**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**


Washington, D.C. 20549





AMENDMENT NO. 1 TO


**FORM 10-K/A**





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the Year Ended December 31, 2002


Commission File Number: 1-12401





**ACTIVE IQ TECHNOLOGIES, INC.**


(Exact Name of Issuer as Specified in its Charter)





MINNESOTA
41-2004369(State or Other Jurisdiction of
(I.R.S. Employer Identification Number)Incorporation or Organization)





5720 SMETANA DRIVE, SUITE 101, MINNETONKA, MINNESOTA 55343


(Address of Principal Executive Offices)





Issuers telephone number including area code: (952) 345-6600





Securities registered under Section 12(b) of the Exchange Act: NONE





Securities registered under Section 12(g) of the Exchange Act:





COMMON STOCK, $.01 PAR VALUE


Title of Class





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes |X|     No |_|





Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  |_|





Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).


Yes  |_| No |X|





The aggregate market value of Active IQ Technologies, Inc.s Common Stock held by non-affiliates on June 28 2002 (the last business day of Active IQ Technologies, Inc.s most recently completed second fiscal quarter), based on the closing price per share sales price of Active IQ Technologies, Inc.s Common Stock on The Nasdaq SmallCap Market  on June 28, 2002, was $10,200,000.





At March 26, 2003, 13,057,181 shares of Common Stock (the Registrants only class of voting stock) were outstanding. The aggregate market value of the Common Stock on that date held by non-affiliates was approximately $706,000.











ACTIVE IQ TECHNOLOGIES, INC.





Annual Report on Form 10-K


For the Year Ended December 31, 2002


Table of Contents


PART I
****
PageItem 1.
Business
4Item 2.
Properties
10Item 3.
Legal Proceedings
10Item 4.
Submission of Matters to a Vote of Security Holders
10PART IIItem 5.
Market for the Registrants Common Equity and Related Shareholder Matters
12Item 6.
Selected Financial Data
17Item 7.
Managements Discussion and Analysis of Financial Conditionand Results of Operations
17Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
23Item 8.
Consolidated Financial Statements and Supplementary Data
25Item 9.
Changes in and Disagreements with Accountants on Accountingand Financial Disclosure
59PART IIIItem 10.
Directors, Executive Officers, Promoters and Control Persons of the Registrant
61Item 11.
Executive Compensation
63Item 12.
Security Ownership of Certain Beneficial Owners and Management
70Item 13.
Certain Relationships and Related Transactions
71Item 14.
Controls and Procedures
72PART IVItem 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
73Signatures
74Certifications
76

















2














PURPOSE OF AMENDMENT NO. 1





This Amendment No. 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2002, which amends the Companys Form 10-K originally filed on March 31, 2003, is being filed in response to comments received from the Securities and Exchange Commission in connection with its review of the Companys registration statement on Form S-2 (file number 333-110831).





The Company has reclassified certain components between continuing and discontinued operations and added clarification to certain descriptive texts as required pursuant to Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The reclassifications had no impact on the previously reported results of operations or shareholders equity.





Except as described above, this Amendment No. 1 does not update any other disclosures contained in the original Form 10-K filed on March 31, 2003 to reflect developments since the original date of such original filing.











SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS





This Annual Report contains forward-looking statements and information relating to us that is based on the current beliefs of our management as well as assumptions made by and information currently available to management, including statements related to the markets for our products, general trends in our operations or financial results, plans, expectations, estimates and beliefs. In addition, when used in this Annual Report, the words may, could, should, anticipate, believe, estimate, expect, intend, plan, predict and similar expressions and their variants, as they relate to us or our management, may identify forward-looking statements. These statements reflect our judgment as of the date of
this Annual Report with respect to future events, the outcome of which is subject to risks, which may have a significant impact on our business, operating results or financial condition. Readers are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. We undertake no obligation to update forward-looking statements. The risks identified in the section of Item 1 entitled RISK FACTORS, among others, may impact forward-looking statements contained in this Annual Report.








3








PART I





**ITEM 1. BUSINESS**








**OVERVIEW**





During fiscal 2002, Active IQ Technologies, Inc. (we, us, our or the Company) provided industry-specific eBusiness software solutions for selling, managing, sharing and collaborating on business information via the Web and accounting software. In order to offer the foregoing solutions, we completed four acquisitions in fiscal 2001. In April 2001, we completed our merger privately held activeIQ Technologies Inc., a Minnesota corporation (Old AIQ). In June 2001, we completed our acquisition of Red Wing Business Systems, Inc., a Minnesota corporation (Red Wing). In September 2001, we completed our merger with privately held Champion Business Systems, Inc., a Colorado corporation (Champion). And in October 2001, we acquired all of
the outstanding capital stock of FMS Marketing, Inc., an Illinois corporation (FMS/Harvest). FMS Marketing, Inc. did business as FMS/Harvest, and as of December 31, 2001, we merged FMS/Harvest with and into Red Wing.





Until April 2001, we were engaged in the distribution of oil, gas and other refined petroleum products. On April 30, 2001, however, we completed a series of significant transactions resulting in the disposition of our historical operating assets and adoption of the business plan of Old AIQ. Old AIQs main focus was providing software and solutions as part of its Epoxy Network. The Epoxy Network offered an Internet merchandising system called Storefront and a tool set for managing customer information named Account Management. In March 2002, we sold the customer base of the Epoxy Network, thereby allowing us to focus our efforts on developing a hosted solutions model. In August 2002, we sold all of our remaining rights and interests of the Epoxy Network.





In December 2001, we entered in an application service provider (ASP) software license agreement with Stellent, Inc. The agreement provided us with a three-year worldwide exclusive license to be the hosted ASP solution for Stellent's Content Management software in which we would develop and distribute web-based content management solutions (our Hosted Solutions Business). Our Hosted Solutions Business minimized implementation complexities by capturing paper and electronic documents, transform them to Web-viewable formats, personalize them based on security needs and deliver them over the Web to a broad range of users. Subsequent to December 31, 2002, it became apparent to us that, in light of current market conditions, it would be extremely unlikely for us to secure the financing
necessary to fund our Hosted Solutions Business beyond the near term and thereby provide assurance to future customers of our long-term viability. On March 13, 2003, our Board of Directors formally approved the sale of the Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business. We received $650,000 in cash for the assets used in the Hosted Solutions Business (including the ASP software license), plus we were reimbursed $150,000 for expenses we incurred as a result of the transaction.





In addition to eBusiness applications and software solutions discussed above, we offered traditional accounting and financial management software solutions through Red Wing and Champion, our wholly owned subsidiaries, which have collectively operated as our accounting software business (Accounting Software Business). Our original reason for acquiring these companies was to be able to utilize the businesses customer base in order to market to those customers our Epoxy Network products and services. We concluded that these customers would not be prospects for any type of Web-based, hosted solution products or services. Therefore, since we had already sold the Epoxy Network to focus on the Hosted Solutions Business, the Accounting Software Business no longer fit our business plan. In late 2002, we


contacted various entities about purchasing the Accounting Software Business and received no interested responses. In December 2002, our Board of Directors authorized a plan to sell the Accounting Software Business and we began having preliminary discussions with key management employees of the Accounting Software Business, about selling the assets of that business to them or an entity controlled by them. As a result of the formal plan to sell the Accounting Software Business, the results of operations for the Accounting Software Business have been reported as discontinued operations (the Discontinued Operations) and previously reported consolidated financial statements have been restated for the year ended December 31, 2002. (See Footnote No. 2 of the Notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.) On January 14, 2003, we entered into a
non-binding letter of intent with key management employees of the Accounting Software Business, providing for the sale of all or substantially all of the assets of the Accounting Software Business. On February 14, 2003, our Board of Directors formally approved the transaction and authorized management to enter into the definitive asset purchase agreement. The Board further directed management to submit the proposed sale of the Accounting Software Business to our shareholders for their approval. On February 17, 2003, we executed a definitive purchase agreement. Subject to shareholder approval, we expect to complete the transaction by April 30, 2003.





4


If the sale of our Accounting Software Business occurs as proposed, we will no longer have any means of generating revenue (since we have sold our Hosted Solutions Business, as discussed above), however, our Board of Directors is actively searching for businesses or technologies to potentially acquire. There can be no assurance that any acquisitions will be obtainable on terms acceptable to us or on any terms whatsoever.





We were originally incorporated under Colorado law in December 1992 under the name Meteor Industries, Inc. In April 2001, in conjunction with our merger with Old AIQ, we reincorporated under Minnesota law. (Old AIQ was a development stage company from its inception in April 1996 through its fiscal year ended December 31, 2000. For accounting purposes, however, Old AIQ was treated as the acquiring company. Accordingly, in this Annual Report on Form 10-K, when we discuss or refer to business and financial information relating to dates prior to the merger, we are referring to Old AIQ's business and financial information, unless otherwise indicated.)





Our principal office is located at 5720 Smetana Drive, Suite 101 Minnetonka, Minnesota 55343. Our telephone number is (952) 345-6600 and our Internet address is www.activeiq.com.








**INDUSTRY BACKGROUND**





Businesses today are increasingly seeking to leverage their existing information technology infrastructures and to adopt new solutions to automate and improve fundamental business processes within the organization. Legacy applications of small to medium-sized businesses need to extend the reach of their existing systems by linking customers, business partners, suppliers and employees. Historically, these advanced solutions were available only to large enterprise-class software system users.





The rapid growth of the Internet, however, has leveled the playing field in many respects. The requirements of the marketplace are driving purchasers to accounting and management solutions that provide the functionality of an enterprise Internet-capable system in a cost-effective manner.





Additionally, hosted software solutions help organizations increase productivity and customer satisfaction, which results in increased profits. Hosted content management solutions provide organizations in select vertical markets an easy-to-use, affordable tool for publishing, managing, and sharing business content via the Internet.





With Corporate Americas overall slowdown on capital spending for IT infrastructure and the collapse of many of the dot.coms, the availability of ready funds for start-up concepts has become increasingly difficult to procure, if at all. Combine that with what the market perceives as a weak balance sheet or a going concern opinion and many of the larger, more established markets are no longer willing to purchase products and/or services if any of their key resources are at risk.








5


**PRODUCTS AND SERVICES**





During fiscal 2002, we offered three types of business software and solutions: eBusiness solutions through our Epoxy Network; traditional business and accounting software through our Red Wing and Champion subsidiaries; and hosted ASP solutions in selected vertical markets. For fiscal 2003, with the already completed sale of our Hosted Solutions Business and the anticipated completion of the sale of our Accounting Software Business, we will no longer have any means of generating revenue, however, an active search for businesses or technologies to potentially acquire has been initiated.





**Epoxy Network**





In January 2001, Old AIQ completed its merger with privately held Edge Technologies, Incorporated, the creator of a fully integrated eBusiness website service called Account Wizard, which was subsequently branded as the Epoxy Network. The Epoxy Network, which was offered to customers on a monthly subscription basis, included eCommerce, Account Management, customer service and support, and trading partner connectivity. The Epoxy applications integrated with a customers existing accounting software to quickly help get the customer online by accessing information that already exists in its accounting system. Leveraging the power of the Internet, these applications allowed an organization to extend beyond the traditional four walls of their enterprise to integrate their operations with their
customers, suppliers and partners. During the year ended December 31, 2002, revenues from Epoxy Network were $53,599, or 10.7% of our total sales from continuing operations.





In March 2002, we sold the customer base of the Epoxy Network, thereby allowing us to focus our efforts on developing a hosted solutions model. In August 2002, we sold all of our remaining rights and interests of the Epoxy Network.





**Accounting Software Business**





We designed, developed, marketed and supported accounting software products through our Accounting Software Business (Red Wing, Champion and FMS/Harvest) subsidiaries during fiscal 2002. These products addressed the gap market - companies that have outgrown inexpensive, ultra-simple starter accounting software but did not require the significant complexity of high-end software. These products offered a stable, secure and flexible base for growing small business users.





Our original reason for acquiring these companies was to be able to utilize the businesses customer base in order to market to those customers our Epoxy Network products and services. We concluded that these customers would not be prospects for any type of Web-based, hosted solution products or services. Therefore, since we had already sold the Epoxy Network to focus on the Hosted Solutions Business, the Accounting Software Business no longer fit our business plan. On February 17, 2003, we executed a definitive purchase agreement. We expect to complete the transaction by April 30, 2003.





As a result of the plan to sell the Accounting Software Business, the results of operations for the Accounting Software Business have been reported as Discontinued Operations and previously reported financial statements have been restated for the year ended December 31, 2001. During the year ended December 31, 2002, revenues from our Accounting Software Business were $4,179,547. See Footnote No. 2 of the notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.





**Hosted Solutions Business**





As a result of a December 2001 agreement with Stellent, Inc., we had an exclusive worldwide license to distribute Stellents enterprise content management software solutions to customers on a hosted basis. With this license, we offered Web-based content management solutions designed to improve the efficiency of business operations within selected vertical markets. By linking an organizations customers, partners, suppliers and employees, these hosted solutions were designed to enable an organization to improve its operational efficiency and maximize the potential of its content resources. Also, by focusing on industry-specific solutions, we believed we would be more able to closely meet the particular needs of potential customers in those markets. Further, we believed a hosted solutions model would be
attractive to customers in specific markets who demand quicker deployment of new applications and more predictable costs with less financial risk. During the year ended December 31, 2002, revenues from our Hosted Solutions Business were $445,779, or 89.3% of our total sales (including continuing and discontinued operations sales).





6


Subsequent to December 31, 2002, we came to the conclusion that due to current market conditions for capital funding, it would be extremely unlikely for us to secure the financing necessary to fund our Hosted Solutions Business beyond the near term and thereby provide assurance to future customers of our long-term viability. On March 13, 2003, our Board of Directors formally approved the sale of the Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business. We received $650,000 in cash for the assets used in the Hosted Solutions Business (including the exclusive worldwide license), plus we were reimbursed $150,000 for expenses we incurred as a result of the transaction.








**SALES AND MARKETING**





Accounting Business Solutions





Distribution of our Red Wing software applications is managed through a reseller partner organization. The Red Wing partners are the retail distribution arm for software applications to the customers. Along with the distribution of the software, our partners provide implementation and ongoing consulting services to the customers. Red Wing supports this partner organization by providing sales leads generated by our direct marketing efforts. Red Wings marketing and internal account management staff work with our partners to customize a unique marketing plan around the partners business and geographic area.





See Footnote No. 2 of the notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.





Hosted Solutions Business





Our primary marketing objectives were to build awareness and continue to gain market share in select verticals. Accordingly, we did utilize a balanced mix of on and offline advertising and marketing efforts. On-line efforts did include website, affiliate partner links, product demos and industry specific on-line advertising. Offline efforts did include industry specific tradeshows, conferences, publications and vertically specific direct mail campaigns.








**INTELLECTUAL PROPERTY**





Since we sold our rights and interests of the Epoxy Network in August 2002, and already for fiscal 2003, we sold our Hosted Solutions Business, combined with the anticipate sale of our Accounting Software Business, we will not have any intellectual property at risk.








**RESEARCH AND DEVELOPMENT**





Since inception, we made substantial investments in research and software product development. We believed that the timely development of additional services and enhancements to existing software products and the acquisition of rights to sell or incorporate complementary technologies and products into our software product offerings were essential to maintaining and increasing our competitive position in our market. The software services market is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and rapidly evolving industry standards. Our total research and development expense was $134,217 and $562,762 in fiscal 2002 and 2001, respectively.








