with interest accruing at the rate of 12.5% per
annum. In addition, the re-negotiated notes allowed the former FMS shareholders
to convert the outstanding balance into shares of our common
12
stock until July 12, 2002 at a price equal to 90% of the average closing sales
price for the 5 days preceding conversion. On April 10, 2002, three of the
former FMS shareholders exercised the conversion option with respect to their
notes, converting an aggregate of $118,758 of outstanding principal and interest
into 151,669 shares of our common stock (at a conversion price of $0.783 per
share). In connection with the re-negotiation of these notes and the shares into
which such notes were convertible, we relied on the exemption from registration
provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as
Rule 506 of Regulation D based on (i) our belief that the issuances did not
involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the noteholders were either accredited or otherwise had sufficient knowledge and
sophistication, either alone or with a purchaser representative, to appreciate
and evaluate the risks and merits associated with their investment decision.
In May 2002, we renegotiated one of the payments we were required to pay in
satisfaction of certain notes payable issued to the former shareholders of
Champion Business Systems, Inc. in connection with our acquisition of that
company. Specifically, in exchange for extending until December 31, 2002 the due
date relating to an aggregate of installment of approximately $159,041 required
to be paid on May 18, 2002 (the "May Installment") in satisfaction of such
notes, we agreed to pay interest at the rate of 12.5% per annum on the entire
unpaid balance and granted such noteholders a 60-day right to convert the May
Installment, including accrued interest, into shares of our common stock at a
price equal to 90% of the average closing sale price for the 5 days preceding
conversion. None of such noteholders exercised their right to convert. In
connection with the amendment of these notes, we relied on the exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933,
as well as Rule 506 of Regulation D based on (i) our belief that the issuances
did not involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the noteholders were either accredited or otherwise had sufficient knowledge and
sophistication, either alone or with a purchaser representative, to appreciate
and evaluate the risks and merits associated with their investment decision.
On May 27, 2002, we sold 500,000 shares of our common stock in a private
placement to one accredited investor at a price of $0.75 per share, for a total
purchase price of $375,000, (we received $350,000 in cash and recorded a stock
subscription receivable of $25,000). Also, as consideration for its purchase of
such shares, the investor also received a warrant to purchase an additional
500,000 shares of our common stock at an exercise price of $1.00 per share. We
further agreed to reduce to $1.00 the exercise price on all other warrants to
purchase shares of our common stock held by this investor and its affiliates.
Such warrants represent the right to purchase 1 million shares of common stock
and had exercise prices ranging from $5.50 to $7.50 per share. In connection
with this offering, we relied on the exemption from registration provided by
Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of
Regulation D because we had a reasonable basis to believe that the purchaser was
an accredited investor. In December 2002, the Company finalized an amendment to
the agreement and canceled the $25,000 stock subscription receivable, thereby
reducing the shares sold to 466,667 shares.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of common stock at an exercise price of $1.25 per share. The warrants may
be redeemed by us any time after January 30, 2003 and following a period of at
least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. One of the
investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E.
Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement. Additionally, we also
issued a warrant to purchase 50,000 shares of common stock in September 2002 to
Mr. Eibensteiner as consideration for the placement. This warrant has a term of
5 years and is exercisable at a price of $1.00 per share. In connection with
this offering, we relied on the exemption from registration provided by Sections
4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D
because we had a reasonable basis to believe that both purchasers were
accredited investors.
13
In connection with our June 2001 acquisition of Red Wing Business Systems, Inc.,
we were required to make an aggregate payment of $400,000 to the former
shareholders of such company on June 6, 2002 (the "June Payment"). With respect
to former Red Wing shareholders representing $339,093 of the June Payment, such
shareholders agreed to extend the due date of the June Payment until December
31, 2002. In exchange for the extension, we agreed to pay interest on the unpaid
portion of the June Payment at the rate of 12.5% per annum (commencing July 1,
2002) and granted such shareholders a 60-day right to convert any or all of the
June Payment (including accrued interest) into shares of our common stock at a
price equal to 90% of the average closing sale price of our common stock during
the 5 days preceding conversion. None of the former Red Wing shareholders
exercised their right to convert. In connection with the amending the terms of
the June Payment, we relied on the exemption from registration provided by
Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of
Regulation D based on (i) our belief that the issuances did not involve a public
offering, (ii) the transactions involved fewer than 35 purchasers, and (iii) we
had a reasonable basis to conclude that each of the noteholders were either
"accredited investors" or otherwise had sufficient knowledge and sophistication,
either alone or with a purchaser representative, to appreciate and evaluate the
risks and merits associated with their investment decision.
On September 18, 2002, we renegotiated one of the payments we were required to
make in satisfaction of certain notes payable issued to the former shareholders
of Champion Business Systems, Inc. in connection with our acquisition of that
company. Specifically, in exchange for extending until December 15, 2002 the due
date relating to an aggregate of installment of approximately $159,041 required
to be paid on September 18, 2002 in satisfaction of such notes, we agreed to pay
interest at the rate of 12.5% per annum on the entire unpaid balance. As
consideration for their agreeing to the deferral, each such note holder also
received one common stock purchase warrant for every dollar deferred until
December 15, 2002. We issued warrants to purchase an aggregate of 119,285 shares
of our common stock to 9 persons. The warrants have a term of 5 years and have
an exercise price of $1.00 per share. In connection with the issuance of these
warrants, we relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.
Pursuant to our 1999 Stock Option Plan and 2001 Employee Stock Option Plan, we
issued to various employees options to purchase shares of common stock. All of
the options were issued in reliance on the exemption from registration under
Section 4(2) of the Securities Act, based on the Company's belief that none of
the issuances involved a public offering and because all of the employees to
whom the options were issued had access to financial and business information
concerning the Company. The table below summarizes the unregistered option
grants made during 2002.
14
Grant Number Exercise Expiration Vesting Vesting
Date of shares Price Date Date Shares
01/02/02 96,950 $4.27 01/20/12 01/02/03 24,237
01/02/04 24,237
01/02/05 24,238
01/02/06 24,238
01/09/02 150,000 $4.00 01/09/12 12/31/02 37,500
12/31/03 37,500
12/31/04 37,500
12/31/05 37,500
01/14/02 500,000 $4.00 01/14/12 01/14/03 166,666
01/14/03 166,667
01/14/03 166,667
04/22/02 35,000 $1.80 04/22/12 04/22/03 8,750
04/22/04 8,750
04/22/05 8,750
04/22/06 8,750
04/29/02 35,000 $1.50 04/22/12 04/29/03 8,750
04/29/04 8,750
04/29/05 8,750
04/29/06 8,750
05/06/02 50,000 $1.15 05/06/12 05/06/03 12,500
05/06/04 12,500
05/06/05 12,500
05/06/06 12,500
05/14/02 175,000 $1.25 05/14/12 05/14/02 35,000
05/14/03 35,000
05/14/04 35,000
05/14/05 35,000
05/14/06 35,000
05/17/02 6,000 $1.00 05/17/12 06/17/02 2,000
07/17/02 2,000
08/17/02 2,000
08/19/02 60,000 $0.66 08/19/12 08/19/03 15,000
08/19/04 15,000
08/19/05 15,000
08/19/06 15,000
09/01/02 25,000 $1.25 09/01/12 09/01/03 6,250
09/01/04 6,250
09/01/05 6,250
09/01/06 6,250
10/01/02 175,000 $0.50 10/01/12 10/01/03 43,750
10/01/04 43,750
10/01/05 43,750
10/01/06 43,750
11/15/02 50,000 $0.43 11/15/12 02/13/03 10,000
11/15/04 20,000
11/15/05 20,000
11/25/02 900,000 $0.35 11/25/12 11/25/02 90,000
11/25/03 270,000
11/25/04 270,000
11/25/05 270,000
15
EQUITY COMPENSATION
The following table sets forth certain information regarding equity compensation
plan information as of December 31, 2002:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ------------------------ ----------------------- -------------------- -----------------------
(a) (b) (c)
----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 3,315,259 $2.06 2,566,274
Equity compensation
plans not approved by
security holders 2,027,543 $2.49 --
---------- ----- ---------
Total 5,342,802 $2.22 2,566,274
========== ===== =========
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data with respect to the statement of operations data for
the years ended December 31, 2002 and 2001, and the balance sheets data as of
December 31, 2002 and 2001 are derived from the Consolidated Financial
Statements of the Company that have been audited by Virchow, Krause & Company,
LLP, independent auditors. The data provided should be read in conjunction with
the Consolidated Financial Statements, related notes and other financial
information included in this Annual Report. The selected financial data
presented below with respect to the statements of operations data for the years
ended December 31, 2000, 1999 and 1998 and the balance sheets data as of
December 31, 2000, 1999 and 1998 have been derived from the Consolidated
Financial Statements of the Company that have been audited by Arthur Andersen
LLP, independent public accountants.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share information)
For the Years Ended December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------ ------
Revenue $ 499 $ 463 $ -- $ -- $ --
Loss from operations (4,239) (7,941) (2,806) (414) (12)
Other income (expense) 78 86 (34) (48) (132)
Loss from continuing operations (4,162) (7,855) (2,840) (462) (144)
Loss from discontinued operations (5,497) (1,592) -- -- --
------- ------- ------- ------ ------
Net loss $(9,659) $(9,447) $(2,840) $( 462) $ (144)
======= ======= ======= ====== ======
Basic and diluted net loss
per common share
Continuing operations $ (0.33) $ (0.96) $ (1.65) $(1.92) $(0.79)
Discontinued operations $ (0.44) $ (0.19) $ -- $ -- $ --
------- ------- ------- ------ ------
Net loss $ (0.77) $ (1.15) $ (1.65) $(1.92) $(0.79)
======= ======= ======= ====== ======
Basic and diluted weighted average
common shares outstanding 12,532 8,210 1,718 240 184
BALANCE SHEET DATA:
(in thousands)
At December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------ ------
Cash and equivalents $ 13 $ 1,377 $ 1,349 $ 410 $ 39
Net assets of discontinued operations -- 4,894 -- -- --
Total assets 1,182 9,652 2,672 474 72
Net liabilities of discontinued operations 93 -- -- -- --
Total liabilities 593 1,645 790 289 242
Shareholders' equity (deficit) 589 8,007 1,882 185 (170)
Common shares outstanding 13,265 10,731 3,836 374 152
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
Annual Report. See Item 8. "Consolidated Financial Statements and Supplementary
Data."
17
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the "Special
Note Regarding Forward-Looking Statements" appearing at the beginning of this
Annual Report.
During fiscal 2002, Active IQ Technologies, Inc. ("we," "us," "our" or the
"Company") provided industry-specific eBusiness software solutions for selling,
managing, sharing and collaborating on business information via the Web and
accounting software. We offered an eBusiness website service called the Epoxy
Network (through March 2002), we offered traditional business and accounting
software products through our Accounting Software Business subsidiaries (Red
Wing, Champion and FMS/Harvest) and we initiated our Hosted Solutions Business
of hosted ASP solutions in selected vertical markets.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001.
REVENUES
Revenues were $499,378 for 2002 as compared to $462,800 for 2001. For 2002, our
revenues were as follows: the Epoxy Network generated $53,599 and our Hosted
Solutions Business generated $445,779. For 2001, our revenues were as follows:
the Epoxy Network generated $196,356 and our eBusiness and miscellaneous
revenues were $266,444.
In March 2002, we sold the customer base of the Epoxy Network thereby
terminating this revenue source from future periods. On March 14, 2003, we
executed a definitive purchase agreement with Stellent, Inc. and completed the
sale of the Hosted Solutions Business thereby terminating our only remaining
revenue source.
COSTS AND EXPENSES
Costs of goods sold, represents data hosting center rentals, commissions and
royalty fees related to our worldwide license. Cost of goods sold for 2002 was
$588,488 as compared to $191,422 for 2001. The increase of $397,066 was due
primarily to the recognition of prepaid royalty fees related to our ASP hosted
license.
Selling, general and administrative expenses were $3,339,590 for 2002 as
compared to $5,952,067 for 2001. The $2,612,477 decrease in selling, general and
administrative expenses was primarily attributable to three main areas:
reduction in the expenses of deferred compensation; reduction in number of
employee stock options exercised; and overall cost reductions in the areas of
our labor force eliminations.
Depreciation and amortization for 2002 was $144,962 as compared to $1,641,875
for 2001. For fiscal 2001, depreciation and amortization expense of property,
equipment and other intangibles was $195,937 and goodwill and other acquisition
related intangible amortization expense was $1,445,938, related to the merger of
Edge with Old AIQ. Goodwill and other acquisition related intangible
amortization represents the excess of the purchase price and related costs over
the fair value of the net assets. Through December 31, 2002, amortized acquired
goodwill and other intangibles is a component of discontinued operations.
Product development expenses for 2002 were $134,217 as compared to $562,762 for
2001. The $428,545 decrease in product development expenses was related
primarily to the closing of our software engineering office located in Boston,
Massachusetts during fiscal 2001.
During fiscal 2002, we recorded losses on disposal of assets of $114,037. These
losses relate primarily to the general retirement of computer hardware and the
closing of our Las Vegas office. In order to facilitate an early release from
our Las Vegas lease, the furniture and fixtures located within our space were
given as consideration to the landlord and written off and recorded as loss on
assets.
18
Loss on impairment of goodwill for fiscal 2002 was $417,273, all related to the
sale of the Epoxy Network. As of December 31, 2001, the balance of goodwill was
$817,273. In August 2002, we sold all of our rights and interests of the Epoxy
Network for $400,000 and recorded the remaining balance as goodwill impairment.
Our other income and expense consists of interest and dividend income, other
income and interest expense. Interest and dividend income for 2002 was $15,244
as compared to $159,101 for 2001. This income represents interest earned on our
short-term investments. We expect interest income to decrease substantially in
the future as cash is used to develop new operations and for investments in
infrastructure. Other income for 2002 was $430,000. This income is from two
sources. In March 2002, we sold the customer base of the Epoxy Network for
$20,000. Additionally, we received $410,000 in referral fees for our sales
efforts in connection with customers that were not candidates for our ASP hosted
solution. Interest expense for 2002 was $367,469 as compared to $73,411 for
2001. This $294,058 increase in expense relates primarily to the amortization of
the debt discount on the 7% promissory notes, plus interest paid and accrued for
extending promissory note due dates to the old shareholders of Red Wing,
Champion and FMS/Harvest. We expect interest expense to decrease over the next
year. As our Board of Directors explore possible business and technology
acquisitions, we may incur debt financing and as such, our interest expenses
could be significantly different in scope and magnitude..
DISCONTINUED OPERATIONS
The loss of $5,497,341 in 2002 is a result of the discontinuation of the
Accounting Software Business, including the write-off of all assets associated
with the business. No further costs are anticipated, however, if any arise, they
will be charged to operations as incurred.
FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000.
REVENUES
Revenues were $462,800 for 2001 as compared to no revenue for 2000. Our revenues
are as follows: Active IQ had software and miscellaneous incomes of $279,444 and
the Epoxy Network generated $183,356. During 2000, our company was in the
development stage and had not yet generated any revenue.
COSTS AND EXPENSES
Costs of goods sold represents labor and benefit expenses, overhead allocation
and material costs for the development, production and sales of software. Cost
of goods sold for 2001 was $191,422. There were no costs of goods sold in 2000.
Selling, general and administrative expenses were $5,952,067 for 2001 as
compared to $1,978,697 for 2000. The $3,973,370 increase in selling, general and
administrative expenses was primarily due to the increased corporate overhead
structure for the development of our eBusiness software and services and the
costs associated with our acquisitions.
Depreciation and amortization for 2001 was $1,641,875 as compared to $112,544
for 2000. For fiscal 2001, depreciation and amortization expense of property,
equipment and other intangibles was $185,520 and goodwill and other acquisition
related intangible amortization expense was $1,456,355. Goodwill and other
acquisition related intangible amortization represents the excess of the
purchase price and related costs over the fair value of the net assets that the
Company acquires through its mergers and acquisitions. Through December 31,
2001, the Company amortized acquired goodwill and other intangibles on a
straight-line basis on acquisitions that occurred prior to July 1, 2001.
19
Product development expenses for 2001 were $562,762 as compared to $609,344 for
2000. The $46,582 decrease in product development expenses was related primarily
to our change in focus of utilization of the Epoxy Network verse building a
complete software solution from the ground up.
During 2001, the Company closed its office located in Boston, Massachusetts.
With this closure the Company booked a loss on disposal of assets of $55,194
relating to the Boston office. In order to facilitate an early release from our
office lease, the furniture and fixtures located within our space were given as
consideration to the landlord and written off and recorded as loss on assets.
The Company's other income and expense consists of interest and dividend income
and interest expense. Interest and dividend income for 2001 was $159,101 as
compared to $7,500 for 2000. This income represents interest earned on our
short-term investments.
Interest expense for 2001 was $73,411 as compared to $41,974 for 2000. This
$31,437 increase in expense relates primarily to the amortization of the debt
discount on the 7% notes payable to the old shareholders of Red Wing, Champion
and FMS/Harvest.
DISCONTINUED OPERATIONS
The loss of $1,591,978 in 2001 is a result of the discontinuation of the
Accounting Software Business, including the write-off of all assets associated
with the business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and satisfied its capital expenditure
requirements primarily through the sale of its common stock in private
placements and the exercise of employee stock options, in addition to the cash
received from the merger and acquisition of activeIQ and Meteor. Net cash used
by operating activities was $2,058,283 for 2002 as compared to net cash used by
operating activities of $3,843,954 for 2001 and $2,236,896 for 2000.
The Company had a working capital deficit of $509,372 at December 31, 2002,
compared to working capital of $335,630 on December 31, 2001. Cash and
equivalents were $13,211 at December 31, 2002, representing a decrease of
$1,364,104 from the cash and equivalents of $1,377,315 at December 31, 2001.
As of December 31, 2002, our principal commitments consist of payments to the
former shareholders at Red Wing ($705,186), Champion ($674,077) and FMS/Harvest
($152,255). One remaining payment was due the former shareholders of Champion on
January 14, 2003 of $256,000. With the pending sale to be completed of our
Accounting Software Business, these commitments are recorded as "Net liabilities
of operations of discontinued accounting software business" on the consolidated
balance sheet dated December 31, 2002 of Item 8. "Consolidated Financial
Statements and Supplementary Data" included elsewhere in this Annual Report.
On March 14, 2002, we issued a warrant to purchase 54,000 shares of common stock
at $5.50 per share to an underwriter who exercised a warrant for which he was
entitled to receive 54,000 units, each unit consisting of one share of common
stock and a warrant to purchase one share of common stock. The original warrant
had an exercise price of $6.875 and was re-priced to $2.00 per share, providing
net proceeds of $108,000.
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. The proceeds received were allocated to the fair
value of the securities issued (debt and warrant issued). On May 30, 2002, we
allowed Blake Capital Partners to convert $150,000 of outstanding principal
under the note into 200,000 shares of common stock. We satisfied the remaining
outstanding principal and accrued interest in full on June 10, 2002.
20
In December 2001, we entered in an application service provider ("ASP") software
license agreement with Stellent, Inc. The ASP agreement provided us with a
three-year worldwide exclusive license to be the hosted ASP solution for
Stellent's Content Management software. The ASP agreement required a minimum
royalty to be paid as follows: a credit of $500,000 from existing prepaid
royalties recorded at Stellent, a payment of $500,000 was paid with the
execution of the ASP agreement and two $500,000 payments were due in September
and December 2002. On March 29, 2002 we prepaid the September and December
payments and in consideration of the early payment, we received a 5% discount,
or $50,000.
