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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, 2001
Commission File Number: 1-12401
ACTIVE IQ TECHNOLOGIES, INC.
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(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
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(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
Check whether the issuer (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 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 [ ]
At March 25, 2002, 11,592,345 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 $16,032,174.
ACTIVE IQ TECHNOLOGIES, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2001
Table of Contents
PART I
Page
----
Item 1. Business........................................................... 4
Item 2. Properties......................................................... 14
Item 3. Legal Proceedings.................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders................ 14
PART II
Item 5. Market for Common Equity and Related Shareholder Matters........... 16
Item 6. Selected Financial Data............................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 23
Item 8. Consolidated Financial Statements and Supplementary Data........... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................. 46
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..... 47
Item 11. Executive Compensation............................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 53
Item 13. Certain Relationships and Related Transactions..................... 54
PART IV
Item 14. Exhibits and Reports on Form 8-K. ................................. 56
Signatures.................................................................. 59
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
Active IQ Technologies, Inc. provides accounting software and eBusiness services
solutions to the small to medium-sized business market, known as the "SME
market." Our solutions address existing legacy applications, general business
requirements and select vertical markets.
We offer traditional accounting and financial management software solutions
through Red Wing Business Systems, Inc., Champion Business Systems, Inc. and FMS
Marketing, Inc. (which does business as FMS/Harvest, and as of December 31,
2001, we merged FMS/Harvest with and into Red Wing), its recently-acquired and
wholly-owned subsidiaries. In addition to traditional accounting and financial
management software solutions, we offer eBusiness applications and software
solutions as part of its "Epoxy Network." The Epoxy Network offers an Internet
merchandising system called "Storefront" and a tool for managing customer
information named "Account Management." Through an exclusive worldwide-hosted
licensing agreement with Stellent, Inc., we also develop hosted content
management solutions in selected vertical markets using Stellent's Content
Management software.
Our objective is to become a leading provider of accounting software, eBusiness
solutions and hosted solutions to small to medium-sized businesses (known as the
"SME market"). To achieve this objective, we intend to pursue the following
strategies: provide additional value-added products and services to our existing
customers; acquire complimentary businesses; leverage our existing sales
channels; and develop and market web-based content management solutions to
selected vertical markets.
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. In April 2001 we reincorporated under Minnesota
law. Our principal offices are located at 5720 Smetana Drive, Suite 101
Minnetonka, Minnesota 55343. Our telephone number is (952) 345-6000 and our
Internet address is www.activeiq.com.
2001 CORPORATE DEVELOPMENTS
Merger with activeIQ Technologies Inc.
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 a business plan focused on providing business
software and solutions. The primary reason we decided to exit our historical
business operations was because our operations were no longer able to generate
the cash flow needed to conduct our business. Historically, we had grown our
business through acquisitions using either cash or our stock as consideration.
As our business operations required more working capital to offset the increased
price of petroleum products, we had less working capital to use toward
acquisitions. Moreover, we were not able to generate sufficient interest in our
stock to continue using it as attractive consideration. Our board of directors
therefore determined that it was prudent to sell the operating assets since the
company no longer had a means to fund the acquisitions that were central to our
business development.
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Accordingly, as the first step in the plan to shift our business operations, we
sold all of the outstanding stock of our wholly-owned subsidiary, Meteor
Enterprises, Inc., which directly or indirectly owned substantially all of our
company's operating assets, to Capco Energy, Inc. At the time of the
transaction, Capco was a significant shareholder of our company. In
consideration for the sale of Meteor Enterprises, Capco Energy paid
approximately $5.1 million consisting of $4.6 million in cash and a 9-month
promissory note in the amount of $500,000, of which there remained a principal
balance of approximately $290,000 as of February 28, 2002. In addition, Capco
also surrendered for cancellation an aggregate of 100,833 shares of our common
stock held by it.
Immediately following the sale of Meteor Enterprises to Capco Energy, we
completed a merger transaction in which activeIQ Technologies Inc., a
privately-held Minnesota corporation ("Old AIQ"), merged with and into our
newly-created wholly-owned subsidiary, AIQ, Inc., a Minnesota corporation, in a
triangular merger transaction. In consideration for the merger, the former
shareholders of Old AIQ received one share of our common stock for each share of
common stock of Old AIQ held, which resulted in the former Old AIQ shareholders
holding approximately 50 percent of our company's outstanding shares of common
stock immediately following the transaction. In addition to the shares of our
common stock, each former Old AIQ shareholder also received two Class B
Redeemable Warrants for every three shares of Old AIQ common stock held at the
time of the merger. Each Class B Warrant grants to the holder thereof the right
to purchase one share of our common stock at a price of $5.50 per share. The
Class B Warrants may be redeemed by us if the closing price of our common stock
averages $7.50 per share for a 10-day period. Pursuant to the merger agreement,
immediately following the merger all of the directors of our company resigned
and were replaced by 6 new directors, five of whom were appointed by Old AIQ and
the other appointed by our company.
Old AIQ was a development stage company since 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.
Acquisition of Red Wing Business Systems, Inc.
On June 6, 2001, we acquired all of the outstanding capital stock of Red Wing
Business Systems, Inc. ("Red Wing"), based in Red Wing, Minnesota. Red Wing,
which has since operated as our wholly-owned subsidiary, develops, markets and
distributes accounting software applications to small to medium-sized
businesses, primarily in the agricultural industry. 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.
Acquisition of Champion Business Systems, Inc.
On September 18, 2001, we acquired Champion Business Systems, Inc. ("Champion"),
a Denver, Colorado-based accounting software company, in a merger transaction.
Champion develops, integrates and supports accounting and business management
software, focusing on small and growing businesses. As consideration for the
merger, we paid at closing an aggregate of approximately $512,000 in cash to the
former Champion shareholders; issued 299,185 shares of our common stock; and
issued promissory notes in the aggregate amount of approximately $1 million. The
notes are payable in equal installments on the four, eight, twelve and
sixteen-month anniversaries of the merger, and to date, the first payment has
been made.
Acquisition of FMS/Harvest
On October 10, 2001, we 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 primarily
users in the agricultural and farming industries. In consideration for the
purchase, we paid $300,000 in cash at closing; issued 6-month promissory notes
in the total amount of $300,000; and issued 250,000 shares of our common stock.
Effective December 31, 2001, we merged FMS/Harvest with and into Red Wing.
5
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.
PRODUCTS AND SERVICES
During fiscal 2001, we offered three types of business software and solutions
for small to medium-sized business market, known as the SME market: traditional
business and accounting software through our Red Wing and Champion subsidiaries;
eBusiness solutions through our Epoxy Network; and hosted business solutions in
selected vertical markets. For fiscal 2002, however, we intend to shift the
focus of our efforts on the development of our hosted solutions business.
Accounting/Business Solutions
We design, develop, market and support accounting software products through our
Red Wing and Champion business units. These products address the "gap market" -
companies that have outgrown inexpensive, ultra-simple "starter" accounting
software but do not require the significant complexity of high-end software.
These products offer a stable, secure and flexible base for growing small
business users. In fiscal 2001, revenues from our accounting software solutions
were approximately $2,248,061, or 82.9% of total revenues.
Our software product offering includes the following solutions:
Red Wing Products and Solutions
o Red Wing's TurningPoint Accounting Software was specifically designed
for growing small businesses that need ease of use, flexibility, and
expandability. General Ledger, Accounts Payable, and Accounts
Receivable modules were released in September 2001. We intend to
release additional modules throughout 2002.
o AgCHEK Accounting, also from Red Wing, is designed for
production-oriented agricultural operations, especially those needing
crop and livestock management information.
o Red Wing Windows Accounting Series is modular-based accounting
software.
o Red Wing Payroll software is a stand-alone system designed for ease of
use and comprehensive employee pay processing and reporting.
o Red Wing DOS Accounting Series is a solid, historically successful
software solution.
6
Champion's Solutions and Products
o Champion's PROFIT GOLD is designed for small and growing businesses
needing solid bookkeeping and financial management.
o PROFIT offers full-featured accounting functionality, multi-user
support and ease of use - all at an affordable price.
o PROFIT in the Classroom is an all-inclusive accounting software
package that teaches students financial and managerial accounting
principles and includes features for instructors as well.
o Champion CONTROLLER is a DOS-based product that provides all of the
features a small business needs to manage finances.
FMS/Harvest Solutions and Products
o Perception Accounting is a complete accounting software solution
created especially for the unique needs of farmers.
Epoxy Network
In addition to traditional accounting solutions, we offer an eBusiness product
for small to medium-sized businesses known as the "Epoxy Network." The Epoxy
Network, which is offered to customers on a monthly subscription basis, includes
eCommerce, Account Management, customer service and support, and trading partner
connectivity. The Epoxy applications integrate 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 allow an organization to extend beyond the
traditional "four walls" of their enterprise to integrate their operations with
their customers, suppliers and partners. During the fiscal year ended December
31, 2001, revenues from Epoxy Network were $183,356, or 6.8% of our total sales.
As a result of our decision to concentrate our business development efforts on
our hosted solutions business, we entered into a license agreement in March 2002
in which we licensed our Epoxy Network applications and transferred our Epoxy
customers to POSitive Software Company, an unaffiliated third party.
Hosted Solutions
As a result of a December 2001 agreement with Stellent, Inc., one of our
shareholders, we have an exclusive worldwide license to distribute Stellent's
enterprise content management software solutions to customers on a hosted basis.
With this license, we have begun developing and offering 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 are designed to enable
an organization to improve its operational efficiency and maximize the potential
of its content resources. Also, by focusing on industry-specific solutions, we
believe we are able to more closely meet the particular needs of potential
customers in those markets. Further, we believe a hosted solutions model will be
attractive to customers in specific markets who demand quicker deployment of new
applications and more predictable costs with less financial risk. We realized no
revenues from our hosted solutions in fiscal 2001.
In February 2002, we launched our first hosted solution offering in the real
estate vertical market, called "SmartCabinet for RealEstate." SmartCabinet for
Real Estate is an offering of Web-based solutions designed to allow property
owners and managers to conduct their everyday business of content management via
the Web. Users in this vertical market can organize their documents in e-file
cabinets according to properties/buildings, tenants, transactions, etc., as they
would with traditional document files. The efficiencies associated with
SmartCabinet for RealEstate is intended to shorten the time to fill vacancies,
shorten the length of lease negotiations, reduce document storage costs and
improve landlord-tenant communications.
7
Through contacts we acquired as a result of our Red Wing and FMS/Harvest
acquisitions, we entered a second vertical market in March 2002 with the
launching of SmartCabinet for Agri Business. Farm Credit Services is a network
of lenders and service providers in the agribusiness industry. The Farm Credit
Services solution is designed to improve the efficiency of financial, tax, loan
and insurance reporting workflow between financial institutions and their
agribusiness customers.
OUR GROWTH STRATEGY
Our objective is to be a leading provider of accounting software, eBusiness and
hosted solutions to small to medium-sized businesses. To achieve this objective,
we intend to pursue the following strategies:
o PROVIDE ADDITIONAL VALUE-ADDED PRODUCTS AND SERVICES TO OUR
CUSTOMERS. We plan to enhance our core products to offer more
value to existing and new customers by adding new business process
applications and functionality. We believe there is a significant
market opportunity for new and enhanced applications that can
effectively automate and improve customer and supplier
relationships. We expect to continue developing additional
value-added products and services, principally by partnering with
third parties.
o PURSUE STRATEGIC ACQUISITIONS. An important element of our growth
strategy is the acquisition and integration of complementary
businesses in order to broaden product offerings, capture market
share and improve profitability. We have made various acquisitions
in the past and, to the extent suitable acquisition candidates,
acquisition terms and financing are available, we intend to make
acquisitions in the future.
o LEVERAGING EXISTING SALES CHANNELS. Accounting software has
traditionally been sold through a network of value-added
resellers, or "VARs." As we access the existing sales channels
through partnerships or acquisitions, an important part of our
strategy is to train and support the channel to develop new
customers and deliver vertical market solutions.
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.
Red Wing also continues to develop corporate distribution agreements for its
vertical agriculture applications. Our corporate partners distribute our
vertical applications to their existing clients and also use our software
applications to provide additional services to their clients.
Hosted Solutions
Our sales strategy leverages proven methodologies that have been adapted to our
unique market position. We believe we have unique competitive advantages not
only in our solution but how we offer our solution to the marketplace. Our
pricing and delivery model gives our customers the best of both worlds, low
initial capital outlay and speed to market.
We have built our sales model to support a high volume of transactions in the
shortest period of time. We will support these initiatives through a direct
sales model with a phased approach.
o Phase 1 - Four (4) direct sales representatives across the United
States, one each in the East, Midwest, South, West regions. We
will also take steps to establish global reseller partnerships.
o Phase 2 - Four (4) additional sales representative each with a
vertical market focus.
Our primary marketing objectives are to build awareness and continue to gain
market share in select verticals. Accordingly, we will utilize a balanced mix of
on and offline advertising and marketing efforts. On-line efforts will include
web site, affiliate partner links, product demos and industry specific on-line
advertising. Offline efforts will include industry specific tradeshows,
conferences, publications and vertically specific direct mail campaigns.
INTELLECTUAL PROPERTY
We regard certain aspects of our internal operations, software and documentation
as proprietary, and rely on a combination of contract, copyright, trademark and
trade secret laws and other measures, including confidentiality agreements, to
protect our proprietary information. Existing copyright laws afford us only
limited protection. We believe that, because of the rapid pace of technological
change in the computer software industry, trade secret and copyright protection
is less significant than other factors such as the knowledge, ability and
experience of our employees, frequent software product enhancements and the
timeliness and quality of support services. We cannot guarantee that these
protections will be adequate or that our competitors will not independently
develop technologies that are substantially equivalent or superior to our
technology. In addition, when we license our products to customers, we provide
source code for most of our products. We also permit customers to possibly
obtain access to our other source code through a source code escrow arrangement.
This access to our source code may increase the likelihood of misappropriation
or other misuse of our intellectual property. In addition, the laws of certain
countries in which our software products are or may be licensed do not protect
our software products and intellectual property rights to the same extent as the
laws of the United States.
8
Our license agreements with our customers contain provisions designed to limit
the exposure to potential product liability claims. It is possible, however,
that the limitation of liability provisions contained in these license
agreements may not be valid as a result of future federal, state or local laws
or ordinances or unfavorable judicial decisions. Although we have not
experienced any material product liability claims to date, the license and
support of our software for use in mission critical applications creates the
risk of a claim being successfully pursued against us. Damages or injunctive
relieve resulting from such a successful claim could seriously harm our
business.
We also license key components of the solutions we offer from a third party. In
particular, we have an exclusive worldwide license from Stellent, Inc., one of
our shareholders, to sell and distribute its content management software on a
Web hosted basis.
RESEARCH AND DEVELOPMENT
Since inception, we have made substantial investments in research and software
product development. We believe 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 are essential to maintaining and increasing our competitive
position in our market. The software services market is characterized by rapid
technological change, frequent introductions of new products, changes in
customer demands and rapidly evolving industry standards. Our total research and
development expense was approximately $615,000 and $609,000 in fiscal 2001 and
2000, respectively. The Company estimates that research and development
expenditures in 2002 will be approximately $400,000.