7


**EMPLOYEES**





As of March 26, 2003, we employ 45 people, (approximately 96% full time status) including 43 employees of the Accounting Software Business. None of our employees are represented by a labor union and we consider our employee relations to be good.








**FINANCIAL INFORMATION IN INDUSTRY SEGMENTS**





During the year ended December 31, 2002, our continuing operations included one reportable segment: our Hosted Solutions Business.





See Footnote No. 1 of the notes to the Consolidated Financial Statements included elsewhere herein for financial information regarding this segment.








**AVAILABLE INFORMATION**





The Companys web site address is www.activeiq.com .





We make available free of charge through our Internet web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission. You can also request a free copy of the above filings by writing or calling us at:





Active IQ Technologies, Inc.


Attention: Mark D. Dacko, Secretary


5720 Smetana Drive, Suite 101


Minnetonka, Minnesota 55343


(952) 345-6600











**RISK FACTORS**





**OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALL CAP MARKET.**





One of Nasdaqs continued listing rules required us to maintain a minimum closing bid price of $1 for our common stock. We were notified in August 2002 that, since the minimum bid price of our common stock was less than $1, we had until February 10, 2003 in order to achieve compliance. On March 18, 2003, we received further notification from Nasdaq on this matter.





Nasdaq has informed us that since we had not regained compliance with the minimum $1 closing bid price per common share and we also were not eligible for an additional 180 calendar day grace period since we did not meet the initial inclusion requirements as specified by The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(A) (the Rule), our common stock was delisted effective with the opening of business on March 27, 2003. Specifically, for initial inclusion, the Rule requires meeting one of following requirements: a $5,000,000 shareholders equity; a $50,000,000 market value of our listed securities; or $750,000 net income from continuing operations for certain fiscal years. We did not meet any of these requirements.





8


Since our common stock has been delisted from the Nasdaq SmallCap Market, trading, if any, in our common stock will be conducted in the over-the-counter markets in the so-called pink sheets or the OTC Bulletin Board. Consequently, the liquidity of our common stock is impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, reduction in the coverage of our securities by security analysts and the news media, and lower prices for our securities than might otherwise prevail. In addition, our common stock has become subject to certain rules of the Securities and Exchange Commission relating to penny stocks. These rules require broker-dealers to make special suitability determinations for purchasers other
than established customers and certain institutional investors and to receive the purchasers' prior written consent for a purchase transaction prior to sale. Consequently, these penny stock rules may adversely affect the ability of broker-dealers to sell our common stock and may adversely affect your ability to sell shares of our common stock in the secondary market.





**WE HAVE SOLD OUR ONLY CONTINUING OPERATIONS REVENUE SOURCE.**





During the year ended December 31, 2002, our continuing operations included one reportable segment: our Hosted Solutions Business. Subsequent to December 31, 2002, it became apparent to us that, in light of current market conditions, it would be extremely unlikely for us to secure the financing necessary to fund our Hosted Solutions Business beyond the near term. On March 13, 2003, our Board of Directors formally approved the sale of the Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business. We received $650,000 in cash for the assets used in the Hosted Solutions Business, plus we were reimbursed $150,000 for expenses we incurred as a result of the transaction.





**WE ARE PROPOSING TO SELL SUBSTANTIALLY ALL OF OUR REMAINING ASSETS.**





For the year ended December 31, 2002, the Accounting Software Business was responsible for $4,179,547 in revenue, or approximately 89 percent of our consolidated revenues (including continuing and discontinued operations sales). Our original reason for acquiring these companies was to be able to utilize the businesses customer base in order to market to those customers our Epoxy Network products and services. We concluded that these customers would not be prospects for any type of Web-based, hosted solution products or services. Therefore, since we had already sold the Epoxy Network to focus on the Hosted Solutions Business, the Accounting Software Business no longer fit our business plan. On February 17, 2003, we executed a definitive purchase agreement. Accordingly, following completion
of the proposed transaction, we will no longer have any ongoing business operations and no significant means of generating any revenue.





See Footnote No. 2 of the notes to the Consolidated Financial Statements included elsewhere herein for further discussion and financial information regarding the Discontinued Operations of Accounting Software Business.








**WE ARE CURRENTLY IN DEFAULT OF OUR OBLIGATIONS TO REPAY THE DEBT WE INCURRED IN CONNECTION WITH OUR ACQUISITION OF THE ACCOUNTING SOFTWARE BUSINESS.**





When we acquired the three businesses that collectively comprise our Accounting Software Business we paid a combination of cash, stock and notes or other obligations. The notes and other obligations are collectively secured by the stock or assets of the companies we acquired. The current remaining indebtedness incurred in connection with these acquisitions is $1.45 million and we are currently in default of these obligations. If the proposed sale is not completed, the beneficiaries of our obligations to repay this indebtedness may commence foreclosure proceedings against the stock and/or assets of the Accounting Software Business. If this were to occur, there is no assurance that the proceeds from any such foreclosure sale would be sufficient to satisfy the outstanding indebtedness.





9


**WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.**





For the year ended December 31, 2002, we had a net loss of $9,658,755, and since our inception as Old AIQ in April 1996 through December 31, 2002, we have incurred an aggregate net loss of $22,580,994. As of December 31, 2002, we had total assets of $4,772,106. We expect operating losses to continue for the foreseeable future and there can be no assurance that we will ever be able to operate profitably.





**WE WILL REQUIRE FUTURE FINANCING.**





Further financing will be needed in order to potentially acquire other businesses or technologies. And there is no precise way to predict when further financing will be needed or how much will be needed. Moreover, we cannot guarantee that the additional financing will be available when needed. If it is not available, your investment in our securities may be lost. If the financing is available only at a low valuation of our Company, your investment may be substantially diluted








**ITEM 2. PROPERTIES**





As of December 31, 2002, our corporate office is located at 5720 Smetana Drive, Suite 101, Minnetonka, Minnesota 55343, which we occupy pursuant to a lease agreement that expires June 30, 2004. We occupy approximately 6,850 square feet for a monthly payment of $11,670. With the sale of our Hosted Solutions Business to Stellent, Inc. in March 2003, the aforementioned lease has been assigned to Stellent and we will be moving to a new location on or about May 1, 2003.





We currently lease office space in Red Wing, Minnesota (Red Wing Business Systems), Denver, Colorado (Champion Business Systems) and New Lenox, Illinois (FMS/Harvest). With the anticipated sale of the Accounting Software Business, the following property lease liabilities would be assigned to the Purchasers.





The Red Wing location is approximately 12,000 square feet. Current rentals of $6,500 per month ($78,000 annually) are required under the lease, in addition to real estate taxes and nominal charges for common area maintenance. The lease expires October 1, 2008. The landlords were former shareholders in the privately held Red Wing business and one is still a current employee of the Company.





At December 31, 2002, the Denver location was approximately 11,740 square feet requiring rentals of $17,115 per month. The lease expired February 28, 2003, although a one-month extension was granted at a reduced rate. We signed a new lease commencing on March 15, 2003 for 2,040 square feet with a monthly payment of $2,720 ($32,640 annually) in addition to real estate taxes and nominal charges for common area maintenance, for the first twelve months. The subsequent months of 13 through 24 and 25 through 39 require monthly payments of $2,805 and $2,890, respectively. The lease expires June 2006.





The New Lenox location is approximately 800 square feet with current rentals of $600 per month. This is a month-to-month lease.








**ITEM 3. LEGAL PROCEEDINGS**





We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our operations.








**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





On December 12, 2002, the Company held its Annual Meeting of Shareholders. As of November 8, 2002, the record date for determining the shares of the Companys stock outstanding and entitled to vote at the meeting, there were 13,298,014 shares of common stock issued and outstanding. A total of 9,022,711 shares were represented at the meeting. The following matters were voted:





10


(A) To elect six directors. All of the managements nominees for directors as listed in the proxy statement were elected with the following:





Shares Voted For

WithheldKenneth W. Brimmer


8,899,434


123,277Ronald E. Eibensteiner


8,773,634


249,077Jack A. Johnson


8,899,434


123,277Wayne W. Mills


8,899,434


123,277Patrick L. Nelson


8,899,434


123,277D. Bradly Olah


8,379,686


643,025Brent Robbins


8,899,434


123,277











(B) Vote to approve an amendment to Active IQ Technologies 1999 Stock Option Plan to increase the number of shares of common stock issuable thereunder from 2,500,000 to 4,250,000 shares:





Shares Voted For
Against
Abstain
Non-Vote5,400,002
964,214
206,500
2,451,995











(C) Vote to approve an amendment to Active IQ Technologies 2000 Director Stock Option Plan to increase the number of shares of common stock issuable thereunder from 250,000 to 550,000 shares:








Shares Voted For
Against
Abstain
Non-Vote5,399,802
964,414
206,500
2,451,995








(D) Vote to approve an amendment to Active IQ Technologies 2001 Employee Stock Option Plan to increase the number of shares of common stock issuable thereunder from 700,000 to 1,450,000 shares:





Shares Voted For
Against
Abstain
Non-Vote5,401,400
962,816
206,500
2,451,995








(E) Vote to approve an amendment to the Companys Articles of Incorporation to increase the number of authorized shares of undesignated capital stock to 150,000,000 shares:








Shares Voted For
Against
Abstain
Non-Vote5,508,189
856,027
206,500
2,451,995











11








**PART II**





**ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS**





**PRICE RANGE OF COMMON STOCK**





The Companys common stock was quoted on the Nasdaq SmallCap Market under the symbol AIQT until March 26, 2003. (See Risk Factors in Item 1 for a further discussion regarding our common stock being delisted from the Nasdaq SmallCap Market.) Prior to May 1, 2001, our stock traded under the symbol METR. As of March 26, 2003 the last sale price of our common stock as reported by Nasdaq was $0.08 per share. The following table sets forth for the periods indicated the range of high and low bid prices of the common stock as reported by Nasdaq:





BidPeriod

High

LowQuarter Ended March 31, 2002

$
4.75

$
1.66Quarter Ended June 30, 2002

$
2.00

$
0.69Quarter Ended September 30, 2002

$
1.00

$
0.25Quarter Ended December 31, 2002

$
0.75

$
0.16Quarter Ended March 31, 2001

$
5.50

$
2.38Quarter Ended June 30, 2001

$
6.00

$
3.63Quarter Ended September 30, 2001

$
5.99

$
1.75Quarter Ended December 31, 2001

$
4.71

$
2.55





As of the March 26, 2003, there were approximately 600 record holders of our common stock. Based on securities position listings, we believe that there are approximately 900 beneficial holders of our common stock.





**DIVIDENDS**





We have paid no cash dividends on our common stock and have no present intention of paying cash dividends in the foreseeable future. Rather, we intend to retain all earnings to provide for the growth of our Company. Payment of cash dividends in the future, if any, will depend, among other things, upon our future earnings, requirements for capital improvements and financial condition.





**RECENT SALES OF UNREGISTERED SECURITIES**





On March 14, 2002, the holder of a warrant issued as compensation to an underwriter of the Company's 1998 offering, exercised the warrant for which he was entitled to receive 54,000 units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock (the Warrant). The Warrant was exercised at a price of $2.00 per unit. The Warrant as originally issued, had an exercise price of $6.875. The new warrants issued upon exercise of the Warrant, have an exercise price of $5.50. No commission was paid in connection with this transaction. In connection with this issuance, we relied upon the exemptions from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933 and Rule 506 promulgated thereunder since this was a private, isolated transaction, not
constituting a public offering, and we had a reasonable basis for concluding that the warrant holder met the definition of accredited investor.





In connection with our October 2001 acquisition of FMS Marketing, Inc., we were required to pay to the 4 former shareholders of FMS Marketing an aggregate of $300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In May 2002 we re-negotiated the terms of those notes in order to provide that we would immediately pay an aggregate of $30,000 and the remaining $270,000 would be payable by December 15, 2002, with interest accruing at the rate of 12.5% per annum. In addition, the re-negotiated notes allowed the former FMS shareholders to convert the outstanding balance into shares of our common stock until July 12, 2002 at a price equal to 90% of the average closing sales price for the 5 days preceding conversion. On April 10, 2002, three of the former FMS shareholders exercised the conversion
option with respect to their notes, converting an aggregate of $118,758 of outstanding principal and interest into 151,669 shares of our common stock (at a conversion price of $0.783 per share). In connection with the re-negotiation of these notes and the shares into which such notes were convertible, we relied on the exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D based on (i) our belief that the issuances did not involve a public offering, (ii) the transactions involved fewer than 35 purchasers, and (iii) because we had a reasonable basis to believe that each of the noteholders were either accredited or otherwise had sufficient knowledge and sophistication, either alone or with a purchaser representative, to appreciate and evaluate the risks and merits associated with their investment decision.





12


In May 2002, we renegotiated one of the payments we were required to pay in satisfaction of certain notes payable issued to the former shareholders of Champion Business Systems, Inc. in connection with our acquisition of that company. Specifically, in exchange for extending until December 31, 2002 the due date relating to an aggregate of installment of approximately $159,041 required to be paid on May 18, 2002 (the May Installment) in satisfaction of such notes, we agreed to pay interest at the rate of 12.5% per annum on the entire unpaid balance and granted such noteholders a 60-day right to convert the May Installment, including accrued interest, into shares of our common stock at a price equal to 90% of the average closing sale price for the 5 days preceding conversion. None of such noteholders
exercised their right to convert. In connection with the amendment of these notes, we relied on the exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D based on (i) our belief that the issuances did not involve a public offering, (ii) the transactions involved fewer than 35 purchasers, and (iii) because we had a reasonable basis to believe that each of the noteholders were either accredited or otherwise had sufficient knowledge and sophistication, either alone or with a purchaser representative, to appreciate and evaluate the risks and merits associated with their investment decision.





On May 27, 2002, we sold 500,000 shares of our common stock in a private placement to one accredited investor at a price of $0.75 per share, for a total purchase price of $375,000, (we received $350,000 in cash and recorded a stock subscription receivable of $25,000). Also, as consideration for its purchase of such shares, the investor also received a warrant to purchase an additional 500,000 shares of our common stock at an exercise price of $1.00 per share. We further agreed to reduce to $1.00 the exercise price on all other warrants to purchase shares of our common stock held by this investor and its affiliates. Such warrants represent the right to purchase 1 million shares of common stock and had exercise prices ranging from $5.50 to $7.50 per share. In connection with this offering, we relied on the
exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D because we had a reasonable basis to believe that the purchaser was an accredited investor. In December 2002, the Company finalized an amendment to the agreement and canceled the $25,000 stock subscription receivable, thereby reducing the shares sold to 466,667 shares.





On May 31, 2002, we sold to two investors in a private placement an aggregate of 800,000 shares of our common stock at a price of $0.75 per share for total proceeds of $600,000. In connection with the sale of these shares, we also issued to the investors 5-year warrants to purchase an aggregate of 800,000 shares of common stock at an exercise price of $1.25 per share. The warrants may be redeemed by us any time after January 30, 2003 and following a period of at least 30 business days in which our common stock trades at $2.50 per share or more. The redemption price is equal to $.01 per warrant share. One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the shares and warrants issued in this private
placement. Additionally, we also issued a warrant to purchase 50,000 shares of common stock in September 2002 to Mr. Eibensteiner as consideration for the placement. This warrant has a term of 5 years and is exercisable at a price of $1.00 per share. In connection with this offering, we relied on the exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D because we had a reasonable basis to believe that both purchasers were accredited investors.