In December 2000, Old AIQ entered into a subscription receivable for the
purchase of 100,000 shares of common stock at a price of $2.75 per share with
Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner
delivered to our company a cash payment in the amount of $75,000 and a 2-month
promissory note in the principal amount of $200,000. In April 2002, the
receivable was paid in full.
In connection with our October 2001 acquisition of FMS Marketing, Inc., we were
required to pay to the 4 former shareholders of FMS/Harvest an aggregate of
$300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In
May 2002 we re-negotiated the terms of those notes in order to provide that we
would immediately pay an aggregate of $30,000 and the remaining $270,000 would
be payable by December 15, 2002, with interest accruing at the rate of 12.5% per
annum. In addition, the re-negotiated notes allowed the former FMS/Harvest
shareholders to convert the outstanding balance into shares of our common stock
until July 12, 2002 at a price equal to 90% of the average closing sales price
for the 5 days preceding conversion. On April 10, 2002, three of the former
FMS/Harvest shareholders exercised the conversion option with respect to their
notes, converting an aggregate of $118,758 of outstanding principal and interest
into 151,669 shares of our common stock (at a conversion price of $0.783 per
share, the fair value of the common stock on that date). We issued the common
stock in June 2002.
We completed our merger with Old AIQ on April 30, 2001 and entered into a note
receivable in the amount of $500,000. The note was secured by a stock pledge
dated April 27, 2001, pledging 1,500,000 shares of common stock of Capco Energy,
Inc. The note receivable accrued interest at 10% per annum. We received the
remaining principal balance plus accrued interest in May 2002.
On May 27, 2002, we sold 500,000 shares of its common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for
total proceeds of $375,000 (we received $350,000 in cash and recorded a stock
subscription receivable of $25,000). We issued the common stock in June 2002. As
consideration for its purchase of such shares, Boston Financial Partners also
received a warrant to purchase an additional 500,000 shares of our common stock
at an exercise price of $1.00 per share, and we further agreed to reduce to
$1.00 the exercise price on all other warrants to purchase shares of our common
stock held by Boston Financial Partners and its affiliates. Such warrants
represent the right to purchase 1 million shares of common stock and had
exercise prices ranging from $5.50 to $7.50 per share. Prior to this private
placement, Boston Financial Partners beneficially owned more than 5% of our
common stock. In December 2002, the Company finalized an amendment to the
agreement and canceled the $25,000 stock subscription receivable.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. We issued the common stock in June 2002. In connection
with the sale of these shares, we also issued to the investors 5-year warrants
to purchase an aggregate of 800,000 shares of our common stock at an exercise
price of $1.25 per share. The warrants may be redeemed by us any time after
January 30, 2003 and following a period of at least 30 business days in which
our common stock trades at $2.50 per share or more. The redemption price is
equal to $.01 per warrant share. One of the investors was Wyncrest Capital,
Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of the
Company. Wyncrest Capital acquired half of the shares and warrants issued in
this private placement. In conjunction with this transaction, we also issued an
additional 50,000 warrants in September 2002 to Mr. Eibensteiner as
consideration for the placement.
During the year ended December 31, 2002, our continuing operations included one
reportable segment: our Hosted Solutions Business. Subsequent to December 31,
2002, it became apparent to us that, in light of
21
current market conditions, it would be extremely unlikely for us to secure the
financing necessary to fund our Hosted Solutions Business beyond the near term.
On March 13, 2003, our Board of Directors formally approved the sale of the
Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase
agreement with Stellent, Inc. and completed the sale of the Hosted Solutions
Business. We received $650,000 in cash for the assets used in the Hosted
Solutions Business, plus we were reimbursed $150,000 for expenses we incurred as
a result of the transaction. If the anticipated sale of our Accounting Software
Business is finalized on or about April 20, 2003, and our Board of Directors
have not identified a potential business or technology acquisition, we will no
longer be generating any revenues. Furthermore, if we are successful in our
acquisition strategy, we will require further sources of capital to fund
operations. There can be no assurance that additional capital will be available
on terms acceptable to us or on any terms whatsoever. See Note 1 -- Nature of
Business, included elsewhere in this Annual Report, regarding our going concern
opinion.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
effective for fiscal years beginning after May 15, 2002. The Company believes
the adoption of SFAS No. 145 will not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is still
evaluating the effect of adopting SFAS No. 146.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 is effective October 1, 2002. The adoption
of SFAS No. 147 did not have a material effect on the Company's consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 is an amendment to SFAS
No. 123 providing alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation
and also provides requires additional disclosures about the method of accounting
for stock-based employee compensation. The amendments are effective for
financial statements for fiscal years ending after December 15, 2002 and for the
interim periods beginning after December 15, 2002. The Company adopted the
annual disclosure position of SFAS No. 148. The Company has currently chosen to
not adopt the voluntary change to the fair value based method of accounting for
stock-based employee compensation, pursuant to SFAS No. 148, which, if adopted,
could have a material effect on the Company's consolidated financial position or
results of operations.
CRITICAL ACCOUNTING POLICIES
Goodwill and other intangibles
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill and other intangibles associated with our
acquired businesses, which amounts to $7,965,476 (or 58% of total assets), is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. During 2002, the Company
recorded an impairment charge of $417,273 related to the Epoxy Network and an
impairment charge of goodwill of $3,781,391, which is included in loss on
discontinued operations for the year ended December 31, 2002. During the years
ended December 31, 2001 and 2000, the Company did not record any impairment
losses related to goodwill and other intangibles related to acquired businesses.
22
Long-Lived Assets
The Company's long-lived assets include property, equipment and software. At
December 31, 2002, the Company had net property and equipment and software of
$123,505, which represents approximately 11% of the Company's total assets. With
the sale of our Hosted Solutions Business on March 14, 2003, we sold
substantially all of our long-lived assets to Stellent, Inc.
Revenue recognition
Software license revenue is recognized when all of the following criteria have
been met: there is an executed license agreement, software has been delivered to
the customer, the license fee is fixed and payable within twelve months,
collection is deemed probable and product returns are reasonably estimable.
Revenues related to multiple element arrangements are allocated to each element
of the arrangement based on the fair values of elements such as license fees,
maintenance, and professional services. Fair value is determined based on vendor
specific objective evidence. Maintenance revenues are recognized ratably over
the term of the maintenance contract, typically 12 months. The Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition" provides guidance on the application of accounting policies
generally accepted in the United States of America to selected revenue
recognition issues. We have concluded that our revenue recognition policy is
appropriate and in accordance with accounting principles generally accepted in
the United States of America and SAB No. 101.
Contractual obligations
The Company has entered into various non-cancelable leases for land, buildings
and equipment with terms ranging from 3 to 8 years.
Minimum future obligations on leases in effect at December 31, 2002, are
approximately as follows:
Total 1 Yr or less 1 -- 3 Yrs 4 -- 5 Yrs Over 5 Yrs
--------- ------------ ---------- ---------- ----------
Real property leases $ 804,900 $ 281,000 $ 182,000 $ 112,900 $ 229,000
Equipment leases $ 29,100 $ 13,000 $ 11,000 $ 5,100 --
--------- --------- --------- --------- ---------
Total $ 834,000 $ 294,000 $ 193,000 $ 118,000 $ 229,000
========= ========= ========= ========= =========
If the Accounting Software Business is disposed of as anticipated in April 2003,
(See Note 2 -- Discontinued Operations of the Accounting Business, included
elsewhere in this Annual Report) the revised future obligations on the leases in
effect at December 31, 2002, are approximately as follows:
Total 1 Year or less 1 -- 3 Years
Real property leases $ 210,000 $ 140,000 $ 70,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Based on our overall interest rate exposure during the year ended December 31,
2002 and assuming similar interest rate volatility in the future, a near-term
(12 months) change in interest rates would not materially affect our
consolidated financial position, results of operation or cash flows. Interest
rate movements of 5% would not have a material effect on our financial position,
results of operation or cash flows.
23
FOREIGN EXCHANGE EXPOSURE
We receive Canadian funds for the sale of certain software products related to
the Accounting Software Business. A 5% change in the foreign exchange rate would
not have a material effect on our financial position, results of operation or
cash flows.
24
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
Page
Report of Virchow, Krause & Company, LLP............................ 26
Report of Arthur Andersen LLP....................................... 27
Consolidated Balance Sheets as of December 31, 2002 and 2001........ 28
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.................................. 29
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000............................ 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.................................. 36
Notes to Consolidated Financial Statements.......................... 37
25
INDEPENDENT AUDITORS' REPORT
To Audit Committee, Shareholders and Board of Directors of Active IQ
Technologies, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Active IQ
Technologies, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Active
IQ Technologies, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
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 had net losses for the years
ended December 31, 2002, 2001 and 2000 and had an accumulated deficit and
negative working capital at December 31, 2002. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Virchow, Krause & Company, LLP
Minneapolis, Minnesota
February 14, 2003
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Active IQ Technologies, Inc.:
We have audited the accompanying balance sheets of Active IQ Technologies Inc.
(formerly activeIQ Technologies, Inc.) (a Minnesota corporation formerly in the
development stage) as of December 31, 2000, and the related statements of
operations, stockholders' equity and cash flows for the two years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Active IQ Technologies, Inc. as
of December 31, 2000, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring losses from
operations 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 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Arthur Andersen LLP
Minneapolis, Minnesota,
March 23, 2001
**THE FOREGOING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN RE-ISSUED BY ARTHUR ANDERSEN LLP.
27
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 13,211 $ 1,377,315
Accounts receivable, net 35,107 95,831
Note receivable -- 500,000
Prepaid expenses 35,542 7,382
------------ ------------
Total current assets 83,860 1,980,528
Property and equipment, net 123,505 420,736
Prepaid royalties, net 975,000 1,500,000
Other assets, net -- 40,090
Net assets of operations of discontinued
accounting software business -- 4,893,588
Goodwill, net -- 817,273
------------ ------------
$ 1,182,365 $ 9,652,215
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Note payable $ -- $ 1,000,000
Accounts payable 304,526 331,895
Net liabilities of operations of discontinued
accounting software business 93,078 --
Accrued payroll 119,211 272,517
Accrued professional fees 31,250 35,000
Accrued interest 18,552 2,906
Accrued expenses 26,615 2,580
------------ ------------
Total current liabilities 593,232 1,644,898
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Series B Convertible Preferred Stock, $1.00 par value,
365,000 shares authorized; 0 and 365,000 shares issued and
outstanding at December 31, 2002 and December 31, 2001 -- 365,000
Common stock, $.01 par value, 150,000,000 shares authorized;
13,264,681 and 10,731,345 shares issued and outstanding
at December 31, 2002 and 2001 132,647 107,313
Additional paid-in capital 22,616,833 19,335,027
Stock subscription receivable (2,000,000) (200,000)
Deferred compensation (182,213) (311,701)
Warrants 2,602,860 1,633,917
Accumulated deficit (22,580,994) (12,922,239)
------------ ------------
Total shareholders' equity 589,133 8,007,317
------------ ------------
$ 1,182,365 $ 9,652,215
============ ============
See accompanying notes to consolidated financial statements
28
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2002 2001 2000
----------- ----------- -----------
Revenues $ 499,378 $ 462,800 $ --
----------- ----------- -----------
Operating Expenses:
Costs of goods sold 588,488 191,422 --
Selling, general and administrative 3,339,590 5,952,067 1,978,697
Depreciation and amortization 144,962 1,641,875 112,544
Product development 134,217 562,762 609,344
Loss on disposal of assets 114,037 55,194 105,360
Loss on impairment of goodwill 417,273 -- --
----------- ----------- -----------
Total operating expenses 4,738,567 8,403,320 2,805,945
----------- ----------- -----------
Loss from Operations (4,239,189) (7,940,520) (2,805,945)
=========== =========== ===========
Other Income (Expense):
Interest and dividend income 15,244 159,101 7,500
Other income 430,000 -- --
Interest expense (367,469) (73,411) (41,974)
----------- ----------- -----------
Total other income (expense) 77,775 85,690 (34,474)
----------- ----------- -----------
Loss from Continuing Operations (4,161,414) (7,854,830) (2,840,419)
----------- ----------- -----------
Discontinued Operations (See Note 2)
Loss from operations of discontinued
accounting software business (3,757,341) (1,591,978) --
Loss on disposal of accounting software business
(including provision for operating losses of
$50,000 during phase out period) (1,740,000) -- --
----------- ----------- -----------
Loss on discontinued operations (5,497,341) (1,591,978) --
----------- ----------- -----------
Net Loss $(9,658,755) $(9,446,808) $(2,840,419)
=========== =========== ===========
Basic and diluted net loss per common share:
Continuing operations $ (0.33) $ (0.96) $ (1.65)
Discontinued operations (0.44) (0.19) --
----------- ----------- -----------
Net Loss $ (0.77) $ (1.15) $ (1.65)
=========== =========== ===========
Basic and diluted weighted average
common shares outstanding 12,532,354 8,210,326 1,717,731
=========== =========== ===========
See accompanying notes to consolidated financial statements
29
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Preferred Additional
stock stock paid-in
shares Amount shares Amount capital
----------- ------- --------- -------- ----------
BALANCE, December 31, 1999 373,626 $ 3,736 -- $ -- $1,144,385
Issuance of common stock in March 2000
at $37.50 per share 4,667 47 -- -- 174,953
Issuance of warrants in June 2000 in
payment of legal fees -- -- -- -- --
Issuance of common stock in June 2000
at $0.38 per share (net of offering
costs of $10,000) 1,856,634 18,567 -- -- 677,545
Repayment of stock subscription receivable -- -- -- --
Conversion of accounts payable to common
stock in June 2000 at $0.38 per share 216,216 2,162 -- -- 78,919
Issuance of options to purchase 60,000 shares
at an exercise price of $1.00 per share as
part of severance in June 2000 -- -- -- -- 25,800
Issuance of common stock in July 2000
for assets at $2.50 per share 151,200 1,512 -- -- 376,488
Issuance of common stock in August through
December 2000 at $2.75 per share
(net of offering costs of $408,578) 956,780 9,568 -- -- 2,079,050
Issuance of common stock in September
2000 at $2.75 per share to director 100,000 1,000 -- -- 274,000
Issuance of warrants in August 2000 in
conjunction with stockholder note payable -- -- -- -- --
Conversion of notes payable to common
stock in September 2000 at $2.75 per share 20,000 200 -- -- 54,800
Deferred compensation related to September
and November 2000 option grants -- -- -- -- 227,500
Issuance of options to consultant exercisable
at $1.00 per share in October 2000 -- -- -- -- 90,000
Issuance of common stock at $2.75 per
share in December 2000 in payment
of accounts payable 29,515 295 -- -- 80,871
Issuance of common stock in December
2000 for assets at $2.75 per share 127,273 1,272 -- -- 348,729
Deferred compensation expense -- -- -- -- --
Net loss -- -- -- -- --
----------- ------- ------- -------- ----------
BALANCE, December 31, 2000 3,835,911 38,359 -- -- 5,633,040
Issuance of common stock in January 2001
at $2.75 per share 400,000 4,000 -- -- 1,096,000
Issuance of common stock in January and April
2001 for acquisition of Edge Technologies, Inc 550,000 5,500 -- -- 1,507,000
Issuance of common stock for merger with
activeIQ net of $1,000,000 costs 3,874,511 38,745 365,000 365,000 3,634,028
Cashless exercise of warrants issued in June 2000 17,976 180 -- -- 22,502
Employee and consultant stock option
exercises from May through December 2001 605,496 6,055 -- -- 1,623,900
Surrender of common stock at $37.50 per share
in exchange for cancellation of promissory note (8,334) (83) -- -- (312,417)
30
Common Preferred Additional
stock stock paid-in
shares Amount shares Amount capital
----------- ------- --------- -------- ----------
Issuance of common stock in June 2001 for
acquisition of Red Wing Business Systems, Inc 400,000 4,000 -- -- 1,774,000
Issuance of common stock in June 2001 at
$3.00 per share net of $82,500 costs 500,000 5,000 -- -- 1,373,500
Issuance of common stock in July 2001 to a
director at $2.75 per share pledged with
stock subscription 100,000 1,000 -- -- 274,000
Issuance of consulting warrants in August
2001, 450,000 at $5.50 per share,
250,000 at $7.50 per share -- -- -- -- --
Conversion of accounts payable to common
stock in September 2001 at $4.00 per share 16,667 167 -- -- 89,002
Issuance of common stock in September
2001 for acquisition of Champion
Business Systems, Inc 299,185 2,992 -- -- 1,460,023
Conversion of accounts payable to warrant in
August and September 2001 -- -- -- -- --
Issuance of commons stock in October 2001
for acquisition of FMS Marketing, Inc 250,000 2,500 -- -- 752,500
Company's re-purchase of common stock
in December 2001 (106,667) (1,067) -- -- (409,254)
Cancellation of stock bonus shares
in December 2001 (3,400) (34) -- -- 34
Deferred compensation related to options granted -- -- -- -- 817,169
Deferred compensation expense -- -- -- -- --
Net loss -- -- -- -- --
----------- ------- --------- -------- ----------
BALANCE, December 31, 2001 10,731,345 107,313 365,000 365,000 19,335,027
Employee stock option exercise in January 2002 11,500 115 -- -- 34,385
Issuance of common stock in January 2002
at $4.00 per share to officer 500,000 5,000 -- -- 1,995,000
Company's re-purchase of common stock
in February 2002 (15,500) (155) -- -- (62,880)
Conversion of Series B Preferred Stock
in February 2002 365,000 3,650 (365,000) (365,000) 361,350
Re-pricing and exercise of warrant in March
2002, issued to underwriter in June 1998 54,000 540 -- -- 107,460
Issuance of warrant in March 2002 to director
relating to loan to Company, 25,000 shares
at $3.00 per share -- -- -- -- --
Re-payment of stock subscription receivable
in April 2002 from director -- -- -- -- --
Partial conversion of note payable to
common stock in May 2002 at $1.15 per
common share due to a director 200,000 2,000 -- -- 228,000
Partial conversion of notes payable to common
stock in June 2002 at $0.78 per share due to
former shareholders of FMS Marketing, Inc 151,669 1,517 -- -- 117,241
Issuance of common stock in June 2002 at $0.75
per share and 500,000 warrants at $1.00 per share
800,000 warrants at $1.25 per share to an
investor and to a director (includes re-pricing
of certain warrants) 1,300,000 13,000 -- -- 501,249
31
Common Preferred Additional
stock stock paid-in
shares Amount shares Amount capital
----------- -------- --------- --------- -----------
Conversion of accounts payable to warrant in
June 2002 at $0.83 per share -- -- -- -- --
Issuance of 119,285 warrants at $1.00 per share
in September 2002 to former Champion Business
Systems promissory note holders for
deferring principal payment -- -- -- -- --
Surrender of common stock at $0.75 per share
in exchange for cancellation of stock
subscription receivable (33,333) (333) -- -- --
Deferred compensation expense -- -- -- -- --
Net loss -- -- -- -- --
----------- -------- --------- --------- -----------
BALANCE, December 31, 2002 13,264,681 $132,647 -- $ -- $22,616,833
=========== ======== ========= ========= ===========
See accompanying notes to consolidated financial statements
32
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Stock Deferred
subscription compen- Accumulated
Receivable sation Warrants deficit Total
----------- -------- ------- ----------- -----------