COMPETITION
The markets for our products are intensely competitive. Many of the world's
largest software companies, including Microsoft Great Plains Software, Sage
Software and Intuit, have developed software solutions addressing our target
market. These companies are all substantially larger than we are, have greater
brand recognition and substantially more financial and other resources.
EMPLOYEES
As of March 31, 2002, we employed 62 people, including employees of our
subsidiaries. None of our employees are represented by a labor union and we
consider our employee relations to be good.
RISK FACTORS
WE HAVE NO MEANINGFUL OPERATING HISTORY ON WHICH TO EVALUATE OUR BUSINESS OR
PROSPECTS.
We were a development stage company until January 2001 when we acquired Edge
Technologies. Accordingly, we do not have a significant operating history on
which you can base an evaluation of our business and prospects. Our business
prospects must therefore be considered in the light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets, such as online commerce, using new and unproven business models. These
risks include our:
o substantial dependence on products with only limited market
acceptance;
o need to create sales and support organizations;
o competition;
o need to manage changing operations;
o customer concentration;
o reliance on strategic relationships; and
o dependence on key personnel.
We also depend heavily on the growing use of the Internet for commerce and
communication and on general economic conditions. Our management cannot be
certain that our business strategy will be successful or that it will
successfully address these risks.
9
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
For the year ended December 31, 2001, we had a net loss of $9,446,808, and since
our inception as Old AIQ in April 1996 through December 31, 2001, we have
incurred an aggregate net loss of $12,922,239. As of December 31, 2001, we had
total assets of $13,628,772. 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. Furthermore, to the extent our business strategy is
successful, we must manage the transition to higher volume operations, which
will require us to control overhead expenses and add necessary personnel.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO SUCCESSFULLY INTEGRATE OUR
RECENT ACQUISITIONS WITH OUR BUSINESS PLAN AND TO SIGNIFICANTLY GROW EACH OF
THESE BUSINESSES AS A PART OF OUR BUSINESS.
From June 2001 to October 2001, we acquired Red Wing Business Systems, Inc.,
Champion Business Systems, Inc. and FMS Marketing, Inc. and we are currently
integrating those businesses and products with ours. We may incur unanticipated
costs in the course of integrating these businesses. In addition, the
integration of Red Wing Business Systems, Champion Business Systems and FMS
Marketing with our operations involves the following risks:
o failure to develop complementary product offerings and marketing
strategies;
o failure to maintain the customer relationships of the acquired
businesses;
o failure to retain the key employees of the acquired businesses;
o failure to effectively coordinate product development efforts;
o diversion of our management's time and attention from other aspects of
our business; and
o failure to successfully manage operations that are geographically
diverse.
We cannot be sure that we will be successful in integrating and growing the
businesses and products of Red Wing Business Systems, Champion Business Systems
and FMS Marketing as part of our core business and products. If we are not, our
business, operating results and financial condition may be materially adversely
affected.
BECAUSE WE ARE DEPENDENT UPON THIRD-PARTY SYSTEMS AND STRATEGIC RELATIONSHIPS,
OUR BUSINESS MAY BE HARMED IF WE DO NOT MAINTAIN THOSE RELATIONSHIPS.
We license key elements of our services from third parties, including Stellent,
Inc. (f/k/a IntraNet Solutions, Inc.) from which we license, among other things,
its Content Management solution. Termination of these licenses would adversely
affect our business.
We believe that our success in penetrating our target markets depends in part on
our ability to develop and maintain strategic relationships with key software
vendors, distribution partners and customers. We believe these relationships are
important in order to validate our technology, facilitate broad market
acceptance of our products, and enhance our sales, marketing and distribution
capabilities. If we are unable to develop key relationships or maintain and
enhance existing relationships, we may have difficulty selling our products and
services.
WE WILL REQUIRE FUTURE FINANCINGS IN ORDER TO COMPLETE THE DEVELOPMENT OF OUR
PRODUCTS AND SERVICES AND TO IMPLEMENT OUR BUSINESS PLAN. THERE IS NO ASSURANCE
THAT SUCH FINANCINGS WILL BE AVAILABLE ON ACCEPTABLE TERMS OR EVEN AT ALL.
Further financing will be needed in order to complete development of our
products, to develop our brand and services and to otherwise implement our
business plan. Product development, brand development and other aspects of
Internet-related businesses are extremely expensive, 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, we may be forced to discontinue our
business, and 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. The continued health of the market for Internet-related
securities and other factors beyond our control will have a major impact on the
valuation of our Company when we raise capital in the future.
10
Potential fluctuations in our operating results and difficulty in predicting our
operating results may adversely affect the market price of our securities.
We expect our anticipated revenues and operating results to vary significantly
from quarter to quarter. As a result, quarter-to-quarter comparisons of our
revenues and operating results may not be meaningful. In addition, due to the
fact that we have little or no operating history with our new and unproven
technology, we may be unable to predict our future revenues or results of
operations accurately.
Our current and future expense levels are based largely on our investment plans
and estimates of future revenues and are, to a large extent, fixed. Accordingly,
we may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, and any significant shortfall in revenues relative
to its planned expenditures could have an immediate adverse effect on our
business and results of operations.
Lack of operating history and rapid growth makes it difficult for us to assess
the effect of seasonality and other factors outside our control. Nevertheless,
we expect our business to be subject to fluctuations, reflecting a combination
of various Internet-related factors.
OUR MARKETS ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO EFFECTIVELY
COMPETE.
We compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing. We face competition in the overall Internet, Corporate
Intranet and Extranet infrastructure markets. We will experience increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources.
We compete with a number of companies to provide intelligent software-based
solutions, many of which have operated services in the market for a longer
period, have greater financial resources, have established marketing
relationships with leading online software vendors, and have secured greater
presence in distribution channels.
Our business does not depend on significant amounts of proprietary rights and,
therefore, our technology does not pose a significant entry barrier to potential
competitors. Additionally, our competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements than we
can. In addition, our current and potential competitors may bundle their
products with other software or hardware, including operating systems and
browsers, in a manner that may discourage users from purchasing services and
products offered by us. Also, current and potential competitors have greater
name recognition, more extensive customer bases that could be leveraged, and
access to proprietary content. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share.
BECAUSE THE MARKETS IN WHICH WE COMPETE ARE RAPIDLY CHANGING AND HIGHLY
COMPETITIVE, OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO DEVELOP AND
INTRODUCE SUCCESSFUL NEW APPLICATIONS AND SERVICES IN A TIMELY MANNER.
The Internet, Corporate Intranet and Extranet infrastructure market is
characterized by rapid technological change, frequent new product introductions,
changes in customer requirements and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards could render our existing products obsolete. Our future
success will depend upon our ability to develop and introduce a variety of new
products and product enhancements to address the increasingly sophisticated
needs of our customers. We may be unable to develop any products on a timely
basis, or at all, and we may experience delays in releasing new products and
product enhancements. Material delays in introducing new products and
enhancements may cause our customers to forego purchases of our products and
purchase those of our competitors.
11
IF WE ARE UNABLE TO DEVELOP AND GROW OUR SALES AND SUPPORT ORGANIZATIONS, OUR
BUSINESS WILL NOT BE SUCCESSFUL.
We will need to create and substantially grow our direct and indirect sales
operations, both domestically and internationally, in order to create and
increase market awareness and sales. Our products and services will require a
sophisticated sales effort targeted at several people within our prospective
customers. Competition for qualified sales personnel is intense, and we might
not be able to hire the kind and number of sales personnel we are targeting. In
addition, we believe that our future success is dependent upon establishing
successful relationships with a variety of distribution partners, including
value added resellers. We cannot be certain that we will be able to reach
agreement with additional distribution partners on a timely basis or at all, or
that these distribution partners will devote adequate resources to selling our
products. There is also no assurance that the pricing model relating to our
Epoxy product will be accepted by our customers.
Similarly, the anticipated complexity of our products and services and the
difficulty of customizing them require highly trained customer service and
support personnel. We will need to hire staff for our customer service and
support organization. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING THE DEMAND FOR OUR PRODUCTS.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. Rapid growth will place a significant strain on our
management systems and resources. We expect that we will need to continually
improve our financial and managerial controls and reporting systems and
procedures, and will need to continue to expand, train and manage our work
force. Furthermore, we expect that we will be required to manage multiple
relationships with various customers and other third parties.
POTENTIAL ACQUISITIONS MAY CONSUME SIGNIFICANT RESOURCES.
We may continue to acquire businesses that we feel will complement or further
our business plan. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees of acquired businesses. No assurance can be
given as to our ability to consummate any acquisitions or integrate successfully
any operations, personnel, services or products that might be acquired in the
future, and our failure to do so could have a material adverse effect on our
business, financial condition and operating results.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL.
Our products and technologies are complex and we are substantially dependent
upon the continued service of its existing engineering personnel. We also expect
to continue to add other important personnel in the near future. The loss of any
of those individuals may have a material adverse impact on our business. We
intend to hire a significant number of sales, support, marketing, and research
and development personnel in calendar 2002 and beyond. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain
additional highly qualified personnel in the future. Further, some of these
individuals may be either unable to begin or continue working for us because
they may be subject to non-competition agreements with their former employers.
12
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition may
be materially adversely affected. Any steps we take to protect our intellectual
property may be inadequate, time consuming and expensive. We currently have no
patents, registered trademarks or service marks, or pending patent, trademark or
service mark applications. Without significant patent, trademark, service mark
or copyright protection, we may be vulnerable to competitors who develop
functionally equivalent products and services. We may also be subject to claims
that our products infringe on the intellectual property rights of others. Any
such claim may have a material adverse effect on our business, operating results
and financial condition.
Our success and ability to compete are substantially dependent upon our
internally developed products and services, which we intend to protect through a
combination of patent, copyright, trade secret and trademark law. We generally
enter into confidentiality or license agreements with our employees, consultants
and corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. As with any knowledge-based
product, we anticipate that policing unauthorized use of our products will be
difficult, and we cannot be certain that the steps we intend to take to prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States,
will be successful. Other businesses may also independently develop
substantially equivalent information.
OUR TECHNOLOGY MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS.
We anticipate that software product developers will be increasingly subject to
infringement claims due to growth in the number of products and competitors in
our industry, and the overlap in functionality of products in different
industries. We also believe that many of our competitors in the intelligent
applications business have filed or intend to file patent applications covering
aspects of their technology that they may claim our technology infringes. We
cannot be certain that these competitors or other third parties will not make a
claim of infringement against us with respect to our products and technology.
Any infringement claim, regardless of its merit, could be time-consuming,
expensive to defend, or require us to enter into royalty or licensing
agreements. Such royalty and licensing agreements may not be available on
commercially favorable terms, or at all. We are not currently involved in any
intellectual property litigation.
Our products and services operate in part by making copies of material available
on the Internet and other networks and making this material available to end
users. This creates the potential for claims to be made against us (either
directly or through contractual indemnification provisions with customers) for
defamation, negligence, copyright or trademark infringement, personal injury,
invasion of privacy or other legal theories based on the nature, content or
copying of these materials. These claims have been brought, and sometimes
successfully pressed, against online service providers in the past. Although we
carry general liability insurance, that insurance may not cover potential claims
of this type or may not be adequate to protect us from all liability that may be
imposed.
GOVERNMENT REGULATION OF E-COMMERCE IS INCREASING AND THERE ARE MANY
UNCERTAINTIES RELATING TO THE LAWS OF THE INTERNET.
Laws and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. Recent sessions of the United States
Congress have resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet. In addition, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, that may impose additional burdens on
companies conducting business online. The adoption or modification of laws or
regulations relating to the Internet could adversely affect our business.
13
ITEM 2. PROPERTIES
As of December 31, 2001, our corporate offices were located at 601 Carlson
Parkway, Suite 1550, Minnetonka, Minnesota 55305, which we occupied pursuant to
a sublease agreement. We occupied approximately 6,555 square feet for a monthly
sublease payment of $16,000. The sublease expired on February 28, 2002, but we
extended it for one month to facilitate a move to a new location. In March 2002
we moved our corporate offices to 5720 Smetana Drive, Suite 101, Minnetonka,
Minnesota 55343.
Also as of December 31, 2001, we subleased approximately 2,951 square feet in
Las Vegas, Nevada for $5,164 per month ($61,968 annually). The expiration date
was October 31, 2004. During January 2002, we closed down operations being
provided in our Las Vegas location. In February 2002, we entered into a
sub-lease and received from our sub-tenant an agreement to indemnify us against
claims from our sub-landlord.
We currently lease office space in Red Wing, Minnesota (Red Wing Business
Systems), Denver, Colorado (Champion Business Systems) and New Lenox, Illinois
(FMS/Harvest). We plan to consolidate all operations of the accounting
subsidiaries into one leased facility at Red Wing, Minnesota.
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 current employees of the Company.
The Denver location is approximately 11,736 square feet. Current rentals of
$17,115 per month ($205,380 annually) are required under the lease, in addition
to nominal charges for common area maintenance. The lease expires February 28,
2003.
The New Lenox location is approximately 2,124 square feet. Current rentals of
$3,000 per month ($36,000 annually) are required under the lease, in addition to
nominal charges for common area maintenance. The lease expires February 28,
2003.
We believe that our current facilities are adequate for the current level of our
activities. In the event we were to require additional facilities, we believe
that we could procure acceptable facilities.
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 business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 2001, we held our Annual Meeting of Shareholders. As of October
2, 2001, the record date for determining the shares of our stock outstanding and
entitled to vote at the meeting, there were 10,277,227 shares of Common Stock
and 365,000 shares of Series B Preferred Stock issued and outstanding. A total
of 7,212,268 shares were represented at the meeting. The following matters were
voted:
(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 7,023,093 189,175
Ronald E. Eibensteiner 6,990,551 221,717
Kenneth S. Kaufman 7,095,551 116,717
Steven R. Levine 7,095,551 116,717
D. Bradly Olah 7,023,093 189,175
Steven A. Weiss 7,095,551 116,717
14
(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 1,300,000 to 2,500,000 shares:
Shares Voted For Against Abstain Non-Vote
---------------- ------- ------- ---------
5,128,650 307,684 30,540 1,416,580
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on the Nasdaq Small Cap Market under the
symbol "AIQT." Prior to May 1, 2001, our stock traded under the symbol "METR."
As of March 28, 2002, the last sale price of our common stock as reported by
Nasdaq was $2.10 per share. The following table sets forth for the periods
indicated the range of high and low sale prices of the common stock as reported
by Nasdaq:
Bid
Period High Low
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
Quarter Ended March 31, 2000. . . . . . $3.13 $2.25
Quarter Ended June 30, 2000 . . . . . . $4.88 $2.25
Quarter Ended September 30, 2000. . . . $7.63 $4.00
Quarter Ended December 31, 2000 . . . . $6.25 $2.88
As of the March 25, 2002, there were approximately 670 record holders of our
common stock. Based on securities position listings, we believe that there are
approximately 964 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 December 1, 2001, the Company issued to a consultant a warrant to purchase
18,000 shares of common stock. The right to purchase the shares underlying the
warrant vest in four (4) installments upon completion of certain performance
criteria. The exercise price for the shares is the current market price at the
time the installments become vested. The warrant was issued as payment for
services rendered to the Company. The Company relied upon the exemption from
federal registration under Section 4(2) of the Securities Act of 1933 (the
"Securities Act"), based on its belief that the issuance did not involve a
public offering, the consultant was sophisticated in financial and business
matters and the consultant had access to information pertaining to the Company.