13


In connection with our June 2001 acquisition of Red Wing Business Systems, Inc., we were required to make an aggregate payment of $400,000 to the former shareholders of such company on June 6, 2002 (the June Payment). With respect to former Red Wing shareholders representing $339,093 of the June Payment, such shareholders agreed to extend the due date of the June Payment until December 31, 2002. In exchange for the extension, we agreed to pay interest on the unpaid portion of the June Payment at the rate of 12.5% per annum (commencing July 1, 2002) and granted such shareholders a 60-day right to convert any or all of the June Payment (including accrued interest) into shares of our common stock at a price equal to 90% of the average closing sale price of our common stock during the 5 days preceding
conversion. None of the former Red Wing shareholders exercised their right to convert. In connection with the amending the terms of the June Payment, we relied on the exemption from registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D based on (i) our belief that the issuances did not involve a public offering, (ii) the transactions involved fewer than 35 purchasers, and (iii) we had a reasonable basis to conclude that each of the noteholders were either accredited investors or otherwise had sufficient knowledge and sophistication, either alone or with a purchaser representative, to appreciate and evaluate the risks and merits associated with their investment decision.





On September 18, 2002, we renegotiated one of the payments we were required to make in satisfaction of certain notes payable issued to the former shareholders of Champion Business Systems, Inc. in connection with our acquisition of that company. Specifically, in exchange for extending until December 15, 2002 the due date relating to an aggregate of installment of approximately $159,041 required to be paid on September 18, 2002 in satisfaction of such notes, we agreed to pay interest at the rate of 12.5% per annum on the entire unpaid balance. As consideration for their agreeing to the deferral, each such note holder also received one common stock purchase warrant for every dollar deferred until December 15, 2002. We issued warrants to purchase an aggregate of 119,285 shares of our common stock to 9 persons. The
warrants have a term of 5 years and have an exercise price of $1.00 per share. In connection with the issuance of these warrants, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933.





Pursuant to our 1999 Stock Option Plan and 2001 Employee Stock Option Plan, we issued to various employees options to purchase shares of common stock. All of the options were issued in reliance on the exemption from registration under Section 4(2) of the Securities Act, based on the Companys belief that none of the issuances involved a public offering and because all of the employees to whom the options were issued had access to financial and business information concerning the Company. The table below summarizes the unregistered option grants made during 2002.











14





Grant
Number
Exercise
Expiration
Vesting
VestingDate
of shares
Price
Date
Date
Shares01/02/02
96,950
$4.27
01/20/12
01/02/03
24,23701/02/04
24,23701/02/05
24,23801/02/06
24,23801/09/02
150,000
$4.00
01/09/12
12/31/02
37,50012/31/03
37,50012/31/04
37,50012/31/05
37,50001/14/02
500,000
$4.00
01/14/12
01/14/03
166,66601/14/03
166,66701/14/03
166,66704/22/02
35,000
$1.80
04/22/12
04/22/03
8,75004/22/04
8,75004/22/05
8,75004/22/06
8,75004/29/02
35,000
$1.50
04/22/12
04/29/03
8,75004/29/04
8,75004/29/05
8,75004/29/06
8,75005/06/02
50,000
$1.15
05/06/12
05/06/03
12,50005/06/04
12,50005/06/05
12,50005/06/06
12,50005/14/02
175,000
$1.25
05/14/12
05/14/02
35,00005/14/03
35,00005/14/04
35,00005/14/05
35,00005/14/06
35,00005/17/02
6,000
$1.00
05/17/12
06/17/02
2,00007/17/02
2,00008/17/02
2,00008/19/02
60,000
$0.66
08/19/12
08/19/03
15,00008/19/04
15,00008/19/05
15,00008/19/06
15,00009/01/02
25,000
$1.25
09/01/12
09/01/03
6,25009/01/04
6,25009/01/05
6,25009/01/06
6,25010/01/02
175,000
$0.50
10/01/12
10/01/03
43,75010/01/04
43,75010/01/05
43,75010/01/06
43,75011/15/02
50,000
$0.43
11/15/12
02/13/03
10,00011/15/04
20,00011/15/05
20,00011/25/02
900,000
$0.35
11/25/12
11/25/02
90,00011/25/03
270,00011/25/04
270,00011/25/05
270,000 
 15





EQUITY COMPENSATION





The following table sets forth certain information regarding equity compensation plan information as of December 31, 2002:





Number of securitiesremaining available forfuture issuance underNumber of securities to

Weighted-average

equity compensationbe issued upon exercise

exercise price of

plans (excludingof outstanding options,

outstanding options,

securities reflected inPlan category

warrants and rights

warrants and rights

column (a))(a)

(b)

(c)Equity compensationplans approved bysecurity holders


3,315,259

$
2.06


2,566,274Equity compensationplans not approved bysecurity holders


2,027,543

$
2.49


--Total


5,342,802

$
2.22


2,566,274

















16








**ITEM 6. SELECTED FINANCIAL DATA**


****


The selected financial data with respect to the statement of operations data for the years ended December 31, 2002 and 2001, and the balance sheets data as of December 31, 2002 and 2001 are derived from the Consolidated Financial Statements of the Company that have been audited by Virchow, Krause & Company, LLP, independent auditors. The data provided should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included in this Annual Report. The selected financial data presented below with respect to the statements of operations data for the years ended December 31, 2000, 1999 and 1998 and the balance sheets data as of December 31, 2000, 1999 and 1998 have been derived from the Consolidated Financial Statements of the Company that have been audited
by Arthur Andersen LLP, independent public accountants.











**STATEMENT OF OPERATIONS DATA:**


(in thousands, except per share information)





For the Years Ended December 31,2002

2001

2000

1999

1998Revenue

$
499

$
463

$


$


$
Loss from operations


(4,239
)

(7,941
)

(2,806
)

(414
)

(12
)Other income (expense)


326


152


(34
)

(48
)

(132
)Loss from continuing operations


(3,913
)

(7,789
)

(2,840
)

(462
)

(144
)Loss from discontinued operations


(5,746
)

(1,658
)







Net loss

$
(9,659
)
$
(9,447
)
$
(2,840
)
$
(462
)
$
(144
)Basic and diluted net lossper common shareContinuing operations

$
(0.31
)
$
(0.95
)
$
(1.65
)
$
(1.92
)
$
(0.79
)Discontinued operations

$
(0.46
)
$
(0.20
)
$


$


$
Net loss

$
(0.77
)
$
(1.15
)
$
(1.65
)
$
(1.92
)
$
(0.79
)Basic and diluted weighted averagecommon shares outstanding


12,532


8,210


1,718


240


184








**BALANCE SHEET DATA:**


(in thousands)





At December 31,2002

2001

2000

1999

1998Cash and equivalents

$
13

$
1,377

$
1,349

$
410

$
39Net assets of discontinued operations


3,590


8,870








Total assets


4,772


13,628


2,672


474


72Net liabilities of discontinued operations


3,683


3,977








Total liabilities


4,183


5,621


790


289


242Shareholders equity (deficit)


589


8,007


1,882


185


(170
)Common shares outstanding


13,265


10,731


3,836


374


152








**ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto included elsewhere in this Annual Report. See Item 8. Consolidated Financial Statements and Supplementary Data.





17


Readers are cautioned that the following discussion contains certain forward-looking statements and should be read in conjunction with the Special Note Regarding Forward-Looking Statements appearing at the beginning of this Annual Report.





During fiscal 2002, Active IQ Technologies, Inc. (we, us, our or the Company) provided industry-specific eBusiness software solutions for selling, managing, sharing and collaborating on business information via the Web and accounting software. We offered an eBusiness website service called the Epoxy Network (through March 2002), we offered traditional business and accounting software products through our Accounting Software Business subsidiaries (Red Wing, Champion and FMS/Harvest) and we initiated our Hosted Solutions Business of hosted ASP solutions in selected vertical markets.








**RESULTS OF OPERATIONS**





**FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001.**





**REVENUES**





Revenues were $499,378 for 2002 as compared to $462,800 for 2001. For 2002, our revenues were as follows: the Epoxy Network generated $53,599 and our Hosted Solutions Business generated $445,779. For 2001, our revenues were as follows: the Epoxy Network generated $196,356 and our eBusiness and miscellaneous revenues were $266,444.





In March 2002, we sold the customer base of the Epoxy Network thereby terminating this revenue source from future periods. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business thereby terminating our only remaining revenue source.





**COSTS AND EXPENSES**





Costs of goods sold, represents data hosting center rentals, commissions and royalty fees related to our worldwide license. Cost of goods sold for 2002 was $588,488 as compared to $191,422 for 2001. The increase of $397,066 was due primarily to the recognition of prepaid royalty fees related to our ASP hosted license.





Selling, general and administrative expenses were $3,339,590 for 2002 as compared to $5,952,067 for 2001. The $2,612,477 decrease in selling, general and administrative expenses was primarily attributable to three main areas: reduction in the expenses of deferred compensation; reduction in number of employee stock options exercised; and overall cost reductions in the areas of our labor force eliminations.





Depreciation and amortization for 2002 was $144,962 as compared to $1,641,875 for 2001. For fiscal 2001, depreciation and amortization expense of property, equipment and other intangibles was $195,937 and goodwill and other acquisition related intangible amortization expense was $1,445,938, related to the merger of Edge with Old AIQ. Goodwill and other acquisition related intangible amortization represents the excess of the purchase price and related costs over the fair value of the net assets. Through December 31, 2002, amortized acquired goodwill and other intangibles is a component of discontinued operations.





Product development expenses for 2002 were $134,217 as compared to $562,762 for 2001. The $428,545 decrease in product development expenses was related primarily to the closing of our software engineering office located in Boston, Massachusetts during fiscal 2001.





During fiscal 2002, we recorded losses on disposal of assets of $114,037. These losses relate primarily to the general retirement of computer hardware and the closing of our Las Vegas office. In order to facilitate an early release from our Las Vegas lease, the furniture and fixtures located within our space were given as consideration to the landlord and written off and recorded as loss on assets.





18


Loss on impairment of goodwill for fiscal 2002 was $417,273, all related to the sale of the Epoxy Network. As of December 31, 2001, the balance of goodwill was $817,273. In August 2002, we sold all of our rights and interests of the Epoxy Network for $400,000 and recorded the remaining balance as goodwill impairment.





Our other income and expense consists of interest and dividend income, other income and interest expense. Interest and dividend income for 2002 was $15,244 as compared to $159,101 for 2001. This income represents interest earned on our short-term investments. We expect interest income to decrease substantially in the future as cash is used to develop new operations and for investments in infrastructure. Other income for 2002 was $430,000. This income is from two sources. In March 2002, we sold the customer base of the Epoxy Network for $20,000. Additionally, we received $410,000 in referral fees for our sales efforts in connection with customers that were not candidates for our ASP hosted solution. Interest expense for 2002 was $119,206 as compared to $7,138 for 2001. The increase in expense relates primarily to


a loan we entered into in March 2002, in which we borrowed $450,000 from Blake Capital Partners, LLC, an entity wholly owned by Mr. Mills, a shareholder and who was then a director. In May 2002, we allowed Blake Capital Partners to convert $150,000 of outstanding principal under the note into 200,000 shares of common stock at a price of $0.75 per share. We satisfied the remaining outstanding principal and accrued interest in full in June 2002. Included in the total interest expense is an $80,000 non-cash interest charge to reflect the discount to market of the shares issued.





**DISCONTINUED OPERATIONS**





The loss of $5,745,604 in 2002 is a result of the discontinuation of the Accounting Software Business, including the write-off of all assets associated with the business. No further costs are anticipated, however, if any arise, they will be charged to operations as incurred.





**FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000.**





**REVENUES**





Revenues were $462,800 for 2001 as compared to no revenue for 2000. Our revenues are as follows: Active IQ had software and miscellaneous incomes of $279,444 and the Epoxy Network generated $183,356. During 2000, our company was in the development stage and had not yet generated any revenue.





**COSTS AND EXPENSES**





Costs of goods sold represents labor and benefit expenses, overhead allocation and material costs for the development, production and sales of software. Cost of goods sold for 2001 was $191,422. There were no costs of goods sold in 2000.





Selling, general and administrative expenses were $5,952,067 for 2001 as compared to $1,978,697 for 2000. The $3,973,370 increase in selling, general and administrative expenses was primarily due to the increased corporate overhead structure for the development of our eBusiness software and services and the costs associated with our acquisitions.





Depreciation and amortization for 2001 was $1,641,875 as compared to $112,544 for 2000. For fiscal 2001, depreciation and amortization expense of property, equipment and other intangibles was $185,520 and goodwill and other acquisition related intangible amortization expense was $1,456,355. Goodwill and other acquisition related intangible amortization represents the excess of the purchase price and related costs over the fair value of the net assets that the Company acquires through its mergers and acquisitions. Through December 31, 2001, the Company amortized acquired goodwill and other intangibles on a straight-line basis on acquisitions that occurred prior to July 1, 2001.





19


Product development expenses for 2001 were $562,762 as compared to $609,344 for 2000. The $46,582 decrease in product development expenses was related primarily to our change in focus of utilization of the Epoxy Network verse building a complete software solution from the ground up.





During 2001, the Company closed its office located in Boston, Massachusetts. With this closure the Company booked a loss on disposal of assets of $55,194 relating to the Boston office. In order to facilitate an early release from our office lease, the furniture and fixtures located within our space were given as consideration to the landlord and written off and recorded as loss on assets.





The Companys other income and expense consists of interest and dividend income and interest expense. Interest and dividend income for 2001 was $159,101 as compared to $7,500 for 2000. This income represents interest earned on our short-term investments.





Interest expense for 2001 was $7,138 as compared to $41,974 for 2000. The overall reduction in interest expense relates to the accelerated payoff of capital lease obligations.





**DISCONTINUED OPERATIONS**





The loss of $1,658,251 in 2001 is a result of the discontinuation of the Accounting Software Business, including the write-off of all assets associated with the business.





**LIQUIDITY AND CAPITAL RESOURCES**





The Company has funded its operations and satisfied its capital expenditure requirements primarily through the sale of its common stock in private placements and the exercise of employee stock options, in addition to the cash received from the merger and acquisition of activeIQ and Meteor. Net cash used by operating activities was $2,058,283 for 2002 as compared to net cash used by operating activities of $3,843,954 for 2001 and $2,236,896 for 2000.





The Company had a working capital deficit of $509,372 at December 31, 2002, compared to working capital of $335,630 on December 31, 2001. Cash and equivalents were $13,211 at December 31, 2002, representing a decrease of $1,364,104 from the cash and equivalents of $1,377,315 at December 31, 2001.





As of December 31, 2002, our principal commitments consist of payments to the former shareholders at Red Wing ($705,186), Champion ($674,077) and FMS/Harvest ($152,255). One remaining payment was due the former shareholders of Champion on January 14, 2003 of $256,000. With the pending sale to be completed of our Accounting Software Business, these commitments are recorded as Net liabilities of operations of discontinued accounting software business on the consolidated balance sheet dated December 31, 2002 of Item 8. Consolidated Financial Statements and Supplementary Data included elsewhere in this Annual Report.





On March 14, 2002, we issued a warrant to purchase 54,000 shares of common stock at $5.50 per share to an underwriter who exercised a warrant for which he was entitled to receive 54,000 units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock. The original warrant had an exercise price of $6.875 and was re-priced to $2.00 per share, providing net proceeds of $108,000.





