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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) --
I