On October 10, 2001, the Company completed its acquisition of FMS Marketing,
Inc., an Illinois corporation doing business as "FMS/Harvest." In exchange for
the sale of all of the outstanding shares of stock of FMS/Harvest, the former
shareholders of FMS/Harvest received an aggregate of 250,000 shares of the
Company's common stock, plus cash and notes totaling $600,000. The Company
relied on the exemptions from federal registration under Section 4(2) and Rule
506 promulgated under the Securities Act, based on (i) its belief that the
transaction did not involve a public offering (ii) the transaction involved
fewer than 35 purchasers, and (iii) the Company had a reasonable basis to
believe that all of such purchasers had sufficient knowledge and sophistication,
either alone or together with a purchaser representative, to appreciate and
evaluate the risks and merits associated with their investment in the Company's
common stock.
In connection with the Company's acquisition of Champion Business Systems, Inc.,
on September 18, 2001, the Company issued an aggregate of 299,185 shares of
common stock to 21 former Champion shareholders. The Company relied on the
exemptions from registration provided by Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder, as it had a reasonable basis for concluding
that all but four of the former Champion shareholders receiving the Company's
common stock were "accredited investors," and that all of such persons had
sufficient knowledge and sophistication, either alone or together with a
purchaser representative, to appreciate and evaluate the risks and merits
associated with their investment in the Company's common stock.
16
On August 30, 2001, the Company issued to a consulting company two 5-year
warrants to purchase an aggregate of 21,593 shares of common stock, of which
7,636 shares were exercisable at $2.75 per share and 13,957 shares were
exercisable at $5.00 per share. On September 4, 2001, the Company issued to the
same consulting company an additional warrant to purchase 35,000 shares of the
Company's common stock at a price of $5.00 per share. All of the warrants were
issued as payment for services rendered by the consulting company. The Company
relied on the exemptions from registration under Sections 4(2) and 4(6) of the
Securities Act, as well as Rule 506 promulgated thereunder, as the Company had a
reasonable basis for concluding that the consultant was an accredited investor
and that the issuances did not involve a public offering.
On August 1, 2001, the Company issued 450,000 Class B Redeemable Warrants, each
representing the right to purchase one share of common stock on or before April
30, 2006, at a price of $5.50 per share, and two 5-year warrants representing
the right to purchase an aggregate of 250,000 shares of the Company's common
stock at a price of $7.50 per share. The warrants were issued as payment for
services rendered by a consultant. The Company relied on the exemptions from
registration provided by Sections 4(2) and 4(6) of the Securities Act, and Rule
506 promulgated thereunder, as the Company had a reasonable basis for concluding
that the consultant was an accredited investor.
On June 15, 2001, the Company completed a private placement of 10 units, each
unit consisting of 50,000 shares of common stock and a 5-year warrant to
purchase 30,000 shares of common stock at a price of $5.50 per share. The units
were purchased by two investors. The Company relied on the exemption from
registration provided in Sections 4(2) and 4(6) and Rule 506 under the
Securities Act, as the Company had a reasonable basis for concluding that the
purchasers were accredited investors.
On June 6, 2001, the Company completed its acquisition of all of the outstanding
capital stock of Red Wing Business Systems, Inc. In consideration for their
shares of Red Wing stock, the 27 former shareholders of Red Wing received an
aggregate of 400,000 shares of the Company's common stock, plus cash of
$1,600,000. The Company relied on the exemptions from registration provided by
Section 4(2) and Rule 506, based on (i) the Company's belief that the
transaction did not involve a public offering, (ii) the transaction involved
fewer than 35 purchasers and (iii) because all of the investors were either
accredited or otherwise had sufficient knowledge and sophistication, either
alone or together with a purchaser representative, to appreciate and evaluate
the risks and merits associated with their investment in the Company's common
stock.
On April 30, 2001, the Company completed its merger with Old AIQ. Pursuant to
the merger agreement, the shareholders of Old AIQ received an aggregate of
4,385,911 shares of the Company's common stock and 2,935,979 Class B Redeemable
Warrants, each warrant representing the right to purchase, on or before April
30, 2006, one share of the Company's common stock at a price of $5.50 per share.
As a basis for a federal exemption, the Company relied on Rule 506 under the
Securities Act, as the transaction involved fewer than 35 purchasers, excluding
those with respect to whom the Company reasonably believed to be accredited
investors, and all of such persons had sufficient knowledge and sophistication,
either alone or together with a purchaser representative, to appreciate and
evaluate the risks and merits associated with their investment in the Company's
common stock and the Class B Warrants.
17
Upon the closing of the merger with Old AIQ, the Company issued to 6 persons
warrants representing the aggregate right to purchase 1,500,000 shares of the
Company's common stock, 1 million of which shares were purchasable at a price of
$5.50 per share and the remaining 500,000 shares purchasable at a price of $3.00
per share. The warrants were issued as payment for financial advisory services
rendered to the Company in connection with the merger. The Company relied on the
exemptions from federal registration under Sections 4(2) and 4(6) of the
Securities Act, as well as Rule 506 promulgated thereunder, as the Company had a
reasonable basis to believe that all of the persons to whom warrants were issued
were accredited investors and because the issuances did not involve a public
offering. During August 2001, the $5.50 warrants were exchanged by each of the
holders for 1 million of Class B Redeemable Warrants. In connection with the
exchange, the Company also relied on the exemptions from registration under
Sections 4(2), 4(6) and Rule 506.
On March 8, 2001, the Company completed a private placement to five accredited
investors. In the offering, the Company sold approximately 123,000 units of its
securities, at a price of $15 per unit, for total proceeds of $1.9 million. Each
unit consisted of 5 shares of common stock and 3 common stock purchase warrants,
exercisable for 5 years at a price of $5.50 per share. The Company relied on the
exemptions from federal registration provided by Sections 4(2) and 4(6) and Rule
506 under the Securities Act based on its belief that the sales did not involve
a public offering, the Company had a reasonable basis to conclude that all of
the purchasers were accredited investors, and all of the purchasers had such
knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of their investment. The Company used
$1.1 million of the proceeds to purchase a 10 percent interest in Old AIQ and
the remainder for working capital.
Pursuant to its 1999 Stock Option Plan and 2001 Employee Stock Option Plan, the
Company issued to various employees options to purchase shares of common stock.
All of the options were issued in reliance on the exemption from registration
under Section 4(2) of the Securities Act, based on the Company's belief that
none of the issuances involved a public offering and because all of the
employees to whom the options were issued had access to financial and business
information concerning the Company. The table below summarizes the unregistered
option grants made during 2001.
Vesting
Exercise Price ------------------------------
Grant Date No. of Shares ($) Expiration Date Date No. of Shares
----------- ------------- -------------- --------------- ----------- -------------
05/15/01 2,000 4.70 05/15/02 05/15/01 2,000
05/23/01 5,000 4.60 05/23/11 08/23/01 1,000
05/23/02 1,333
05/23/03 1,333
05/23/04 1,334
07/11/01 5,000 5.25 07/11/11 07/11/02 1,250
07/11/03 1,250
07/11/04 1,250
07/11/05 1,250
07/11/01 5,000 5.25 07/11/11 07/11/02 1,250
07/11/03 1,250
07/11/04 1,250
07/11/05 1,250
07/11/01 10,000 5.25 07/11/11 07/11/02 2,500
07/11/03 2,500
07/11/04 2,500
07/11/05 2,500
07/11/01 10,000 5.25 07/11/11 07/11/02 2,500
07/11/03 2,500
07/11/04 2,500
07/11/05 2,500
07/11/01 10,000 5.25 07/11/11 07/11/02 2,500
07/11/03 2,500
07/11/04 2,500
07/11/05 2,500
07/26/01 250,000 5.00 07/26/11 07/26/01 50,000
11/27/01 200,000
07/26/01 300,000 5.00 07/26/11 07/26/01 60,000
05/01/02 60,000
05/01/03 60,000
05/01/04 60,000
05/01/05 60,000
07/27/01 1,000 2.75 07/27/02 07/27/01 1,000
07/27/01 75,000 5.50 08/02/11 08/02/02 18,750
08/02/03 18,750
08/02/04 18,750
08/02/05 18,750
08/02/01 100,000 5.25 08/06/11 08/06/02 33,333
08/06/03 33,333
08/06/04 33,334
08/02/01 10,000 5.25 08/02/11 08/11/02 2,500
08/11/03 2,500
08/11/04 2,500
08/11/05 2,500
18
Vesting
Exercise Price ------------------------------
Grant Date No. of Shares ($) Expiration Date Date No. of Shares
----------- ------------- -------------- --------------- ----------- -------------
08/29/01 4,000 5.30 08/29/11 08/29/02 1,000
08/29/03 1,000
08/29/04 1,000
08/29/05 1,000
09/01/01 350,000 5.20 09/01/11 09/01/01 9,722
10/01/01 9,722
11/01/01 9,722
12/01/01 9,722
01/01/02 9,722
02/01/02 9,722
03/01/02 9,722
04/01/02 9,722
05/01/02 9,722
06/01/02 9,722
07/01/02 9,722
08/01/02 9,722
09/01/02 116,668
09/01/03 116,668
09/04/01 40,000 5.01 09/04/11 09/04/02 10,000
09/04/03 10,000
09/04/04 10,000
09/04/05 10,000
09/04/01 150,000 5.01 09/04/11 09/04/02 50,000
09/04/03 50,000
09/04/04 50,000
09/14/01 15,000 4.66 09/14/11 09/14/01 3,750
09/14/02 3,750
09/14/03 3,750
09/14/04 3,750
09/14/01 15,000 4.66 09/14/11 09/14/01 3,750
09/14/02 3,750
09/14/03 3,750
09/14/04 3,750
09/14/01 15,000 4.66 09/14/11 09/14/01 3,750
09/14/02 3,750
09/14/03 3,750
09/14/04 3,750
09/14/01 45,000 4.66 09/14/11 09/14/01 11,250
09/14/02 11,250
09/14/03 11,250
09/14/04 11,250
10/31/01 2,500 2.75 04/30/02 10/31/02 2,500
10/31/01 1,250 2.75 04/30/02 10/31/02 1,250
11/14/01 25,000 1.00 01/01/11 11/14/01 25,000
11/27/01 60,000 1.00 12/01/06 11/27/01 60,000
12/18/01 50,000 4.05 12/18/11 12/18/02 12,500
12/18/03 12,500
12/18/04 12,500
12/18/05 12,500
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data with respect to the statement of operations data for
the year ended December 31, 2001 and the balance sheet data as of December 31,
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 sheet 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. The statement of
operations data for the year ended December 31, 1997 and the balance sheet data
as of December 31, 1997, are derived from our unaudited financial statements. We
believe the unaudited financial statements include all normal recurring
adjustments that we consider necessary for a fair presentation of our operating
results.
19
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share information)
For the Years Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenue $ 2,711 $ -- $ -- $ -- $ --
Loss from operations (9,525) (2,806) (414) (12) (8)
Other income (expense) 78 (34) (48) (132) 16
Net income (loss) $ (9,447) $ (2,840) $ (462) $ (144) 8
Basic and diluted net income
(loss) per common share $ (1.15) $ (1.65) $ (1.92) $ (0.79) $ 0.04
Basic and diluted weighted
average common shares
outstanding 8,210 1,718 240 184 228
BALANCE SHEET DATA:
At December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Cash and equivalents $ 1,765 $ 1,349 $ 410 $ 39 $ 63
Total assets 13,629 2,672 474 72 422
Total liabilities 5,621 790 289 242 476
Shareholders' equity (deficit) 8,007 1,882 185 (170) (54)
Common shares outstanding 10,731 3,836 374 152 228
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."
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.
We are engaged in the design, development, marketing and support of accounting
software and eBusiness services to the small to medium-sized business market,
known as the "SME market." We provide solutions to address existing legacy
applications, general business requirements and select vertical markets.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000.
REVENUES
Revenues were $2,710,861 for 2001 as compared to no revenue for 2000. Our
revenues are as follows: Active IQ had software and miscellaneous incomes of
$279,444, the Epoxy Network generated $183,356, and $2,248,061 from Red Wing,
Champion and FMS/Harvest. The FMS/Harvest merger closed on October 10, 2001.
During 2000, our company was in the development stage and had not yet generated
any revenue.
20
Our ability to continue our present operations and successfully implement our
expansion plans is contingent upon our ability to increase our revenues and
ultimately attain and sustain profitable operations. Without additional
financing, the cash generated from our current operations will not be adequate
to fund operations and service our indebtedness during the next year of
operations.
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 $595,080. There were no costs of goods sold in 2000.
Selling, general and administrative expenses were $7,809,416 for 2001 as
compared to $1,978,697 for 2000. The $5,830,719 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 $3,161,492 as compared to $112,544
for 2000. Depreciation and amortization expense of property, equipment and other
intangibles was $192,075 and goodwill and other acquisition related intangible
amortization expense was $2,969,417. 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. For the year 2002 and beyond, goodwill is
evaluated on a yearly basis to determine if an impairment charge is necessary.
Product development expenses for 2001 were $614,803 as compared to $609,344 for
2000. The $5,459 increase in product development expenses was due to acquisition
related expenses.
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 income and interest
expense. Interest income for 2001 was $163,834 as compared to $7,500 for 2000.
This income represents interest earned on our short-term investments. The
Company expects interest income to decrease in the future as cash is used to
fund operations and for investments in infrastructure.
Interest expense for 2001 was $85,356 as compared to $41,974 for 2000. This
$43,382 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. The Company expects interest expense to remain consistent over the next
year.
FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999.
REVENUES
During 2000 and 1999, our company was in the development stage and had not yet
generated any revenue.
COSTS AND EXPENSES
During 2000 and 1999, our company was in the development stage and had not yet
generated any costs of goods.
Selling, general and administrative expenses were $1,978,697 for 2000 as
compared to $393,149 for 1999. The $1,585,548 increase in selling, general and
administrative expenses was primarily due to the opening of a corporate location
in Minneapolis, Minnesota.
21
Depreciation and amortization for 2000 was $112,544 as compared to $20,833 for
1999 of property, equipment and other intangibles.
Product development expenses for 2000 were $609,344. There were no costs in
1999. The Company opened an office located in Boston, Massachusetts, and began
to hire a staff of software engineers.
The Company's other income and expense consists of interest income and interest
expense. Interest income for 2000 was $7,500. No interest income was earned in
1999. This income represents interest earned on our short-term investments.
Interest expense for 2000 was $41,974 as compared to $24,445 for 1999. This
expense relates primarily to the $200,000 credit facility with a bank.
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 $3,843,954 for 2001 as compared to net cash used by
operating activities of $2,236,896 for 2000 and $292,736 for 1999.
The Company had a working capital deficit of $2,679,454 at December 31, 2001,
compared to working capital of $643,505 on December 31, 2000. Cash and
equivalents were $1,764,893 at December 31, 2001, representing an increase of
$415,436 from the cash and equivalents of $1,349,457 at December 31, 2000. The
Company's principal commitments consists of payments to the former shareholders
at Red Wing Business Systems, Champion Business Systems and FMS/Harvest. The
remaining notes payable to Red Wing of $800,000 (two payments of $400,000 each)
are due June 2002 and December 2002. In January 2002, we paid the first payment
of $250,000 to Champion and the remaining notes payable of $750,000 (three
payments of $250,000 each) are due May 2002, September 2002 and January 2003.