On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an entity wholly owned by Mr. Mills who currently is a director and shareholder. The loan was evidenced by a 90-day promissory note and accrued interest at the rate of 7% annually. In connection with the loan, we also issued to Blake Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock at a price of $3.00 per share. The proceeds received were allocated to the fair value of the securities issued (debt and warrant issued). On May 30, 2002, we allowed Blake Capital Partners to convert $150,000 of outstanding principal under the note into 200,000 shares of common stock. We satisfied the remaining outstanding principal and accrued interest in full on June 10, 2002.





20


In December 2001, we entered in an application service provider (ASP) software license agreement with Stellent, Inc. The ASP agreement provided us with a three-year worldwide exclusive license to be the hosted ASP solution for Stellents Content Management software. The ASP agreement required a minimum royalty to be paid as follows: a credit of $500,000 from existing prepaid royalties recorded at Stellent, a payment of $500,000 was paid with the execution of the ASP agreement and two $500,000 payments were due in September and December 2002. On March 29, 2002 we prepaid the September and December payments and in consideration of the early payment, we received a 5% discount, or $50,000.





In December 2000, Old AIQ entered into a subscription receivable for the purchase of 100,000 shares of common stock at a price of $2.75 per share with Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner delivered to our company a cash payment in the amount of $75,000 and a 2-month promissory note in the principal amount of $200,000. In April 2002, the receivable was paid in full.





In connection with our October 2001 acquisition of FMS Marketing, Inc., we were required to pay to the 4 former shareholders of FMS/Harvest an aggregate of $300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In May 2002 we re-negotiated the terms of those notes in order to provide that we would immediately pay an aggregate of $30,000 and the remaining $270,000 would be payable by December 15, 2002, with interest accruing at the rate of 12.5% per annum. In addition, the re-negotiated notes allowed the former FMS/Harvest shareholders to convert the outstanding balance into shares of our common stock until July 12, 2002 at a price equal to 90% of the average closing sales price for the 5 days preceding conversion. On April 10, 2002, three of the former FMS/Harvest shareholders exercised the
conversion option with respect to their notes, converting an aggregate of $118,758 of outstanding principal and interest into 151,669 shares of our common stock (at a conversion price of $0.783 per share, the fair value of the common stock on that date). We issued the common stock in June 2002.





We completed our merger with Old AIQ on April 30, 2001 and entered into a note receivable in the amount of $500,000. The note was secured by a stock pledge dated April 27, 2001, pledging 1,500,000 shares of common stock of Capco Energy, Inc. The note receivable accrued interest at 10% per annum. We received the remaining principal balance plus accrued interest in May 2002.





On May 27, 2002, we sold 500,000 shares of its common stock in a private placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for total proceeds of $375,000 (we received $350,000 in cash and recorded a stock subscription receivable of $25,000). We issued the common stock in June 2002. As consideration for its purchase of such shares, Boston Financial Partners also received a warrant to purchase an additional 500,000 shares of our common stock at an exercise price of $1.00 per share, and we further agreed to reduce to $1.00 the exercise price on all other warrants to purchase shares of our common stock held by Boston Financial Partners and its affiliates. Such warrants represent the right to purchase 1 million shares of common stock and had exercise prices ranging from $5.50 to $7.50 per
share. Prior to this private placement, Boston Financial Partners beneficially owned more than 5% of our common stock. In December 2002, the Company finalized an amendment to the agreement and canceled the $25,000 stock subscription receivable.





On May 31, 2002, we sold to two investors in a private placement an aggregate of 800,000 shares of our common stock at a price of $0.75 per share for total proceeds of $600,000. We issued the common stock in June 2002. In connection with the sale of these shares, we also issued to the investors 5-year warrants to purchase an aggregate of 800,000 shares of our common stock at an exercise price of $1.25 per share. The warrants may be redeemed by us any time after January 30, 2003 and following a period of at least 30 business days in which our common stock trades at $2.50 per share or more. The redemption price is equal to $.01 per warrant share. One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the
shares and warrants issued in this private placement. In conjunction with this transaction, we also issued an additional 50,000 warrants in September 2002 to Mr. Eibensteiner as consideration for the placement.





During the year ended December 31, 2002, our continuing operations included one reportable segment: our Hosted Solutions Business. Subsequent to December 31, 2002, it became apparent to us that, in light of current market conditions, it would be extremely unlikely for us to secure the financing necessary to fund our Hosted Solutions Business beyond the near term. On March 13, 2003, our Board of Directors formally approved the sale of the Hosted Solutions Business. On March 14, 2003, we executed a definitive purchase agreement with Stellent, Inc. and completed the sale of the Hosted Solutions Business. We received $650,000 in cash for the assets used in the Hosted Solutions Business, plus we were reimbursed $150,000 for expenses we incurred as a result of the transaction. If the anticipated sale of our Accounting


Software Business is finalized on or about April 20, 2003, and our Board of Directors have not identified a potential business or technology acquisition, we will no longer be generating any revenues. Furthermore, if we are successful in our acquisition strategy, we will require further sources of capital to fund operations. There can be no assurance that additional capital will be available on terms acceptable to us or on any terms whatsoever. See Note 1  Nature of Business, included elsewhere in this Annual Report, regarding our going concern opinion.





21


**NEW ACCOUNTING PRONOUNCEMENTS**





In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections effective for fiscal years beginning after May 15, 2002. The Company believes the adoption of SFAS No. 145 will not have a material effect on the Companys consolidated financial position or results of operations.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred versus the date the Company commits to an exit plan. In addition, SFAS No. 146 states the liability should be initially measured at fair value. The requirements of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is still evaluating the effect of adopting SFAS No. 146.





In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 is effective October 1, 2002. The adoption of SFAS No. 147 did not have a material effect on the Companys consolidated financial position or results of operations.





In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides requires additional disclosures about the method of accounting for stock-based employee compensation. The amendments are effective for financial statements for fiscal years ending after December 15, 2002 and for the interim periods beginning after December 15, 2002. The Company adopted the annual disclosure position of SFAS No. 148. The Company has currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock-based employee
compensation, pursuant to SFAS No. 148, which, if adopted, could have a material effect on the Company's consolidated financial position or results of operations.





**CRITICAL ACCOUNTING POLICIES**





Goodwill and other intangibles





We periodically evaluate acquired businesses for potential impairment indicators. Our judgements regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangibles associated with our acquired businesses, which amounts to $7,965,476 (or 58% of total assets), is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. During 2002, the Company recorded an impairment charge of $417,273 related to the Epoxy Network and an impairment charge of goodwill of $3,781,391, which is included in loss on discontinued operations for the year
ended December 31, 2002. During the years ended December 31, 2001 and 2000, the Company did not record any impairment losses related to goodwill and other intangibles related to acquired businesses.





22


Long-Lived Assets





The Companys long-lived assets include property, equipment and software. At December 31, 2002, the Company had net property and equipment and software of $123,505, which represents approximately 11% of the Companys total assets. With the sale of our Hosted Solutions Business on March 14, 2003, we sold substantially all of our long-lived assets to Stellent, Inc.





Revenue recognition





Software license revenue is recognized when all of the following criteria have been met: there is an executed license agreement, software has been delivered to the customer, the license fee is fixed and payable within twelve months, collection is deemed probable and product returns are reasonably estimable. Revenues related to multiple element arrangements are allocated to each element of the arrangement based on the fair values of elements such as license fees, maintenance, and professional services. Fair value is determined based on vendor specific objective evidence. Maintenance revenues are recognized ratably over the term of the maintenance contract, typically 12 months. The Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition provides guidance on the application of accounting policies generally accepted in the United States of America to selected revenue recognition issues. We have concluded that our revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 101.





Contractual obligations





The Company has entered into various non-cancelable leases for land, buildings and equipment with terms ranging from 3 to 8 years.





Minimum future obligations on leases in effect at December 31, 2002, are approximately as follows:








Total

1 Yr or less

1 - 3 Yrs

4 - 5 Yrs

Over 5 YrsReal property leases

$
804,900

$
281,000

$
182,000

$
112,900

$
229,000Equipment leases

$
29,100

$
13,000

$
11,000

$
5,100


Total

$
834,000

$
294,000

$
193,000

$
118,000

$
229,000








If the Accounting Software Business is disposed of as anticipated in April 2003, (See Note 2 - Discontinued Operations of the Accounting Business, included elsewhere in this Annual Report) the revised future obligations on the leases in effect at December 31, 2002, are approximately as follows:





Total

1 Year or less

1 - 3 YearsReal property leases

$
210,000

$
140,000

$
70,000











**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





**INTEREST RATE EXPOSURE**





Based on our overall interest rate exposure during the year ended December 31, 2002 and assuming similar interest rate volatility in the future, a near-term (12 months) change in interest rates would not materially affect our consolidated financial position, results of operation or cash flows. Interest rate movements of 5% would not have a material effect on our financial position, results of operation or cash flows.





23





**FOREIGN EXCHANGE EXPOSURE**





We receive Canadian funds for the sale of certain software products related to the Accounting Software Business. A 5% change in the foreign exchange rate would not have a material effect on our financial position, results of operation or cash flows.





24





**ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





Table of Contents


****
PageReport of Virchow, Krause & Company, LLP
26Report of Arthur Andersen LLP
27Consolidated Balance Sheets as of December 31, 2002 and 2001
28Consolidated Statements of Operations for the Years EndedDecember 31, 2002, 2001 and 2000
29Consolidated Statements of Shareholders Equity for the YearsEnded December 31, 2002, 2001 and 2000
30Consolidated Statements of Cash Flows for the Years EndedDecember 31, 2002, 2001 and 2000
36Notes to Consolidated Financial Statements
37











25








**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To Audit Committee, Shareholders and Board of Directors of Active IQ Technologies, Inc. and subsidiaries:





We have audited the accompanying consolidated balance sheets of Active IQ Technologies, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Active IQ Technologies, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had net losses for the years ended December 31, 2002, 2001 and 2000 and had an accumulated deficit and negative working capital at December 31, 2002. These conditions raise substantial doubt about its ability to continue as a going concern. Managements plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Virchow, Krause & Company, LLP





Minneapolis, Minnesota


February 14, 2003





26








**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**





To Active IQ Technologies, Inc.:





We have audited the accompanying balance sheets of Active IQ Technologies Inc. (formerly activeIQ Technologies, Inc.) (a Minnesota corporation formerly in the development stage) as of December 31, 2000, and the related statements of operations, stockholders equity and cash flows for the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Active IQ Technologies, Inc. as of December 31, 2000, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





Arthur Andersen LLP





Minneapolis, Minnesota,


March 23, 2001








**THE FOREGOING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN RE-ISSUED BY ARTHUR ANDERSEN LLP.







27










****ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETS**





December 31,2002

2001AssetsCurrent assetsCash and cash equivalents

$
13,211

$
1,377,315Accounts receivable, net


35,107


95,831Note receivable





500,000Prepaid expenses


35,542


7,382Assets of operations of discontinuedaccounting software business


3,589,741


Total current assets


3,673,601


1,980,528Property and equipment, net


123,505


420,736Prepaid royalties, net


975,000


1,500,000Other assets, net





40,090Assets of operations of discontinuedaccounting software business





8,870,145Goodwill, net





817,273$
4,772,106

$
13,628,772Liabilities and Shareholders EquityCurrent LiabilitiesNote payable

$


$
1,000,000Accounts payable


304,526


331,895Liabilities of operations of discontinuedaccounting software business


3,682,819


Accrued payroll


119,211


272,517Accrued professional fees


31,250


35,000Accrued interest


18,552


2,906Accrued expenses


26,615


2,580Total current liabilities


4,182,973


1,644,898Long-term liabilities of operations of discontinuedaccounting software business





3,976,557Total liabilities


4,182,973


5,621,455Commitments and ContingenciesShareholders EquitySeries B Convertible Preferred Stock, $1.00 par value,365,000 shares authorized; 0 and 365,000 shares issued andoutstanding at December 31, 2002 and December 31, 2001





365,000Common stock, $.01 par value, 150,000,000 shares authorized;13,264,681 and 10,731,345 shares issued and outstandingat December 31, 2002 and 2001


132,647


107,313Additional paid-in capital


22,616,833


19,335,027Stock subscription receivable


(2,000,000
)

(200,000
)Deferred compensation


(182,213
)

(311,701
)Warrants


2,602,860


1,633,917Accumulated deficit


(22,580,994
)

(12,922,239
)Total shareholders equity


589,133


8,007,317$
4,772,106

$
13,628,772





See accompanying notes to consolidated financial statements





28








**ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF OPERATIONS**








Years Ended December 31,2002

2001

2000Revenues

$
499,378

$
462,800

$
Operating Expenses:Costs of goods sold


588,488


191,422


Selling, general and administrative


3,339,590


5,952,067


1,978,697Depreciation and amortization


144,962


1,641,875


112,544Product development


134,217


562,762


609,344Loss on disposal of assets


114,037


55,194


105,360Loss on impairment of goodwill


417,273





Total operating expenses


4,738,567


8,403,320


2,805,945Loss from Operations


(4,239,189
)

(7,940,520
)

(2,805,945
)Other Income (Expense):Interest and dividend income


15,244


159,101


7,500Other income


430,000





Interest expense


(119,206
)

(7,138
)

(41,974
)Total other income (expense)


326,038


151,963


(34,474
)Loss from Continuing Operations


(3,913,151
)

(7,788,557
)

(2,840,419
)Discontinued Operations (See Note 2)Loss from operations of discontinuedaccounting software business


(4,005,604
)

(1,658,251
)

Loss on disposal of accounting software business(including provision for operating losses of$50,000 during phase out period)


(1,740,000
)




Loss on discontinued operations


(5,745,604
)

(1,658,251
)

Net Loss

$
(9,658,755
)
$
(9,446,808
)
$
(2,840,419
)Basic and diluted net loss per common share:Continuing operations

$
(0.31
)
$
(0.95
)
$
(1.65
)Discontinued operations


(0.46
)

(0.20
)

Net Loss

$
(0.77
)
$
(1.15
)
$
(1.65
)Basic and diluted weighted averagecommon shares outstanding


12,532,354


8,210,326


1,717,731





See accompanying notes to consolidated financial statements





29








**ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY**


**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**


****
****
****
****

Commonstockshares

Amount

Preferredstockshares

Amount

Additionalpaid-incapitalBALANCE, December 31, 1999


373,626

$
3,736




$


$
1,144,385Issuance of common stock in March 2000at $37.50 per share


4,667


47








174,953Issuance of warrants in June 2000 inpayment of legal fees














Issuance of common stock in June 2000at $0.38 per share (net of offeringcosts of $10,000)


1,856,634


18,567








677,545Repayment of stock subscription receivable














Conversion of accounts payable to commonstock in June 2000 at $0.38 per share


216,216


2,162








78,919Issuance of options to purchase 60,000 sharesat an exercise price of $1.00 per share aspart of severance in June 2000














25,800Issuance of common stock in July 2000for assets at $2.50 per share


151,200


1,512








376,488Issuance of common stock in August throughDecember 2000 at $2.75 per share(net of offering costs of $408,578)


956,780


9,568








2,079,050Issuance of common stock in September2000 at $2.75 per share to director


100,000


1,000








274,000Issuance of warrants in August 2000 inconjunction with stockholder note payable














Conversion of notes payable to commonstock in September 2000 at $2.75 per share


20,000


200








54,800Deferred compensation related to Septemberand November 2000 option grants














227,500Issuance of options to consultant exercisableat $1.00 per share in October 2000