BALANCE, December 31, 1999 $ (328,750) $ -- $ -- $ (635,012) $ 184,359
Issuance of common stock in March 2000
at $37.50 per share -- -- -- -- 175,000
Issuance of warrants in June 2000 in
payment of legal fees -- -- 22,682 -- 22,682
Issuance of common stock in June 2000
at $0.38 per share (net of offering
costs of $10,000) -- -- -- -- 696,112
Repayment of stock subscription receivable 16,250 -- -- -- 16,250
Conversion of accounts payable to common
stock in June 2000 at $0.38 per share -- -- -- -- 81,081
Issuance of options to purchase 60,000 shares
at an exercise price of $1.00 per share as
part of severance in June 2000 -- -- -- -- 25,800
Issuance of common stock in July 2000
for assets at $2.50 per share -- -- -- -- 378,000
Issuance of common stock in August through
December 2000 at $2.75 per share
(net of offering costs of $408,578) -- -- 133,949 -- 2,222,567
Issuance of common stock in September
2000 at $2.75 per share to director -- -- -- 275,000
Issuance of warrants in August 2000 in
conjunction with stockholder note payable -- -- 14,250 -- 14,250
Conversion of notes payable to common
stock in September 2000 at $2.75 per share -- -- -- -- 55,000
Deferred compensation related to September
and November 2000 option grants -- (227,500) -- -- --
Issuance of options to consultant exercisable
at $1.00 per share in October 2000 -- -- -- -- 90,000
Issuance of common stock at $2.75 per
share in December 2000 in payment
of accounts payable -- -- -- -- 81,166
Issuance of common stock in December
2000 for assets at $2.75 per share -- -- -- -- 350,001
Deferred compensation expense -- 54,687 -- -- 54,687
Net loss -- -- -- (2,840,419) (2,840,419)
----------- -------- ------- ----------- -----------
BALANCE, December 31, 2000 (312,500) (172,813) 170,881 (3,475,431) 1,881,536
Issuance of common stock in January 2001
at $2.75 per share -- -- -- -- 1,100,000
Issuance of common stock in January and April
2001 for acquisition of Edge Technologies, Inc. -- -- -- -- 1,512,500
Issuance of common stock for merger with
activeIQ net of $1,000,000 costs -- -- -- -- 4,037,773
Cashless exercise of warrants issued in June 2000 -- -- (22,682) -- --
Employee and consultant stock option
exercises from May through December 2001 -- -- -- -- 1,629,955
Surrender of common stock at $37.50 per share
in exchange for cancellation of promissory note 312,500 -- -- -- --
33
Stock Deferred
subscription compen- Accumulated
Receivable sation Warrants deficit Total
----------- --------- --------- ----------- -----------
Issuance of common stock in June 2001 for
acquisition of Red Wing Business Systems, Inc -- -- -- -- 1,778,000
Issuance of common stock in June 2001 at
$3.00 per share net of $82,500 costs -- -- 114,000 -- 1,492,500
Issuance of common stock in July 2001 to a
director at $2.75 per share pledged with
stock subscription (200,000) -- -- -- 75,000
Issuance of consulting warrants in August
2001, 450,000 at $5.50 per share,
250,000 at $7.50 per share -- -- 1,246,000 -- 1,246,000
Conversion of accounts payable to common
stock in September 2001 at $4.00 per share -- -- -- -- 89,169
Issuance of common stock in September
2001 for acquisition of Champion
Business Systems, Inc -- -- -- -- 1,463,015
Conversion of accounts payable to warrant in
August and September 2001 -- -- 125,718 -- 125,718
Issuance of commons stock in October 2001
for acquisition of FMS Marketing, Inc -- -- -- -- 755,000
Company's re-purchase of common stock
in December 2001 -- -- -- -- (410,321)
Cancellation of stock bonus shares
in December 2001 -- -- -- -- --
Deferred compensation related to options granted -- (817,169) -- -- --
Deferred compensation expense -- 678,281 -- -- 678,281
Net loss -- -- -- (9,446,808) (9,446,808)
----------- --------- --------- ----------- -----------
BALANCE, December 31, 2001 (200,000) $(311,701) 1,633,917 (12,922,239) 8,007,317
Employee stock option exercise in January 2002 -- -- -- -- 34,500
Issuance of common stock in January 2002
at $4.00 per share to officer (2,000,000) -- -- -- --
Company's re-purchase of common stock
in February 2002 -- -- -- -- (63,035)
Conversion of Series B Preferred Stock
in February 2002 -- -- -- -- --
Re-pricing and exercise of warrant in March
2002, issued to underwriter in June 1998 -- -- 61,020 -- 169,020
Issuance of warrant in March 2002 to director
relating to loan to Company, 25,000 shares
at $3.00 per share -- -- 33,750 -- 33,750
Re-payment of stock subscription receivable
in April 2002 from director 200,000 -- -- -- 200,000
Partial conversion of note payable to
common stock in May 2002 at $1.15 per
common share due to a director -- -- -- -- 230,000
Partial conversion of notes payable to common
stock in June 2002 at $0.78 per share due to
former shareholders of FMS Marketing, Inc -- -- -- -- 118,758
Issuance of common stock in June 2002 at $0.75
per share and 550,000 warrants at $1.00 per share
800,000 warrants at $1.25 per share to an
investor and to a director (includes re-pricing
of certain warrants) (25,000) -- 779,474 -- 1,268,723
34
Stock Deferred
subscription compen- Accumulated
Receivable sation Warrants deficit Total
----------- --------- ---------- ------------ -----------
Conversion of accounts payable to warrant in
June 2002 at $0.83 per share -- -- 12,500 -- 12,500
Issuance of 119,285 warrants at $1.00 per share
in September 2002 to former Champion Business
Systems promissory note holders for
deferring principal payment -- -- 82,199 -- 82,199
Surrender of common stock at $0.75 per share
in exchange for cancellation of stock
subscription receivable 25,000 -- -- -- 24,667
Deferred compensation expense -- 129,488 -- -- 129,488
Net loss -- -- -- (9,658,755) (9,658,755)
----------- --------- ---------- ------------ -----------
BALANCE, December 31, 2002 $(2,000,000) $(182,213) $2,602,860 $(22,580,994) $ 589,133
=========== ========= ========== ============ ===========
See accompanying notes to consolidated financial statements
35
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss $(9,658,755) $(9,446,808) $(2,840,419)
Adjustments to reconcile net loss to cash
flows from operating activities:
Depreciation and amortization 1,824,372 3,161,492 112,544
Deferred compensation expense 129,488 678,280 54,687
Loss on disposal of assets 114,037 55,356 105,360
Loss on discontinued accounting software business 1,650,000 -- --
Loss on impairment of goodwill 2,548,664 -- --
Issuance of warrants, options and common stock for services 189,469 1,436,393 320,000
Issuance of options in lieu of severance -- -- 25,800
Amortization of original issue discount 79,145 66,273 14,250
Amortization of acquired software developed 441,237 187,253 --
Re-pricing of common stock warrants 343,390 -- --
Excess of common stock value in connection with
conversion of note payable to common stock 80,000 -- --
Forgiveness of note payable -- (63,677) --
Changes in operating assets and liabilities:
Accounts receivable, net 72,974 (164,287) --
Inventories 13,683 40,184 --
Prepaid expenses (39,844) 26,154 20,715
Prepaid royalties -- -- (150,000)
Other assets 63,670 175,084 (261,028)
Accounts payable (45,121) 53,219 272,767
Deferred revenue 292,741 (303,840) --
Accrued expenses (157,433) 254,970 88,428
----------- ----------- -----------
Net cash used in operating activities (2,058,283) (3,843,954) (2,236,896)
----------- ----------- -----------
INVESTING ACTIVITIES:
Payments on note receivable 500,000 -- --
Proceeds from sale of property and equipment 52,145 -- --
Proceeds from sale of Epoxy Network (goodwill) 400,000 -- --
Acquisition of Edge Technologies Incorporated -- (750,711) --
Acquisition of Red Wing Business Systems, Inc-net of cash
acquired -- (421,031) --
Acquisition of Champion Business Systems, Inc-net of cash
acquired -- (501,056) --
Acquisition of FMS Marketing, Inc-net of cash acquired -- (311,134) --
Payments for acquired software developed -- (189,290) --
Purchases of property and equipment (59,506) (134,026) (267,103)
----------- ----------- -----------
Net cash provided by (used in) investing activities 892,639 (2,307,248) (267,103)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net decrease on bank line of credit -- (277,381) (102,471)
Payments on capital lease obligations -- (46,216) --
Payments on long-term debt (1,727,570) (534,672) --
Common stock repurchased (63,035) (410,321) --
Cash proceeds from issuance of common stock 1,246,514 6,205,273 3,191,010
Cash proceeds from exercise of options 34,500 1,629,955 --
Cash proceeds from short-term shareholder note payable -- -- 355,000
Cash proceeds from long-term debt 450,000 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities (59,591) 6,566,638 3,443,539
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS OF
DISCONTINUED ACCOUNTING SOFTWARE BUSINESS (138,869) (387,578) --
----------- ----------- -----------
INCREASE (DECREASE) IN CASH EQUIVALENTS (1,364,104) 27,858 939,540
CASH AND EQUIVALENTS, beginning of period 1,377,315 1,349,457 409,917
----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 13,211 $ 1,377,315 $ 1,349,457
=========== =========== ===========
See accompanying notes to consolidated financial statements
36
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Active IQ Technologies, Inc. ("Active IQ," the "Company," "our," or "we")
provides online document management services delivered through an outsourced,
fully managed hosted service provider model. The Company's document management
services are currently focused on delivering solutions to the commercial real
estate market with potential application to related markets requiring similar
document management solutions. Through an exclusive worldwide-hosted licensing
agreement with Stellent, Inc., Active IQ employs Stellent's Content Management
software as the underlying software engine on which its service solutions are
developed. See Note 11 -- Subsequent Events.
Active IQ offers traditional accounting and financial management software
solutions through its accounting software business comprised of Red Wing
Business Systems, Inc. ("Red Wing") (including FMS Marketing, Inc.
("FMS/Harvest") which was merged into Red Wing in December 2001) and Champion
Business Systems, Inc., ("Champion") (collectively, "the accounting software
business"). In December 2002, the Company's Board of Directors authorized a plan
to sell the Company's accounting software business. On February 17, 2003, the
Company executed a definitive purchase agreement to sell substantially all
assets of the accounting software business to a newly formed company led by
management of that accounting software business. See Note 2 - Discontinued
Operations of Accounting Software Business.
Up through March 2002, the Company provided an eBusiness application and
software solution as part of its "Epoxy Network." The Epoxy Network offered an
Internet merchandising system called "Storefront" and a tool for managing
customer information named "Account Management." In April 2002, the Company sold
the existing customer contracts of this business to a third party. In August
2002, the Company sold its remaining rights and interests in the Epoxy Network
to a different third party.
The Company was originally incorporated under Colorado law in December 1992
under the name Meteor Industries, Inc. On April 30, 2001, the Company, activeIQ
Technologies Inc. ("Old AIQ") and a wholly owned subsidiary of the Company (the
Company's subsidiary) closed a triangular reverse merger transaction whereby Old
AIQ merged with and into the Company's subsidiary. Immediately prior to the
merger, the Company (i) sold all of its assets relating to its petroleum and gas
distribution business, (ii) was reincorporated under Minnesota law, and (iii)
changed its name to Active IQ Technologies, Inc. As a result of the sale of the
Company's petroleum and gas distribution assets, it discontinued all operations
in the petroleum and gas distribution business and has adopted the business plan
of Old AIQ. Because Old AIQ was treated as the acquiring company in the merger,
all financial and business information contained herein relating to periods
prior to the merger is the business and financial information of Old AIQ. In
April 2001 we reincorporated under Minnesota law.
Old AIQ was incorporated in Minnesota on April 11, 1996, and was considered a
development stage company until January 2001, when it began to recognize
revenues as a result of an acquisition (see Note 3 - Business Combinations). Old
AIQ was formed to develop and provide eBusiness application software and
services for small-to-medium sized accounting software customers. Since its
inception and up through the merger, Old AIQ's efforts have been devoted to the
development of its principal product and raising capital.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the years ended December 31, 2002, 2001 and 2000, the Company incurred
37
losses from continuing operations of $4,161,414, $7,854,830 and $2,840,419,
respectively. At December 31, 2002, the Company had an accumulated deficit of
$22,580,994 and a negative working capital of $509,372. The Company's ability to
continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. Management intends to obtain
additional debt or equity capital to meet all of its existing cash obligations,
however, there can be no assurance that the sources will be available or
available on terms favorable to the Company. We believe we have enough cash to
fund our operations through the end of our first quarter ended March 31, 2003.
Management anticipates that the impact of the actions listed below, might
generate sufficient cash flows to pay current liabilities and fund the Company's
future operations:
- Continued reduction of operating expenses by controlling payroll
and other general and administrative expenses.
- Solicit additional equity and /or debt investment in the Company.
- Sell operating assets of the company
- See Note 11 - Subsequent Events
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Active IQ
Technologies, Inc. and its wholly owned subsidiaries, Red Wing Business Systems,
Inc. and Champion Business Systems, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation. See Note 2 -
Discontinued Operations of Accounting Software Business.
CASH AND CASH EQUIVALENTS
The Company includes as cash equivalents certificates of deposit and all other
investments with maturities of three months or less when purchased which are
readily convertible into known amounts of cash. The Company maintains its cash
in high-quality financial institutions. The balances, at times, may exceed
federally insured limits.
ACCOUNTS RECEIVABLE
The balance of accounts receivable was $35,542 and $95,831 at December 31, 2002
and 2001, respectively. The allowance for uncollectible accounts was $0 at both
December 31, 2002 and 2001. The allowance for uncollectible accounts for the
discontinued accounting software business (see Note 2) was $55,000 at both
December 31, 2002 and 2001. The Company extends unsecured credit to customers in
the normal course of business. On a periodic basis the Company evaluates its
accounts receivable based on history of past write-offs and collections and
current credit conditions and accordingly adjusts the allowance for doubtful
accounts. The Company believes all accounts receivable in excess of the
allowance are fully collectible. The Company does not accrue interest on past
due accounts receivable. If accounts receivable in excess of the provided
allowance are determined uncollectible, they are charged to expense in the year
that determination is made.
INVENTORIES
The Company's online document management service does not require maintaining
any assets classified as inventories, as the services are delivered
electronically. Inventories related to the discontinued accounting software
business consist principally of manuals for the various software modules,
stocked software and shipping supplies. Inventory is recorded at the lower of
cost (first-in, first-out) or market. See Note 2 - Discontinued Operations of
Accounting Software Business.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are recorded at cost.
Improvements are capitalized while repairs and maintenance costs are charged to
operations when incurred. Property and equipment is depreciated or amortized
using the straight-line method over estimated useful lives ranging from three to
38
seven years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the asset.
SOFTWARE DEVELOPMENT COSTS
The Company has adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Pursuant to
SOP 98-1, expenditures for internal use software are expensed during the
preliminary project stage. For the years ended December 31, 2002, 2001 and 2000,
the Company expensed all initial software costs as research and development
expense since costs were incurred during the preliminary project stage.
The Company did capitalize certain software development related to new product
development, which was acquired as part of the Red Wing and Champion
acquisitions in 2001 plus an additional $189,290 related to new project
development during the year ended December 31, 2001, for certain developed
software that has reached technological feasibility. As a result of the proposed
sale of the accounting software business, all capitalized software costs are
reclassified in net liabilities of discontinued operations at December 31, 2002.
See Note 2 - Discontinued Operations of Accounting Software Business.
PREPAID ROYALTIES
The Company has a software license agreement with Stellent, Inc., which required
advance royalty payments and certain minimum royalty fees. The prepaid royalties
at December 31, 2002 and 2001 of $975,000 and $1,500,000, respectively,
represents the balance remaining on minimum fees paid under the software license
agreement entered into on December 28, 2001.
GOODWILL
During the year ended December 31, 2001, goodwill of approximately $2,264,000,
$4,059,000, $1,562,000 and $694,000 was recorded related to the acquisitions of
Edge Technologies, Incorporated ("Edge"), Red Wing, Champion and FMS/Harvest,
respectively.
In June 2001, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 discontinues the amortization of recorded
goodwill for fiscal years beginning after December 15, 2001. Pursuant to SFAS
No. 142, goodwill will be reduced based upon an impairment analysis of the
amount recorded on the Company's books. To the extent it has been determined
that the carrying value of goodwill is not recoverable and is in excess of fair
value, an impairment loss will be recognized. Goodwill will be reviewed on a
periodic basis based on its fair value.
Goodwill, net of accumulated amortization, was $1,318,260 and $5,916,924 at
December 31, 2002 and 2001, respectively. See Note 2 - Discontinued Operations
of Accounting Software Business. Pursuant to SFAS No. 142, the Company
recognized and recorded an impairment charge against goodwill in the amount of
$2,131,391 during the second quarter ended June 30, 2002 related to the software
accounting business. Also pursuant to SFAS No. 142, the Company recognized and
recorded an impairment charge against goodwill in the amount of $417,273 (net
goodwill of $817,273 less $400,000 in sales proceeds) during the third quarter
ended September 30, 2002 related to the sale of our Epoxy Network discussed
above. The net loss would have been $6,796,504 without amortization of goodwill
of $2,650,304 for the year ended December 31, 2001.
OTHER INTANGIBLES AND ACQUIRED SOFTWARE DEVELOPED
Other intangibles (included in discontinued operations of the accounting
software business), net of amortization, were $869,927 and $2,048,552 at
December 31, 2002 and 2001, respectively. The intangible assets relate to
customer relationships, acquired software developed and non-compete agreements
related to the accounting software business. Included in the discontinued
operations of the accounting software business is amortization of acquired
software developed of $441,237 and $187,253 for the years ended
39
December 31, 2002 and 2001, respectively. Other intangible assets were being
amortized over two years on a straight-line basis. Accumulated amortization at
December 31, 2002 and 2001 was $1,487,321 and $308,697, respectively. Pursuant
to the Company's decision to discontinue the accounting software business, a
loss on disposal of accounting software business of $1,650,000 related to other
intangibles and goodwill was recorded in December 2002. See Note 2 -
Discontinued Operations of Accounting Software Business.
Based on the Company's decision to discontinue the accounting software business
operations, no amortization of other intangibles and acquired software developed
will be recorded during the year ending December 31, 2003.
SEGMENT REPORTING
The Company provides online document management services to the commercial real
estate market in the United States. The Company has only one operating segment.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company currently derives revenues from customers of the online document
management service for monthly access to the service and initial service
configuration/implementation. Customers are invoiced at the beginning of each
month for access service and revenue is recognized when invoiced.
Configuration/implementation revenue is invoiced the month after the services
are performed and recognized in the month invoiced.
The Company recognizes the revenues derived from the accounting software
business sales after all of the following criteria have been met: there is an
executed license agreement, software has been delivered to the customer, the
license fee is fixed and payable within twelve months, collection is deemed
probable and product returns are reasonably estimable. Revenues related to
multiple element arrangements are allocated to each element of the arrangement
based on the fair values of elements such as license fees, maintenance, and
professional services. Fair value is determined based on vendor specific
objective evidence. Service revenue is recognized ratably over the term of the
agreement, which is typically one year. All service revenue invoiced in excess
of revenue recognized is recorded as deferred revenue. At December 31, 2002 and
2001, deferred revenue was $1,774,491 and $1,481,750, respectively. See Note 2 -
Discontinued Operations of Accounting Software Business.
CREDIT RISK
Credit risk on accounts receivable is minimized as a result of the large and
diverse nature of the Company's customer base.