The remaining notes payable to FMS/Harvest of $300,000 are due April 2002.
Although the Company has no material commitments for capital expenditures, it
anticipates continued capital expenditures consistent with its anticipated
growth in operations, infrastructure and personnel.
In January 2001, the Company sold 400,000 shares of common stock for net
proceeds of $1,100,000 as part of the Meteor merger.
On January 16, 2001, the Company completed our merger with privately held Edge
Technologies Incorporated, the creator of a fully integrated eBusiness website
service called Account Wizard. The merger was accounted for under the purchase
method of accounting with the operations of Edge included in our Company's
financial statements as of that date. The former stockholders of Edge received
$300,000 in cash and 325,000 shares of our 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 Technologies received the
final consideration as specified in the merger agreement of 225,000 shares of
our common stock on April 30, 2001, and $400,000 in cash on May 2, 2001, in
settlement of the earnout provisions.
With the completion of the Meteor merger and acquisition on April 30, 2001,
(less closing fees), the Company received approximately $3,537,773 in cash and a
secured promissory note of $500,000 due January 30, 2002. The promissory note
accrues interest at a rate of 10% per annum, compounded annually. The note is
secured by a stock pledge agreement dated April 27, 2001, by SEDCO INC.,
pledging 1,500,000 shares of common stock of Capco Energy, Inc. We received a
principal and interest payment of $250,000 on February 28, 2002, the Company
extended the term of the note. The remaining principal and interest balance of
approximately $295,000 is due April 15, 2002.
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-to-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 Sellers received an
22
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 is 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.
In June 2001, the Company raised cash proceeds of $1,500,000 from the private
placement of 10 Units at a purchase price of $150,000 per Unit. Each Unit
consisted of 50,000 shares of the Company's common stock, par value $.01 per
share, and one five-year warrant to purchase 30,000 shares of the Company's
common stock with an exercise price of $5.50.
In December 2000, the Company 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. On July 30, 2001, the director delivered to the Company
a cash payment in the amount of $75,000 and a two-month promissory note in the
principal amount of $200,000. Interest accrues on the principal balance of the
prime rate as of the date of the note. The note has been extended due to market
conditions and as of December 31, 2001, remains unpaid.
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 to medium-sized
businesses. The merger was accounted for under the purchase method of accounting
with the operations of Champion included in the Company's consolidation as of
that date.
The former shareholders of Champion are divided into two groups: "Minority
Shareholders" and "Majority 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 an 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.
On October 10, 2001, the Company completed its acquisition of FMS Marketing,
Inc. ("FMS/Harvest"), an Illinois corporation. Pursuant to a Stock Purchase
Agreement (the "Agreement"), the Company purchased all of the outstanding
capital stock from the shareholders of FMS/Harvest (the "FMS Sellers"). The FMS
Sellers received an aggregate of 250,000 shares of the Company's common stock
and cash in the aggregate of $600,000, of which $300,000 was delivered at the
closing. Under the Agreement, the Company is obligated to pay the remaining
$300,000 of cash in six months of the closing date. As security for the
Company's obligations to make the remaining cash payment, the Company agreed to
grant a security interest in the assets of FMS/Harvest to the FMS Sellers.
The Company anticipates that it will continue to experience growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of the Company's cash resources. The Company believes
that it will require further sources of liquidity to fund its operations and the
Company is seeking to raise additional capital. There can be no assurance that
additional capital will be available on terms acceptable to the Company or on
any terms whatsoever. See Note 1 Nature of Business regarding our going concern
opinion.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Statements Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 "Business Combinations." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria
to recognize intangible assets separately from goodwill. The requirements of
SFAS No. 141 are effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. The Company applied this
new accounting standard to business combinations that occurred after June 30,
2001.
In June 2001, the FASB issued 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. In the future, 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. Pursuant to SFAS No. 142, the Company is not amortizing the
goodwill recorded on business combinations that occurred after June 30, 2001.
Amortization expense for goodwill was $2,650,302, $0 and $0 for the years ended
December 31, 2001, 2000 and 1999, respectively. As noted, amortization will not
be recorded in the future beginning with the year ending December 31, 2002.
In June 2001, the FASB issued SFAS No. 143. "Accounting for Asset Retirement
Obligations." SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The Company believes the adoption of SFAS No. 143 will not have a
material effect on the Company's consolidated financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121. SFAS No.
144 primarily addresses significant issues relating to the implementation of
SFAS No. 121 and develops a single accounting model for long-lived assets to be
disposed of, whether primarily held, used or newly acquired. The provisions of
SFAS No. 144 will be effective for fiscal years beginning after December 15,
2001. The provisions of SFAS No. 144 generally are to be applied prospectively.
The Company believes the adoption of SFAS No. 143 will not have a material
effect on the Company's consolidated financial position or results of
operations. During the years ended December 31, 2001, 2000 and 1999, the Company
recorded charges of $0, $100,000, and $0, to impairment of long-lived assets and
is included in loss on disposal of assets on the consolidated statements 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 the years ended
December 31, 2001, 2000 and 1999, the Company did not record any impairment
losses related to goodwill and other intangibles related to acquired businesses.
Long-Lived Assets
The Company's long-lived assets include property, equipment and acquired
software developed. At December 31, 2001, the Company had net property and
equipment and acquired software developed of $1,453,896, which represents
approximately 11% of the Company's total assets. Our business acquisitions
during the year ended December 31, 2001 resulted in acquired software developed
to be recorded. Amortization of these costs is done on a straight-line method
over the estimated useful life of two years. We continue to evaluate the
recoverability of acquired software developed. The estimated fair value of these
long-lived assets is dependent on the Company's future performance. In assessing
for potential impairment for these long-lived assets, the Company considers
future performance. If these forecasts are not met, the Company may have to
record an impairment charge not previously recognized, which may be material.
During the years ended December 31, 2001, 2000 and 1999, the Company recorded
impairment losses related to long-lived assets of $0, $100,000 and $0,
respectively.
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.
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,
2001 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.
FOREIGN EXCHANGE EXPOSURE
We receive Canadian funds for the sale of certain software products. A 5%
change in the foreign exchange rate would not have a material effect on our
financial position, results of operation or cash flows.
23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
Page
----
Report of Virchow, Krause & Company, LLP 25
Report of Arthur Andersen LLP 25A
Consolidated Balance Sheets as of December 31, 2001 and 2000 26
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 27
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 32
Notes to Consolidated Financial Statements 33
24
INDEPENDENT AUDITORS' REPORT
To Stockholders and Board of Directors
Active IQ Technologies, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of Active IQ
Technologies, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Active
IQ Technologies, Inc. and subsidiaries as of December 31, 2001, and the results
of their operations and their cash flows for the year 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, 2001, 2000 and 1999 and had an accumulated deficit and
negative working capital at December 31, 2001. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters also are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Virchow, Krause & Company, LLP
Minneapolis, Minnesota
March 7, 2002
25
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
25A
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,764,893 $ 1,349,457
Accounts receivable, net 284,451 --
Note receivable 500,000 --
Inventories 60,121 --
Prepaid expenses 24,985 57,285
------------ -----------
Total current assets 2,634,450 1,406,742
PROPERTY and EQUIPMENT, net 520,489 549,116
ACQUIRED SOFTWARE DEVELOPED, net 933,407 --
PREPAID ROYALTIES 1,500,000 500,001
OTHER ASSETS, net 74,950 216,072
GOODWILL, net 5,916,924 --
OTHER INTANGIBLES, net 2,048,552 --
------------ -----------
$ 13,628,772 $ 2,671,931
============ ===========
LIABILITIES and SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ -- $ 97,529
Current portion notes payable - shareholders 2,791,521 --
Accounts payable 443,212 257,509
Deferred revenue 1,481,750 306,000
Accrued expenses 597,421 83,141
Current portion of capital lease obligations -- 19,058
------------ -----------
Total current liabilities 5,313,904 763,237
NOTES PAYABLE
SHAREHOLDERS AND CAPITAL LEASE OBLIGATIONS,
less current portion 307,551 27,158
------------ -----------
Total liabilities 5,621,455 790,395
------------ -----------
COMMITMENTS and CONTINGENCIES
SHAREHOLDERS' EQUITY
Series B Convertible Preferred Stock,
$1.00 par value, 365,000 shares
authorized, issued and outstanding,
liquidation preference of $730,000 365,000 --
Common stock, $.01 par value, 40,000,000
Shares authorized; 10,731,345 and
3,835,911 shares issued and outstanding 107,313 38,359
Additional paid-in capital 19,335,027 5,633,040
Stock subscription receivable (200,000) (312,500)
Deferred compensation (311,701) (172,813)
Warrants 1,633,917 170,881
Accumulated deficit (12,922,239) (3,475,431)
------------ -----------
Total shareholders' equity 8,007,317 1,881,536
------------ -----------
$ 13,628,772 $ 2,671,931
============ ===========
See accompanying notes to consolidated financial statements
26
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2001 2000 1999
---------- ---------- ----------
REVENUES $2,710,861 $ -- $ --
---------- ---------- ----------
OPERATING EXPENSES:
Costs of goods sold 595,080 -- --
Selling, general and administrative 7,809,416 1,978,697 393,149
Depreciation and amortization 3,161,492 112,544 20,833
Product development 614,803 609,344 --
Loss on disposal of assets 55,356 105,360 --
---------- ---------- ----------
Total operating expenses 12,236,147 2,805,945 413,982
---------- ---------- ----------
LOSS FROM OPERATIONS (9,525,286) (2,805,945) (413,982)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and dividend income 163,834 7,500 --
Interest expense (85,356) (41,974) (24,445)
Loss on available-for-sale securities -- -- (23,554)
---------- ---------- ----------
Total other income (expense) 78,478 (34,474) (47,999)
---------- ---------- ----------
NET LOSS $(9,446,808) $(2,840,419) $ (461,981)
========== ========== ==========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (1.15) $ (1.65) $ (1.92)
========== ========== ==========
BASIC AND DILUTED WEIGHTED
AVERAGE OUTSTANDING SHARES 8,210,326 1,717,731 240,394
========== ========== ==========
See accompanying notes to consolidated financial statements
27
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Preferred Additional Stock Deferred
stock stock paid-in subscription compen-
shares Amount shares Amount capital receivable sation
---------- --------- --------- -------- ------------ ------------- ----------
BALANCE, December 31, 1998 152,000 $ 1,520 -- $ -- $ 1,480 $ -- $ --
Issuance of common stock in May 1999 at
$.75 per share in exchange for
intellectual property 83,333 833 -- -- 61,667 -- --
Capital contribution from shareholders
in August 1999 -- -- -- -- 47,180 -- --
Issuance of common stock in August
through September 1999 at $1.50
per share 88,266 883 -- -- 131,517 -- --
Issuance of common stock in
October 1999 for services at $1.50
per share 27,027 270 -- -- 40,271 -- --
Issuance of common stock in October
and November 1999 at $37.50
per share 23,000 230 -- -- 862,270 (328,750) --
Unrealized loss on available-for-
sale securities -- -- -- -- -- -- --
Net loss -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- --
---------- --------- -------- -------- ------------ ------------ ----------
BALANCE, December 31, 1999 373,626 3,736 -- -- 1,144,385 (328,750) --
Issuance of common stock in March
2000 at $37.50 per share 4,667 47 -- -- 174,953 -- --
Issuance of warrants to purchase common
stock at $1.00 per share in June 2000
in payment of legal fees -- -- -- -- -- -- --
Issuance of common stock in June 2000
at $.38 per share (net of offering
costs of $10,000) 1,856,634 18,567 -- -- 677,545 -- --
Repayment of stock
subscription receivable -- -- -- -- -- 16,250 --
Conversion of accounts payable to
common stock in June 2000 at
$.38 per share 216,216 2,162 -- -- 78,919 -- --
Issuance of options to purchase 60,000
shares at an exercise price of $1.00
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 -- (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 -- -- -- -- -- -- 54,687
Net loss -- -- -- -- -- -- --
---------- --------- -------- -------- ------------ ------------ ----------
BALANCE, December 31, 2000 3,835,911 38,359 -- -- 5,633,040 (312,500) (172,813)
28
Common Preferred Additional Stock Deferred
stock stock paid-in subscription compen-
shares Amount shares Amount capital receivable sation
---------- --------- --------- -------- ------------ ------------- ----------
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) 312,500 --
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 (200,000) --
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 common 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 -- (817,169)
Deferred compensation
expense -- -- -- -- -- -- 678,281
Net loss -- -- -- -- -- -- --
---------- --------- -------- -------- ------------ ------------ ----------
BALANCE, December 31, 2001 10,731,345 $ 107,313 365,000 $365,000 $ 19,335,027 $ (200,000) $ (311,701)
========== ========= ======== ======== ============ ============ ==========
29
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated
other Compre-
Accumulated comprehensive hensive
Warrants deficit income (loss) Total loss
------------ ------------ ------------- ------------ ------------
BALANCE, December 31, 1998 $ -- $ (173,031) $ 218 $ (169,813) $
Issuance of common stock in May 1999 at
$.75 per share in exchange for
intellectual property -- -- -- 62,500
Capital contribution from shareholders in
August 1999 -- -- -- 47,180
Issuance of common stock in August
through September 1999 at $1.50
per share -- -- -- 132,400
Issuance of common stock in
October 1999 for services at $1.50
per share -- -- -- 40,541
Issuance of common stock in October
and November 1999 at $37.50
per share -- -- -- 533,750
Unrealized loss on available-for-
sale securities -- -- (218) (218) (218)
Net loss -- (461,981) -- (461,981) (461,981)
------------
Comprehensive loss -- -- -- -- $ (462,199)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 -- (635,012) -- 184,359
Issuance of common stock in March 2000
at $37.50 per share -- -- -- 175,000
Issuance of warrants to purchase common
stock at $1.00 per share in June 2000 in
payment of legal fees 22,682 -- -- 22,682
Issuance of common stock in June 2000
at $.38 per share (net of offering costs
of $10,000) -- -- -- 696,112
Repayment of stock
subscription receivable -- -- -- 16,250
Conversion of accounts payable to
common stock in June 2000 at
$.38 per share -- -- -- 81,081
Issuance of options to purchase 60,000 shares
at an exercise price of $1.00 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 -- -- -- --
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
Net loss -- (2,840,419) -- (2,840,419)
------------ ------------ ------------ ------------
BALANCE, December 31, 2000 170,881 (3,475,431) -- 1,881,536
30
Accumulated
other Compre-
Accumulated comprehensive hensive
Warrants deficit income (loss) Total loss
------------ ------------ ------------- ------------ ------------
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 -- -- -- --
Issuance of common stock
in June 2001 for acquisition
of Red Wing Business Systems -- -- -- 1,778,000
Issuance of common stock
in June 2001 at $3.00 per
share net of $75,000 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 -- -- -- 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 common 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 -- -- -- --
Deferred compensation
expense -- -- -- 678,281
Net loss -- (9,446,808) (9,446,808)
------------ ------------ ------------ ------------
BALANCE, December 31, 2001 $ 1,633,917 $(12,922,239) $ -- $ 8,007,317
============ ============ ============ ============
See accompanying notes to consolidated financial statements
31
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss $(9,446,808) $(2,840,419) $ (461,981)
Adjustments to reconcile net loss to cash
flows from operating activities:
Depreciation and amortization 3,161,492 112,544 20,833
Realized loss on sale of available-for-sale
Securities -- -- 23,554
Deferred compensation expense 678,281 54,687 --
Loss on disposal of assets 55,356 105,360 --
Issuance of warrants, options and common stock for services 1,436,392 320,000 40,541
Issuance of options in lieu of severance -- 25,800 --
Amortization of original issue discount 66,273 14,250 --
Amortization of acquired software developed 187,253 -- --
Forgiveness of note payable (63,677) -- --
Changes in operating assets and liabilities:
Accounts receivable, net (164,287) -- --
Inventories 40,183 -- --
Prepaid expenses 26,155 20,715 --
Prepaid royalties -- (150,000) --
Other assets 175,084 (261,028) (4,988)
Accounts payable 53,219 272,767 88,592
Deferred revenue (303,840) -- --
Accrued expenses 254,970 88,428 713
----------- ----------- -----------
Net cash used in operating activities (3,843,954) (2,236,896) (292,736)
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities -- -- 1,750
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 (134,026) (267,103) (17,092)
----------- ----------- -----------
Net cash used in investing activities (2,307,248) (267,103) (15,342)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net decrease on bank line of credit (277,381) (102,471) (41,827)
Payments on capital lease obligations (46,216) -- --
Payments on long-term debt (534,672) -- --
Common stock repurchased (410,321) -- --
Cash proceeds from issuance of common stock 6,205,273 3,191,010 666,150
Cash proceeds from exercise of options 1,629,955 -- --
Cash proceeds from short-term shareholder note payable -- 355,000 55,000
----------- ----------- -----------
Net cash provided by financing activities 6,566,638 3,443,539 679,323
----------- ----------- -----------
INCREASE IN CASH and EQUIVALENTS 415,436 939,540 371,245
CASH AND EQUIVALENTS, beginning of period 1,349,457 409,917 38,672
----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 1,764,893 $ 1,349,457 $ 409,917
=========== =========== ===========
See accompanying notes to consolidated financial statements
32
ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Active IQ Technologies, Inc. ("Active IQ" or the "Company") provides accounting
software and eBusiness services solutions to the small to medium-sized business
market, known as the "SME market." The Company's solutions address existing
legacy applications, general business requirements and select vertical markets.