90,000Issuance of common stock at $2.75 pershare in December 2000 in paymentof accounts payable


29,515


295








80,871Issuance of common stock in December2000 for assets at $2.75 per share


127,273


1,272








348,729Deferred compensation expense














Net loss














BALANCE, December 31, 2000


3,835,911


38,359








5,633,040Issuance of common stock in January 2001at $2.75 per share


400,000


4,000








1,096,000Issuance of common stock in January and April2001 for acquisition of Edge Technologies, Inc


550,000


5,500








1,507,000Issuance of common stock for merger withactiveIQ net of $1,000,000 costs


3,874,511


38,745


365,000


365,000


3,634,028Cashless exercise of warrants issuedin June 2000


17,976


180








22,502Employee and consultant stock optionexercises from May through December 2001


605,496


6,055








1,623,900Surrender of common stock at $37.50 per sharein exchange for cancellation of promissory note


(8,334
)

(83
)







(312,417
)




30


Commonstockshares


Amount


Preferred
stock
shares


Amount


Additional
paid-in
capitalIssuance of common stock in June 2001 foracquisition of Red Wing Business Systems, Inc


400,000


4,000








1,774,000Issuance of common stock in June 2001 at$3.00 per share net of $82,500 costs


500,000


5,000








1,373,500Issuance of common stock in July 2001 to adirector at $2.75 per share pledged withstock subscription


100,000


1,000








274,000Issuance of consulting warrants in August2001, 450,000 at $5.50 per share,250,000 at $7.50 per share














Conversion of accounts payable to commonstock in September 2001 at $4.00 per share


16,667


167








89,002Issuance of common stock in September2001 for acquisition of ChampionBusiness Systems, Inc


299,185


2,992








1,460,023Conversion of accounts payable to warrant inAugust and September 2001














Issuance of commons stock in October 2001for acquisition of FMS Marketing, Inc


250,000


2,500








752,500Companys re-purchase of common stockin December 2001


(106,667
)

(1,067
)







(409,254
)Cancellation of stock bonus sharesin December 2001


(3,400
)

(34
)







34Deferred compensation related to options granted














817,169Deferred compensation expense














Net loss














BALANCE, December 31, 2001


10,731,345


107,313


365,000


365,000


19,335,027Employee stock option exercise in January 2002


11,500


115








34,385Issuance of common stock in January 2002at $4.00 per share to officer


500,000


5,000








1,995,000Companys re-purchase of common stockin February 2002


(15,500
)

(155
)







(62,880
)Conversion of Series B Preferred Stockin February 2002


365,000


3,650


(365,000
)

(365,000
)

361,350Re-pricing and exercise of warrant in March2002, issued to underwriter in June 1998


54,000


540








107,460Issuance of warrant in March 2002 to directorrelating to loan to Company, 25,000 sharesat $3.00 per share














Re-payment of stock subscription receivablein April 2002 from director














Partial conversion of note payable tocommon stock in May 2002 at $1.15 percommon share due to a director


200,000


2,000








228,000Partial conversion of notes payable to commonstock in June 2002 at $0.78 per share due toformer shareholders of FMS Marketing, Inc


151,669


1,517








117,241Issuance of common stock in June 2002 at $0.75per share and 500,000 warrants at $1.00 per share800,000 warrants at $1.25 per share to aninvestor and to a director (includes re-pricingof certain warrants)


1,300,000


13,000








501,249  31
 Commonstockshares


Amount


Preferred
stock
shares


Amount


Additional
paid-in
capitalConversion of accounts payable to warrant inJune 2002 at $0.83 per share














Issuance of 119,285 warrants at $1.00 per sharein September 2002 to former Champion BusinessSystems promissory note holders fordeferring principal payment














Surrender of common stock at $0.75 per sharein exchange for cancellation of stocksubscription receivable


(33,333
)

(333
)







Deferred compensation expense














Net loss














BALANCE, December 31, 2002


13,264,681

$
132,647




$


$
22,616,833





See accompanying notes to consolidated financial statements





32








**ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY**


**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**


****
****
****
****

Stocksubscriptionreceivable

Deferred
compen-
sation

Warrants

Accumulated
deficit

TotalBALANCE, December 31, 1999

$
(328,750
)
$


$


$
(635,012
)
$
184,359Issuance of common stock in March 2000at $37.50 per share














175,000Issuance of warrants in June 2000 inpayment of legal fees








22,682





22,682Issuance of common stock in June 2000at $0.38 per share (net of offeringcosts of $10,000)














696,112Repayment of stock subscription receivable


16,250











16,250Conversion of accounts payable to commonstock in June 2000 at $0.38 per share














81,081Issuance of options to purchase 60,000 sharesat an exercise price of $1.00 per share aspart of severance in June 2000














25,800Issuance of common stock in July 2000for assets at $2.50 per share














378,000Issuance of common stock in August throughDecember 2000 at $2.75 per share(net of offering costs of $408,578)








133,949





2,222,567Issuance of common stock in September2000 at $2.75 per share to director














275,000Issuance of warrants in August 2000 inconjunction with stockholder note payable








14,250





14,250Conversion of notes payable to commonstock in September 2000 at $2.75 per share














55,000Deferred compensation related to Septemberand November 2000 option grants





(227,500
)







Issuance of options to consultant exercisableat $1.00 per share in October 2000














90,000Issuance of common stock at $2.75 pershare in December 2000 in paymentof accounts payable














81,166Issuance of common stock in December2000 for assets at $2.75 per share














350,001Deferred compensation expense





54,687








54,687Net loss











(2,840,419
)

(2,840,419
)BALANCE, December 31, 2000


(312,500
)

(172,813
)

170,881


(3,475,431
)

1,881,536Issuance of common stock in January 2001at $2.75 per share














1,100,000Issuance of common stock in January and April2001 for acquisition of Edge Technologies, Inc.














1,512,500Issuance of common stock for merger withactiveIQ net of $1,000,000 costs














4,037,773Cashless exercise of warrants issuedin June 2000








(22,682
)




Employee and consultant stock optionexercises from May through December 2001














1,629,955Surrender of common stock at $37.50 per sharein exchange for cancellation of promissory note


312,500
















33


Stocksubscriptionreceivable


Deferred
compen-
sation


Warrants


Accumulated
deficit


TotalIssuance of common stock in June 2001 foracquisition of Red Wing Business Systems, Inc














1,778,000Issuance of common stock in June 2001 at$3.00 per share net of $82,500 costs








114,000





1,492,500Issuance of common stock in July 2001 to adirector at $2.75 per share pledged withstock subscription


(200,000
)










75,000Issuance of consulting warrants in August2001, 450,000 at $5.50 per share,250,000 at $7.50 per share








1,246,000





1,246,000Conversion of accounts payable to commonstock in September 2001 at $4.00 per share














89,169Issuance of common stock in September2001 for acquisition of ChampionBusiness Systems, Inc














1,463,015Conversion of accounts payable to warrant inAugust and September 2001








125,718





125,718Issuance of commons stock in October 2001for acquisition of FMS Marketing, Inc














755,000Companys re-purchase of common stockin December 2001














(410,321
)Cancellation of stock bonus sharesin December 2001














Deferred compensation related to options granted





(817,169
)







Deferred compensation expense





678,281








678,281Net loss











(9,446,808
)

(9,446,808
)BALANCE, December 31, 2001


(200,000
)
$
(311,701
)

1,633,917


(12,922,239
)

8,007,317Employee stock option exercise in January 2002














34,500Issuance of common stock in January 2002at $4.00 per share to officer


(2,000,000
)










Companys re-purchase of common stockin February 2002














(63,035
)Conversion of Series B Preferred Stockin February 2002














Re-pricing and exercise of warrant in March2002, issued to underwriter in June 1998








61,020





169,020Issuance of warrant in March 2002 to directorrelating to loan to Company, 25,000 sharesat $3.00 per share








33,750





33,750Re-payment of stock subscription receivablein April 2002 from director


200,000











200,000Partial conversion of note payable tocommon stock in May 2002 at $1.15 percommon share due to a director














230,000Partial conversion of notes payable to commonstock in June 2002 at $0.78 per share due toformer shareholders of FMS Marketing, Inc














118,758Issuance of common stock in June 2002 at $0.75per share and 550,000 warrants at $1.00 per share800,000 warrants at $1.25 per share to aninvestor and to a director (includes re-pricingof certain warrants)


(25,000
)




779,474





1,268,723  34
 Stocksubscriptionreceivable


Deferred
compen-
sation


Warrants


Accumulated
deficit


TotalConversion of accounts payable to warrant inJune 2002 at $0.83 per share








12,500





12,500Issuance of 119,285 warrants at $1.00 per sharein September 2002 to former Champion BusinessSystems promissory note holders fordeferring principal payment








82,199





82,199Surrender of common stock at $0.75 per sharein exchange for cancellation of stocksubscription receivable


25,000











24,667Deferred compensation expense





129,488








129,488Net loss











(9,658,755
)

(9,658,755
)BALANCE, December 31, 2002

$
(2,000,000
)
$
(182,213
)
$
2,602,860

$
(22,580,994
)
$
589,133





See accompanying notes to consolidated financial statements





35








**ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF CASH FLOWS**





For the Years Ended December 31,2002

2001

2000OPERATING ACTIVITIES:Net loss

$
(9,658,755
)
$
(9,446,808
)
$
(2,840,419
)Adjustments to reconcile net loss to cashflows from operating activities:Depreciation and amortization


1,824,372


3,161,492


112,544Deferred compensation expense


129,488


678,280


54,687Loss on disposal of assets


114,037


55,356


105,360Loss on discontinued accounting software business


1,650,000





Loss on impairment of goodwill


2,548,664





Issuance of warrants, options and common stock for services


189,469


1,436,393


320,000Issuance of options in lieu of severance








25,800Amortization of original issue discount


79,145


66,273


14,250Amortization of acquired software developed


441,237


187,253


Re-pricing of common stock warrants


343,390





Excess of common stock value in connection withconversion of note payable to common stock


80,000





Forgiveness of note payable





(63,677
)

Changes in operating assets and liabilities:Accounts receivable, net


72,974


(164,287
)

Inventories


13,683


40,184


Prepaid expenses


(39,844
)

26,154


20,715Prepaid royalties








(150,000
)Other assets


63,670


175,084


(261,028
)Accounts payable


(45,121
)

53,219


272,767Deferred revenue


292,741


(303,840
)

Accrued expenses


(157,433
)

254,970


88,428Net cash used in operating activities


(2,058,283
)

(3,843,954
)

(2,236,896
)INVESTING ACTIVITIES:Payments on note receivable


500,000





Proceeds from sale of property and equipment


52,145





Proceeds from sale of Epoxy Network (goodwill)


400,000





Acquisition of Edge Technologies Incorporated





(750,711
)

Acquisition of Red Wing Business Systems, Inc-net of cash acquired





(421,031
)

Acquisition of Champion Business Systems, Inc-net of cash acquired





(501,056
)

Acquisition of FMS Marketing, Inc-net of cash acquired





(311,134
)

Payments for acquired software developed





(189,290
)

Purchases of property and equipment


(59,506
)

(134,026
)

(267,103
)Net cash provided by (used in) investing activities


892,639


(2,307,248
)

(267,103
)FINANCING ACTIVITIES:Net decrease on bank line of credit





(277,381
)

(102,471
)Payments on capital lease obligations





(46,216
)

Payments on long-term debt


(1,727,570
)

(534,672
)

Common stock repurchased


(63,035
)

(410,321
)

Cash proceeds from issuance of common stock


1,246,514


6,205,273


3,191,010Cash proceeds from exercise of options


34,500


1,629,955


Cash proceeds from short-term shareholder note payable








355,000Cash proceeds from long-term debt


450,000





Net cash provided by (used in) financing activities


(59,591
)

6,566,638


3,443,539CHANGE IN CASH AND CASH EQUIVALENTS OFDISCONTINUED ACCOUNTING SOFTWARE BUSINESS


(138,869
)

(387,578
)

INCREASE (DECREASE) IN CASH EQUIVALENTS


(1,364,104
)

27,858


939,540CASH AND EQUIVALENTS, beginning of period


1,377,315


1,349,457


409,917CASH AND EQUIVALENTS, end of period

$
13,211

$
1,377,315

$
1,349,457








See accompanying notes to consolidated financial statements





36


**ACTIVE IQ TECHNOLOGIES, INC. AND SUBSIDIARIES**





**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER 31, 2002 and 2001**





**NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**NATURE OF BUSINESS**





Active IQ Technologies, Inc. (Active IQ, the Company, our, or we) provides online document management services delivered through an outsourced, fully managed hosted service provider model. The Companys document management services are currently focused on delivering solutions to the commercial real estate market with potential application to related markets requiring similar document management solutions. Through an exclusive worldwide-hosted licensing agreement with Stellent, Inc., Active IQ employs Stellents Content Management software as the underlying software engine on which its service solutions are developed. See Note 11 - Subsequent Events.





Active IQ offers traditional accounting and financial management software solutions through its accounting software business comprised of Red Wing Business Systems, Inc. (Red Wing) (including FMS Marketing, Inc. (FMS/Harvest) which was merged into Red Wing in December 2001) and Champion Business Systems, Inc., (Champion) (collectively, the accounting software business). In December 2002, the Companys Board of Directors authorized a plan to sell the Companys accounting software business. On February 17, 2003, the Company executed a definitive purchase agreement to sell substantially all assets of the accounting software business to a newly formed company led by management of that accounting software business. See Note 2 - Discontinued Operations of
Accounting Software Business.





Up through March 2002, the Company provided an eBusiness application and software solution as part of its Epoxy Network. The Epoxy Network offered an Internet merchandising system called Storefront and a tool for managing customer information named Account Management. In April 2002, the Company sold the existing customer contracts of this business to a third party. In August 2002, the Company sold its remaining rights and interests in the Epoxy Network to a different third party.





The Company was originally incorporated under Colorado law in December 1992 under the name Meteor Industries, Inc. On April 30, 2001, the Company, activeIQ Technologies Inc. (Old AIQ) and a wholly owned subsidiary of the Company (the Companys subsidiary) closed a triangular reverse merger transaction whereby Old AIQ merged with and into the Companys subsidiary. Immediately prior to the merger, the Company (i) sold all of its assets relating to its petroleum and gas distribution business, (ii) was reincorporated under Minnesota law, and (iii) changed its name to Active IQ Technologies, Inc. As a result of the sale of the Companys petroleum and gas distribution assets, it discontinued all operations in the petroleum and gas distribution business and has adopted the business plan of
Old AIQ. Because Old AIQ was treated as the acquiring company in the merger, all financial and business information contained herein relating to periods prior to the merger is the business and financial information of Old AIQ. In April 2001 we reincorporated under Minnesota law.





Old AIQ was incorporated in Minnesota on April 11, 1996, and was considered a development stage company until January 2001, when it began to recognize revenues as a result of an acquisition (see Note 3 - Business Combinations). Old AIQ was formed to develop and provide eBusiness application software and services for small-to-medium sized accounting software customers. Since its inception and up through the merger, Old AIQs efforts have been devoted to the development of its principal product and raising capital.