ADVERTISING
Advertising costs are charged to expense as incurred. Advertising costs were
$154,886, $258,929, and $54,045 for the years ended December 31, 2002, 2001 and
2000, respectively, and are included in discontinued operations in the
consolidated statement of operations.
STOCK BASED COMPENSATION
In accordance with Accounting Principles Board ("APB") Opinion No. 25, the
Company uses the intrinsic value-based method for measuring stock-based
compensation cost which measures compensation cost as the excess, if any, of the
quoted market price of the Company's common stock at the grant date over the
amount the employee must pay for the stock. The Company's general policy is to
grant stock options and warrants at fair value at the date of grant.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company recorded compensation
expense pursuant to APB Opinion No. 25 and
40
related interpretations on options granted and due to modifications of options
of $129,488, $678,280 and $54,687, for the years ended December 31, 2002, 2001
and 2000, respectively. The Company recorded expense related to stock based
compensation issued to non-employees in accordance with SFAS No. 123. Had
compensation costs for employees been recognized based upon the fair value of
options at the grant date consistent with the provisions of SFAS No. 123, the
Company's results would have been as follows:
Years Ended December 31,
2002 2001 2000
------------ ------------ -----------
Net loss:
As reported $ (9,658,755) $ (9,446,808) $(2,840,419)
Pro forma (11,221,388) (13,062,595) (2,968,959)
Basic and diluted net loss per share:
As reported $ (0.77) $ (1.15) $ (1.65)
Pro forma $ (0.90) $ (1.59) $ (1.73)
Stock-based compensation
As reported $ 129,488 $ 678,280 $ 54,687
Pro forma $ 1,562,633 $ 3,615,787 $ 128,540
In determining the compensation cost of the options granted during fiscal 2002,
2001, and 2000, as specified by SFAS No. 123, the fair value of each option
grant has been estimated on the date of grant using the Black-Scholes option
pricing model and the weighted average assumptions used in these calculations
are summarized below:
Years Ended December 31,
2002 2001 2000
------- -------- -------
Risk free interest rate 4.5% 5% 6.1%
Expected life of options granted 10 years 10 years 5 years
Expected volatility range 193.0% 130.0% 0%
Expected dividend yield 0% 0% 0%
FINANCIAL INSTRUMENTS
The carrying amounts for all financial instruments approximates fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt approximates the
carrying amounts based upon the Company's expected borrowing rate for debt with
similar remaining maturities and comparable risk.
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the periods
presented. The impact of common stock equivalents has been excluded from the
computation of weighted average common shares outstanding, as the net effect
would be anti-dilutive for all periods presented. Total options and warrants
outstanding at December 31, 2002 were 4,566,649 and 9,269,301, respectively,
options and warrants outstanding at December 31, 2001 were 4,055,341 and
7,779,456, respectively, and options and warrants outstanding at December 31,
2000 were 1,268,997 and 150,694, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method to recognize
deferred income tax assets and liabilities. Deferred income taxes are provided
for differences between the financial reporting and tax bases of the Company's
assets and liabilities at currently enacted tax rates.
41
The Company has recorded a full valuation allowance against the net deferred tax
asset due to the uncertainty of realizing the related benefits.
USE OF ESTIMATES
Preparing 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. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
effective for fiscal years beginning after May 15, 2002. The Company believes
the adoption of SFAS No. 145 will not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is still
evaluating the effect of adopting SFAS No. 146.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 is effective October 1, 2002. The adoption
of SFAS No. 147 did not have a material effect on the Company's consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 is an amendment to SFAS
No. 123 providing alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation
and also provides requires additional disclosures about the method of accounting
for stock-based employee compensation. The amendments are effective for
financial statements for fiscal years ending after December 15, 2002 and for the
interim periods beginning after December 15, 2002. The Company has adopted the
annual disclosure provision of SFAS No. 148, which, if adopted, could have a
material effect on the Company's consolidated financial position or results of
operations.
NOTE 2 -- DISCONTINUED OPERATIONS OF ACCOUNTING SOFTWARE BUSINESS
In December 2002, the Company's Board of Directors authorized a plan to sell the
Company's accounting software business to key employees. In February 2003, the
Company entered into a definitive purchase agreement to sell substantially all
the assets of our accounting software business to key employees ("the
Purchaser"). The accounting software business publishes traditional accounting
and financial management software for small and medium sized businesses, farms
and ranches throughout North America. The Company acquired the accounting
software business during the year ended December 31, 2001 for the purpose of
utilizing the businesses' customer base to market the Company's Epoxy products
and services. In 2002, the Company determined to abandon the Epoxy business
after acquiring the rights to develop and market hosted content management
solution products. Therefore, since the Company abandoned the Epoxy business
model to focus on the hosted solutions business, the accounting software
business no longer fits within the Company's business plan. The assets to be
sold consist primarily of all intellectual property rights, cash, accounts
receivable, inventories, property and equipment, and customer contracts. The
Purchaser will also assume substantially all the liabilities of the accounting
software business incurred in the ordinary course of the business consisting of
trade payables, accrued expenses, debt and liabilities
42
arising from contractual obligations related to the ongoing operations. In
addition, the Purchaser will pay the Company cash sufficient to discharge
outstanding debt that was incurred during 2001 to acquire the accounting
software business. The proposed sale, which we expect to be complete by April
30, 2003, is subject to the satisfaction or waiver of several conditions,
including the approval of the Company's shareholders.
The estimated loss on the disposal of the accounting software business of
$1,740,000 (net of income tax benefit of $0) represents the estimated loss on
the disposal of assets, net of liabilities assumed, of the accounting software
business, transactions costs of $40,000 and a provision of $50,000 for expected
operating losses during the phase out period from January 1, 2003 through March
31, 2003 (this includes a write down of goodwill which was recorded when the
accounting software business was acquired).
Net sales of the accounting software business for the years ended December 31,
2002 and 2001 were $4,179,547 and $2,248,060, respectively. The pretax loss
related to the discontinued operations reported in the consolidated statements
of operations for the years ended December 31, 2002 and 2001 was $3,787,341 and
$1,591,978, respectively. The pretax loss for the years ended December 31, 2002
and 2001 includes amortization of goodwill and other intangible assets of
$1,178,625 and $1,513,061, respectively, and loss on impairment of goodwill of
$2,131,391 recorded during the year ended December 31, 2002.
Assets and liabilities of the accounting software business consisted of the
following at December 31:
2002 2001
---- ----
Cash $ 526,447 $ 387,578
Accounts receivable, net 176,370 188,620
Inventories 46,438 60,121
Property and equipment, net 119,561 99,753
Acquired software developed, net 492,170 933,407
Goodwill, net 1,318,260 5,099,651
Other intangibles, net 869,927 2,048,552
Other assets 40,568 52,463
------------ ------------
Total assets $ 3,589,741 $ 8,870,145
------------ ------------
Accounts payable 81,064 111,317
Accrued expenses 244,360 284,418
Deferred revenue 1,774,491 1,481,750
Notes payable 1,582,904 2,099,072
------------ ------------
Total liabilities $ 3,682,819 $ 3,976,557
------------ ------------
Net assets (liabilities) of operations of
discontinued accounting software business $ (93,078) $ 4,893,588
============ ============
On June 6, 2001, we acquired all of the outstanding capital stock of Red Wing.
In exchange for all of the outstanding shares of Red Wing's capital stock, we
issued an aggregate of 400,000 shares of our common stock and paid at closing a
total of $400,000. Pursuant to the purchase agreement, we were obligated to make
three additional payments of $400,000 each to the former Red Wing shareholders
on December 6, 2001, June 6, 2002 and December 6, 2002, respectively. We timely
satisfied the December 6, 2001 payment and as of December 31, 2001, the
outstanding principal balance due was $759,878 (net of debt discount of $40,122
using a 7% discount rate). We re-negotiated an extension of the June payment
with several of the former Red Wing shareholders, totaling $339,093. In
connection with the re-negotiation, we paid 10% of the June payment (totaling
$33,909) immediately in exchange for an extension of such payment until December
31, 2002. Additionally, we agreed to pay interest at the rate of 12.5% per annum
on the unpaid balance of the June payment (monthly interest payments began July
1, 2002). The remaining former Red Wing shareholders were paid their June 2002
payment as stated in the original notes. On December 6, 2002, a notice was sent
to all of the former Red Wing shareholders that the Company was not
43
in the position to make the final payments due and was seeking a solution to
meet our obligation. The outstanding principal balance due all former Red Wing
shareholders as of December 31, 2002 was $705,186. The notes are secured by
pledge of common stock.
Two former investors of Red Wing receive monthly principal and interest
payments, ranging from 7% to 8.5%, which were assumed by us when we acquired Red
Wing. Note balances as of December 31, 2001 were $13,074 and $52,296,
respectively. Note balances as of December 31, 2002 were $10,277 and $41,109,
respectively. The required monthly principal and interest payments are $317 and
$1,267, both through December 2005. The notes are unsecured.
On September 18, 2001, we acquired Champion in a merger transaction. As
consideration for the merger, (i) we paid at closing an aggregate of
approximately $512,000 in cash to the former Champion shareholders, (ii) issued
299,184 shares of our common stock, and (iii) issued promissory notes. The
promissory notes outstanding balance at December 31, 2001 was $978,425 (net of
debt discount of $46,231 using a 7% discount rate). The notes are payable in
equal installments of $256,164 on January 18, May 18, September 18, 2002, and
January 18, 2003. The January 18, 2002 payment was paid timely. In May 2002 we
re-negotiated an extension of the May payment with several of the note holders
until December 31, 2002, in the amount of $159,041. In exchange for the
extension, we paid 10% of the amount owed to such note holders and agreed to pay
monthly interest at the rate of 12.5% per annum on the unpaid balance of the
notes. All remaining former Champion shareholders were paid their May 2002
payment as stated in the original notes. In September 2002 we re-negotiated an
extension of the September payment with several of the note holders until
December 15, 2002, in the amount of $159,041. In exchange for the extension, we
paid 25% of the amount owed to such note holders and agreed to pay monthly
interest at the rate of 12.5% per annum on the unpaid balance of the notes. As
consideration for their agreeing to another deferral, each such note holder
received one warrant for every dollar deferred until December 15, 2002. We
issued 5-year warrants to purchase 119,285 shares of our common stock at an
exercise price of $1.00 per share. All remaining former Champion shareholders
were paid their September 2002 payment as stated in the original notes. One
shareholder (representing $54,061 of the May and September payment) has not
accepted the terms of the new notes and as such, we are in default with the
terms of the note and continue to accrue interest. On December 6, 2002, a notice
was sent to all of the former Champion shareholders that the Company was not in
the position to make the final payments due and was seeking a solution to meet
our obligation. The outstanding principal balance due all former Champion
shareholders as of December 31, 2002 is $674,077. The notes are secured by a
pledge of common stock.
On October 10, 2001, we acquired FMS/Harvest. Effective December 31, 2001, we
merged FMS/Harvest with and into Red Wing. In consideration for the purchase, we
paid $300,000 in cash at closing, issued promissory notes in the total amount of
$300,000, and issued 250,000 shares of our common stock. The promissory notes
were originally payable in May 2002. In May we re-negotiated an extension of the
due date with all former shareholders of FMS/Harvest. In consideration for
extending the due date until December 15, 2002, we paid 10% of the May payment
totaling $30,000 in satisfaction of the notes and agreed to (i) pay interest at
the rate of 12.5% on the unpaid balance, (ii) until July 12, 2002, allow the
note holders to convert any or all of the unpaid balance of the notes into
shares of our common stock at a price equal to 90% of the average closing sales
price for the 5 days preceding conversion, and (iii) release such shareholders
from their lock-up agreements relating to the shares issued in the acquisition.
In June, three of the FMS/Harvest shareholders converted $117,745 of principal
and $1,013 of interest into 151,669 shares of common stock at $0.783 per share.
On December 6, 2002, a notice was sent to all of the former FMS/Harvest
shareholders that the Company was not in the position to make the final payments
due and was seeking a solution to meet our obligation. The outstanding principal
balance due all FMS/Harvest shareholders as of December 31, 2002 is $152,255 and
is unsecured.
44
Components of goodwill and other intangibles (which are included in the net
assets (liabilities) of operations of discontinued accounting software business)
are as follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------- ------------ -------------
Intangible assets subject to amortization
Customer lists $ 1,737,248 $ 1,096,128 $ 1,737,248 $ 228,435
Non-compete agreements 620,000 391,193 620,000 80,261
------------ ------------- ------------ -------------
2,357,248 1,487,321 2,357,248 308,696
Intangible assets not subject to amortization
Goodwill $ 5,618,564 $ 4,300,304 $ 8,567,228 $ 2,650,304
The changes in the carrying value of goodwill for the year ended December 31,
2002 are as follows:
Balance of goodwill (less accumulated amortization) as of December 31, 2001 $ 5,916,924
Second quarter impairment loss recorded June 30, 2002 (2,131,391)
Sale of Epoxy Network technology asset in August 2002 (817,273)
Loss on discontinued accounting software business (1,650,000)
------------
Balance as of December 31, 2002 $ 1,318,260
============
NOTE 3 - BUSINESS COMBINATIONS
PRE JULY 1, 2001 COMBINATIONS
EDGE TECHNOLOGIES, INC.
On January 16, 2001, the Company completed its merger with privately held Edge
Technologies, Incorporated ("Edge"), the creator of a fully integrated eBusiness
website service called Account Wizard, which has been subsequently branded as
part of the Epoxy Network. The merger was accounted for under the purchase
method of accounting with the operations of Edge included in the Company's
consolidation as of that date. The former stockholders of Edge received $300,000
in cash and 325,000 shares of the Company's common stock.
Terms of the merger agreement required an additional cash payment and issuance
of stock upon a capital raising event. With the completion of the Meteor
Industries, Inc. merger on April 30, 2001, the former stockholders of Edge
received the final consideration as specified in the merger agreement of 225,000
shares of the Company's common stock on April 30, 2001, and $400,000 in cash on
May 2, 2001, in settlement of the earn-out provisions.
With closing costs, the total consideration plus the fair value of the net
liabilities assumed was approximately $2,264,000, consisting primarily of
goodwill. (See the table below for a condensed balance sheet summarizing the
amounts assigned to assets acquired and liabilities assumed at the date of
combination.)
METEOR INDUSTRIES, INC.
On April 30, 2001, the Company completed its merger with Meteor Industries, Inc.
Pursuant to an Agreement and Plan of Merger dated as of January 11, 2001, as
amended April 27, 2001 (the "Merger Agreement"), by and among Meteor Industries,
Inc. ("Meteor"), activeIQ Technologies Inc., a Minnesota corporation ("AIQ") and
MI Merger, Inc., Minnesota corporation and a wholly owned subsidiary of Meteor
("Merger Sub"), AIQ merged with and into Merger Sub (the "Merger"). The
surviving corporation in the
45
Merger was renamed AIQ, Inc. In addition, pursuant to the Merger Agreement,
Meteor was reincorporated under Minnesota law by merging with and into AIQ
Acquisition Corp., a Minnesota corporation (the "Re-incorporation Merger"). The
surviving corporation in the Re-incorporation Merger was renamed Active IQ
Technologies, Inc., a Minnesota corporation. Meteor's shareholders approved both
the Merger and the Re-incorporation Merger on March 27, 2001, and both
transactions became effective on April 30, 2001. Since Meteor had only monetary
assets and no operations, the merger was accounted for as the issuance of stock
by AIQ in exchange for monetary assets of Meteor.
Pursuant to the Merger Agreement, in exchange for shares of AIQ common stock,
each shareholder of AIQ common stock was entitled to receive one share of
Meteor's common stock (after giving effect to the re-incorporation Merger). At
the time of the Merger there were 4,385,911 shares of common stock of AIQ
outstanding, excluding 400,000 shares held by Meteor, which were cancelled upon
the effective time of the Merger. In addition to receiving shares of Meteor's
common stock, each of the former AIQ shareholders was entitled to receive a
warrant to purchase two shares of Meteor's common stock for every three shares
of AIQ common stock held by such shareholder. The warrants, which expire on
April 30, 2006, are exercisable at a price of $5.50 share upon notice to the
holders thereof after the closing price of Meteor's common stock (as quoted on
the Nasdaq SmallCap Market) has averaged $7.50 for 14 consecutive days. (See the
table below for a condensed balance sheet summarizing the amounts assigned to
assets acquired and liabilities assumed at the date of combination.)
RED WING BUSINESS SYSTEMS, INC.
On June 6, 2001, the Company completed its acquisition of Red Wing Business
Systems, Inc. ("Red Wing"), a Minnesota corporation. Red Wing, which operates as
a wholly owned subsidiary of the Company, produces and sells accounting and
financial management software for small and medium-sized businesses, farm and
agricultural producers. Pursuant to a Stock Purchase Agreement (the "Agreement")
dated June 6, 2001, the Company purchased all of the outstanding capital stock
from the shareholders of Red Wing (the "Sellers"). The acquisition of Red Wing
was accounted for under the purchase method of accounting.
The Sellers received an aggregate of 400,000 shares of the Company's common
stock and cash in the aggregate of $1,600,000, of which $400,000 was delivered
at the closing. Under the Agreement, the Company was obligated to pay the
remaining $1,200,000 of cash in three future payments of $400,000 due on the 6-,
12- and 18-month anniversaries of the closing date. As security for the
Company's obligations to make the first two future cash payments of $400,000
each, the Company granted a security interest in the newly-acquired shares of
Red Wing to the Sellers pursuant to a pledge agreement by and among the Company
and the Sellers dated as of June 6, 2001.
With closing costs, the total consideration plus the fair value of the net
liabilities assumed is approximately $4,724,000, consisting primarily of
goodwill and other intangibles. The other intangibles acquired consisted of
acquired software developed. (See the table below for a condensed balance sheet
summarizing the amounts assigned to assets acquired and liabilities assumed at
the date of combination.)
POST JUNE 30, 2001 COMBINATIONS
CHAMPION BUSINESS SYSTEMS, INC.
On September 18, 2001, the Company completed its merger with privately held
Champion Business Systems, Inc. ("Champion"), a Colorado corporation. Champion,
which operates as a wholly owned subsidiary of the Company, produces and sells
accounting and financial management software for small and medium-sized
businesses. The merger was accounted for under the purchase method of accounting
with the operations of Champion included in the Company's consolidated financial
statements as of that date.
The former shareholders of Champion are divided into two groups: Minority
Shareholders and Majority
46
Shareholders. At closing, the Majority Shareholders received an aggregate of
299,185 shares of the Company's common stock and all former Champion
shareholders received their pro rata share of a $512,328 cash payment. Terms of
the merger agreement required additional cash payments of $1,000,000 payable in
4 equal installments, each due on the 4, 8, 12 and 16-month anniversaries. The
Company granted a security interest in the newly-acquired shares of Champion to
the former Champion shareholders pursuant to a pledge agreement dated as of
September 14, 2001.
With closing costs, the total consideration plus the fair value of the net
liabilities assumed is approximately $3,692,000, consisting primarily of
goodwill and other intangibles.
The primary reason for the acquisition of Champion was to expand the Company's
software and service support customer base and business. The factors
contributing to goodwill were principally based on the Company's belief that
synergies would be generated through the combining of the Company's other
software and service support with Champion's accounting packages. The total
purchase included common stock issued of 299,185 valued at $4.89 per share, the
average of the closing bid and ask price for the Company's common stock 10
trading days before September 18, 2001 (the effective date of the acquisition of
Champion). In addition, the Company did not issue any options or warrants in
conjunction with the Champion acquisition.