Active IQ offers traditional accounting and financial management software
solutions through Red Wing Business Systems, Inc., Champion Business Systems,
Inc. and FMS Marketing, Inc. (which does business as FMS/Harvestand as of
December 31, 2001, we merged FMS/Harvest into Red Wing), its recently-acquired
and wholly-owned subsidiaries. In addition to traditional accounting and
financial management software solutions, the Company offers eBusiness
applications and software solutions as part of its "Epoxy Network." The Epoxy
Network offers an Internet merchandising system called "Storefront" and a tool
for managing customer information named "Account Management." Through an
exclusive worldwide-hosted licensing agreement with Stellent, Inc., Active IQ
also develops hosted content management solutions in selected vertical markets
using Stellent's Content Management software.
We were 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 closed
a triangular reverse merger transaction whereby Old AIQ merged with and into the
Company 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 2 - 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 21, 2001, 2000 and 1999, the Company incurred net
losses of $9,446,808, $2,840,419 and $461,981, respectively. At December 31,
2001, the Company had an accumulated deficit of $12,922,239 and a negative
working capital of $2,679,454. 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. Management anticipates that the impact of the actions listed below,
will generate sufficient cash flows to pay current liabilities, long-term debt
and fund the Company's future operations:
- Continued reduction of operating expenses by controlling
payroll and other general and administrative expenses.
- Solicit additional equity investment in the Company.
- Continue to expand software services for the small to
medium-sized business market and develop and offer the
Company's hosted software solutions using our exclusive
worldwide license agreement we entered into in December 2001
with Stellent, Inc.
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.
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.
33
ACCOUNTS RECEIVABLE
The Company provides an allowance for uncollectible accounts on accounts
receivable. The allowance for uncollectible accounts was $55,000 and $0 at
December 31, 2001 and 2000, respectively. The Company believes all accounts
receivable in excess of the allowance are fully collectible. If accounts
receivable in excess of the provided allowance are determined uncollectible,
they are charged to expense in the year that determination is made. The Company
extends unsecured credit to customers in the normal course of business.
INVENTORIES
Inventories 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.
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
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
Effective January 1, 1999, the Company implemented 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,
2001, 2000 and 1999, the Company expensed all initial software costs as research
and development expense since they were projects 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 Business, Inc., the
Champion Business Systems, Inc. and FMS Marketing, Inc. acquisitions. The
Company has capitalized 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. Amortization was $187,253
and $0 for the years ended December 31, 2001 and 2000.
PREPAID ROYALTIES
The Company has a software license agreement with Stellent, Inc., a shareholder
of the Company, which required advance royalty payments and certain minimum
royalty fee. The prepaid royalties at December 31, 2001 of $1,500,000 relates to
minimum fees required under the software license agreement that was entered into
on December 28, 2001. See note 6 (related party transactions) related to prepaid
royalties recorded at December 31, 2000.
GOODWILL
Goodwill recorded on the Edge Technologies and Red Wing Business Systems, Inc.
business combination (see Note 2) represents the excess of acquisition costs
over the fair value of identifiable net assets acquired before July 1, 2001 and
is being amortized using the straight-line method over two years. The carrying
value of goodwill is reviewed if the facts and circumstances suggest that it may
be impaired. If the review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the assets acquired over the
remaining amortization period, the Company's carrying value of goodwill is
reduced by the estimated shortfall of cash flows.
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. In the future, 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. Impairment will be reviewed on a periodic basis based on its
fair value. The Company recorded approximately $1,562,000 and $683,000 of
goodwill related to the Champion Business Systems, Inc. and FMS Marketing, Inc.
business combinations that occurred after June 30, 2001, respectively (see Note
2). Pursuant to SFAS No. 142, the Company is not amortizing the goodwill
recorded related to these business combinations. Accumulated amortization on all
goodwill was $2,650,302 and $0 at December 31, 2001 and 2000, respectively.
OTHER INTANGIBLES AND ACQUIRED SOFTWARE DEVELOPED
As noted in Note 2, the Company recorded other intangibles assets related to the
Champion Business Systems, Inc. and FMS Marketing, Inc. business combinations.
The intangible assets relate to customer relationships, acquired software
developed and noncompete agreements. Other intangible assets are being amortized
over two years on a straight line basis. Accumulated amortization at December
31, 2001 and 2000 was $308,697 and $0, respectively.
The Company does not expect to record an impairment charge based on SFAS No.
142. However, there can be no assurance that at the time the review of all
intangible assets a material impairment charge will not be recorded.
35
AVAILABLE-FOR-SALE SECURITIES
During the year ended December 31, 1999, the Company sold certain
available-for-sale securities, which consisted of publicly-traded equity
securities. For purposes of determining gross realized losses, the cost of
available-for-sale securities is based on specific identification. Proceeds from
the sales of these securities totaled $1,750 for the year ended December 31,
1999. Gross realized losses were $23,554 for the year ended December 31, 1999.
SEGMENT REPORTING
The Company sells software in the United States within the agricultural and farm
industry, providing similar products to similar customers. The software packages
also possess similar pricing structures, resulting in similar long-term expected
financial performance characteristics. Management believes that the Company
meets the criteria for aggregating its operating segments into a single
reporting segment.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company currently derives revenues from monthly subscribers of the Epoxy
Network and through sales of accounting and financial management software and
services of its subsidiaries. Epoxy Network subscription revenue is recognized
monthly after the customer accepts the license agreement and the Company
verifies that the customer has a version of software it interfaces with. After
the initial period of set up and configuration, customers are invoiced at the
beginning of each month for all services subscribed to.
The Company, through its subsidiaries of Red Wing Business Systems and Champion
Business Systems, recognizes the revenues derived from software 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, 2001, deferred revenue was $1,481,750. See
note 6 (related party transactions) related to deferred revenue recorded at
December 31, 2000.
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
$258,929, $54,045 and $0 for the years ended December 31, 2001, 2000 and 1999,
respectively, and are included in selling, general and administrative expenses
in the consolidated statements 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 at fair value at the date of grant. Required pro forma disclosures of
compensation expense determined under the fair value method of SFAS No. 123,
"Accounting for Stock-Based Compensation," are presented in Note 7. Options and
warrants issued to nonemployees are recorded at fair value, as required by SFAS
No. 123, using the Black Scholes model.
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 capital lease obligations and
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 antidilutive for all periods presented. Total 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, and options and warrants outstanding at December 31, 1999
were 46,997 and 10,000, respectively.
34
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.
The Company has recorded a full valuation allowance against the net deferred tax
asset due to the uncertainty of realizing the related benefits.
DERIVATIVES
On January 1, 1999, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded on the
balance sheet at fair value. As the Company does not currently engage or plan to
engage in derivative or hedging activities, the adoption of SFAS No. 133 had no
impact to the Company's results of operations, financial position or cash flows.
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 June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 "Business Combinations." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria
to recognize intangible assets separately from goodwill. The requirements of
SFAS No. 141 are effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. The Company applied this
new accounting standard to business combinations that occurred after June 30,
2001.
In June 2001, the FASB issued SFAS No. 143. "Accounting for Asset Retirement
Obligations." SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The Company believes the adoption of SFAS No. 143 will not have a
material effect on the Company's consolidated financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121. SFAS No.
144 primarily addresses significant issues relating to the implementation of
SFAS No. 121 and develops a single accounting model for long-lived assets to be
disposed of, whether primarily held, used or newly acquired. The provisions of
SFAS No. 144 will be effective for fiscal years beginning after December 15,
2001. The provisions of SFAS No. 144 generally are to be applied prospectively.
The Company is evaluating the adoption of SFAS No. 143. During the years ended
December 31, 2001, 2000 and 1999, the Company recorded charges of $0, $100,000,
and $0, related to impairment of long-lived assets.
36
NOTE 2 - 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 earnout 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. The Company is amortizing the acquired goodwill on a straight-line
basis over 18 months. (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 INDUSTIRES, 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 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 Reincorporation
Merger). The surviving corporation in the Reincorporation Merger was renamed
Active IQ Technologies, Inc., a Minnesota corporation. Meteor's shareholders
approved both the Merger and the Reincorporation 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 reincorporation 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 Small Cap 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 is 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. The Company is amortizing the acquired goodwill and
other intangibles on a straight-line basis over a two-year period. (See the
table below for a condensed balance sheet summarizing the amounts assigned to
assets acquired and liabilities assumed at the date of combination.)
37
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 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
$1,318,700, $200,000 and $495,000, respectively. Other intangibles are being
amortized on a straight-line basis over a two-year period and goodwill related
to this acquisition has not been amortized (See Note 1). The amount allocated to
goodwill is expected to be deductible for tax purposes. (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
primarily users 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. Other intangibles are being amortized
on a straight-line basis over a two-year period and goodwill related to this
acquisition has not been amortized (See Note 1). The amount allocated to
goodwill is expected to be deductible for tax purposes. (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.
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 $ 0 $ 3,538,000 $ 171,000 $ 91,000 $ 11,000
Property and equipment 0 0 58,000 25,000 2,000
Note receivable 0 500,000 0 0 0
Acquired software developed 0 0 436,000 495,000 0
Goodwill 2,264,000 0 4,059,000 1,562,000 694,000
Other intangible assets 0 0 0 1,519,000 838,000
----------- ----------- ----------- ----------- -----------
Total assets $ 2,264,000 $ 4,038,000 $ 4,724,000 $ 3,692,000 $ 1,545,000
=========== =========== ============ =========== ===========
Current liabilities $ 0 $ 0 $ 1,257,000 $ 709,000 $ 136,000
Note payable - former
shareholders 0 0 1,122,000 956,000 290,000
Due to Active IQ Technologies,
Inc. 2,264,000 0 2,200,000 1,964,000 1,066,000
Long-term debt 0 0 145,000 63,000 53,000
Shareholders' equity 0 4,038,000 0 0 0
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 2,264,000 $ 4,038,000 $ 4,724,000 $ 3,692,000 $ 1,545,000
=========== =========== =========== =========== ===========
The accompanying unaudited pro forma condensed results of operations for the
years ended December 31, 2001 and 2000, give effect to the acquisitions of
Meteor, Edge, Red Wing, Champion, and FMS/Harvest as if such transactions had
occurred on January 1, 2000.
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 Years Ended December 31,
2001 2000
Revenues $ 5,382,906 $ 4,956,704
Loss from operations (9,491,914) (3,801,212)
---------- ----------
Net loss $(9,413,688) $(3,911,617)
========== ==========
Basic and diluted net loss
per common share $ ( .93) $ ( .55)
========== ==========
38
NOTE 3 - NOTE RECEIVABLE
Based on the Meteor Industries, Inc. merger which occurred on April 30, 2001 the
Company entered into a note receivable in the amount of $500,000. The note is
due April 15, 2002. The note receivable accrues interest at 10% per annum. The
note is secured by a stock pledge dated April 27, 2001 pledging 1,500,000 shares
of common stock of Capco Energy, Inc.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2001 2000
-------- --------
Computer equipment $ 312,653 $ 158,928
Furniture and equipment 69,122 82,741
Software 393,056 383,128
Leasehold improvements 6,701 4,427
Less-accumulated depreciation and amortization (261,043) (80,108)
--------- ---------
Net property and equipment $ 520,489 $ 549,116
========= =========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$192,075, $81,294 and $0, respectively.
NOTE 5 - DEBT
NOTES PAYABLE - SHAREHOLDERS
Notes payable consist of the following:
December 31,
2001 2000
----------- ----------
Notes Payable (a) $ 65,370 $ --
Notes Payable - former Red Wing shareholders (b) 759,879 --
Notes Payable - former Champion shareholders (c) 978,424 --
Notes Payable - former FMS/Harvest shareholders (d) 295,399 --
Note Payable - Stellent, Inc. (e) 1,000,000 --
----------- ----------
3,099,072 --
Less: current portion (2,791,521) --
----------- ----------
Long-term debt, net of current portion $ 307,551 $ --
=========== ==========
(a) Two investors in Red Wing receive monthly principal and interest payments,
ranging from 7% to 8 1/2%. The investors are current employees at Red Wing. Note
balances as of December 31, 2001 were $13,074 and $52,296. The $13,074 note is
due monthly principal and interest payments of $317 through December 2005 and
the $52,296 is due monthly principal and interest payments of $1,267 through
December 2005.
(b) Pursuant to a Stock Purchase Agreement dated June 6, 2001, the Company
purchased all of the outstanding capital stock from the shareholders of Red
Wing. Under the Agreement, the Company is obligated to pay the remaining
$800,000 of cash in two future payments of $400,000 due June 2002 and December
2002. The balance of the note is presented net of debt discount of 7% and is
secured by a pledge of common stock.
(c) Pursuant to the terms of the merger agreement dated August 30, 2001, the
Company is obligated to pay the remaining $1,000,000 in four future payments of
$250,000 due on the 4, 8, 12 and 16-month anniversaries of the closing date. The
balance of the note is presented net of debt discount of 7% and is secured by a
pledge of common stock.
(d) Pursuant to the terms of the merger agreement dated October 10, 2001, the
Company is obligated to pay the remaining $300,000 on April 10, 2002. The
balance of the note is presented net of debt discount of 7% and is unsecured.