The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the years ended December 31, 2002, 2001 and 2000, the Company incurred losses from continuing operations of $3,913,151, $7,788,557 and $2,840,419, respectively. At December 31, 2002, the Company had an accumulated deficit of $22,580,994 and a negative working capital of $509,372. The Companys ability to continue as a going concern is dependent on it ultimately achieving profitability and/or raising additional capital. Management intends to obtain additional debt or equity capital to meet all of its existing cash obligations, however, there can be no assurance that the
sources will be available or available on terms favorable to the Company. We believe we have enough cash to fund our operations through the end of our first quarter ended March 31, 2003. Management anticipates that the impact of the actions listed below, might generate sufficient cash flows to pay current liabilities and fund the Companys future operations:





37


·
Continued reduction of operating expenses by controlling payroll and other general and administrative expenses.


·
Solicit additional equity and /or debt investment in the Company.


·
Sell operating assets of the company


·
See Note 11- Subsequent Events





**PRINCIPLES OF CONSOLIDATION**





The consolidated financial statements include the accounts of Active IQ Technologies, Inc. and its wholly owned subsidiaries, Red Wing Business Systems, Inc. and Champion Business Systems, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. See Note 2 - Discontinued Operations of Accounting Software Business.





**CASH AND CASH EQUIVALENTS**





The Company includes as cash equivalents certificates of deposit and all other investments with maturities of three months or less when purchased which are readily convertible into known amounts of cash. The Company maintains its cash in high-quality financial institutions. The balances, at times, may exceed federally insured limits.





**ACCOUNTS RECEIVABLE**





The balance of accounts receivable was $35,542 and $95,831 at December 31, 2002 and 2001, respectively. The allowance for uncollectible accounts was $0 at both December 31, 2002 and 2001. The allowance for uncollectible accounts for the discontinued accounting software business (see Note 2) was $55,000 at both December 31, 2002 and 2001. The Company extends unsecured credit to customers in the normal course of business. On a periodic basis the Company evaluates its accounts receivable based on history of past write-offs and collections and current credit conditions and accordingly adjusts the allowance for doubtful accounts. The Company believes all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on past due accounts receivable. If accounts receivable in


excess of the provided allowance are determined uncollectible, they are charged to expense in the year that determination is made.





**INVENTORIES**





The Companys online document management service does not require maintaining any assets classified as inventories, as the services are delivered electronically. Inventories related to the discontinued accounting software business consist principally of manuals for the various software modules, stocked software and shipping supplies. Inventory is recorded at the lower of cost (first-in, first-out) or market. See Note 2 - Discontinued Operations of Accounting Software Business .





**PROPERTY AND EQUIPMENT**





Property, equipment and leasehold improvements are recorded at cost. Improvements are capitalized while repairs and maintenance costs are charged to operations when incurred. Property and equipment is depreciated or amortized using the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.





38


**SOFTWARE DEVELOPMENT COSTS**





The Company has adopted Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Pursuant to SOP 98-1, expenditures for internal use software are expensed during the preliminary project stage. For the years ended December 31, 2002, 2001 and 2000, the Company expensed all initial software costs as research and development expense since costs were incurred during the preliminary project stage.





The Company did capitalize certain software development related to new product development, which was acquired as part of the Red Wing and Champion acquisitions in 2001 plus an additional $189,290 related to new project development during the year ended December 31, 2001, for certain developed software that has reached technological feasibility. As a result of the proposed sale of the accounting software business, all capitalized software costs are reclassified in net liabilities of discontinued operations at December 31, 2002. See Note 2 - Discontinued Operations of Accounting Software Business.





**PREPAID ROYALTIES**





The Company has a software license agreement with Stellent, Inc., which required advance royalty payments and certain minimum royalty fees. The prepaid royalties at December 31, 2002 and 2001 of $975,000 and $1,500,000, respectively, represents the balance remaining on minimum fees paid under the software license agreement entered into on December 28, 2001.





**GOODWILL**





During the year ended December 31, 2001, goodwill of approximately $2,264,000, $4,059,000, $1,562,000 and $694,000 was recorded related to the acquisitions of Edge Technologies, Incorporated (Edge), Red Wing, Champion and FMS/Harvest, respectively.





In June 2001, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 discontinues the amortization of recorded goodwill for fiscal years beginning after December 15, 2001. Pursuant to SFAS No. 142, goodwill will be reduced based upon an impairment analysis of the amount recorded on the Companys books. To the extent it has been determined that the carrying value of goodwill is not recoverable and is in excess of fair value, an impairment loss will be recognized. Goodwill will be reviewed on a periodic basis based on its fair value.





Goodwill, net of accumulated amortization, was $1,318,260 and $5,916,924 at December 31, 2002 and 2001, respectively. See Note 2 - Discontinued Operations of Accounting Software Business. Pursuant to SFAS No. 142, the Company recognized and recorded an impairment charge against goodwill in the amount of $2,131,391 during the second quarter ended June 30, 2002 related to the software accounting business. Also pursuant to SFAS No. 142, the Company recognized and recorded an impairment charge against goodwill in the amount of $417,273 (net goodwill of $817,273 less $400,000 in sales proceeds) during the third quarter ended September 30, 2002 related to the sale of our Epoxy Network discussed above. The net loss would have been $6,796,504 without amortization of goodwill of $2,650,304 for the year ended December 31,


2001.





**OTHER INTANGIBLES AND ACQUIRED SOFTWARE DEVELOPED**





Other intangibles (included in discontinued operations of the accounting software business), net of amortization, were $869,927 and $2,048,552 at December 31, 2002 and 2001, respectively. The intangible assets relate to customer relationships, acquired software developed and non-compete agreements related to the accounting software business. Included in the discontinued operations of the accounting software business is amortization of acquired software developed of $441,237 and $187,253 for the years ended December 31, 2002 and 2001, respectively. Other intangible assets were being amortized over two years on a straight-line basis. Accumulated amortization at December 31, 2002 and 2001 was $1,487,321 and $308,697, respectively. Pursuant to the Companys decision to discontinue the accounting software
business, a loss on disposal of accounting software business of $1,650,000 related to other intangibles and goodwill was recorded in December 2002. See Note 2 - Discontinued Operations of Accounting Software Business.





39


Based on the Companys decision to discontinue the accounting software business operations, no amortization of other intangibles and acquired software developed will be recorded during the year ending December 31, 2003.





**SEGMENT REPORTING**





The Company provides online document management services to the commercial real estate market in the United States. The Company has only one operating segment.





**REVENUE RECOGNITION AND DEFERRED REVENUE**





The Company currently derives revenues from customers of the online document management service for monthly access to the service and initial service configuration/implementation. Customers are invoiced at the beginning of each month for access service and revenue is recognized when invoiced. Configuration/implementation revenue is invoiced the month after the services are performed and recognized in the month invoiced.





The Company recognizes the revenues derived from the accounting software business sales after all of the following criteria have been met: there is an executed license agreement, software has been delivered to the customer, the license fee is fixed and payable within twelve months, collection is deemed probable and product returns are reasonably estimable. Revenues related to multiple element arrangements are allocated to each element of the arrangement based on the fair values of elements such as license fees, maintenance, and professional services. Fair value is determined based on vendor specific objective evidence. Service revenue is recognized ratably over the term of the agreement, which is typically one year. All service revenue invoiced in excess of revenue recognized is recorded as deferred revenue. At
December 31, 2002 and 2001, deferred revenue was $1,774,491 and $1,481,750, respectively. See Note 2 - Discontinued Operations of Accounting Software Business.





**CREDIT RISK**





Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Companys customer base.





**ADVERTISING**





Advertising costs are charged to expense as incurred. Advertising costs were $154,886, $258,929, and $54,045 for the years ended December 31, 2002, 2001 and 2000, respectively, and are included in discontinued operations in the consolidated statement of operations.





**STOCK BASED COMPENSATION**





In accordance with Accounting Principles Board (APB) Opinion No. 25, the Company uses the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of the Company's common stock at the grant date over the amount the employee must pay for the stock. The Company's general policy is to grant stock options and warrants at fair value at the date of grant.





40


The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company recorded compensation expense pursuant to APB Opinion No. 25 and related interpretations on options granted and due to modifications of options of $129,488, $678,280 and $54,687, for the years ended December 31, 2002, 2001 and 2000, respectively. The Company recorded expense related to stock based compensation issued to non-employees in accordance with SFAS No. 123. Had compensation costs for employees been recognized based upon the fair value of options at the grant date consistent with the provisions of SFAS No. 123, the Companys results would have been as follows:





Years Ended December 31,2002

2001

2000Net loss:As reported

$
(9,658,755
)
$
(9,446,808
)
$
(2,840,419
)Pro forma


(11,221,388
)

(13,062,595
)

(2,968,959
)Basic and diluted net loss per share:As reported

$
(0.77
)
$
(1.15
)
$
(1.65
)Pro forma

$
(0.90
)
$
(1.59
)
$
(1.73
)Stock-based compensationAs reported

$
129,488

$
678,280

$
54,687Pro forma

$
1,562,633

$
3,615,787

$
128,540








In determining the compensation cost of the options granted during fiscal 2002, 2001, and 2000, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized below:





Years Ended December 31,2002

2001

2000Risk free interest rate


4.5
%

5
%

6.1
%Expected life of options granted


10 years


10 years


5 yearsExpected volatility range


193.0
%

130.0
%

0
%Expected dividend yield


0
%

0
%

0
%








**FINANCIAL INSTRUMENTS**





The carrying amounts for all financial instruments approximates fair value. The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt approximates the carrying amounts based upon the Companys expected borrowing rate for debt with similar remaining maturities and comparable risk.





**NET LOSS PER COMMON SHARE**





Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods presented. The impact of common stock equivalents has been excluded from the computation of weighted average common shares outstanding, as the net effect would be anti-dilutive for all periods presented. Total options and warrants outstanding at December 31, 2002 were 4,566,649 and 9,269,301, respectively, options and warrants outstanding at December 31, 2001 were 4,055,341 and 7,779,456, respectively, and options and warrants outstanding at December 31, 2000 were 1,268,997 and 150,694, respectively.





**INCOME TAXES**





The Company accounts for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are provided for differences between the financial reporting and tax bases of the Companys assets and liabilities at currently enacted tax rates.





41


The Company has recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits.





**USE OF ESTIMATES**





Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





**NEW ACCOUNTING PRONOUNCEMENTS**





In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections effective for fiscal years beginning after May 15, 2002. The Company believes the adoption of SFAS No. 145 will not have a material effect on the Companys consolidated financial position or results of operations.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred versus the date the Company commits to an exit plan. In addition, SFAS No. 146 states the liability should be initially measured at fair value. The requirements of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is still evaluating the effect of adopting SFAS No. 146.





In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 is effective October 1, 2002. The adoption of SFAS No. 147 did not have a material effect on the Companys consolidated financial position or results of operations.





In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides requires additional disclosures about the method of accounting for stock-based employee compensation. The amendments are effective for financial statements for fiscal years ending after December 15, 2002 and for the interim periods beginning after December 15, 2002. The Company has adopted the annual disclosure provision of SFAS No. 148, which, if adopted, could have a material effect on the Company's consolidated financial position or results of operations.








**NOTE 2 - DISCONTINUED OPERATIONS OF ACCOUNTING SOFTWARE BUSINESS**





In December 2002, the Companys Board of Directors authorized a plan to sell the Companys accounting software business to key employees. In February 2003, the Company entered into a definitive purchase agreement to sell substantially all the assets of our accounting software business to key employees (the Purchaser). The accounting software business publishes traditional accounting and financial management software for small and medium sized businesses, farms and ranches throughout North America. The Company acquired the accounting software business during the year ended December 31, 2001 for the purpose of utilizing the businesses customer base to market the Companys Epoxy products and services. In 2002, the Company determined to abandon the Epoxy business after acquiring the
rights to develop and market hosted content management solution products. Therefore, since the Company abandoned the Epoxy business model to focus on the hosted solutions business, the accounting software business no longer fits within the Companys business plan. The assets to be sold consist primarily of all intellectual property rights, cash, accounts receivable, inventories, property and equipment, and customer contracts. The Purchaser will also assume substantially all the liabilities of the accounting software business incurred in the ordinary course of the business consisting of trade payables, accrued expenses, debt and liabilities arising from contractual obligations related to the ongoing operations. In addition, the Purchaser will pay the Company cash sufficient to discharge outstanding debt that was incurred during 2001 to acquire the accounting software business. The proposed sale, which we expect to be complete by April 30, 2003, is subject to the satisfaction or waiver of several
conditions, including the approval of the Companys shareholders.





42


The estimated loss on the disposal of the accounting software business of $1,740,000 (net of income tax benefit of $0) represents the estimated loss on the disposal of assets, net of liabilities assumed, of the accounting software business, transactions costs of $40,000 and a provision of $50,000 for expected operating losses during the phase out period from January 1, 2003 through March 31, 2003 (this includes a write down of goodwill which was recorded when the accounting software business was acquired).





Net sales of the accounting software business for the years ended December 31, 2002 and 2001 were $4,179,547 and $2,248,060, respectively. The pretax loss related to the discontinued operations reported in the consolidated statements of operations for the years ended December 31, 2002 and 2001 was $4,005,604 and $1,658,251, respectively. The pretax loss for the years ended December 31, 2002 and 2001 includes amortization of goodwill and other intangible assets of $1,178,625 and $1,513,061, respectively, and loss on impairment of goodwill of $2,131,391 recorded during the year ended December 31, 2002.





Assets and liabilities of the accounting software business consisted of the following at December 31:








2002

2001Cash

$
526,447

$
387,578Accounts receivable, net


176,370


188,620Inventories


46,438


60,121Property and equipment, net


119,561


99,753Acquired software developed, net


492,170


933,407Goodwill, net


1,318,260


5,099,651Other intangibles, net


869,927


2,048,552Other assets


40,568


52,463Total assets

$
3,589,741

$
8,870,145Accounts payable


81,064


111,317Accrued expenses


244,360


284,418Deferred revenue


1,774,491


1,481,750Notes payable


1,582,904


2,099,072Total liabilities

$
3,682,819

$
3,976,557Net assets (liabilities) of operations of discontinued accounting software business

$
(93,078
)
$
4,893,588








On June 6, 2001, we acquired all of the outstanding capital stock of Red Wing. In exchange for all of the outstanding shares of Red Wings capital stock, we issued an aggregate of 400,000 shares of our common stock and paid at closing a total of $400,000. Pursuant to the purchase agreement, we were obligated to make three additional payments of $400,000 each to the former Red Wing shareholders on December 6, 2001, June 6, 2002 and December 6, 2002, respectively. We timely satisfied the December 6, 2001 payment and as of December 31, 2001, the outstanding principal balance due was $759,878 (net of debt discount of $40,122 using a 7% discount rate). We re-negotiated an extension of the June payment with several of the former Red Wing shareholders, totaling $339,093. In connection with the re-negotiation, we
paid 10% of the June payment (totaling $33,909) immediately in exchange for an extension of such payment until December 31, 2002. Additionally, we agreed to pay interest at the rate of 12.5% per annum on the unpaid balance of the June payment (monthly interest payments began July 1, 2002). The remaining former Red Wing shareholders were paid their June 2002 payment as stated in the original notes. On December 6, 2002, a notice was sent to all of the former Red Wing shareholders that the Company was not in the position to make the final payments due and was seeking a solution to meet our obligation. The outstanding principal balance due all former Red Wing shareholders as of December 31, 2002 was $705,186. The notes are secured by pledge of common stock.





43


Two former investors of Red Wing receive monthly principal and interest payments, ranging from 7% to 8.5%, which were assumed by us when we acquired Red Wing. Note balances as of December 31, 2001 were $13,074 and $52,296, respectively. Note balances as of December 31, 2002 were $10,277 and $41,109, respectively. The required monthly principal and interest payments are $317 and $1,267, both through December 2005. The notes are unsecured.