The Company recorded goodwill and other intangibles allocated to customer
relationships, non-compete agreements and acquired software developed of
approximately $1,318,700, $200,000 and $495,000, respectively. (See table below
for a condensed balance sheet summarizing the amounts assigned to assets
acquired and liabilities assumed at the date of combination).
FMS MARKETING, INC.
On October 10, 2001, the Company acquired all of the outstanding capital stock
of FMS Marketing, Inc., a New Lennox, Illinois accounting software provider
doing business as "FMS/Harvest." Like Red Wing, FMS/Harvest also serves users
primarily in the agricultural and farming industries. In consideration for the
purchase, the Company paid approximately $300,000 in cash at closing; issued
6-month promissory notes in the total amount of $300,000; and issued 250,000
shares of the Company's common stock. The common stock was valued at $3.02 per
share, the average of the closing bid and ask price for the Company's common
stock 10 trading days before October 10, 2001 (the effective date of
acquisition). The primary reason for the acquisition of FMS/Harvest was to
continue expanding the Company's software and service support customer base and
business. The factors contributing to goodwill were principally based on the
Company's belief that synergies would be generated through the combining of the
Company's other software and service support with FMS/Harvest's accounting
packages.
The Company recorded approximately $694,000 as goodwill and approximately
$418,000 and $420,000 as other intangibles allocated to customer relationships
and non-compete agreements, respectively. (See table below for a condensed
balance sheet summarizing the amounts assigned to assets acquired and
liabilities assumed at the date of combination.)
Effective December 31, 2001, the Company merged FMS/Harvest with and into Red
Wing.
47
Following are condensed balance sheets summarizing the amounts assigned to the
assets acquired and liabilities assumed at the various dates of acquisition:
Edge Meteor Red Wing Champion FMS/Harvest
------------ ------------ ------------ ------------ ------------
Current assets $ -- $ 3,538,000 $ 171,000 $ 91,000 $ 11,000
Property and equipment -- -- 58,000 25,000 2,000
Note receivable -- 500,000 -- -- --
Acquired software developed -- -- 436,000 495,000 --
Goodwill 2,264,000 -- 4,059,000 1,562,000 694,000
Other intangible assets -- -- -- 1,519,000 838,000
------------ ------------ ------------ ------------ ------------
Total assets $ 2,264,000 $ 4,038,000 $ 4,724,000 $ 3,692,000 $ 1,545,000
============ ============ ============ ============ ============
Current liabilities $ -- $ -- $ 1,257,000 $ 709,000 $ 136,000
Note payable-former shareholders -- -- 1,122,000 956,000 290,000
Due to Active IQ Technologies 2,264,000 -- 2,200,000 1,964,000 1,066,000
Long-term debt -- -- 145,000 63,000 53,000
Shareholders' equity -- 4,038,000 -- -- --
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 2,264,000 $ 4,038,000 $ 4,724,000 $ 3,692,000 $ 1,545,000
============ ============ ============ ============ ============
The assets and liabilities assigned to the acquisitions are included in net
assets of operations of discontinued accounting software business at December
31, 2001. The accompanying unaudited pro forma condensed results of operations
for the year ended December 31, 2001 give effect to the acquisitions of Meteor,
Edge, Red Wing, Champion, and FMS/Harvest as if such transactions had occurred
on January 1, 2001. The unaudited pro forma information does not purport to
represent what the Company's results of operations would actually have been if
such transactions in fact had occurred at such date or to project the Company's
results of future operations:
Pro Forma for the Year Ended December 31, 2001
Revenues $ 5,382,906
Loss from operations (9,491,914)
-------------
Net loss $ (9,413,688)
=============
Basic and diluted net loss per common share $ (0.93)
=============
NOTE 4 - NOTE RECEIVABLE
We completed our merger with Old AIQ on April 30, 2001 and entered into a note
receivable in the amount of $500,000. The note was secured by a stock pledge
dated April 27, 2001, pledging 1,500,000 shares of common stock of Capco Energy,
Inc. The note receivable accrued interest at 10% per annum. We received the
remaining principal balance plus accrued interest in May 2002.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2002 2001
--------- --------
Furniture $ 40,845 $ 54,312
Equipment 121,333 221,058
Software 64,056 393,056
Leasehold improvements -- 4,427
Less-accumulated depreciation and amortization (102,729) (252,117)
--------- --------
Net property and equipment $ 123,505 $ 420,736
========= =========
48
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$144,962, $185,520 and $81,294, respectively.
See Note 2 -- Discontinued Operations of the Accounting Business relating to the
re-classification of certain property and equipment.
NOTE 6 - PREPAID ROYALTIES AND LONG-TERM DEBT
We have entered into an application service provider software license agreement
with Stellent, Inc. The prepaid royalties at December 31, 2002 and 2001 of
$975,000 and $1,500,000, respectively, relates to minimum royalty fees required
under the agreement. On December 28, 2001, we entered in an application service
provider ("ASP") software license agreement. The ASP agreement provides us with
a three-year worldwide exclusive license to be the hosted ASP solution for
Stellent's Content Management software. We agreed to pay a royalty of 20% of net
receipts, as defined in the ASP agreement, or $500 per month per customer,
whichever is greater. The minimum royalty commitments for the exclusive ASP
license are as follows: $1,000,000 for 2002, $2,000,000 for year 2003 and
$3,000,000 for year 2004. If the minimum royalties have been paid for all three
years, an additional three-year exclusive option is provided, otherwise, we have
the option to renew for an additional three years under a non-exclusive right.
The ASP agreement required a minimum royalty to be paid as follows: a credit of
$500,000 from existing prepaid royalties recorded at Stellent, a payment of
$500,000 was paid with the execution of the ASP agreement and two $500,000
payments were due in September and December 2002. On March 29, 2002 we prepaid
the September and December payments and in consideration of the early payment,
we received a 5% discount, or $50,000. Since our revenues for the year of 2002
were below the minimum, we recognized the full amount of expense and finished
the year with a remaining balance of $975,000.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into various non-cancelable leases for land, buildings
and equipment with terms ranging from 3 to 8 years. Under most leasing
arrangements the Company pays the property taxes, insurance, maintenance and
expenses related to the leased property. Total rent expense under operating
leases for the years ended December 31, 2002, 2001 and 2000, was $479,724,
$400,635, and $55,913, respectively. Total rent expense under operating leases
for the accounting software business for the years ended December 31, 2002, 2001
and 2000, was $316,887, $118,828, and $0, respectively.
Minimum future obligations on leases in effect at December 31, 2002, are
approximately as follows:
2003 $ 294,000
2004 193,000
2005 118,000
Thereafter 229,000
----------
Total $ 834,000
==========
If the accounting software business is disposed of as anticipated in April 2003,
(See Note 2 -- Discontinued Operations of the Accounting Business) the revised
future obligations on the leases in effect at December 31, 2002, are
approximately as follows:
2003 $ 140,000
2004 70,000
----------
Total $ 210,000
==========
49
EMPLOYMENT AGREEMENTS
On January 1, 2002, we amended the employment agreement with D. Bradly Olah, the
Company's Chief Executive Officer through December 2002. Pursuant to the terms
of the agreement, Mr. Olah was entitled to an annual salary of $200,000 and was
eligible for an annual bonus of up to 100 percent of his salary upon the
achievement of certain corporate objectives. Following the amendment of his
employment agreement, Mr. Olah was awarded an option to purchase an additional
500,000 shares at $4.00 per share. Mr. Olah served as our President until
November 25, 2002, and our Chief Executive Officer until December 31, 2002, at
which time he resigned from his positions. See Note 11 -- Subsequent Events for
a detailed discussion regarding Mr. Olah's severance agreement and cancellation
of the promissory note.
On May 8, 2002, we entered into a one-year employment agreement with Jeffrey M.
Traynor as our Chief Financial Officer. Pursuant to the terms of the agreement,
Mr. Traynor is entitled to an annual salary of $120,000 and a guaranteed bonus
of $60,000 (the bonus to be paid in four equal installments beginning May 2002,
then in August and November 2002, with a final installment due February 2003).
Mr. Traynor was also awarded an option to purchase 175,000 shares of the
Company's common stock at a price of $1.25 per share, with 35,000 options
vesting immediately and the balance vesting ratably over a four-year period. The
Company may be required to pay nine months of severance for a termination
without cause, as defined in the agreement or in the event of a change of
control as defined in the agreement.
On November 25, 2002, we entered into a two-year employment agreement with Jack
A. Johnson as our President and Chief Operating Officer. Pursuant to the terms
of the agreement, Mr. Johnson is entitled to an annual salary of $180,000 and is
entitled to an annual bonus of up to 100% of his salary upon achievement of
certain corporate objectives established by the Company's Board of Directors.
Mr. Johnson was also awarded an option to purchase 900,000 shares of the
Company's common stock at a price of $0.35 per share, with 90,000 options
vesting immediately and the balance vesting ratably over a three-year period.
The Company may be required to pay one-year severance payment for a termination
without cause, as defined in the agreement and up to two years in the event of a
change of control as defined in the agreement. Note 11 -- Subsequent Events for
a discussion regarding Mr. Johnson's appointment to Chief Executive Officer.
RELATED-PARTY TRANSACTIONS
In December 2000, Old AIQ entered into a subscription receivable for the
purchase of 100,000 shares of common stock at a price of $2.75 per share with
Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner
delivered to our company a cash payment in the amount of $75,000 and a 2-month
promissory note in the principal amount of $200,000. In April 2002, the
receivable was paid in full.
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. The proceeds received were allocated to the fair
value of the securities issued (debt and warrant issued). On May 30, 2002, we
allowed Blake Capital Partners to convert $150,000 of outstanding principal
under the note into 200,000 shares of common stock. We satisfied the remaining
outstanding principal and accrued interest in full on June 10, 2002. We also
recorded an $80,000 interest charge to reflect the difference between the market
value of the shares issued and the remaining outstanding debt.
On May 27, 2002, we sold 500,000 shares of its common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for
total proceeds of $375,000 (we received $350,000 in cash and recorded a stock
subscription receivable of $25,000). As consideration for its purchase of such
shares, Boston Financial Partners also received a warrant to purchase an
additional 500,000 shares of our common stock at an exercise price of $1.00 per
share, and we further agreed to reduce to $1.00 the exercise price on all other
warrants to purchase shares of our common stock held by Boston Financial
Partners and its affiliates. Such warrants represent the right to purchase 1
million shares of common stock and had exercise
50
prices ranging from $5.50 to $7.50 per share. We recorded an expense of $343,390
(related to the reduction of price of the 1 million warrants) using the
Black-Scholes pricing model. Prior to this private placement, Boston Financial
Partners beneficially owned more than 5% of our common stock. In December 2002,
the Company finalized an amendment to the agreement and canceled the $25,000
stock subscription receivable.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of our common stock at an exercise price of $1.25 per share. The warrants
may be redeemed by us any time after January 30, 2003 and following a period of
at least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. Proceeds were
allocated to the fair value of the securities issued (common stock and warrant).
One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of
Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired
half of the shares and warrants issued in this private placement. In conjunction
with this transaction, we also issued an additional 50,000 warrants in September
2002 to Mr. Eibensteiner as consideration for the placement.
NOTE 8 - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUANCES
During January 2001, the Company sold 400,000 shares of common stock at $2.75
per share to Meteor.
The Company issued 550,000 shares of common stock in January and April 2001 to
the former shareholders of Edge Technologies, Incorporated as part of the
completion of the merger.
As part of the merger with Meteor in April 2001, the Company issued 3,874,511
shares of common stock and 365,000 shares of $1.00 Series Convertible B
Preferred Stock as well as 365,000 Series B Preferred Warrants exercisable at
$2.50 per share. There were also 4,483,101 Class B Warrants issued at an
exercise price of $5.50 per share as part of the transaction exercisable through
April 30, 2006. Additionally, the Company carried over 2,047,935 options to
purchase common stock exercisable at $2.50 to $5.25 per share from Meteor as
well as 690,000 warrants exercisable at $7.15 per share through May 31, 2002.
In June 2001, the Company issued 400,000 shares of common stock valued at $4.45
per share as part of the purchase of Red Wing. See Note 2 - Discontinued
Operations of Accounting Software Business.
In June 2001, the Company sold 500,000 shares of its common stock at $3.00 per
share in a private placement. The private placement resulted in net proceeds of
approximately $1.5 million.
In September 2001, the Company issued 299,185 shares of common stock valued at
$4.89 per share as part of the purchase of Champion. See Note 2 - Discontinued
Operations of Accounting Software Business.
In September 2001, the Company issued 16,667 shares of common stock to one of
the law firms of the Company, in exchange for amounts due them for services
rendered, which we had previously recorded as accounts payable.
In September 2001, the Board of Directors authorized a repurchase of up to an
aggregate of 500,000 common shares in the open market. Through December 31,
2002, the Company had repurchased and retired 122,167 shares of its common stock
ranging from $3.03 to $4.26 per share.
In October 2001, the Company issued 250,000 shares of common stock valued at
$3.02 per share as part of the purchase of FMS Marketing, Inc. See Note 2 -
Discontinued Operations of Accounting Software Business.
51
In December 2001, the Company cancelled 3,400 shares of common stock issued
under a stock bonus plan. The plan was designed to retain key employees of
Meteor Industries after the merger with Old AIQ. The plan issued 25% of the
bonus each quarter to the employee if still currently employed by one of the
subsidiaries on the last day of each quarter. Termination from employment was
cause for forfeiture of any future shares.
During the year ended December 31, 2001, the Company received proceeds of
$1,629,955 from the exercise of 605,496 options.
During February 2002, all 365,000 shares of Series B Convertible Preferred Stock
were converted into units, each unit consisting of one share of common stock and
one warrant to purchase common stock. The warrants issued as part of the units
converted are exercisable until May 15, 2005, at an exercise price of $2.50 per
share.
On March 14, 2002, we issued a warrant to purchase 54,000 shares of common stock
at $5.50 per share to an underwriter who exercised a warrant for which he was
entitled to receive 54,000 units, each unit consisting of one share of common
stock and a warrant to purchase one share of common stock. The original warrant
had an exercise price of $6.875 and was re-priced to $2.00 per share, providing
net proceeds of $108,000. We recorded an expense of $61,020 related to the
re-pricing of the warrant using the Black-Scholes pricing model. The newly
issued warrant expires on April 30, 2006.
In connection with our October 2001 acquisition of FMS Marketing, Inc., we were
required to pay to the 4 former shareholders of FMS/Harvest an aggregate of
$300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In
May 2002 we re-negotiated the terms of those notes in order to provide that we
would immediately pay an aggregate of $30,000 and the remaining $270,000 would
be payable by December 15, 2002, with interest accruing at the rate of 12.5% per
annum. In addition, the re-negotiated notes allowed the former FMS/Harvest
shareholders to convert the outstanding balance into shares of our common stock
until July 12, 2002 at a price equal to 90% of the average closing sales price
for the 5 days preceding conversion. On April 10, 2002, three of the former
FMS/Harvest shareholders exercised the conversion option with respect to their
notes, converting an aggregate of $118,758 of outstanding principal and interest
into 151,669 shares of our common stock (at a conversion price of $0.783 per
share, the fair value of the common stock on that date).
See Note 7, Related-Party Transactions, for other issuances of common stock
during the year ended December 31, 2002.
During the year ended December 31, 2002, the Company received proceeds of
$12,830 from the exercise of 4,000 options.
OPTION GRANTS
In March 2001, an employee was granted options to purchase 25,000 shares of
common stock at $1.00 per share at a time when the fair value of the Company's
common stock was $2.75 per share. Deferred compensation of $43,750 was
established and is being expensed over the vesting period of the options.
In April 2001, one employee was granted options to purchase 40,000 options to
purchase common stock at $1.00 per share and another was granted options to
purchase 100,000 options at $2.00 per share at a time when the fair value of the
Company's common stock was $2.75 per share. Deferred compensation of $145,000
was established and is being expensed over the vesting period of the options.
In July 2001, 550,000 options were granted to two of the Company's executives
with an exercise price of $5.00 per share when the fair market value of common
stock was $5.87. Deferred compensation of $478,500 was established and is being
expensed over the vesting period of the options.
Deferred compensation was reversed by $35,000 in the year ended December 31,
2001 for prior deferred compensation established related to employees that left
the Company as their options were cancelled prior
52
to exercise.
In October 2001 and November 2001, 28,750 options relating to three terminated
employees were granted at an exercise price of $2.75 with immediate vesting.
Deferred compensation of $19,750 was recorded.
With the resignation of two members of our board of directors in November and
December 2001, 33,000 options were immediately vested at an exercise price of
$1.00 and compensation expense of $29,040 was recorded.
Mr. Brimmer served as the Company's Chief Executive Officer from April 30, 2001
until December 1, 2001. The Company had an employment agreement dated May 1,
2001 with Mr. Brimmer. In addition to his annual salary of $125,000, Mr. Brimmer
was entitled to an annual bonus of up to 75 percent of his salary upon the
achievement of certain corporate objectives and a $250,000 bonus when the
Company raised an aggregate of $12 million in equity financings, which was
reached in the fourth quarter of fiscal 2001. Mr. Brimmer was also awarded an
option to purchase up to 250,000 shares of the Company's common stock at a price
of $5.00 per share, which option was to vest in equal installments over four
years. Pursuant to an agreement dated November 27, 2001, and in accordance with
Mr. Brimmer's employment agreement, the Company paid $250,000 to Brimmer
Company, LLC in satisfaction of the bonus owed to Mr. Brimmer for achieving
equity financings of at least $12 million. Although Mr. Brimmer resigned from
his positions as Chief Executive Officer and Chief Financial Officer as of
December 1, 2001, he agreed to remain as Chairman of the Board of Directors for
the remainder of his term and to provide certain consulting services to the
Company as requested. In connection with the termination, Mr. Brimmer agreed to
waive any severance of any other payments under the remaining term of the
agreement. The Company agreed to immediate vesting of his existing options and
to permit exercise of those options until December 1, 2006. In connection with
the $250,000 payment to Brimmer Company, the Company recorded an expense of
$250,000 in 2001. The Company also recorded aggregate expenses of $343,500 in
connection with the agreement to immediately vest Mr. Brimmer's options and
permit the exercise of such options until December 1, 2006 pursuant to APB
Opinion No. 25 and related interpretations.
During the year ended December 31, 2002, the Company granted 2,366,283 options
to purchase common stock at prices ranging from $0.35 to $4.27 per share. All
options were granted with exercise prices equal to the fair market value of the
Company's common stock on the date of grant.
The total amount of compensation expense recorded, pursuant to APB 25 and
related interpretations, for the years ended December 31, 2002 and 2001 was
$129,488 and $678,281, respectively. Following is a roll forward of the deferred
compensation account:
Balance at December 31, 2000 $ 172,813
Additions 817,169
Compensation expense (678,281)
-----------
Balance at December 31, 2001 $ 311,701
Additions --
Compensation expense (129,488)
-----------
Balance at December 31, 2002 $ 182,213
===========
WARRANT GRANTS
During June 2001 the Company issued 300,000 warrants to purchase common stock at
$5.50 per share in conjunction with the private placement of common stock. The
stock was sold in units of 50,000 shares with attached warrants to purchase
30,000 shares of common stock. The Company assigned $114,000 of the purchase
price to warrants using the Black-Scholes pricing model.
The Company also issued warrants totaling 450,000 with an exercise price of
$5.50 per share and 250,000 with an exercise price of $7.50 per share
exercisable through April 30, 2006 and August 1, 2006, respectively.
53
The Company also issued 7,636 and 48,957 warrants to purchase common stock at
$2.75 and $5.00, respectively, to a vendor in exchange for service completed.