(e) The Company entered in an application service provider (ASP) software
license agreement in December 2001, with Stellent, Inc. a shareholder of the
Company. The ASP agreement provides the Company with a three year worldwide
exclusive license to be the hosted solution for Stellent's Content Management
software. Pursuant to the software license agreement, the Company agreed to pay
Stellent a royalty of 20% of net receipts, as defined in the license agreement,
or $500 per month per customer, whichever is greater, with an aggregate minimum
royalty payment of $2,000,000. The minimum royalty is payable as follows: a
credit of $500,000 for existing prepaid royalties, a payment of $500,000 which
was paid in December 2001 and $500,000 on each September 30, 2002 and December
15, 2002.
39
NOTE 6 - 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, 2001, 2000 and 1999, was $400,635,
$55,913, and $6,596.
Minimum future obligations on leases in effect at December 31, 2001, are
approximately as follows:
2002 $ 409,600
2003 131,200
2004 89,000
2005 80,000
2006 78,000
Thereafter 136,500
--------
Total $ 924,300
========
BANK LINE OF CREDIT
The Company had a $200,000 revolving line of credit with a bank which expired in
May 2000. Outstanding borrowings were $97,529 at December 31, 2000. The Company
paid off this line of credit during 2001.
CAPITAL LEASES
The Company leased certain office equipment and furniture under capital lease
obligations. Payments were $3,068 per month. The liability outstanding at
December 31, 2000 was $46,216. The Company paid off these capital lease
obligations during 2001.
EMPLOYMENT AGREEMENTS
The Company has an employment 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.
Approximately $12.7 million has been raised to date. Mr. Brimmer was also
awarded an option to purchase up to 250,000 shares of Company 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 or 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.
The Company has an employment agreement dated May 1, 2001 with Mr. Olah, which
was amended in January 2002. Pursuant to the terms of the agreement, Mr. Olah is
entitled to an annual salary of $200,000 and is eligible for an annual bonus of
up to 100 percent of his salary upon the achievement of certain corporate
objectives. Mr. Olah was also awarded an option to purchase up to 300,000 shares
of common stock at a price of $5.00 per share, which option vests in equal
installments over four years.
RELATED-PARTY TRANSACTIONS
In July 2000, the Company acquired software and related maintenance from
Stellent, Inc. (formerly IntraNet Solutions, Inc.), a shareholder of the
Company, for 151,200 shares of common stock, valued at $2.50 per share, as
consideration.
On August 25, 2000, the Company received $300,000 from Stellent in connection
with a bridge loan transaction with interest accruing at the rate of 8 percent
per annum. The Company also issued a warrant to Stellent for the purchase of
20,000 shares of common stock at a price of $2.75 per share.
In December 2000, the Company entered into a series of agreements with Stellent,
including a reseller arrangement which allows the Company to sell Stellent's
products. In connection with this transaction, the Company paid Stellent
$150,000 in cash and issued 127,273 shares of common stock (valued at $2.75 per
share) as consideration of a non-refundable, prepaid minimum royalty. This total
amount of $500,001 is recorded as prepaid royalty in the accompanying
consolidated balance sheet at December 31, 2000.
Also in December 2000, the Company signed an agreement with Stellent to exchange
the Company's $300,000 promissory note and $6,000 of accrued interest for an
advance on fees payable upon the resale of the Company's products. Accordingly,
such amounts have been recorded as deferred revenue in the accompanying
consolidated balance sheet at December 31, 2000.
Pursuant to an intellectual property purchase agreement dated April 27, 2001
between the Company and Stellent, the Company sold to Stellent our "Content
Categorizer" product for $706,000. The Company received $400,000 in cash and the
satisfaction of the $306,000 deferred revenue (discussed above). In connection
with this agreement the Company netted the prepaid royalty against the sale
transaction since the Company's management decided to terminate all selling
efforts of the Xpedio software. The $500,000 asset write-off was recorded as a
reduction of revenue since both transactions occurred simultaneously and were
with a related party (Stellent).
Pursuant to an Application Service Provider Software License Agreement dated
December 28, 2001 (the "License Agreement"), between Stellent and the Company,
Stellent has provided the Company with a 3-year worldwide exclusive license,
subject to some exceptions, to become the hosted solution for Stellent's Content
Management software. Pursuant to the License Agreement, the Company agreed to
pay Stellent a royalty of 20 percent of net receipts or $500 per month per
customer, whichever is greater, with an aggregate minimum royalty payment of
$2,000,000. The minimum royalty will be satisfied as follows: a credit of
$500,000 for existing prepaid royalties and 3 payments of $500,000 each, one of
which was paid upon execution of the License Agreement, and the other two of
which are to be paid on September 30, 2002 and December 15, 2002, respectively.
The License Agreement is more fully described in the Company's Current Report on
Form 8-K dated December 28, 2001 and filed with the SEC on January 4, 2002.
40
NOTE 7 - SHAREHOLDERS' EQUITY
STOCK SPLITS
In May 1999, the Company declared a 1,140-for-1 stock split. In June 2000, the
Company declared a 1-for-15 reverse stock split. The stock splits have been
retroactively reflected in the accompanying consolidated financial statements.
COMMON STOCK ISSUANCES
In May 1999, the Company issued 83,333 shares of common stock valued at $0.75
per share in exchange for intellectual property. The intellectual property was
recorded in other assets in the accompanying consolidated balance sheet and was
fully amortized at December 31, 2001.
During August through September 1999, the Company sold 88,266 shares of common
stock through a private placement, resulting in $132,400 of net proceeds. During
November 1999 and March 2000, the Company sold an additional 14,667 and 4,667
shares of common stock, resulting in net proceeds of $533,750 and $175,000,
respectively.
In June 2000, the Company conducted a rights offering whereby existing
shareholders purchased 1,856,634 shares of common stock for net proceeds of
$712,362.
During August through December 2000, the Company sold 956,780 shares of common
stock in a private placement for net proceeds of $2,222,567.
Meteor transaction
As part of the merger with Meteor, 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.
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 (see Note 2).
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).
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).
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).
During the year ended December 31, 2001, the Company received proceeds of
$1,629,955 from the exercise of 605,496 options.
Other Option grants
During the year ended December 31, 2001, the Company granted 2,384,559 options
to purchase common stock at prices ranging from $2.75 to $5.50 per share in
addition to those options carried over from the Meteor merger. All options were
granted with exercise prices equal to the fair market value of the Company's
common stock on the date of grant with the exception of the following grants for
which deferred compensation was recorded:
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 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.
Compensation of the options relating to the resignation of Mr. Brimmer
in November 2001, was recorded (see Note 6).
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.
The total amount of compensation expense recorded for the year ended December
31, 2001 and 2000 was $678,281 and $54,687, respectively. Following is a roll
forward of the deferred compensation account:
Balance at December 31, 1999 $ 0
Additions 227,500
Terminations 0
Compensation expense (54,687)
---------
Balance at December 31, 2000 $ 172,813
Additions 817,169
Compensation expense (678,281)
---------
Balance at December 31, 2001 311,701
=========
Other 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.
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 an expense of $1,246,000 related to the warrants
issued to a non-employee using the Black-Scholes pricing model.
For warrants issued to non-employees in exchange for services, the Company
accounts for such warrants in accordance with Emerging Issue 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 are more
reliably measurable.
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 20 to 130%.
Information regarding the Company's warrants is summarized below:
WEIGHTED AVG. RANGE OF
NUMBER EXERCISE PRICE EXERCISE PRICE
---------------- ----------------- -----------------
Outstanding at December 31, 1998
Granted 10,000 $60.00 $60.00
Cancelled or expired 0 0.00 0.00
Exercised 0 0.00 0.00
------------ ----------- -------------
Outstanding at December 31, 1999 10,000 60.00 60.00
Granted 140,694 3.04 1.00-37.50
Cancelled or expired 0 0.00 0.00
Exercised 0 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
============ =========== =============
Warrants exercisable at December 31, 2001 7,779,456 $5.28 $1.00-$60.00
============ =========== =============
The weighted average fair value of warrants granted was $0 in 1999 as the
warrants' exercise price significantly exceeded fair value, $1.21 in 2000 and
$1.41 in 2001.
SERIES B CONVERTIBLE PREFERRED STOCK
Part of the monetary assets acquired with Meteor, were 365,000 shares of
convertible preferred stock. Meteor issued these shares in June 2000. Each share
was: (1) not entitled to dividends, (2) entitled to a liquidation preference of
$2.00 per share, (3) entitled to one vote, (4) not redeemable, and (5)
convertible. Holders of the Series B Convertible Preferred Stock had the right
to convert all or a portion of their shares into units, each unit consisting of
one share of Common Stock and one warrant to purchase Common Stock. The warrants
to be issued as part of the units upon conversion were to be in a form
determined by the Board of Directors and were to be exercisable until May 15,
2005, at an exercise price of $2.50 per share. All 365,000 shares of the Series
B Convertible Preferred Stock was converted in February 2002.
41
STOCK SUBSCRIPTION RECEIVABLE
In December 2000, the Company 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. On July 30, 2001, the director delivered to the Company
a cash payment in the amount of $75,000 and a two-month promissory note in the
principal amount of $200,000. Interest accrues on the principal balance of the
prime rate as of the date of the note. The note has been extended and as of
December 31, 2001, remains unpaid.
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.
STOCK OPTION PLANS
The Company has five stock option plans. The Company has the 1994 Stock Option
Plan and the 1998 Incentive Equity Plan. With the completion of the activeIQ
merger, the Company adopted the activeIQ 1999 Stock Option Plan and the activeIQ
2000 Director Stock Option Plan. At a regular meeting of the board of directors
on July 20, 2001, the Company approved and adopted the 2001 Non-Executive Stock
Option Plan. As of December 31, 2001, an aggregate of 6,450,000 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 approximately 3 years and expire 10 years from the
date of grant.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company accounts for
its stock option plan in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion
No. 25, no compensation expense is recognized if the exercise price of the
employee stock option or warrant equals the market price on the grant date. The
Company recorded compensation expense pursuant to APB Opinion No. 25 and related
interpretations on options granted and due to modifications of options of
$678,281, $54,687 and $0, for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company recorded expense related to warrants issued to
non-employees in accordance with SFAS No. 123 in the amount of $1,371,718, $0
and $0 for the years ended December 31, 2001, 2000 and 1999, respectively. 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,
-----------------------------------------
2001 2000 1999
Net loss:
As reported $ (9,446,808) $(2,840,419) $(461,981)
Pro forma (13,062,595) (2,968,959) (475,480)
Basic and diluted net loss per share:
As reported (1.15) (1.65) (1.92)
Pro forma (1.59) (1.73) (1.98)
42
Information regarding the Company's stock options is summarized below:
Weighted
Average
Number of Exercise
Options Price
---------- --------
Options outstanding - December 31, 1998 -- --
Granted 46,997 29.52
Canceled or expired -- --
Exercised -- --
---------- --------
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
========== ========
Options exercisable - December 31, 2001 2,625,679 $ 3.10
========== ========
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
========
Weighted average fair value of options
granted during the year ended December 31, 1999 $ 1.15
========
Options outstanding under the plans as of December 31, 2001, have exercise
prices ranging from $1.00 per share to $37.50 per share and a weighted average
remaining contractual life of 6.5 years.
The following information summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted Weighted
Range of Number Remaining Average Average
Exercise Out- Contractual Exercise Number Exercise
Prices standing Life Price Exercisable Price
- --------- ---------- ------------ -------- ----------- --------
$1.00 to
$2.87 1,690,115 6.1 years $ 2.03 1,419,565 $ 2.03
$3.00 to
$5.50 2,348,225 7.1 years $ 4.54 1,189,113 $ 4.10
$15.00 to
$37.50 17,001 2.7 years $ 22.06 17,001 $ 22.06
- --------- ---------- ------------ -------- ----------- --------
$1.00 to
$37.50 4,055,341 6.5 years $ 3.57 2,625,679 $ 3.10
In determining the compensation cost of the options granted during fiscal 2001,
2000, and 1999, 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:
43
December 31,
2001 2000 1999
-------- -------- --------
Risk free interest rate 5% 6.1% 6.1%
Expected life of options granted 10 years 5 years 5 years
Expected volatility range 130.0% 0% 0%
Expected dividend yield 0% 0% 0%
NOTE 8 - INCOME TAXES
The Company has generated net operating losses of approximately $9,175,000
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 limitations on the use of
these net operating loss carryforwards.
The benefit from income taxes consists of the following:
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Current income tax expense $ -- $ -- $ --
Deferred income tax benefit -- -- --
--------- --------- ---------
Total benefit from income taxes $ -- $ -- $ --
========= ========= =========
The Company's deferred tax assets are as follows:
December 31,
2001 2000
---------- ----------
Net operating loss carryforwards $ 3,760,000 $ 1,100,000
Property and equipment basis difference 1,217,000 9,000
Less: valuation allowance (4,977,000) (1,109,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
Reconciliation between the statutory rate and the effective tax rate for the
fiscal years is as follows:
December 31,
2001 2000 1999
------- ------- -------
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%
======= ======= =======
44
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
For the Years Ended December 31,
2001 2000 1999
---------- ---------- ----------
Cash paid for interest $ 19,083 $ 37,517 $ 24,445
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of warrants in payment
of legal fees and accounts payable 175,718 22,682 --
Issuance of stock in payment
of accounts payable -- 162,247 --
Conversion of notes payable
to common stock -- 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
in exchange for intellectual property -- -- 62,500
Issuance of common stock
to director -- 225,000 --
Issuance of common stock with
non-recourse note receivable 200,000 -- 312,500
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 shareholder 1,000,000 -- --
NOTE 10 - SUBSEQUENT EVENTS (UNAUDITED)
On March 29, 2002 the Company paid to Stellent, Inc. $950,000 for the balance
due on the note payable pertaining to our license agreement. In consideration of
the early payment, the Company received a discount of five percent, or $50,000.
On March 29, 2002, the Company borrowed $450,000 from Blake Capital Partners,
LLC, an entity wholly-owned by Mr. Mills who currently is one of the Company's
director. The loan is evidenced by a 90-day promissory note and accrues interest
at the rate of 7 percent per annum. The Company used the proceeds of the loan to
pay the remaining balance it owed to Stellent pursuant to the December 2001
License Agreement. In connection with the loan, the Company 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.
NOTE 11 - Quarterly Data (UNAUDITED)
The following is the unaudited quarterly financial data for the years ended
December 31, 2001 and 2000:
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------------
QUARTERS ENDED
--------------------------------------------------------------------------------------
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
---------------------------------------------------------------------------------------
Revenues $ 35 $ 373 $ 645 $ 1,658
Operating expenses (1,169) (2,238) (3,871) (4,958)
(Loss) from operations (1,134) (1,865) (3,226) (3,300)
Other income (expense) 18 21 47 (8)
Net (loss) (1,116) (1,844) (3,179) (3,308)
Basic and diluted Net (Loss)
per common share $ (0.25) $ (0.25) $ (0.31) $ (0.34)
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------------------
QUARTERS ENDED
--------------------------------------------------------------------------------------
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
---------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ -
Operating expenses (661) (374) (836) (935)
(Loss) from operations (661) (374) (836) (935)
Other income (expense) (6) (5) (131) 108
Net (loss) (667) (379) (967) (827)
Basic and diluted Net (Loss)
per common share $ (1.78) $ (0.95) $ (0.37) $ (0.24)
45
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.