On September 18, 2001, we acquired Champion in a merger transaction. As consideration for the merger, (i) we paid at closing an aggregate of approximately $512,000 in cash to the former Champion shareholders, (ii) issued 299,184 shares of our common stock, and (iii) issued promissory notes. The promissory notes outstanding balance at December 31, 2001 was $978,425 (net of debt discount of $46,231 using a 7% discount rate). The notes are payable in equal installments of $256,164 on January 18, May 18, September 18, 2002, and January 18, 2003. The January 18, 2002 payment was paid timely. In May 2002 we re-negotiated an extension of the May payment with several of the note holders until December 31, 2002, in the amount of $159,041. In exchange for the extension, we paid 10% of the amount owed to such note holders
and agreed to pay monthly interest at the rate of 12.5% per annum on the unpaid balance of the notes. All remaining former Champion shareholders were paid their May 2002 payment as stated in the original notes. In September 2002 we re-negotiated an extension of the September payment with several of the note holders until December 15, 2002, in the amount of $159,041. In exchange for the extension, we paid 25% of the amount owed to such note holders and agreed to pay monthly interest at the rate of 12.5% per annum on the unpaid balance of the notes. As consideration for their agreeing to another deferral, each such note holder received one warrant for every dollar deferred until December 15, 2002. We issued 5-year warrants to purchase 119,285 shares of our common stock at an exercise price of $1.00 per share. All remaining former Champion shareholders were paid their September 2002 payment as stated in the original notes. One shareholder (representing $54,061 of the May and September payment) has not
accepted the terms of the new notes and as such, we are in default with the terms of the note and continue to accrue interest. On December 6, 2002, a notice was sent to all of the former Champion shareholders that the Company was not in the position to make the final payments due and was seeking a solution to meet our obligation. The outstanding principal balance due all former Champion shareholders as of December 31, 2002 is $674,077. The notes are secured by a pledge of common stock.





On October 10, 2001, we acquired FMS/Harvest. Effective December 31, 2001, we merged FMS/Harvest with and into Red Wing. In consideration for the purchase, we paid $300,000 in cash at closing, issued promissory notes in the total amount of $300,000, and issued 250,000 shares of our common stock. The promissory notes were originally payable in May 2002. In May we re-negotiated an extension of the due date with all former shareholders of FMS/Harvest. In consideration for extending the due date until December 15, 2002, we paid 10% of the May payment totaling $30,000 in satisfaction of the notes and agreed to (i) pay interest at the rate of 12.5% on the unpaid balance, (ii) until July 12, 2002, allow the note holders to convert any or all of the unpaid balance of the notes into shares of our common stock at a price
equal to 90% of the average closing sales price for the 5 days preceding conversion, and (iii) release such shareholders from their lock-up agreements relating to the shares issued in the acquisition. In June, three of the FMS/Harvest shareholders converted $117,745 of principal and $1,013 of interest into 151,669 shares of common stock at $0.783 per share. On December 6, 2002, a notice was sent to all of the former FMS/Harvest shareholders that the Company was not in the position to make the final payments due and was seeking a solution to meet our obligation. The outstanding principal balance due all FMS/Harvest shareholders as of December 31, 2002 is $152,255 and is unsecured.








44


Components of goodwill and other intangibles (which are included in the net assets (liabilities) of operations of discontinued accounting software business) are as follows:





December 31, 2002

December 31, 2001Gross



GrossCarrying

Accumulated

Carrying

AccumulatedAmount

Amortization

Amount

AmortizationIntangible assets subject to amortizationCustomer lists

$
1,737,248

$
1,096,128

$
1,737,248

$
228,435Non-compete agreements


620,000


391,193


620,000


80,2612,357,248


1,487,321


2,357,248


308,696Intangible assets not subject to amortizationGoodwill

$
5,618,564

$
4,300,304

$
8,567,228

$
2,650,304








The changes in the carrying value of goodwill for the year ended December 31, 2002 are as follows:





Balance of goodwill (less accumulated amortization) as of December 31, 2001

$
5,916,924Second quarter impairment loss recorded June 30, 2002


(2,131,391
)Sale of Epoxy Network technology asset in August 2002


(817,273
)Loss on discontinued accounting software business


(1,650,000
)Balance as of December 31, 2002

$
1,318,260








**NOTE 3 - BUSINESS COMBINATIONS**





**PRE JULY 1, 2001 COMBINATIONS**





**EDGE TECHNOLOGIES, INC.**





On January 16, 2001, the Company completed its merger with privately held Edge Technologies, Incorporated (Edge), the creator of a fully integrated eBusiness website service called Account Wizard, which has been subsequently branded as part of the Epoxy Network. The merger was accounted for under the purchase method of accounting with the operations of Edge included in the Companys consolidation as of that date. The former stockholders of Edge received $300,000 in cash and 325,000 shares of the Companys common stock.





Terms of the merger agreement required an additional cash payment and issuance of stock upon a capital raising event. With the completion of the Meteor Industries, Inc. merger on April 30, 2001, the former stockholders of Edge received the final consideration as specified in the merger agreement of 225,000 shares of the Companys common stock on April 30, 2001, and $400,000 in cash on May 2, 2001, in settlement of the earn-out provisions.





With closing costs, the total consideration plus the fair value of the net liabilities assumed was approximately $2,264,000, consisting primarily of goodwill. (See the table below for a condensed balance sheet summarizing the amounts assigned to assets acquired and liabilities assumed at the date of combination.)





**METEOR INDUSTRIES, INC. - OLD AIQ MERGER TRANSACTION**





On April 30, 2001, Old AIQ completed its merger with Meteor Industries, Inc. Pursuant to an Agreement and Plan of Merger dated as of January 11, 2001, as amended April 27, 2001 (the Merger Agreement), by and among Meteor Industries, Inc. (Meteor), activeIQ Technologies Inc., a Minnesota corporation (Old AIQ) and MI Merger, Inc., a Minnesota corporation and a wholly owned subsidiary of Meteor (Merger Sub), Old AIQ merged with and into Merger Sub (the Merger). The surviving corporation in the Merger was renamed AIQ, Inc. In addition, immediately prior to the Merger, Meteor was reincorporated under Minnesota law by merging with a wholly owned subsidiary (the Re-incorporation Merger) and was subsequently renamed Active IQ
Technologies, Inc. Meteors shareholders approved both the Merger and the Re-incorporation Merger on March 27, 2001, and both transactions became effective on April 30, 2001 resulting in AIQ, Inc. becoming a wholly owned subsidiary of Active IQ Technologies, Inc. Since Meteor had only monetary assets and no operations, the merger was accounted for as the issuance of stock by Old AIQ in exchange for monetary assets of Meteor.





45


Pursuant to the Merger Agreement, in exchange for their shares of Old AIQ common stock, each shareholder of Old AIQ common stock received one share of Meteors common stock (after giving effect to the Re-incorporation Merger). At the time of the Merger there were 4,385,911 shares of common stock of Old AIQ outstanding, (excluding 400,000 shares held by Meteor, which were cancelled upon the effective time of the Merger). In addition to receiving shares of Meteors common stock, each of the former Old AIQ shareholders was entitled to receive a warrant to purchase two shares of Meteors common stock for every three shares of Old AIQ common stock held by such shareholder. The warrants, which expire on April 30, 2006, are exercisable at a price of $5.50 share upon notice to the holders thereof after
the closing price of Meteors common stock (as quoted on the Nasdaq SmallCap Market) has averaged $7.50 for 14 consecutive days. (See the table below for a condensed balance sheet summarizing the amounts assigned to assets acquired and liabilities assumed at the date of combination.)








**RED WING BUSINESS SYSTEMS, INC.**





On June 6, 2001, the Company completed its acquisition of Red Wing Business Systems, Inc. (Red Wing), a Minnesota corporation. Red Wing, which operates as a wholly owned subsidiary of the Company, produces and sells accounting and financial management software for small and medium-sized businesses, farm and agricultural producers. Pursuant to a Stock Purchase Agreement (the Agreement) dated June 6, 2001, the Company purchased all of the outstanding capital stock from the shareholders of Red Wing (the Sellers). The acquisition of Red Wing was accounted for under the purchase method of accounting.





The Sellers received an aggregate of 400,000 shares of the Companys common stock and cash in the aggregate of $1,600,000, of which $400,000 was delivered at the closing. Under the Agreement, the Company was obligated to pay the remaining $1,200,000 of cash in three future payments of $400,000 due on the 6-, 12- and 18-month anniversaries of the closing date. As security for the Companys obligations to make the first two future cash payments of $400,000 each, the Company granted a security interest in the newly-acquired shares of Red Wing to the Sellers pursuant to a pledge agreement by and among the Company and the Sellers dated as of June 6, 2001.





With closing costs, the total consideration plus the fair value of the net liabilities assumed is approximately $4,724,000, consisting primarily of goodwill and other intangibles. The other intangibles acquired consisted of acquired software developed. (See the table below for a condensed balance sheet summarizing the amounts assigned to assets acquired and liabilities assumed at the date of combination.)





**POST JUNE 30, 2001 COMBINATIONS**





**CHAMPION BUSINESS SYSTEMS, INC.**





On September 18, 2001, the Company completed its merger with privately held Champion Business Systems, Inc. (Champion, a Colorado corporation. Champion, which operates as a wholly owned subsidiary of the Company, produces and sells accounting and financial management software for small and medium-sized businesses. The merger was accounted for under the purchase method of accounting with the operations of Champion included in the Companys consolidated financial statements as of that date.





46


The former shareholders of Champion are divided into two groups: Minority Shareholders and Majority Shareholders. At closing, the Majority Shareholders received an aggregate of 299,185 shares of the Companys common stock and all former Champion shareholders received their pro rata share of a $512,328 cash payment. Terms of the merger agreement required additional cash payments of $1,000,000 payable in 4 equal installments, each due on the 4, 8, 12 and 16-month anniversaries. The Company granted a security interest in the newly-acquired shares of Champion to the former Champion shareholders pursuant to a pledge agreement dated as of September 14, 2001.





With closing costs, the total consideration plus the fair value of the net liabilities assumed is approximately $3,692,000, consisting primarily of goodwill and other intangibles.





The primary reason for the acquisition of Champion was to expand the Companys software and service support customer base and business. The factors contributing to goodwill were principally based on the Companys belief that synergies would be generated through the combining of the Companys other software and service support with Champions accounting packages. The total purchase included common stock issued of 299,185 valued at $4.89 per share, the average of the closing bid and ask price for the Companys common stock 10 trading days before September 18, 2001 (the effective date of the acquisition of Champion). In addition, the Company did not issue any options or warrants in conjunction with the Champion acquisition.





The Company recorded goodwill and other intangibles allocated to customer relationships, non-compete agreements and acquired software developed of approximately $1,318,700, $200,000 and $495,000, respectively. (See table below for a condensed balance sheet summarizing the amounts assigned to assets acquired and liabilities assumed at the date of combination).





**FMS MARKETING, INC.**





On October 10, 2001, the Company acquired all of the outstanding capital stock of FMS Marketing, Inc., a New Lennox, Illinois accounting software provider doing business as FMS/Harvest. Like Red Wing, FMS/Harvest also serves users primarily in the agricultural and farming industries. In consideration for the purchase, the Company paid approximately $300,000 in cash at closing; issued 6-month promissory notes in the total amount of $300,000; and issued 250,000 shares of the Companys common stock. The common stock was valued at $3.02 per share, the average of the closing bid and ask price for the Companys common stock 10 trading days before October 10, 2001 (the effective date of acquisition). The primary reason for the acquisition of FMS/Harvest was to continue expanding the Companys


software and service support customer base and business. The factors contributing to goodwill were principally based on the Companys belief that synergies would be generated through the combining of the Companys other software and service support with FMS/Harvests accounting packages.





The Company recorded approximately $694,000 as goodwill and approximately $418,000 and $420,000 as other intangibles allocated to customer relationships and non-compete agreements, respectively. (See table below for a condensed balance sheet summarizing the amounts assigned to assets acquired and liabilities assumed at the date of combination.)





Effective December 31, 2001, the Company merged FMS/Harvest with and into Red Wing.








47





Following are condensed balance sheets summarizing the amounts assigned to the assets acquired and liabilities assumed at the various dates of acquisition:





Edge

Meteor

Red Wing

Champion

FMS/HarvestCurrent assets

$


$
3,538,000

$
171,000

$
91,000

$
11,000Property and equipment








58,000


25,000


2,000Note receivable





500,000








Acquired software developed








436,000


495,000


Goodwill


2,264,000





4,059,000


1,562,000


694,000Other intangible assets











1,519,000


838,000Total assets

$
2,264,000

$
4,038,000

$
4,724,000

$
3,692,000

$
1,545,000Current liabilities

$


$


$
1,257,000

$
709,000

$
136,000Note payable-former shareholders








1,122,000


956,000


290,000Due to Active IQ Technologies


2,264,000





2,200,000


1,964,000


1,066,000Long-term debt








145,000


63,000


53,000Shareholders equity





4,038,000








Total liabilities andshareholders equity

$
2,264,000

$
4,038,000

$
4,724,000

$
3,692,000

$
1,545,000








The assets and liabilities assigned to the acquisitions are included in net assets of operations of discontinued accounting software business at December 31, 2001. The accompanying unaudited pro forma condensed results of operations for the year ended December 31, 2001 give effect to the acquisitions of Meteor, Edge, Red Wing, Champion, and FMS/Harvest as if such transactions had occurred on January 1, 2001. The unaudited pro forma information does not purport to represent what the Companys results of operations would actually have been if such transactions in fact had occurred at such date or to project the Companys results of future operations:





Pro Forma for the Year Ended December 31, 2001Revenues

$
5,382,906Loss from operations


(9,491,914
)Net loss

$
(9,413,688
)Basic and diluted net loss per common share

$
(0.93
)





**NOTE 4 - NOTE RECEIVABLE**





We completed our merger with Old AIQ on April 30, 2001 and entered into a note receivable in the amount of $500,000. The note was secured by a stock pledge dated April 27, 2001, pledging 1,500,000 shares of common stock of Capco Energy, Inc. The note receivable accrued interest at 10% per annum. We received the remaining principal balance plus accrued interest in May 2002.








**NOTE 5 - PROPERTY AND EQUIPMENT**





Property and equipment consists of the following:





December 31,****

2002

2001Furniture

$
40,845

$
54,312Equipment


121,333


221,058Software


64,056


393,056Leasehold improvements





4,427Less-accumulated depreciation and amortization


(102,729
)

(252,117
)Net property and equipment

$
123,505

$
420,736





48


Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was $144,962, $185,520 and $81,294, respectively.





See Note 2 - Discontinued Operations of the Accounting Business relating to the re-classification of certain property and equipment.