The warrants were valued at $125,718 using the Black-Scholes pricing model.
The Company also recorded expenses of $1,246,000 for the year ended December 31,
2001, related to the warrants issued to a non-employee using the Black-Scholes
pricing model.
During March 2002 we issued a warrant to purchase 54,000 shares of common stock
at $5.50 per share to an underwriter who exercised a warrant for which he was
entitled to receive 54,000 units, each unit consisting of one share of common
stock and a warrant to purchase one share of common stock. The original warrant
had an exercise price of $6.875 and was re-priced to $2.00 per share. We
recorded an expense of $61,020 related to the re-pricing of the warrant using
the Black-Scholes pricing model. The newly issued warrant expires on April 30,
2006.
Also in March 2002, we issued a 5-year warrant to purchase 25,000 shares of
common stock at $3.00 per share in conjunction with a loan from a director. We
allocated $33,750 of the proceeds as the value of the warrants issued using the
Black-Scholes pricing model.
On May 27, 2002, we sold 500,000 shares of our common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share. As
consideration for its purchase of such shares, Boston Financial Partners also
received a warrant to purchase an additional 500,000 shares of our common stock
at an exercise price of $1.00 per share, and we further agreed to reduce to
$1.00 the exercise price on all other warrants to purchase shares of our common
stock held by Boston Financial Partners and its affiliates. Such warrants
represent the right to purchase 1 million shares of common stock and had
exercise prices ranging from $5.50 to $7.50 per share. We recorded an expense of
$343,390 (related to the reduction of price of the 1 million warrants) using the
Black-Scholes pricing model.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of common stock at an exercise price of $1.25 per share. The warrants may
be redeemed by us any time after January 30, 2003 and following a period of at
least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. One of the
investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E.
Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement. In conjunction with this
transaction, we also issued a warrant to purchase 50,000 shares of common stock
in September 2002 to Ronald E. Eibensteiner as consideration for the placement.
This warrant has a term of 5 years and is exercisable at a price of $1.00 per
share.
On June 21, 2002, the Company issued 15,060 warrants to purchase common stock at
$0.83, to a vendor in exchange for service completed. The warrants were valued
using the Black-Scholes pricing model.
On September 18, 2001, we acquired Champion Business Systems, Inc. in a merger
transaction. As consideration for the merger, (i) we paid at closing an
aggregate of approximately $512,000 in cash to the former Champion shareholders,
(ii) issued 299,184 shares of our common stock, and (iii) issued promissory
notes in the aggregate amount of approximately $1 million. We are recording an
imputed interest expense of 7% per annum. The notes are payable in equal
installments of $256,164 on January 18, May 18, September 18, 2002, and January
18, 2003. In September 2002 several of the note holders re-negotiated an
extension of the September payment until December 15, 2002, in the amount of
$159,041. In exchange for the extension, we paid 25% of the amount owed to such
note holders and agreed to pay monthly interest at the rate of 12.5% per annum
on the unpaid balance of the notes. As consideration for their agreeing to
another deferral, each such note holder also received one common stock purchase
warrant for every dollar deferred until December 15, 2002. We issued warrants to
purchase an aggregate of 119,285 shares of our common stock to 9 persons. The
warrants have a term of 5 years and have an exercise price of $1.00 per share.
The value of these warrants totaled $82,199, using a Black-Scholes pricing model
and a non-cash interest expense has been charged ratably through December 15,
2002.
54
For warrants issued to non-employees in exchange for services, the Company
accounts for such warrants in accordance with Emerging Issues Task Force (EITF)
Issue No. 96-18. The Company values the fair value of the equity instrument
using the Black-Scholes pricing model unless the value of the services is more
reliably measurable. The Company recorded expense related to warrants issued in
the amount of $612,859, $1,436,393 and $345,800 for the years ended December 31,
2002, 2001 and 2000, respectively.
The following assumptions were used to value the fair value of options and
warrants given for which the fair value of the services were not more reliably
measurable: dividend yield of 0%, risk-free interest rate of 4 to 6%, expected
life equal to the contractual life of five years and volatility of 74 to 193%.
Information regarding the Company's warrants is summarized below:
Weighted Average Range of
Number Exercise Price Exercise Price
----------- ---------------- --------------
Outstanding at December 31, 1999 10,000 $ 60.00 $ 60.00
Granted 140,694 3.04 1.00-37.50
Cancelled or expired -- 0.00 0.00
Exercised -- 0.00 0.00
----------- -------- --------------
Outstanding at December 31, 2000 150,694 $ 3.24 $ 1.00-$60.00
Granted-including warrants previously
issued by Meteor before the merger 7,726,122 5.32 2.50- 7.50
Cancelled or expired (74,678) 3.81 1.00- 37.50
Exercised (22,682) 1.00 1.00
------------ -------- --------------
Outstanding at December 31, 2001 7,779,456 $ 5.28 $ 1.00-$60.00
Granted 1,563,345 1.21 1.00- 5.00
Re-priced grants 1,054,000 1.06 1.00- 2.00
Cancelled or expired (19,500) 3.86 2.43- 6.87
Re-priced cancellations (1,054,000) 5.61 5.50- 7.50
Exercised (54,000) 2.00 2.00
------------ -------- --------------
Outstanding at December 31, 2002 9,269,301 $ 4.05 $ 1.00-$60.00
=========== ======== ==============
Warrants exercisable at December 31, 2002 9,269,301 $ 4.05 $ 1.00-$60.00
=========== ======== ==============
The weighted average fair value of warrants granted was $1.21 in 2000, $1.41 in
2001 and $0.65 in 2002.
STOCK SUBSCRIPTION RECEIVABLE
In December 2000, we entered into a subscription receivable for the purchase of
100,000 shares of common stock at a price of $2.75 per share with a director of
the Company. In April 2002, the receivable was paid.
During the year ended December 31, 2001, the stock subscription receivable in
the amount of $312,500 that was outstanding at December 31, 2000 was cancelled
and the common shares were surrendered.
On January 1, 2002, we amended the employment agreement with D. Bradly Olah.
Following the amendment of his employment agreement, Mr. Olah was awarded an
option to purchase an additional 500,000 shares at $4.00 per share. On January
14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares subject to
the option, though none had yet vested, by delivering a promissory note to us in
the amount of $2,000,000 and pledging all 500,000 shares acquired as security
for the repayment of the note, all in accordance with the terms of the option
agreement. See Note 11 -- Subsequent Events for a detailed discussion regarding
Mr. Olah's severance agreement and cancellation of the promissory note.
55
STOCK OPTION PLANS
The Company has five stock option plans. The Company has the 1994 Stock Option
Plan, the 1998 Incentive Equity Plan, the 1999 Stock Option Plan, the 2000
Director Stock Option Plan and the 2001 Employee Stock Option Plan. As of
December 31, 2002, an aggregate of 9,250,000 shares of the Company's common
stock may be granted under these plans as determined by the board of directors.
Stock options, stock appreciation rights, restricted stock and other stock and
cash awards may be granted under the plans. In general, options vest over a
period of ranging from 3 to 4 years and expire 10 years from the date of grant.
Information regarding the Company's stock options is summarized below:
Weighted
Average
Number of Exercise
Options Price
----------- -------
Options outstanding - December 31, 1999 46,997 $ 29.52
Granted 1,277,000 1.34
Canceled or expired (55,000) 14.27
Exercised -- --
----------- -------
Options outstanding - December 31, 2000 1,268,997 $ 2.07
Grants related to Meteor merger 2,047,935 3.32
Granted 2,384,559 4.16
Canceled or expired (1,004,805) 2.65
Exercised (641,345) 2.79
----------- -------
Options outstanding - December 31, 2001 4,055,341 $ 3.57
Granted 2,366,283 1.68
Canceled or expired (1,343,475) 4.24
Exercised (511,500) 3.98
----------- -------
Options outstanding - December 31, 2002 4,566,649 $ 2.38
=========== =======
Options exercisable - December 31, 2002 2,938,507 $ 3.08
=========== =======
Weighted average fair value of options
granted during the year ended December 31, 2002 $ 1.44
=======
Weighted average fair value of options
granted during the year ended December 31, 2001 $ 4.21
=======
Weighted average fair value of options
granted during the year ended December 31, 2000 $ 0.31
=======
Options outstanding under the plans as of December 31, 2002, have exercise
prices ranging from $1.00 per share to $37.50 per share and a weighted average
remaining contractual life of 7.0 years.
The following information summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted Weighted Weighted Weighted
Average Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ -------------- --------------- ------------- ------------- -------------
$1.00 to $2.87 2,949,365 6.6 years $ 1.24 1,563,115 $ 1.86
$3.00 to $5.50 1,596,950 7.5 years $ 4.26 1,355,058 $ 4.21
$15.00 to $37.50 20,334 1.7 years $ 20.90 20,334 $ 20.90
------------ ------------- --------- ------------ ---------
$1.00 to $37.50 4,566,649 7.0 years $ 2.38 2,938,507 $ 3.08
56
NOTE 9 - INCOME TAXES
The Company has generated net operating loss carryforwards of approximately
$15,150,000, which, if not used, will begin to expire in 2019. These net
operating losses may currently be limited due to past changes in ownership of
the Company. Future changes in the ownership of the Company may place additional
limitations on the use of these net operating loss carryforwards.
The benefit from income taxes consists of the following:
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Current income tax expense $-- $-- $--
Deferred income tax benefit -- -- --
--- --- ---
Total benefit from income taxes $-- $-- $--
=== === ===
The Company's deferred tax assets are as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
Net operating loss carryforwards $ 6,210,000 $ 4,560,000
Federal tax carryback claim refund 290,000 --
Property and equipment basis difference (100,000) (41,000)
Accrued liabilities and other 195,000 --
Less: valuation allowance (6,595,000) (4,519,000)
-------------- -------------
Net deferred tax asset $ -- $ --
============== =============
Reconciliation between the statutory rate and the effective tax rate for the
years is as follows:
December 31,
--------------------------------
2002 2000 2000
-------- --------- ---------
Federal statutory tax rate (35.0%) (35.0%) (35.0%)
State taxes, net of federal benefit (6.0%) (6.0%) (6.0%)
Change in valuation allowance 41.0% 41.0% 41.0%
------ ------ ------
Effective tax rate 0.0% 0.0% 0.0%
====== ====== ======
57
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
For the Years Ended December 31,
------------------------------------------
2002 2001 2000
---- ---- ----
Cash paid for interest, net of original issue discount and
warrants issued for extension of debt $ 75,716 $ 19,083 $ 37,517
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of warrants in payment of legal fees
and accounts payable 12,500 175,718 22,682
Issuance of stock in payment of accounts payable -- -- 162,247
Conversion of notes payable to common stock 348,758 -- 55,000
Issuance of common stock for equipment -- -- 378,000
Issuance of common stock for license fees -- -- 350,001
Conversion of notes payable on advance on product purchases -- -- 306,000
Issuance of common stock to director -- -- 225,000
Issuance of common stock with non-recourse
note receivable 2,000,000 200,000 --
Acquisition of certain assets and goodwill recorded, and
assumption of certain liabilities on Edge
Technologies, Incorporated merger -- 1,512,500 --
Issuance of note receivable in connection with
the Meteor merger -- 500,000 --
Surrender of common stock on stock subscription
receivable canceled -- 312,500 --
Acquisition of certain assets and goodwill recorded and
assumption of certain liabilities on Red Wing
Business Systems, Inc. acquisition -- 4,302,430 --
Acquisition of certain assets and goodwill recorded and
assumption of certain liabilities on Champion
Business Systems, Inc. acquisition -- 3,191,375 --
Acquisition of certain assets and goodwill recorded and
assumption of certain liabilities on FMS
Marketing, Inc. acquisition -- 1,234,594 --
Prepaid royalties financed with note payable -- 1,000,000 --
Reduction of note payable incurred on prepaid royalties
acquired due to discount for early payment 50,000 -- --
Conversion of Series B Preferred Stock into common stock 365,000 -- --
NOTE 11 - SUBSEQUENT EVENTS (UNAUDITED)
On January 6, 2003 the Company entered into a severance agreement with D. Bradly
Olah, its Chief Executive Officer, effective December 31, 2002. The agreement
allows for the payment of Mr. Olah's base salary through May 31, 2003, payment
of health and other insurance benefits through December 31, 2003, the extension
until December 31, 2007 to exercise options issued in July 2000. In exchange,
Mr. Olah resigned as Chief Executive Officer and released the Company from all
claims, including a release from his employment agreement dated May 1, 2001
(amended January 1, 2002). In addition, the Company exercised its right to a
non-cash repurchase of 500,000 shares of common shares issued to Mr. Olah on
January 7, 2002 in exchange for the cancellation of his note receivable to the
Company. Mr. Olah will remain as a Board member.
On February 26, 2003, Mr. Olah agreed to exchange the remaining unpaid base
salary and benefits per the January 6, 2003 severance agreement, totaling
$58,500, into 292,500 common shares of the Company at a rate of $0.20 per share.
On January 16, 2003, the Board of Directors appointed Jack A. Johnson Chief
Executive Officer.
58
On March 3, 2003, the Company received a federal income tax refund of $316,133,
including interest of $23,544.
On March 14, 2003, the Company signed an agreement to sell the assets of the
online document management business to Stellent Inc. for $650,000 cash plus the
assumption of certain obligations, liabilities and employees of the Company. The
transaction is not subject to shareholder approval. Upon completion of this
sale, the Company will no longer operate in the online document management
business and will seek alternative business opportunities.
NOTE 12 - QUARTERLY DATA (UNAUDITED)
The following is the unaudited quarterly financial data for the years ended
December 31, 2002 and 2001, (reported in thousands except per share data):
Quarters Ended
Mar 31, 02 Jun 30, 02 Sep 30, 02 Dec 31, 02
Revenues $ 104 $ 166 $ 108 $ 121
Operating expenses 969 1,441 1,348 981
Loss from operations (865) (1,275) (1,240) (860)
Other income (expense) (30) (132) (51) 231
Loss from continuing operations (835) (1,407) (1,291) (629)
Loss from discontinued operations (502) (2,724) (346) (1,925)
Net loss $ (1,338) $ (4,131) $ (1,637) $ (2,553)
Basic and diluted net loss per common share:
Continuing operations $ (0.07) $ (0.12) $ (0.09) $ (0.05)
Discontinued operations (0.05) (0.22) (0.03) (0.14)
Net loss $ (0.12) $ (0.34) $ (0.12) $ (0.19)
Quarters Ended
Mar 31, 01 Jun 30, 01 Sep 30, 01 Dec 31, 01
Revenues $ 36 $ 258 $ 60 $ 109
Operating expenses 1,169 1,903 2,645 2,686
Loss from operations (1,133) (1,645) (2,585) (2,577)
Other income (expense) 18 23 51 (7)
Loss from continuing operations (1,115) (1,622) (2,534) (2,584)
Loss from discontinued operations -- (222) (645) (725)
Net loss $ (1,115) $ (1,844) $ (3,179) $ (3,309)
Basic and diluted net loss per common share:
Continuing operations $ (0.25) $ (0.22) $ (0.25) $ (0.24)
Discontinued operations -- (0.03) (0.06) (0.08)
Net loss $ (0.25) $ (0.25) $ (0.31) $ (0.32)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 9, 2001, following the date of the merger transaction between Meteor
Industries and Old AIQ, the Company dismissed PricewaterhouseCoopers LLP as its
independent public accountants. The Company's Board of Directors participated in
and approved the decision to change public accountants.
The reports of PricewaterhouseCoopers LLP on the Company's financial statements
for the past two fiscal years (i.e., the financial statements of Meteor
Industries, Inc. for the years ended December 31, 1999 and 2000) contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope, or accounting principle.
In connection with its audits for the two most recent fiscal years and through
May 9, 2001, there had been no disagreements with PricewaterhouseCoopers LLP on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreements if not resolved to the
satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
On May 9, 2001, the Company's board of directors retained Arthur Andersen LLP to
be its principal independent accountants. During the two most recent fiscal
years and through May 9, 2001, the Company had not consulted with Arthur
Andersen LLP regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and either
a written report was provided to the Company or oral advice was provided that
Arthur Andersen LLP concluded was an important factor considered by the Company
in reaching a decision as to the accounting, auditing or financial reporting
issue; or(ii) any matter that was the subject of a "disagreement," as that term
is defined in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities
and Exchange Commission and the related instructions to Item 304 of Regulation
S-K, or a "reportable event," as that term is defined in Item 304(a)(1)(v).
On December 20, 2001, the Company and Arthur Andersen LLP agreed to terminate
their relationship. The Company's Audit Committee and Board of Directors
participated in and approved the decision to change independent accountants on
December 18, 2001. In connection with its audit of the Company's financial
statements for the 2000 and 1999 fiscal years (i.e., the financial statements of
Old AIQ for the years ended December 31, 1999 and 2000) and through December 20,
2001, there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Arthur Andersen LLP, would have caused Arthur Andersen LLP to make reference to
such disagreements in their report on the financial statements for such year.
On December 21, 2001, the Company engaged Virchow, Krause & Company, LLP as its
new independent accountants. The engagement was approved by the Company's Audit
Committee and Board of Directors on December 20, 2001.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
Set forth below are the names of all directors and executive officers of the
Company, their respective ages and all positions and offices with the Company
held by each person as of March 26, 2003:
Name Age Positions with the Company
Kenneth W. Brimmer 47 Chairman of the Board
Mark D. Dacko 51 Chief Financial Officer and Secretary
D. Bradly Olah 38 Director
Ronald E. Eibensteiner 52 Director
Wayne W. Mills 48 Director
Patrick L. Nelson 47 Director
Brent Robbins 35 Director
Jack A. Johnson 54 Director
Kenneth W. Brimmer currently serves as our Chairman of the Board. Until November
30, 2001 Mr. Brimmer was Chief Executive Officer and Chief Financial Officer.
Having been appointed to the board of directors of Old AIQ in 1999, Mr. Brimmer
served that company as its Chairman and Chief Executive Officer until its merger
with our company on April 30, 2001. Mr. Brimmer was president of Rainforest
Cafe, Inc. from April 1997 until April 2000 and was Treasurer from its inception
in 1995. Mr. Brimmer is also Chairman of both Hypertension Diagnostics, Inc.,
and Sterion, Inc. (formerly known as Oxboro Medical, Inc.), both of which are
NASDAQ listed companies. Since February 2002, Mr. Brimmer has served as a
director of Entrx Corporation (formerly known as Metalclad Corporation) (Nasdaq:
ENTX).
Mark D. Dacko has served as our Controller from February 2001 until March 14,
2003, at which time he was appointed our Chief Financial Officer and Secretary.
Prior to joining the Company, Mr. Dacko was Controller for PopMail.com, inc.
from January 1999 until January 2001, and from November 1994 to December 1998,
Mr. Dacko was Controller for Woodroast Systems, Inc.
D. Bradly Olah, one of the co-founders of Old AIQ, is a member of our board of
directors. Through December 31, 2002 Mr. Olah served as our President and Chief
Executive Officer and from November 2001 through May 2002, he served as our
Chief Financial Officer. Mr. Olah formerly served Old AIQ as its Executive Vice
President from November 1999 to March 2001 and as Chief Executive Officer from
April 1996 to November 1999. Mr. Olah was also a member of Old AIQ's board of
directors from its inception in April 1996. He was a director of Natural
Resources Geophysical Corporation from 1996 until 1998, when it was sold to
Eagle Geophysical of Houston, Texas. He was also the founder/Chairman and Chief
Executive Officer and a director of Innovative Gaming Corporation of America
from 1991 through February 1996 and also served as the Chief Financial Officer
of that company from 1991 to 1993.