46
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 December 31, 2001:
NAME AGE POSITIONS WITH THE COMPANY
Kenneth W. Brimmer ................. 46 Chairman of the Board
D. Bradly Olah ..................... 37 President, Chief Executive Officer,
Chief Financial Officer and Director
Philip C. Rickard .................. 33 Vice President
Ronald E. Eibensteiner ............. 51 Director and Secretary
Wayne W. Mills ..................... 47 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 Metalclad Corporation (Nasdaq: MTLC).
D. Bradly Olah, one of the co-founders of Old AIQ, is currently our President,
Chief Executive Officer, Chief Financial Officer and 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's board of directors from
its inception in April 1996 and has been actively involved in its business
development. 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.
Philip C. Rickard has been Executive Vice President of our company since the
merger with Old AIQ on April 30, 2001. Prior to that time, he served in the same
position with Old AIQ from May 1999 until the Old AIQ merger. Prior to joining
Old AIQ, Mr. Rickard served for five years as Director and VP of International
Development for Ariobimo, an Asian-based group of companies. He initiated and
directly managed the group's creation and development of various companies in
Internet technologies, Internet service provision and wireless communications.
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 since December 1,
2001. 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
47
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.
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 Metalclad Corporation. Mr. Mills 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.
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 2001 were filed on
a timely basis.
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, 2001, 2000 and 1999 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 All Options
Position Year Salary Bonus (Number) Payouts
- ----------------- ---- -------- ----- ------------ ------------
Kenneth W. Brimmer 2001 $125,000 -- 250,000 $ 250,000(e)
Chairman of the 2000 -- -- -- --
Board (a)(d) 1999 -- -- -- --
D. Bradly Olah 2001 $150,000 -- 300,000 --
Chief Executive Officer, 2000 75,000 -- -- --
Chief Financial Officer, 1999 -- -- -- --
and President (b)
Philip C. Rickard 2001 $100,000 -- 75,000 --
Vice President (c) 2000 25,000 -- -- --
1999 -- -- -- --
(a) 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.
48
(b) D. Bradly Olah currently serves as our President, Chief Executive Officer,
Chief Financial Officer and 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.
(c) Philip C. Rickard has been Executive Vice President of our company since the
merger with Old AIQ on April 30, 2001. Prior to that time, he served in the same
position with Old AIQ from May 1999 until the Old AIQ merger.
(d) Mr. Brimmer was the Company's Chief Executive Officer from April 30, 2001
until December 1, 2001.
(e) The terms and conditions of Mr. Brimmer's employment with us were set forth
in a May 1, 2001 employment agreement. In addition to his annual salary of
$125,000, Mr. Brimmer was entitled to a $250,000 fee when our Company raised an
aggregate of $12 million in equity financings. Approximately $12.7 million had
been raised by December 31, 2001. The $250,000 fee was recorded as an operating
expense in 2001, and payment was made in January 2002.
OPTION GRANT TABLE
The following information sets forth information with respect to the grants of
options by us during 2001 to our Chief Executive Officer and our other most
highly compensated executive officers as of December 31, 2001.
Potential
Realizable
Percent Value at Assumed
Number of Of Total Annual Rates
Securities Options/SARs Exercise Of Stock Price
Underlying Granted To Or Base Appreciation
Options/SARs Employees In Price Expiration For Option Term
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ------------ ------------ ------------ -------- ---------- ------- ----------
Kenneth W.
Brimmer 250,000 11.4 5.00 5/1/2011 625,000 1,250,000
D. Bradly
Olah 300,000 13.6 5.00 5/1/2011 750,000 1,500,000
Philip C.
Rickard 75,000 3.4 5.50 8/2/2011 259,500 519,000
AGGREGATED OPTION EXERCISES in 2001 AND YEAR-END OPTION VALUE TABLE
Shown below is information relating to (i) the exercise of stock options during
2001 by our Chief Executive Officer and each of our other most highly
compensated executive officers as of December 31, 2001 and (ii) the value of
unexercised options for each of the Chief Executive Officer and such executive
officers as of December 31, 2001:
No. of shares underlying Value of unexercised in-the-money
unexercised options at options at
No. of Dec. 31, 2001 Dec. 31, 2001 (1)
shares ------------------------------- ---------------------------------
acquired Value
Name on exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ---------- ----------- ------------- ----------- -------------
Kenneth W. Brimmer -- $ -- 250,000 -- $ -- $ --
200,000 -- 710,000 --
D. Bradly Olah -- $ -- 60,000 240,000 $ -- $ --
70,000 30,000 248,500 106,500
Philip C. Rickard -- $ -- 75,000 -- $ 266,250 $ --
18,750 56,250 -- --
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price of the options and $4.55, the fair market value of
the Company's common stock on December 31, 2001.
49
EMPLOYMENT AGREEMENTS
Mr. Brimmer served as the Company's chief executive officer from April 30, 2001
until December 1, 2001. The terms and conditions of Mr. Brimmer's employment
with the Company were governed by a May 1, 2001 employment agreement. In
addition to his annualized 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 our company raised an aggregate
of $12 million in equity financings, which was reached in the fourth quarter of
fiscal 2001. Approximately $12.7 million has been raised to date. Mr. Brimmer
was also awarded an option to purchase up to 250,000 shares of our common stock
at a price of $5.00 per share, which option vests in equal installments over
four years.
Pursuant to an agreement dated November 27, 2001, and in accordance with Mr.
Brimmer's May 1 employment agreement, we agreed to pay $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 continued as Chairman of the Board of Directors for the
remainder of his term and to provide certain consulting services our company as
requested. In connection with the termination, Mr. Brimmer agreed to waive any
severance or any other payments under the remaining term of his employment
agreement. We also 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, we recorded an expense of such amount in
the fourth quarter of fiscal 2001. We also recorded aggregate expenses of
$343,500 in connection with our agreement to immediately vest Mr. Brimmer's
options and permit the exercise of such options until December 1, 2006.
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. 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 the Company 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 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. Mr. Olah cannot sell or otherwise transfer any of the
shares acquired under this option agreement until such time as the shares would
have vested in accordance with the vesting schedule provided in the option
agreement and the note has been repaid.
50
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, the Company issues options to its Directors as determined by the
Board. Such options vest over a period of years earlier upon a change of
control.
During 2001, the Company issued 60,000 options to two (2) directors, of which
options to purchase 30,000 shares are exercisable at $3.00 per share and vest
immediately, and the remaining 30,000 options are exercisable at $5.00 per
share, vesting ratably over four years. These options are non-qualified options
granted pursuant to the Company's 2000 Directors Stock Option Plan. During
November and December 2001, the Company accelerated the vesting on 33,000
options, with an exercise price of $2.75, for two different directors who
resigned as board members.
Members of the Board who are also employees of the Company 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 are Messrs. Brimmer, Eibensteiner
and Mills. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee during the fiscal year ended December 31,
2001, 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 currently serves as the Company's secretary, however, a position
for which he receives no additional 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 full
Board. 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, 2001 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.
There are three elements in the Company's executive compensation program, all
determined by individual and corporate performance.
- - Base salary compensation
- - Annual incentive compensation
- - Stock options
Total compensation opportunities are competitive with those offered by employers
of comparable size, growth and profitability in the Company's industry.
51
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.
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.
Mr. Olah received no cash incentive compensation award for the fiscal year ended
December 31, 2001. In lieu of a cash incentive compensation, the Company granted
Mr. Olah an option to purchase up to 300,000 shares of the our common stock at a
price of $5.50 per share (with the closing sale price of the Company's common
stock on the date of grant being $5.87). 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, the closing sale price of the
Company's common stock on the date of the grant.
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
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, 2001, to the
Nasdaq Composite Index and to the S&P Small Cap Internet Software and Services
Index.
52
COMPARISON OF RETURN AMONG ACTIVE IQ TECHNOLOGIES, INC.,
THE NASDAQ COMPOSITE INDEX, AND THE S&P SMALL CAP INTERNET
SOFTWARE AND SERVICES INDEX
[PERFORMANCE GRAPH]
4/30/01 5/31/01 6/30/01 7/31/01 8/31/01 9/30/01 10/31/01 11/30/01 12/31/01
-------- ------- -------- ------- ------- ------- -------- -------- --------
Active IQ Technologies $ 100.00 $ 82.41 $ 110.19 $101.85 $ 94.26 $ 57.41 $ 69.44 $ 66.67 $ 84.26
S&P SC Internet Software & Services Index 100.00 80.38 74.76 74.76 60.05 39.37 49.02 55.15 43.97
Nasdaq Composite 100.00 98.08 98.62 94.29 82.38 68.39 79.66 88.09 93.97
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 25, 2002, 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 PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
Boston Financial Partners, Inc. 1,180,000 (2) 9.5
17 Bayns Hill Road
Boxford, MA 01921
Gulfstream Financial Partners, LLC 855,000 (3) 7.0
2401 PGA Boulevard, Ste 190
Palm Beach Gardens, FL 33410
Stellent, Inc. 952,453 (4) 8.0
7777 Golden Triangle Drive
Eden Prairie, MN 55344
Kenneth W. Brimmer 987,835 (5) 8.1
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Ronald E. Eibensteiner 690,834 (6) 5.8
800 Nicollet Mall, Ste 2690
Minneapolis, MN 55402
D. Bradly Olah 1,440,334 (7) 11.9
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
Wayne W. Mills 2,187,834 (8) 17.5
5020 Blake Road
Edina, MN 55436
Philip C. Rickard 111,055 (9) 1.0
5720 Smetana Drive, Ste 101
Minnetonka, MN 55343
All directors and officers as a group 5,417,892 46.7
(1) Except as otherwise indicated, each person possesses sole voting and
investment power with respect to the shares shown as beneficially owned.
53
(2) Includes 700,000 shares issuable upon the exercise of warrants issued to
Thomas Brazil, president of Boston Financial Partners, Inc., in connection with
a financial advisory services agreement with our Company. Of the 700,000 shares,
450,000 shares are exercisable at a price of $5.50 per share and 250,000 shares
are exercisable at a price of $7.50 per share, except that the Company has
offered to reduce the exercise price of the $7.50 warrants to $2.50 if such
warrants were exercised by April 29, 2002.
(3) Includes 615,000 shares issuable upon the exercise (at a price of $5.50 per
share) of a warrant issued upon the Meteor Industries-activeIQ Technologies
merger in consideration of financial advisory services rendered and 90,000
shares issuable upon the exercise (at a price of $5.50 per share) of a warrant .
(4) Includes 320,982 shares issuable upon the exercise of Class B Redeemable
Warrants (at a price of $5.50 per share) and 20,000 shares issuable upon the
exercise (at a price of $2.75 per share) of a warrant issued in connection with
an August 2000 financing arrangement.
(5) Includes (i) 200,000 shares issuable upon the exercise (at a price of $1.00
per share) of options, (ii) 250,000 shares issuable upon the exercise (at a
price of $5.00 per share) of options, (iii) 1,167 shares issuable upon the
exercise (at a price of $37.50 per share) of a warrant, and (iv) 206,667 shares
issuable upon the exercise of Class B Redeemable Warrants (at a price of $5.50
per share).
(6) Includes 233,334 shares issuable upon the exercise of Class B Redeemable
Warrants (at a price of $5.50 per share) and an option to purchase 50,000 shares
(at an exercise price of $1.00 per share).
(7) Includes (i) 203,334 shares issuable upon the exercise of Class B Redeemable
Warrants (at a price of $5.50 per share), (ii) 275,000 shares held by Mr. Olah's
spouse, of which 110,000 shares are issuable upon the exercise of Class B
Redeemable Warrants (at a price of $5.50 per share), (iii) 25,000 shares held by
the D. Bradly Olah Irrevocable Trust, of which 10,000 shares are issuable upon
the exercise of Class B Redeemable Warrants (at a price of $5.50 per share),
(iv) 90,000 shares issuable upon the exercise (at a price of $1.00 per share) of
an option, (v) 3,333 shares issuable upon the exercise (at a price of $15.00 per
share) of an option, and (vi) 120,000 shares issuable upon the exercise (at a
price of $5.00 per share) of an option.
(8) Includes 30,000 shares owned by Sea Spray, Ltd., a foreign corporation of
which Mr. Mills is the sole shareholder, 150,000 shares owned by Mr. Mills'
spouse. Mr. Mills disclaims beneficial ownership of his spouse's shares. Also
includes 100,000 shares issuable upon the exercise (at a price of $2.50 per
share) of a warrant issued in connection with the Series B Preferred Stock;
90,000 shares issuable upon the exercise (at a price of $5.50 per share) of
warrants issued in connection with a January 2001 private placement and
exchanged for Class B Redeemable Warrants; 208,334 shares issuable upon the
exercise (at a price of $5.50 per share) of Class B Redeemable Warrants and the
warrant to purchase 25,000 shares (at an exercise price of $3.00 per share)
issued in connection with a loan to the Company. Also includes a warrant to
purchase 500,000 shares owned by Blake Capital Partners, LLC, a limited
liability company whose sole director is Wayne Mills, issuable upon exercise (at
a price of $3.00 per share) of warrants issued to financial advisors in
connection with our merger with active IQ Technologies, Inc. Also includes
67,500 shares owned by Blake Capital and publicly traded warrants to purchase
15,000 shares (at an exercise price of $7.15 per share).
(9) Includes 75,000 shares issuable upon the exercise of options at a price of
$1.00 per share and 18,750 shares issuable upon the exercise of options at a
price of $5.50 per share.
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.
54
TRANSACTIONS WITH STELLENT, INC.
Pursuant to an intellectual property purchase agreement dated April 27, 2001
between our company and Stellent, we sold to Stellent our "Content Categorizer"
product for $706,000. We received $400,000 in cash and the satisfaction of a
$300,000 note, plus $6,000 of accrued interest.
Pursuant to an Application Service Provider Software License Agreement dated
December 28, 2001 (the "License Agreement"), between Stellent and us, Stellent
has provided our company with a 3-year worldwide exclusive license, subject to
some exceptions, to become the hosted solution for Stellent's Content Management
software. Pursuant to the License Agreement, we agreed to pay Stellent a royalty
of 20 percent of net receipts or $500 per month per customer, whichever is
greater, with an aggregate minimum royalty payment of $2,000,000. The License
Agreement provided that the minimum royalty was to be satisfied as follows: a
credit of $500,000 for existing royalties that we prepaid in June 2000; and 3
payments of $500,000 each, one of which was paid upon execution of the License
Agreement, and the other two were to be paid on September 30, 2002 and December
15, 2002, respectively. The License Agreement is more fully described in our
Current Report on Form 8-K dated December 28, 2001 and filed with the SEC on
January 4, 2002. On March 29, 2002 we paid in full the balance due to Stellant
under the License Agreement. In consideration of the early payment, we received
a discount of five percent, or $50,000.
TRANSACTIONS IN CONNECTION WITH METEOR INDUSTRIES, INC. MERGER
In connection with the consummation of the merger of Old AIQ and Meteor
Industries on April 30, 2001, we paid Blake Capital Partners, LLC, an entity
owned and controlled by Wayne W. Mills, an aggregate fee of $250,000 pursuant to
financial advisory agreements. In addition, upon the completion of the merger,
Blake Capital Partners received a warrant to purchase 500,000 shares of our
common stock at a price of $3.00 per share. At the time of the Merger, Mr. Mills
was one of our significant shareholders, but he did not become a director until
December 2001.