Ronald E. Eibensteiner has been a director of our company since April 30, 2001,
the effective date of our merger with Old AIQ and Secretary from December 1,
2001 through June 24, 2002. He was initially appointed to the board of directors
of Old AIQ in September 2000. Mr. Eibensteiner is the president of Wyncrest
Capital, Inc. and has been a seed investor in several early stage technology
companies. Since May 1996, Mr. Eibensteiner has been chairman of the board of
directors of OneLink, Inc., a provider of Internet-delivered business
intelligence services to the telecommunications industry. From March 1996 until
March 2001, he served as a director of IntraNet Solutions, Inc. (now known as
Stellent, Inc.), a provider of Web-based document management solutions for
corporate intranets. Mr. Eibensteiner co-founded Diametrics Medical, Inc., a
manufacturer of blood gas diagnostic systems, and was chairman of Prodea
Software Corporation, a data warehousing software company, until its sale to
Platinum technology, inc., in January 1996.
61
Wayne W. Mills was appointed to our board of directors on November 20, 2001.
Since February 2002, Mr. Mills has served as Chief Executive Officer and
director of Entrx Corporation (formerly known as Metalclad Corporation). Mr.
Mills, the Company's largest individual shareholder, is also the owner and
president of Blake Capital Partners, LLC, a company that provides capital and
consulting services to early stage businesses. Prior to forming Blake Capital
Partners in 1999, Mr. Mills was employed for more than 18 years by R.J. Steichen
& Co., where he was an investment banker and stockbroker.
Patrick L. Nelson was appointed to the Company's board of directors in September
2002. Mr. Nelson has been partner of Intersect Strategies Group, LLP since
January 2002 and from 1991 to 1999 he served as Deputy Commissioner of the State
of Minnesota Department of Commerce, Insurance & Registration Division.
Effective February 26, 2002, Mr. Nelson resigned as a member of our board as he
again has taken a position as a Deputy Commissioner of the State of Minnesota.
Brent Robbins was appointed to the Company's board of directors in November
2002. Since 2001, Mr. Robbins has served as counsel at General Mills, Inc. From
1999 to 2001, he was Vice President of Wyncrest Capital, Inc., a
Minneapolis-based company that invests in early stage technology companies. From
1996 to 1999, Mr. Robbins was associated with the Bloomington, Minnesota law
firm of Larkin, Hoffman, Daly & Lindgren, Ltd.
Jack A. Johnson joined the Company as President, Chief Operating Officer and as
a director in November 2002. Prior to joining the Company, and since 1996, Mr.
Johnson served as President of Sopheon Corporation, a Minneapolis, Minnesota
based software company, and prior to that he was chief operating officer and
chief financial officer of Teltech Resource Network, Inc. On January 16, 2003,
the Board of Directors appointed Mr. Johnson Chief Executive Officer. Effective
with the sale of our Hosted Solutions Business, Mr. Johnson was hired by
Stellent, Inc. as vice president of hosted solutions.
There is no family relationship between any director or executive officer of the
Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers, directors and persons who own more than 10% of our outstanding common
stock to file reports of ownership and changes in ownership with the Securities
and Exchange Commission and to furnish copies of these reports to us. Based
solely on a review of the copies of the Forms 3, 4 and 5 and amendments that we
have received, we believe that all such forms required during 2002 were filed on
a timely basis, except for the following:
Ronald E. Eibensteiner filed a Form 4 on October 15, 2002 relating to a purchase
on October 4, 2002.
Wayne W. Mills filed (i) a Form 4 on September 13, 2002 relating to a purchase
on September 9, 2002, (ii) a Form 4 on October 15, 2002 relating to purchases on
October 11, 2002, (iii) a Form 4 on October 17, 2002 relating to a purchase on
October 14, 2002; and (iv) a Form 4 on December 30, 2002 relating to purchases
on or after December 24, 2002.
Patrick L. Nelson filed a Form 3 dated September 4, 2002 on September 18, 2002
and a Form 4 on September 18, 2002 relating to an option grant on September 4,
2002.
D. Bradly Olah filed (i) a Form 4 on September 30, 2002 relating to a
transaction on September 24, 2002; (ii) a Form 4 on October 21, 2002 relating to
a transaction on October 2, 2002 and (iii) a Form 4 on January 14, 2003 relating
to a transaction on December 13, 2002.
Brent Robbins filed a Form 4 on November 21, 2002 relating to a transaction on
November 7, 2002.
We have not received copies of any Forms 3, 4 or 5 filed on behalf of Boston
Financial Partners, Inc. or its affiliates.
62
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following information sets forth information with respect to the
compensation of our Chief Executive Officer and our other executives whose total
compensation for the fiscal years ended December 31, 2002, 2001 and 2000 that
exceeded $100,000. No other executive officer received salary and bonus in
excess of $100,000 during such periods.
Long-Term All Other
Annual Compensation Compensation Compensation
---------------------------------- ---------------- -----------------
Securities
Underlying
Name and Principal Position Year Salary Bonus Options Payouts
- -------------------------------------- ----------- ---------- ----------- ---------------- -----------------
Chief Executive Officer,
and President (a)
D. Bradly Olah 2002 $193,653 -- -- --
2001 $150,000 -- 300,000 --
2000 $ 75,000 -- -- --
Chief Financial Officer
Jeffrey M. Traynor (b) 2002 $ 61,184 $ 45,000 175,000 --
2001 -- -- -- --
2000 -- -- -- --
(a) D. Bradly Olah was our President (until November 2002) and our Chief
Executive Officer until his resignation on December 31, 2002. Mr. Olah was our
Chief Financial Officer from December 1, 2001 until May 8, 2002. Mr. Olah will
continue to be a member of our board of directors. He formerly served Old AIQ as
its Executive Vice President from November 1999 to March 2001 and as Chief
Executive Officer from April 1996 to November 1999. Mr. Olah was also a member
of Old AIQ' board of directors from its inception in April 1996.
(b) Mr. Traynor became our Chief Financial Officer on May 8, 2002 and was
elected to serve as Corporate Secretary on June 25, 2002. Effective March 14,
2003, Mr. Traynor resigned from both of these positions.
OPTION GRANT TABLE
The following information sets forth information with respect to the grants of
options by us during 2002 to our Chief Executive Officer and our other most
highly compensated executive officers as of December 31, 2002.
Percent total
Number of options/SARs
options/ granted to Exercise/ Grant date
SARs employees in base Expiration present
granted fiscal year price ($) date value (c)
------- ----------- --------- ---- ---------
D. Bradly Olah (a) 500,000 22.1% $4.00 01/14/2012 $930,000
Jeffrey M. Traynor (b) 175,000 7.7% $1.25 05/14/2012 $168,000
63
(a) The options granted vest as follows: 166,666 on 1/14/03; and 166,667 on
1/14/04 and 05.
(b) The options granted vest as follows: 35,000 on 5/14/02, 03, 04, 05 and
06.
(c) Grant date present value is calculated on the date of the grant using
the Black-Scholes option pricing model assuming the following: no
dividend yield, risk-free interest rate of 5%, expected volatilities
between 74% and 118%, and expected terms of the options from 3 to 5
years. The Black-Scholes option value is then multiplied by the number
of options granted.
AGGREGATED OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUE TABLE
Shown below is information relating to (i) the exercise of stock options during
2002 by our Chief Executive Officer and each of our other most highly
compensated executive officers as of December 31, 2002 and (ii) the value of
unexercised options for each of the Chief Executive Officer and such executive
officers as of December 31, 2002:
Number of Number of shares Value of unexercised
shares underlying unexercised in-the-money options
acquired on Value options at Dec. 31, 2002 at Dec. 31, 2002 (b)
exercise realized Exercisable Unexercisable Exercisable Unexercisable
D. Bradly Olah (a) 500,000 $2,000,000 -- -- $ -- $ --
60,000 -- $ -- $ --
100,000 -- $ -- $ --
Jeffrey M. Traynor -- $ -- 35,000 140,000 $ -- $ --
(a) On January 1, 2002, we amended an employment agreement with our
President and Chief Executive Officer, D. Bradly Olah. Following the
amendment of this employment agreement, Mr. Olah was awarded an option
to purchase an additional 500,000 shares at $4.00 per share. On January
14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares
subject to the option, though none had yet vested, by delivering a
promissory note to us in the amount of $2,000,000 and pledging all
500,000 shares acquired as security for the repayment of the note, all
in accordance with the terms of the option agreement. In November 2002,
Jack A. Johnson replaced Mr. Olah as our President. On January 6, 2003
we entered into a severance agreement with Mr. Olah, effective December
31, 2002. The agreement allows for the extension until December 31,
2007, to exercise 100,000 options (at $1.00 per share) issued in July
2000. In exchange, Mr. Olah resigned as Chief Executive Officer and
released the Company from all claims, including a release from his
employment agreement dated May 1, 2001 (amended January 1, 2002). In
addition, the Company exercised its right to a non-cash repurchase of
500,000 shares of common shares issued to Mr. Olah on January 7, 2002
in exchange for the cancellation of his note receivable to the Company.
(b) The value of unexercised in-the-money options is based on the
difference between the exercise price of the options and $0.22, the
fair market value of the Company's common stock on December 31, 2002.
EMPLOYMENT AGREEMENTS
D. Bradly Olah
Mr. Olah's employment with our Company is also pursuant to a May 1, 2001
employment agreement, which was amended as of January 1, 2002 in order to
increase his base salary from $150,000 to $200,000 and to reflect his
appointment as Chief Executive Officer. In addition to his annual base salary,
Mr. Olah is eligible for an annual bonus of up to 100 percent of his salary upon
the achievement of certain corporate objectives. The agreement also contains
non-competition and non-solicitation covenants, prohibiting Mr.
64
Olah from engaging in a competing activity or soliciting company employees or
customers for a 12-month period following the termination of his employment. In
the event Mr. Olah's employment with us is terminated without cause (as defined
therein), Mr. Olah is entitled to a lump sum severance payment equal to his
then-current base salary. In the event Mr. Olah's employment is terminated
within one year of a change of control of our Company, he is entitled to receive
his base salary for a 24-month period. In connection with the May 1, 2001
employment agreement, Mr. Olah was also awarded options to purchase up to
300,000 shares of our common stock at a price of $5.00 per share, which option
vests in equal installments over four years. Following the amendment of his
employment agreement in January 2002, Mr. Olah was awarded an option to purchase
an additional 500,000 shares at $4.00 per share.
On January 14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares
subject to the option, though none had yet vested, by delivering a promissory
note to us in the amount of $2,000,000 and pledging all 500,000 shares acquired
as security for the repayment of the note, all in accordance with the terms of
the option agreement
On January 6, 2003 we entered into a severance agreement with Mr. Olah,
effective December 31, 2002. The agreement allows for the payment of Mr. Olah's
base salary through May 31, 2003, payment of health and other insurance benefits
through December 31, 2003, the extension until December 31, 2007 to exercise
options issued in July 2000. In exchange, Mr. Olah resigned as Chief Executive
Officer (Mr. Olah served as our President until November 25, 2002, at which time
we hired Jack A. Johnson to be our President and Chief Operation Officer) and
released us from all claims, including a release from his employment agreement
dated May 1, 2001 (amended January 1, 2002). In addition, we exercised our right
to a non-cash repurchase of 500,000 shares of common shares issued to Mr. Olah
on January 7, 2002 in exchange for the cancellation of his note receivable to
the Company. Mr. Olah will remain as a Board member.
On February 26, 2003, Mr. Olah agreed to exchange the remaining unpaid base
salary and benefits per the January 6, 2003 severance agreement, totaling
$58,500, into 292,500 common shares of the Company at a rate of $0.20 per share.
Jeffrey M. Traynor
On May 8, 2002, we entered into a one-year employment agreement with Jeffrey M.
Traynor as our Chief Financial Officer. Pursuant to the terms of the agreement,
Mr. Traynor is entitled to an annual salary of $120,000 and a guaranteed bonus
of $60,000 (the bonus to be paid in four equal installments beginning May 2002,
then in August and November 2002, with a final installment due February 2003).
Mr. Traynor was also awarded an option to purchase 175,000 shares of the
Company's common stock at a price of $1.25 per share, with 35,000 options
vesting immediately and the balance vesting ratably over a four-year period.
On March 14, 2003, we agreed to terms with Mr. Traynor concerning his separation
as our Chief Financial Officer and Secretary. Mr. Traynor will continue to
provide consulting services for us through April 2003. The Company's Board of
Directors filled the vacancy resulting from Mr. Traynor's departure by
appointing Mark D. Dacko, formerly the Company's Controller, to serve as Chief
Financial Officer and Secretary.
Jack A. Johnson
The terms of Jack A. Johnson's employment with us as our President and Chief
Operating Officer are described in a letter agreement dated October 23, 2002.
Pursuant to the letter agreement, Mr. Johnson was entitled to receive an annual
base salary of $180,000 and a $25,000 automatic bonus payable in the second
quarter of fiscal 2003. Further, Mr. Johnson was eligible to receive an annual
bonus of up to 100 percent of his base salary upon achieving certain performance
objectives. Mr. Johnson was also awarded options to purchase 900,000 shares of
our common stock, of which 90,000 shares vested immediately with the balance
vesting in three equal annual installments. The options have an exercise price
of $0.35 per share. On January 16, 2003, Mr. Johnson was appointed President and
Chief Executive Officer. In connection with the sale of our hosted solutions
business to Stellent, Inc., Mr. Johnson was hired by Stellent to be its vice
president of hosted solutions. Notwithstanding that Mr. Johnson accepted a
full-time employment position with Stellent, Mr. Johnson claims to be entitled
to a lump sum severance payment from us in an amount exceeding $200,000
(including the $25,000 bonus) pursuant to the terms of an alleged employment
agreement with the Company. As we have informed Mr. Johnson, it is our position
that he does not have an enforceable employment agreement with us (other than
the October 23, 2002 letter agreement) and that he is not entitled to any
severance or other payments from us, except for the $25,000 bonus payment.
65
DIRECTOR COMPENSATION
Outside Directors of the Company are reimbursed for all reasonable and necessary
costs and expenses incurred as a result of being a Director of the Company. In
addition, we issue options to our Directors as determined by the Board. Such
options vest over a period of years earlier upon a change of control.
During 2002, we issued a total of 100,000 options to two directors, of which
options to purchase 50,000 shares are exercisable at $0.56 per share and the
remaining 50,000 options are exercisable at $0.35 per share, both vest ratably
over three years. These options are non-qualified options granted pursuant to
our 2000 Directors Stock Option Plan.
Members of the Board who are also employees of ours receive no options for their
services as directors.
BOARD COMMITTEES
The Company has an Audit Committee and a Compensation Committee. The Audit
Committees oversee the activities of the independent auditors and internal
controls. The members of the Audit Committee were Messrs. Brimmer, Nelson and
Robbins. (On February 26, 2003, after participating in a regular meeting of the
Audit Committee, Mr. Nelson submitted his resignation to the full Board of
Directors, informing them of his appointment to serve in the Department of
Commerce of the State of Minnesota.) The Compensation Committee makes
recommendations to the Board of Directors of the Company concerning salaries and
incentive compensation for executive officers of the Company. Messrs.
Eibensteiner and Mills serve on the Compensation Committee.
REPORT OF THE AUDIT COMMITTEE
The Company has established a three-member Audit Committee within the Board of
Directors. For the fiscal year ended December 31, 2002, the Audit Committee
consisted of Kenneth W. Brimmer, Patrick L. Nelson and Brent Robbins. The Board
will proceed with a formal search to replace the vacancy created by the
resignation of Mr. Nelson. The primary functions of the Audit Committee are (i)
to serve an as independent and objective party to monitor the Company's
financial reporting process and internal control system, (ii) to review and
appraise the audit efforts of the Company's independent accountants and internal
audit department, and (iii) to provide an open avenue of communication among the
independent accountants, financial and senior management, the internal audit
department, and the Board of Directors.
The Board of Directors has determined that, except for Mr. Brimmer, each of the
Audit Committee members is an "independent director," as such term is defined by
Section 4200(a)(15) of the listing standards of the National Association of
Securities Dealers ("NASD"). Mr. Brimmer does not meet the definition of
"independent" because, although he is not currently an employee of the Company,
he served as the Company's Chief Executive Officer and Chief Financial Officer
from April 30, 2001 through November 27, 2001. Section 4350(d)(2) of the NASD
listing standards, however, provides that a director who is not independent as
defined by Section 4200(a)(13) and is not currently an employee of the Company
or an immediate family member of an employee of the Company may be appointed to
the Audit Committee if the Board of Directors determines that is required in the
best interests of the Company. Currently, there are only six members of the
Company's Board of Directors and the Company has been unsuccessful in recruiting
additional directors. The Board of Directors therefore determined that,
notwithstanding Mr. Brimmer's former employment by the Company, it would be in
the Company's best interests to have 3 members on the committee, one of whom
does not meet the definition of "independent" under NASD rules, rather than have
only two independent directors serve on the Audit Committee.
66
The Board of Directors has also determined that each of the Audit Committee
members is able to read and understand fundamental financial statements and that
at least one member of the Audit Committee has past employment experience in
finance or accounting. The Board of Directors has reviewed, assessed the
adequacy of, and approved a written Audit Committee charter, which charter was
attached as an exhibit to the Proxy Statement for the 2001 Annual Meeting.
The Audit Committee has reviewed the Company's audited consolidated financial
statements for the last fiscal year and discussed them with management.
The Audit Committee has discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants.
The Audit Committee has received and reviewed the written disclosures and the
letter from Virchow Krause & Company, LLP, the Company's independent auditors,
required by Independence Standard No. 1, Independence Discussions with Audit
Committees, as amended, promulgated by the Independence Standards Board, and has
discussed with Virchow Krause & Company, LLP such firm's independence.
The Audit Committee, based on the review and discussions described above, has
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the last fiscal year.
Submitted by the Audit Committee of the Company's Board of Directors:
Kenneth W. Brimmer
Patrick L. Nelson
Brent Robbins
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee during the fiscal year ended December 31,
2002, consisted of Messrs. Eibensteiner and Mills. Neither Mr. Eibensteiner nor
Mr. Mills have served as an executive officer or employee of the Company. Mr.
Eibensteiner did serve as the Company's Secretary until June 24, 2002, however,
a position for which he received no compensation. No executive officer or
director of the Company served as a member of the compensation committee or
board of directors of another entity, one of whose executive officers or
directors served on the Company's compensation committee or board of directors.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executives generally have been made
by the Compensation Committee. Each member of the Compensation Committee is a
non-employee director. All decisions by the Compensation Committee relating to
the compensation of the Company's executive officers are reviewed by the entire
Board of Directors. Pursuant to rules designed to enhance disclosure of the
Company's policies toward executive compensation, set forth below is a report
prepared by the Compensation Committee addressing the compensation policies for
the Company and its subsidiaries for the fiscal year ended December 31, 2002 as
they affected the Company's executive officers.
The Compensation Committee's executive compensation policies are designed to
provide competitive levels of compensation that integrate pay with the Company's
annual objectives and long-term goals, reward above-average corporate
performance, recognize individual initiative and achievements, and assist the
Company in attracting and retaining qualified executives. Executive compensation
is set at levels that the Compensation Committee believes to be consistent with
others in the Company's industry.
67
There are three elements in the Company's executive compensation program, all
determined by individual and corporate performance: base salary compensation;
annual incentive compensation; and stock grants.