Also in connection with the Old AIQ-Meteor Industries merger, pursuant to an
agreement between Meteor Industries and Gulfstream Financial Partners, LLC, an
entity owned and controlled by Henry Fong, we were obligated to issue to
Gulfstream Financial Partners a warrant to purchase 615,000 shares of our common
stock at a price of $5.50 per share upon the consummation of the merger.
Gulfstream Financial Partners is one of our significant shareholders.
OTHER 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 our 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. No payments have been made
in satisfaction of the note, which accrues interest at the rate of 6.75 percent
per annum, the prime rate in effect on the date of the note.
On March 29, 2002, Mr. Mills loaned the Company $450,000, which is payable in
90 days and accrues interest at the rate of seven percent per annum. The
proceeds of the loan were used to prepay the fees payable to Stellent under the
December 2001 License Agreement. For consideration for this loan the Company
issued a five year Warrant to purchase 25,000 shares at $3.00 per share.
55
PART IV
ITEM 14. EXHIBITS 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
Number Description Location
- ------- ----------- --------
2.1 Stock Purchase Agreement Incorporated by reference to Form
between Meteor 8-K dated February 13, 2001 (SEC
Industries, Inc. and File No. 0-27968)
Capco Energy, Inc. dated
January 30, 2001.
2.2 First Amendment to Stock Incorporated by reference to
Purchase Agreement by and Exhibit 2.2 to Form 8-K dated
between Capco Energy, April 30, 2001 and filed on
Inc. and Meteor May 14, 2001 (SEC File No. 01-12401)
Industries, Inc. dated
April 27, 2001.
2.3 Agreement and Plan of Incorporated by reference to Form
Merger by and among 8-K dated February 13, 2001 (SEC
Meteor Industries, File No. 0-27968)
Inc., its wholly owned
subsidiary, MI Merger,
Inc. and ActiveIQ
Technologies, Inc.
2.4 First Amendment to Incorporated by reference to
Agreement and Plan of Exhibit 2.4 to Form 8-K dated
Merger by and among April 30, 2001 and filed on
Meteor Industries, Inc., May 14, 2001 (SEC File No. 01-12401)
activeIQ Technologies,
Inc. and MI Merger, Inc.
dated April 27, 2001.
2.5 Agreement and Plan of Incorporated by reference to
Merger by and between Exhibit 2.5 to Form 8-K dated
Meteor Industries, Inc. April 30, 2001 and filed on
and AIQ Acquisition Corp. May 14, 2001 (SEC File No. 01-12401)
dated April 27, 2001.
2.6 Stock Purchase Agreement Incorporated by reference to
by and between Active IQ Exhibit 2.1 to Registrant's Form 8-K
Technologies, Inc., Red fled on June 15, 2001
Wing Business Systems,
Inc. and the several
shareholders of Red Wing
Business Systems, Inc.
dated June 6, 2001.
2.7 Agreement and Plan of Incorporated by reference to
Merger by and among Active Exhibit 2.1 to Registrant's Form 8-K
IQ Technologies, Inc., CBS filed on September 21, 2001
Acquisition, Inc. and
Champion Business Systems,
Inc. dated August 30, 2001.
2.8 Stock Purchase Agreement Incorporated by reference to
by and among Active IQ Exhibit 2.1 to Registrant's Form 8-K
Technologies, Inc., filed on October 28, 2001
Kenneth Hilton, Richard
Moore, Gale Saint and
Kenneth Hofer dated October
10, 2001.
3.1 Articles of Incorporation Incorporated by reference to
of AIQ Acquisition Corp. Exhibit 3.1 to Registrant's Form 8-K
filed on May 14, 2001
3.2 Articles of Merger Incorporated by reference to
relating to the merger of Exhibit 3.2 to Registrant's Form 8-K
Meteor Industries, Inc. filed on May 14, 2001
with and into AIQ
Acquisition Corp.
56
Exhibit
Number Description Location
- ------- ----------- --------
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 Incorporated by reference to
August 1, 2001 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 Incorporated by reference to
Warrant Certificate Exhibit 4.4 to Registrant's
Registration Statement on Form S-3 filed on
August 21, 2001 (SEC File No.
333-68088)
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 Pledge Agreement by and Incorporated by reference to
between Active IQ Exhibit 10.1 to Registrant's Form 8-K
Technologies, Inc. and the filed on June 15, 2001
several shareholders of
Red Wing Business Systems,
Inc. dated June 6, 2001
10.3 Employment agreement by Incorporated by reference to
and between Kenneth W. Exhibit 10.1 to Registrant's
Brimmer and the Company Registration Statement on Form S-3 filed on
dated as of May 1, 2001. August 21, 2001 (SEC File No.
333-68088)
10.4 Employment agreement by Incorporated by reference to
and between D. Bradly Olah Exhibit 10.2 to Registrant's
and the Company dated as of Registration Statement on Form S-3 filed on
May 1, 2001. August 21, 2001 (SEC File No.
333-68088)
10.5 The Company's 2000 Incorporated by reference to
Director Stock Option Exhibit 4.1 to Registrant's
Plan. Registration Statement on Form S-8 filed on
August 22, 2001 (SEC File No.
333-68166)
10.6 Registration Rights Incorporated by reference to
Agreement by and between Exhibit 10.1 to Registrant's Form 8-K
Active IQ Technologies, Inc. filed on September 21, 2001
and the several shareholders of
Champion Business Systems,
Inc. dated September 14,
2001.
10.7 Form of Promissory Note Incorporated by reference to
dated September 14, 2001 Exhibit 10.2 to Registrant's Form 8-K
filed on September 21, 2001
10.8 Form of Promissory Note Incorporated by reference to
dated October 10, 2001 Exhibit 10.1 to Registrant's Form 8-K
filed on October 28, 2001
57
Exhibit
Number Description Location
- ------- ----------- --------
10.9 Agreement dated November Incorporated by reference to
27, 2001 by and between Exhibit 10.3 to Registrant's
Kenneth W. Brimmer and the Amendment No. 1 to Registration
Company. Statement on Form S-3 filed on
December 10, 2001 (SEC File No.
333-68088)
10.10 Application Incorporated by reference to
Service Provider Exhibit 10.1 to Registrant's Form 8-K
Software License filed on January 4, 2002
Agreement dated
December 28, 2001
between Stellent,
Inc. and Active IQ
Technologies, Inc.
10.11 Employment Filed herewith electronically
Agreement
effective August
1, 2001 by and
between Philip C.
Rickard and the
Company
10.12 First Amendment to Filed herewith electronically
Employment
Agreement dated
January 1, 2002 by
and between D.
Bradly Olah and
the Company
10.13 Employee Stock Filed herewith electronically
Option Agreement
dated January 7,
2002 between D.
Bradly Olah and
the Company
10.14 Restricted Stock Filed herewith electronically
Purchase Agreement
dated January 14,
2002 by and
between D. Bradly
Olah and the
Company
10.15 Form of Pledge Filed herewith electronically
Agreement
10.16 Form of Non-Recourse Filed herewith electronically
Promissory Note
10.17 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)
10.18 2001 Employee Stock
Option Plan Filed herewith electronically
21 Subsidiaries of the Filed herewith electronically
Registrant
23.1 Consent of Virchow Krause Filed herewith electronically
23.2 Consent of Arthur Andersen, LLP Filed herewith electronically
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 2001 the Company filed the following
reports on Form 8-K:
On October 18, 2001, the Company filed a Current Report on Form 8-K dated
October 10, 2001, under items 5 and 7 announcing the acquisition of FMS
Marketing Inc.
On November 13, 2001, the Company filed a Current Report on Form 8-K/A dated
September 18, 2001, under items 2 and 7. The Company previously filed an 8-K on
September 21, 2001 to announce the completion of a merger by and among the
Company, CBS Acquisition Inc. and Champion Business Systems. The Company filed
this Amendment to Form 8-K to include the financial statements and proforma
financial information required by item 7 of Form 8-K.
On December 27, 2001, the Company filed a Current Report on Form 8-K dated
December 20, 2001, under items 4 and 7, announcing a change in accountants from
Arthur Andersen, LLP to Virchow, Krause & Company, LLP.
58
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: April 3, 2002 By /s/ D. Bradly Olah
-----------------------------------
D. Bradly Olah
Chief Executive Officer, Chief
Financial Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 29, 2002 by the following persons on behalf of the
Registrant, in the capacities indicated.
Signatures Title
- ----------------------------- --------------------------------------------
/s/ Kenneth W. Brimmer Chairman of the Board
- -----------------------------
Kenneth W. Brimmer
/s/ D. Bradly Olah Chief Executive Officer, Chief Financial
- ----------------------------- Officer, President and Director (principal
D. Bradly Olah executive and financial officer)
/s/ Mark D. Dacko Controller (principal accounting officer)
- -----------------------------
Mark D. Dacko
/s/ Ronald E. Eibensteiner Director and Secretary
- -----------------------------
Ronald E. Eibensteiner
/s/ Wayne W. Mills Director
- -----------------------------
Wayne W. Mills
59
Exhibit
Number Description Location
- ------- ----------- --------
2.1 Stock Purchase Agreement Incorporated by reference to Form
between Meteor 8-K dated February 13, 2001 (SEC
Industries, Inc. and File No. 0-27968)
Capco Energy, Inc. dated
January 30, 2001.
2.2 First Amendment to Stock Incorporated by reference to
Purchase Agreement by and Exhibit 2.2 to Form 8-K dated
between Capco Energy, April 30, 2001 and filed on
Inc. and Meteor May 14, 2001 (SEC File No. 01-12401)
Industries, Inc. dated
April 27, 2001.
2.3 Agreement and Plan of Incorporated by reference to Form
Merger by and among 8-K dated February 13, 2001 (SEC
Meteor Industries, File No. 0-27968)
Inc., its wholly owned
subsidiary, MI Merger,
Inc. and ActiveIQ
Technologies, Inc.
2.4 First Amendment to Incorporated by reference to
Agreement and Plan of Exhibit 2.4 to Form 8-K dated
Merger by and among April 30, 2001 and filed on
Meteor Industries, Inc., May 14, 2001 (SEC File No. 01-12401)
activeIQ Technologies,
Inc. and MI Merger, Inc.
dated April 27, 2001.
2.5 Agreement and Plan of Incorporated by reference to
Merger by and between Exhibit 2.5 to Form 8-K dated
Meteor Industries, Inc. April 30, 2001 and filed on
and AIQ Acquisition Corp. May 14, 2001 (SEC File No. 01-12401)
dated April 27, 2001.
2.6 Stock Purchase Agreement Incorporated by reference to
by and between Active IQ Exhibit 2.1 to Registrant's Form 8-K
Technologies, Inc., Red fled on June 15, 2001
Wing Business Systems,
Inc. and the several
shareholders of Red Wing
Business Systems, Inc.
dated June 6, 2001.
2.7 Agreement and Plan of Incorporated by reference to
Merger by and among Active Exhibit 2.1 to Registrant's Form 8-K
IQ Technologies, Inc., CBS filed on September 21, 2001
Acquisition, Inc. and
Champion Business Systems,
Inc. dated August 30, 2001.
2.8 Stock Purchase Agreement Incorporated by reference to
by and among Active IQ Exhibit 2.1 to Registrant's Form 8-K
Technologies, Inc., filed on October 28, 2001
Kenneth Hilton, Richard
Moore, Gale Saint and
Kenneth Hofer dated October
10, 2001.
3.1 Articles of Incorporation Incorporated by reference to
of AIQ Acquisition Corp. Exhibit 3.1 to Registrant's Form 8-K
filed on May 14, 2001
3.2 Articles of Merger Incorporated by reference to
relating to the merger of Exhibit 3.2 to Registrant's Form 8-K
Meteor Industries, Inc. filed on May 14, 2001
with and into AIQ
Acquisition Corp.
Exhibit
Number Description Location
- ------- ----------- --------
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 Incorporated by reference to
August 1, 2001 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 Incorporated by reference to
Warrant Certificate Exhibit 4.4 to Registrant's
Registration Statement on Form S-3 filed on
August 21, 2001 (SEC File No.
333-68088)
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 Pledge Agreement by and Incorporated by reference to
between Active IQ Exhibit 10.1 to Registrant's Form 8-K
Technologies, Inc. and the filed on June 15, 2001
several shareholders of
Red Wing Business Systems,
Inc. dated June 6, 2001
10.3 Employment agreement by Incorporated by reference to
and between Kenneth W. Exhibit 10.1 to Registrant's
Brimmer and the Company Registration Statement on Form S-3 filed on
dated as of May 1, 2001. August 21, 2001 (SEC File No.
333-68088)
10.4 Employment agreement by Incorporated by reference to
and between D. Bradly Olah Exhibit 10.2 to Registrant's
and the Company dated as of Registration Statement on Form S-3 filed on
May 1, 2001. August 21, 2001 (SEC File No.
333-68088)
10.5 The Company's 2000 Incorporated by reference to
Director Stock Option Exhibit 4.1 to Registrant's
Plan. Registration Statement on Form S-8 filed on
August 22, 2001 (SEC File No.
333-68166)
10.6 Registration Rights Incorporated by reference to
Agreement by and between Exhibit 10.1 to Registrant's Form 8-K
Active IQ Technologies, Inc. filed on September 21, 2001
and the several shareholders of
Champion Business Systems,
Inc. dated September 14,
2001.
10.7 Form of Promissory Note Incorporated by reference to
dated September 14, 2001 Exhibit 10.2 to Registrant's Form 8-K
filed on September 21, 2001
10.8 Form of Promissory Note Incorporated by reference to
dated October 10, 2001 Exhibit 10.1 to Registrant's Form 8-K
filed on October 28, 2001
Exhibit
Number Description Location
- ------- ----------- --------
10.9 Agreement dated November Incorporated by reference to
27, 2001 by and between Exhibit 10.3 to Registrant's
Kenneth W. Brimmer and the Amendment No. 1 to Registration
Company. Statement on Form S-3 filed on
December 10, 2001 (SEC File No.
333-68088)
10.10 Application Incorporated by reference to
Service Provider Exhibit 10.1 to Registrant's Form 8-K
Software License filed on January 4, 2002
Agreement dated
December 28, 2001
between Stellent,
Inc. and Active IQ
Technologies, Inc.
10.11 Employment Filed herewith electronically
Agreement
effective August
1, 2001 by and
between Philip C.
Rickard and the
Company
10.12 First Amendment to Filed herewith electronically
Employment
Agreement dated
January 1, 2002 by
and between D.
Bradly Olah and
the Company
10.13 Employee Stock Filed herewith electronically
Option Agreement
dated January 7,
2002 between D.
Bradly Olah and
the Company
10.14 Restricted Stock Filed herewith electronically
Purchase Agreement
dated January 14,
2002 by and
between D. Bradly
Olah and the
Company
10.15 Form of Pledge Filed herewith electronically
Agreement
10.16 Form of Non-Recourse Filed herewith electronically
Promissory Note
10.17 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)
10.18 2001 Employee Stock
Option Plan Filed herewith electronically
21 Subsidiaries of the Filed herewith electronically
Registrant
23.1 Consent of Virchow Krause Filed herewith electronically
23.2 Consent of Arthur Andersen, LLP Filed herewith electronically