Base salary compensation is determined by the potential impact the individual
has on the Company, the skills and experiences required by the job, and the
performance and potential of the incumbent in the job.
Annual incentive compensation for executives of the Company is based primarily
on corporate operating earnings and revenue growth and the Company's positioning
for future results, but also includes an overall assessment by the Compensation
Committee of executive management's performance, as well as market conditions.
Awards of stock grants under the 1999 Stock Option Plan are designed to promote
the identity of long-term interests between the Company's executives and its
shareholders and assist in the retention of executives.
Total compensation opportunities are competitive with those offered by employers
of comparable size, growth and profitability in the Company's industry.
Mr. Olah received an annualized base salary of $150,000 until January 2002, at
which time the Compensation Committee increased Mr. Olah's annualized base
salary to $200,000 for the remainder of the 2002. This increase resulted from
the Committee's assessment of the complexity of the Company's operations.
Following the amendment of his employment agreement in January 2002, the Company
granted Mr. Olah an option to purchase up to 500,000 shares of the our common
stock at a price of $4.00 per share (with the closing sale price of the
Company's common stock on the date of grant being $3.70). Mr. Olah received no
cash incentive compensation award for the fiscal year ended December 31, 2002.
The Compensation Committee surveys employee stock option programs of companies
with similar capitalization to the Company prior to recommending the grant of
options to executives. While the value realizable from exercisable options is
dependent upon the extent to which the Company's performance is reflected in the
market price of the Company's common stock at any particular point in time, the
decision as to whether such value will be realized in any particular year is
determined by each individual executive and not by the Compensation Committee.
Accordingly, when the Committee recommends that an option be granted to an
executive, that recommendation does not take into account any gains realized
that year by that executive as a result of his or her individual decision to
exercise an option granted in a previous year.
Submitted by the Compensation Committee of the Company's Board of Directors:
Ronald E. Eibensteiner
Wayne W. Mills
68
STOCK PERFORMANCE GRAPH
The following presentation compares the Company's common stock price in the
period from May 1, 2001 (the date of which we completed our merger with activeIQ
Technologies and adopted their business model) through December 31, 2002, to the
ISDEX Internet Index and to the Nasdaq Composite Index.
[PERFORMANCE CHART]
4/30/01 6/30/01 9/30/01 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02
------- ------- ------- -------- ------- ------- ------- --------
Active IQ $100.00 $110.19 $57.41 $84.26 $38.89 $20.37 $8.33 $3.89
ISDEX Internet $100.00 $95.97 $44.29 $70.60 $62.71 $41.81 $31.18 $42.10
Nasdaq Composite $100.00 $102.13 $70.82 $92.16 $87.20 $69.14 $55.38 $63.11
69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information sets forth the number and percentage of shares of the
Company's common stock owned beneficially, as of March 26, 2003, by any person,
who is known to the Company to be the beneficial owner of 5 percent or more of
the Company's common stock, and, in addition, by each director and each
executive officer of the Company, and by all directors and executive officers as
a group. Information as to beneficial ownership is based upon statements
furnished to the Company by such persons.
Name and Address Amount of Beneficial Ownership (1) Percentage of Class
- ---------------- ---------------------------------- -------------------
Kenneth W. Brimmer 1,041,434 (2) 7.8
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Ronald E. Eibensteiner 1,525,734 (3) 11.3
800 Nicollet Mall, Ste 2690
Minneapolis, MN 55402
Wayne W. Mills 2,524,234 (4) 18.4
5020 Blake Road
Edina, MN 55436
D. Bradly Olah 868,134 (5) 6.5
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Mark D. Dacko 40,000 (6) *
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Brent Robbins * *
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Jack A. Johnson 90,000 (7) *
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
All directors and officers as a group 6,089,536 (8) 38.9
Boston Financial Partners, Inc. 2,146,667 (9) 15.2
17 Bayns Hill Road
Boxford, MA 01921
Gulfstream Financial Partners, LLC 806,300 (10) 6.0
2401 PGA Boulevard, Ste 190
Palm Beach Gardens, FL 33410
(1) Except as otherwise indicated, each person possesses sole voting and
investment power with respect to the shares shown as beneficially
owned.
(2) Includes 207,834 shares issuable upon exercise of certain warrants.
Also includes 450,000 shares issuable upon exercise of options, all of
which are vested.
(3) Includes 633,334 shares issuable upon exercise of certain warrants, of
which 533,334 are owned by Wyncrest Capital, Inc., of which Mr.
Eibensteiner is the sole director. Also includes 617,400 shares owned
by Wyncrest Capital, Inc. Also includes 75,000 shares issuable upon
exercisable of options which vest within 60 days.
(4) Includes 938,334 shares issuable upon exercise of certain warrants, of
which 540,000 are owned by Blake Capital, LLC of which Mr. Mills is the
sole member. Also includes 271,000 shares owned by Blake Capital, LLC,
30,000 shares owned by Sea Spray, Ltd., a foreign corporation of which
Mr. Mills is the sole director. Also includes 150,000 shares owned by
Mr. Mills' spouse. Mr. Mills disclaims beneficial ownership of these
shares.
70
(5) Includes 204,501 shares issuable upon exercise of certain warrants.
Also includes 223,333 shares issuable upon exercise of options which
vest within 60 days. Also includes 165,000 shares and 110,000 shares
issuable upon exercise of certain warrants owned by Mr. Olah's spouse;
and 15,000 shares and 10,000 shares issuable upon exercise of certain
warrants owned by the D. Bradly Olah Irrevocable Trust.
(6) Represent shares issuable upon the exercise of an option.
(7) Represent shares issuable upon the exercise of an option.
(8) Includes 2,104,003 shares issuable upon exercise of certain warrants.
Also includes 788,333 shares issuable upon exercise of options which
vest within 60 days.
(9) Includes 1,380,000 shares issuable upon the exercise of certain
warrants.
(10)Includes 705,000 shares issuable upon the exercise of certain warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following describes certain relationships and related transactions that we
have with persons deemed to be affiliates of our company. We believe that each
of the transactions described below were on terms at least as favorable to our
Company as we would have expected to negotiate with unaffiliated third parties.
In December 2000, Old AIQ entered into a subscription receivable for the
purchase of 100,000 shares of common stock at a price of $2.75 per share with
Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner
delivered to our company a cash payment in the amount of $75,000 and a 2-month
promissory note in the principal amount of $200,000. In April 2002, the
receivable was paid in full.
On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an
entity wholly owned by Mr. Mills who currently is a director and shareholder.
The loan was evidenced by a 90-day promissory note and accrued interest at the
rate of 7% annually. In connection with the loan, we also issued to Blake
Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock
at a price of $3.00 per share. On May 30, 2002, we allowed Blake Capital
Partners to convert $150,000 of outstanding principal under the note into
200,000 shares of common stock. We satisfied the remaining outstanding principal
and accrued interest in full on June 10, 2002
On May 27, 2002, we sold 500,000 shares of its common stock in a private
placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for
total proceeds of $375,000 (we received $350,000 in cash and recorded a stock
subscription receivable of $25,000). As consideration for its purchase of such
shares, Boston Financial Partners also received a warrant to purchase an
additional 500,000 shares of our common stock at an exercise price of $1.00 per
share, and we further agreed to reduce to $1.00 the exercise price on all other
warrants to purchase shares of our common stock held by Boston Financial
Partners and its affiliates. Such warrants represent the right to purchase 1
million shares of common stock and had exercise prices ranging from $5.50 to
$7.50 per share. Prior to this private placement, Boston Financial Partners
beneficially owned more than 5% of our common stock. In December 2002, the
Company finalized an amendment to the agreement and canceled the $25,000 stock
subscription receivable.
On May 31, 2002, we sold to two investors in a private placement an aggregate of
800,000 shares of our common stock at a price of $0.75 per share for total
proceeds of $600,000. In connection with the sale of these shares, we also
issued to the investors 5-year warrants to purchase an aggregate of 800,000
shares of our common stock at an exercise price of $1.25 per share. The warrants
may be redeemed by us any time after January 30, 2003 and following a period of
at least 30 business days in which our common stock trades at $2.50 per share or
more. The redemption price is equal to $.01 per warrant share. Proceeds were
71
allocated to the fair value of the securities issued (common stock and warrant).
One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of
Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired
half of the shares and warrants issued in this private placement. In conjunction
with this transaction, we also issued an additional 50,000 warrants in September
2002 to Mr. Eibensteiner as consideration for the placement.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Pursuant to Rule 13a-14(c) of the Securities Exchange Act of 1934, within 90
days prior to the filing date of this annual report (the "Evaluation Date"), the
Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and other procedures of the Company that are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits to the SEC is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files to the SEC is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date, including any corrective actions with regard
to significant deficiencies and material weaknesses.
72
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K, or
are incorporated herein by reference.
Exhibit No. Description Location
2.1 Stock Purchase Agreement between Meteor Incorporated by reference to Form 8-K
Industries, Inc. and Capco Energy, Inc. dated February 13, 2001 (SEC File
dated January 30, 2001. No. 0-27968)
2.2 First Amendment to Stock Purchase Incorporated by reference to Exhibit 2.2 to
Agreement by and between Capco Energy, Form 8-K dated April 30, 2001 and filed
Inc. and Meteor Industries, Inc. dated on May 14, 2001 (SEC File No. 01-12401)
April 27, 2001.
2.3 Agreement and Plan of Merger by and Incorporated by reference to Form 8-K
among Meteor Industries, Inc., its wholly dated February 13, 2001 (SEC File
owned subsidiary, MI Merger, Inc. and No. 0-27968)
activeIQ Technologies, Inc.
2.4 First Amendment to Agreement and Plan of Incorporated by reference to Exhibit 2.4
Merger by and among Meteor Industries, to Form 8-K dated April 30, 2001 and
Inc., activeIQ Technologies, Inc. amd MI and filed on May 14, 2001 (SEC File
Merger, Inc. dated April 27, 2001. No. 01-12401)
2.5 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2.5 to
between Meteor Industries, Inc. and AIQ Form 8-K dated April 30, 2001 and filed
Acquisition Corp. dated April 27, 2001. on May 14, 2001 (SEC File No. 01-12401)
2.6 Stock Purchase Agreement by and between Incorporated by reference to Exhibit 2.1
Active IQ Technologies, Inc., Red Wing to Registrant's Form 8-K filed on
Business Systems, Inc. and the several June 15, 2001
shareholders of Red Wing Business
Systems, Inc. dated June 6, 2001.
2.7 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2.1
among Active IQ Technologies, Inc., CBS to Registrant's Form 8-K filed on
Acquisition, Inc. and Champion Business September 21, 2001
Systems, Inc. dated August 30, 2001.
2.8 Stock Purchase Agreement by and among Incorporated by reference to Exhibit 2.1
Active IQ Technologies, Inc., Kenneth to Registrant's Form 8-K filed on
Hilton, Richard Moore, Gale Saint and October 28, 2001
Kenneth Hofer dated October 10, 2001.
3.1 Articles of Incorporation of AIQ Incorporated by reference to Exhibit 3.1
Acquisition Corp. to Registrant's Form 8-K filed on
May 14, 2001
3.2 Articles of Merger relating to the merger Incorporated by reference to Exhibit 3.2
of Meteor Industries, Inc. with and into to Registrant's Form 8-K filed on
AIQ Acquisition Corp. on May 14, 2001
3.3 Bylaws. Incorporated by reference to Exhibit 4.2
to Registrant's Registration Statement
on Form S-3 filed on August 21, 2001
(SEC File No. 333-68088)
4.3 Warrant Agreement dated August 1, 2001. Incorporated by reference to Exhibit 4.3
to Registrant's Registration Statement
on Form S-3 filed on August 21, 2001
(SEC File No. 333-68088)
4.4 Form of Class B Redeemable Warrant Incorporated by reference to Exhibit 4.4
Certificate. to Registrant's Registration Statement
on Form S-3 filed on August 21, 2001
(SEC File No. 333-68088)
73
Exhibit No. Description Location
4.5 Warrant No. BCP-1, issued to Blake Capital Incorporated by reference to Exhibit 4.1
Partners, LLC, dated March 29, 2002 to Registrant's Form 10-Q dated
to purchase 25,000 shares at $3.00 per March 31, 2002
share, expires on March 29, 2007.
4.6 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 4.1
issued to Boston Financial Partners, Inc., to Registrant's Form 8-K filed on
dated May 27, 2002 to purchase 880,000 June 12, 2002
shares at $1.00 per share, expires
5/27/2007.
4.7 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 4.2
issued to Wyncrest Capital, Inc., dated to Registrant's Form 8-K filed on
May 31, 2002 to purchase 400,000 shares June 12, 2002
at $1.25 per share, expires 5/31/2007.
4.8 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 4.2
issued to Marcel Eibensteiner, dated to Registrant's Form 8-K filed on
May 31, 2002 to purchase 400,000 shares June 12, 2002
at $1.25 per share, expires 5/31/2007.
4.9 Form of warrant. Incorporated by reference to Exhibit 4.1
June 12, 2002 to Registrant's Form 10-Q dated
September 30, 2002
4.10 Schedule identifying material details of Incorporated by reference to Exhibit 4.2
warrant issued. to Registrant's Form 10-Q dated
September 30, 2002
10.1 Stock Option Plan. Incorporated by reference to Exhibit 6.1
to Registrant's Form 1-A Offering
Statement (SEC File No. 24D-3802 SML)
10.2 1997 Incentive Plan. Incorporated by reference to Exhibit 10.23
to Registrant's Form 10-K dated
December 31, 1996 (SEC File No. 0-27968)
10.3 Pledge Agreement by and between Active Incorporated by reference to Exhibit 10.1
IQ Technologies, Inc. and the several to Registrant's Form 8-K filed on
shareholders of Red Wing Business June 15, 2001
Systems, Inc. dated June 6, 2001.
10.4 Employment agreement by and between Incorporated by reference to Exhibit 10.1
Kenneth W. Brimmer and the Company to Registrant's Registration Statement
dated as of May 1, 2001. on Form S-3 filed on August 21, 2001
(SEC File No. 333-68088)
10.5 Employment agreement by and between Incorporated by reference to Exhibit 10.2
D. Bradly Olah and the Company dated to Registrant's Registration Statement
as of May 1, 2001. on Form S-3 filed on August 21, 2001
(SEC File No. 333-68088)
10.6 The Company's 2000 Director Stock Incorporated by reference to Exhibit 4.1
Option Plan. to Registrant's Statement on Form S-8
filed on August 22, 2001 (SEC File No.
333-68166)
10.7 Form of Promissory Note dated Incorporated by reference to Exhibit 10.2
September 14, 2001. to Registrant's Form 8-K filed on
September 21, 2001
10.8 Form of Promissory Note dated Incorporated by reference to Exhibit 10.1
October 10, 2001. to Registrant's Form 8-K filed on
September 21, 2001
10.9 Agreement dated November 29, 2001 by Incorporated by reference to Exhibit 10.3
and between Kenneth W. Brimmer and to Registrant's Amendment No. 1 to
the Company. Registration Statement on Form S-3 filed
on December 10, 2001 (SEC File No.
333-68088)
74
Exhibit No. Description Location
10.10 Application Service Provider Software Incorporated by reference to Exhibit 10.1
License Agreement dated December 28, to Registrant's Form 8-K filed on
2001 between Stellent, Inc. and Active IQ January 4, 2002
Technologies, Inc.
10.11 Employment Agreement by and between Incorporated by reference to Exhibit 10.11
Philip C. Rickard and the Company dated to Registrant's Form 10-K dated
as of August 1, 2001. December 31, 2001
10.12 First Amendment to Employment Agreement Incorporated by reference to Exhibit 10.12
dated January 1, 2002 by and between to Registrant's Form 10-K dated
D. Bradly Olah and the Company. December 31, 2001
10.13 Employee Stock Option Agreement dated Incorporated by reference to Exhibit 10.13
January 7, 2002 between D. Bradly Olah to Registrant's Form 10-K dated
and the Company. December 31, 2001
10.14 Restricted Stock Purchase Agreement Incorporated by reference to Exhibit 10.14
dated January 14, 2002 by and between to Registrant's Form 10-K dated
D. Bradly Olah and the Company. December 31, 2001
10.15 Form of Pledge Agreement. Incorporated by reference to Exhibit 10.15
to Registrant's Form 10-K dated
December 31, 2001
10.16 Form of Non-Recourse Promissory Note. Incorporated by reference to Exhibit 10.16
to Registrant's Form 10-K dated
December 31, 2001
10.17 2001 Employee Stock Option Plan. Incorporated by reference to Exhibit 10.18
to Registrant's Form 10-K dated
December 31, 2001
10.18 Promissory Note dated March 29, 2002. Incorporated by reference to Exhibit 10.1
to Registrant's Form 10-Q dated
March 31, 2002
10.19 Employment Agreement by and between Incorporated by reference to Exhibit 10.1
Jeffrey M. Traynor and the Company to Registrant's Form 10-Q dated
dated as of May 8, 2002. June 30, 2002
10.20 Severance Agreement by and between Filed herewith electronically
D. Bradly Olah and the Company
dated January 6, 2003.
10.21 Severance Agreement by and between Filed herewith electronically
Jeffrey M. Traynor and the Company
dated March 14, 2003.
16.1 Letter from Arthur Andersen, LLP, dated Incorporated by reference to Exhibit 16.1
December 27, 2001 regarding changes in to Registrant's Form 8-K filed on
Registrant's Certifying Accountant. December 20, 2001
21 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21
to Registrant's Form 10-K dated
December 31, 2001
23.1 Consent of Virchow, Krause & Filed herewith electronically
Company, LLP.
99.1 Certification Pursuant to 18 U.S.C. Section Filed herewith electronically
1350 as Adopted Pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section Filed herewith electronically
1350 as Adopted Pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
For the quarter ended December 31, 2002, the Company filed no reports on Form
8-K.
75
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACTIVE IQ TECHNOLOGIES, INC.
("REGISTRANT")
Dated: March 28, 2003 By/s/ Kenneth W. Brimmer
----------------------
Kenneth W. Brimmer
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 28, 2003 by the following persons on behalf of the
Registrant, in the capacities indicated.
SIGNATURES TITLE
---------- -----
/s/ Kenneth W. Brimmer Chairman of the Board and Chief Executive Officer
- ---------------------- (principal executive officer)
Kenneth W. Brimmer
/s/ Mark D. Dacko Chief Financial Officer, Controller and Secretary
- ----------------- (principal financial and accounting officer)
Mark D. Dacko
/s/ D. Bradly Olah Director
- ------------------
D. Bradly Olah
/s/ Ronald E. Eibensteiner Director
- --------------------------
Ronald E. Eibensteiner
/s/ Wayne W. Mills Director
- ------------------
Wayne W. Mills
Director
- ------------------
Brent Robbins
Director
- ------------------
Jack A. Johnson
76
CERTIFICATIONS
I, Kenneth W. Brimmer, Chairman and Chief Executive Officer of Active IQ
Technologies, Inc. (the "Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the Registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors:
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ACTIVE IQ TECHNOLOGIES, INC.
Dated: March 28, 2003 By/s/ Kenneth W. Brimmer
----------------------
Kenneth W. Brimmer
Chairman and Chief Executive Officer
77
I, Mark D. Dacko, Chief Financial Officer of Active IQ Technologies, Inc. (the
"Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the Registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors:
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ACTIVE IQ TECHNOLOGIES, INC.
Dated: March 28, 2003 By/s/ Mark D. Dacko
-----------------
Mark D. Dacko
Chief Financial Officer
78