**NOTE 6 - PREPAID ROYALTIES AND LONG-TERM DEBT**





We have entered into an application service provider software license agreement with Stellent, Inc. The prepaid royalties at December 31, 2002 and 2001 of $975,000 and $1,500,000, respectively, relates to minimum royalty fees required under the agreement. On December 28, 2001, we entered in an application service provider (ASP) software license agreement. The ASP agreement provides us with a three-year worldwide exclusive license to be the hosted ASP solution for Stellents Content Management software. We agreed to pay a royalty of 20% of net receipts, as defined in the ASP agreement, or $500 per month per customer, whichever is greater. The minimum royalty commitments for the exclusive ASP license are as follows: $1,000,000 for 2002, $2,000,000 for year 2003 and $3,000,000 for year 2004. If the


minimum royalties have been paid for all three years, an additional three-year exclusive option is provided, otherwise, we have the option to renew for an additional three years under a non-exclusive right. The ASP agreement required a minimum royalty to be paid as follows: a credit of $500,000 from existing prepaid royalties recorded at Stellent, a payment of $500,000 was paid with the execution of the ASP agreement and two $500,000 payments were due in September and December 2002. On March 29, 2002 we prepaid the September and December payments and in consideration of the early payment, we received a 5% discount, or $50,000. Since our revenues for the year of 2002 were below the minimum, we recognized the full amount of expense and finished the year with a remaining balance of $975,000.








**NOTE 7 - COMMITMENTS AND CONTINGENCIES**





**Operating Leases**





The Company has entered into various non-cancelable leases for land, buildings and equipment with terms ranging from 3 to 8 years. Under most leasing arrangements the Company pays the property taxes, insurance, maintenance and expenses related to the leased property. Total rent expense under operating leases for the years ended December 31, 2002, 2001 and 2000, was $479,724, $400,635, and $55,913, respectively. Total rent expense under operating leases for the accounting software business for the years ended December 31, 2002, 2001 and 2000, was $316,887, $118,828, and $0, respectively.





Minimum future obligations on leases in effect at December 31, 2002, are approximately as follows:





2003

$
294,0002004


193,0002005


118,000Thereafter


229,000Total

$
834,000








If the accounting software business is disposed of as anticipated in April 2003, (See Note 2 - Discontinued Operations of the Accounting Business) the revised future obligations on the leases in effect at December 31, 2002, are approximately as follows:





2003

$
140,0002004


70,000Total

$
210,000








49


**Employment Agreements**





On January 1, 2002, we amended the employment agreement with D. Bradly Olah, the Companys Chief Executive Officer through December 2002. Pursuant to the terms of the agreement, Mr. Olah was entitled to an annual salary of $200,000 and was eligible for an annual bonus of up to 100 percent of his salary upon the achievement of certain corporate objectives. Following the amendment of his employment agreement, Mr. Olah was awarded an option to purchase an additional 500,000 shares at $4.00 per share. Mr. Olah served as our President until November 25, 2002, and our Chief Executive Officer until December 31, 2002, at which time he resigned from his positions. See Note 11 - Subsequent Events for a detailed discussion regarding Mr. Olahs severance agreement and cancellation of the promissory
note.





On May 8, 2002, we entered into a one-year employment agreement with Jeffrey M. Traynor as our Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Traynor is entitled to an annual salary of $120,000 and a guaranteed bonus of $60,000 (the bonus to be paid in four equal installments beginning May 2002, then in August and November 2002, with a final installment due February 2003). Mr. Traynor was also awarded an option to purchase 175,000 shares of the Companys common stock at a price of $1.25 per share, with 35,000 options vesting immediately and the balance vesting ratably over a four-year period. The Company may be required to pay nine months of severance for a termination without cause, as defined in the agreement or in the event of a change of control as defined in the agreement.





On November 25, 2002, we entered into a two-year employment agreement with Jack A. Johnson as our President and Chief Operating Officer. Pursuant to the terms of the agreement, Mr. Johnson is entitled to an annual salary of $180,000 and is entitled to an annual bonus of up to 100% of his salary upon achievement of certain corporate objectives established by the Companys Board of Directors. Mr. Johnson was also awarded an option to purchase 900,000 shares of the Companys common stock at a price of $0.35 per share, with 90,000 options vesting immediately and the balance vesting ratably over a three-year period. The Company may be required to pay one-year severance payment for a termination without cause, as defined in the agreement and up to two years in the event of a change of control as defined in
the agreement. Note 11 - Subsequent Events for a discussion regarding Mr. Johnsons appointment to Chief Executive Officer.





**Related-Party Transactions**





In December 2000, Old AIQ entered into a subscription receivable for the purchase of 100,000 shares of common stock at a price of $2.75 per share with Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner delivered to our company a cash payment in the amount of $75,000 and a 2-month promissory note in the principal amount of $200,000. In April 2002, the receivable was paid in full.





On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an entity wholly owned by Mr. Mills who currently is a director and shareholder. The loan was evidenced by a 90-day promissory note and accrued interest at the rate of 7% annually. In connection with the loan, we also issued to Blake Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock at a price of $3.00 per share. The proceeds received were allocated to the fair value of the securities issued (debt and warrant issued). On May 30, 2002, we allowed Blake Capital Partners to convert $150,000 of outstanding principal under the note into 200,000 shares of common stock. We satisfied the remaining outstanding principal and accrued interest in full on June 10, 2002. We also recorded an $80,000 interest charge to
reflect the difference between the market value of the shares issued and the remaining outstanding debt.





On May 27, 2002, we sold 500,000 shares of our common stock in a private placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for total proceeds of $375,000 (we received $350,000 in cash and recorded a stock subscription receivable of $25,000). As consideration for its purchase of such shares, Boston Financial Partners also received a warrant to purchase an additional 500,000 shares of our common stock at an exercise price of $1.00 per share, and we further agreed to reduce to $1.00 the exercise price on all other warrants to purchase shares of our common stock held by Boston Financial Partners and its affiliates. Such warrants represent the right to purchase 1 million shares of common stock and had exercise prices ranging from $5.50 to $7.50 per share. We recorded an expense of $343,390
(related to the reduction of price of the 1 million warrants) using the Black-Scholes pricing model. Prior to this private placement, Boston Financial Partners beneficially owned more than 5% of our common stock. In December 2002, the Company finalized an amendment to the agreement and canceled the $25,000 stock subscription receivable.





50


On May 31, 2002, we sold to two investors in a private placement an aggregate of 800,000 shares of our common stock at a price of $0.75 per share for total proceeds of $600,000. In connection with the sale of these shares, we also issued to the investors 5-year warrants to purchase an aggregate of 800,000 shares of our common stock at an exercise price of $1.25 per share. The warrants may be redeemed by us any time after January 30, 2003 and following a period of at least 30 business days in which our common stock trades at $2.50 per share or more. The redemption price is equal to $.01 per warrant share. Proceeds were allocated to the fair value of the securities issued (common stock and warrant). One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of
the Company. Wyncrest Capital acquired half of the shares and warrants issued in this private placement. In conjunction with this transaction, we also issued an additional 50,000 warrants in September 2002 to Mr. Eibensteiner as consideration for the placement.








**NOTE 8 - SHAREHOLDERS EQUITY**





**Common Stock Issuances**





In March 1999, Old AIQ sold 70,000 shares of its common stock to Stellent, Inc. (f/k/a Intranet Solutions, Inc.) at $2.50 per share, for total cash proceeds of $175,000 (pre-split values).





In June 2000, Old AIQ declared a 1-for-15 reverse stock split. The stock split has been retroactively reflected in the accompanying financial statements. Following the completion of the reverse stock split, Old AIQ conducted a rights offering whereby existing shareholders purchased 1,856,634 shares of common stock at $0.38 per share, with net proceeds of $712,362.





During January 2001, the Company sold 400,000 shares of common stock at $2.75 per share to Meteor.





The Company issued 550,000 shares of common stock in January and April 2001 to the former shareholders of Edge Technologies, Incorporated as part of the completion of the merger.





As part of the merger with Meteor in April 2001, the Company issued 3,874,511 shares of common stock and 365,000 shares of $1.00 Series Convertible B Preferred Stock as well as 365,000 Series B Preferred Warrants exercisable at $2.50 per share. There were also 4,483,101 Class B Warrants issued at an exercise price of $5.50 per share as part of the transaction exercisable through April 30, 2006. Additionally, the Company carried over 2,047,935 options to purchase common stock exercisable at $2.50 to $5.25 per share from Meteor as well as 690,000 warrants exercisable at $7.15 per share through May 31, 2002.





In June 2001, the Company issued 400,000 shares of common stock valued at $4.45 per share as part of the purchase of Red Wing. See Note 2 - Discontinued Operations of Accounting Software Business.





In June 2001, the Company sold 500,000 shares of its common stock at $3.00 per share in a private placement. The private placement resulted in net proceeds of approximately $1.5 million.





In September 2001, the Company issued 299,185 shares of common stock valued at $4.89 per share as part of the purchase of Champion. See Note 2 - Discontinued Operations of Accounting Software Business.





In September 2001, the Company issued 16,667 shares of common stock to one of the law firms of the Company, in exchange for amounts due them for services rendered, which we had previously recorded as accounts payable.





In September 2001, the Board of Directors authorized a repurchase of up to an aggregate of 500,000 common shares in the open market. Through December 31, 2002, the Company had repurchased and retired 122,167 shares of its common stock ranging from $3.03 to $4.26 per share.





51


In October 2001, the Company issued 250,000 shares of common stock valued at $3.02 per share as part of the purchase of FMS Marketing, Inc. See Note 2 - Discontinued Operations of Accounting Software Business.





In December 2001, the Company cancelled 3,400 shares of common stock issued under a stock bonus plan. The plan was designed to retain key employees of Meteor Industries after the merger with Old AIQ. The plan issued 25% of the bonus each quarter to the employee if still currently employed by one of the subsidiaries on the last day of each quarter. Termination from employment was cause for forfeiture of any future shares.





During the year ended December 31, 2001, the Company received proceeds of $1,629,955 from the exercise of 605,496 options.





During February 2002, all 365,000 shares of Series B Convertible Preferred Stock were converted into units, each unit consisting of one share of common stock and one warrant to purchase common stock. The warrants issued as part of the units converted are exercisable until May 15, 2005, at an exercise price of $2.50 per share.





On March 14, 2002, we issued a warrant to purchase 54,000 shares of common stock at $5.50 per share to an underwriter who exercised a warrant for which he was entitled to receive 54,000 units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock. The original warrant had an exercise price of $6.875 and was re-priced to $2.00 per share, providing net proceeds of $108,000. We recorded an expense of $61,020 related to the re-pricing of the warrant using the Black-Scholes pricing model. The newly issued warrant expires on April 30, 2006.





In connection with our October 2001 acquisition of FMS Marketing, Inc., we were required to pay to the 4 former shareholders of FMS/Harvest an aggregate of $300,000 by May 10, 2002 pursuant to the terms of certain promissory notes. In May 2002 we re-negotiated the terms of those notes in order to provide that we would immediately pay an aggregate of $30,000 and the remaining $270,000 would be payable by December 15, 2002, with interest accruing at the rate of 12.5% per annum. In addition, the re-negotiated notes allowed the former FMS/Harvest shareholders to convert the outstanding balance into shares of our common stock until July 12, 2002 at a price equal to 90% of the average closing sales price for the 5 days preceding conversion. On April 10, 2002, three of the former FMS/Harvest shareholders exercised the
conversion option with respect to their notes, converting an aggregate of $118,758 of outstanding principal and interest into 151,669 shares of our common stock (at a conversion price of $0.783 per share, the fair value of the common stock on that date).





See Note 7, Related-Party Transactions, for other issuances of common stock during the year ended December 31, 2002.





During the year ended December 31, 2002, the Company received proceeds of $12,830 from the exercise of 4,000 options.





**Option Grants**





In March 2001, an employee was granted options to purchase 25,000 shares of common stock at $1.00 per share at a time when the fair value of the Companys common stock was $2.75 per share. Deferred compensation of $43,750 was established and is being expensed over the vesting period of the options.





In April 2001, one employee was granted options to purchase 40,000 options to purchase common stock at $1.00 per share and another was granted options to purchase 100,000 options at $2.00 per share at a time when the fair value of the Company's common stock was $2.75 per share. Deferred compensation of $145,000 was established and is being expensed over the vesting period of the options.





52


In July 2001, 550,000 options were granted to two of the Companys executives with an exercise price of $5.00 per share when the fair market value of common stock was $5.87. Deferred compensation of $478,500 was established and is being expensed over the vesting period of the options.





Deferred compensation was reversed by $35,000 in the year ended December 31, 2001 for prior deferred compensation established related to employees that left the Company as their options were cancelled prior to exercise.





In October 2001 and November 2001, 28,750 options relating to three terminated employees were granted at an exercise price of $2.75 with immediate vesting. Deferred compensation of $19,750 was recorded.





With the resignation of two members of our board of directors in November and December 2001, 33,000 options were immediately vested at an exercise price of $1.00 and compensation expense of $29,040 was recorded.





Mr. Brimmer served as the Companys Chief Executive Officer from April 30, 2001 until December 1, 2001. The Company had an employment agreement dated May 1, 2001 with Mr. Brimmer. In addition to his annual salary of $125,000, Mr. Brimmer was entitled to an annual bonus of up to 75 percent of his salary upon the achievement of certain corporate objectives and a $250,000 bonus when the Company raised an aggregate of $12 million in equity financings, which was reached in the fourth quarter of fiscal 2001. Mr. Brimmer was also awarded an option to purchase up to 250,000 shares of the Companys common stock at a price of $5.00 per share, which option was to vest in equal installments over four years. Pursuant to an agreement dated November 27, 2001, and in accordance with Mr. Brimmers employment
agreement, the Company paid $250,000 to Brimmer Company, LLC in satisfaction of the bonus owed to Mr. Brimmer for achieving equity financings of at least $12 million. Although Mr. Brimmer resigned from his positions as Chief Executive Officer and Chief Financial Officer as of December 1, 2001, he agreed to remain as Chairman of the Board of Directors for the remainder of his term and to provide certain consulting services to the Company as requested. In connection with the termination, Mr. Brimmer agreed to waive any severance of any other payments under the remaining term of the agreement. The Company agreed to immediate vesting of his existing options and to permit exercise of those options until December 1, 2006. In connection with the $250,000 payment to Brimmer Company, the Company recorded an expense of $250,000 in 2001. The Company also recorded aggregate expenses of $343,500 in connection with the agreement to immediately vest Mr. Brimmers options and permit the exercise of such options
until December 1, 2006 pursuant to APB Opinion No. 25 and related interpretations.





During the year ended December 31, 2002, the Company granted 2,366,283 options to purchase common stock at prices ranging from $0.35 to $4.27 per share. All options were granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.





The total amount of compensation expense recorded, pursuant to APB 25 and related interpretations, for the years ended December 31, 2002 and 2001 was $129,488 and $678,281, respectively. Following is a roll forward of the deferred compensation account:





Balance at December 31, 2000

$
172,813Additions


817,169Compensation expense


(678,281
)Balance at December 31, 2001

$
311,701Additions


Compensation expense


(129,488
)Balance at December 31, 2002

$
182,213





**Warrant Grants**





During June 2001 the Company issued 300,000 warrants to purchase common stock at $5.50 per share in conjunction with the private placement of common stock. The stock was sold in units of 50,000 shares with attached warrants to purchase 30,000 shares of common stock. The Company assigned $114,000 of the purchase price to warrants using the Black-Scholes pricing model.





53


The Company also issued warrants totaling 450,000 with an exercise price of $5.50 per share and 250,000 with an exercise price of $7.50 per share exercisable through April 30, 2006 and August 1, 2006, respectively.





The Company also issued 7,636 and 48,957 warrants to purchase common stock at $2.75 and $5.00, respectively, to a vendor in exchange for service completed. The warrants were valued at $125,718 using the Black-Scholes pricing model.





The Company also recorded expenses of $1,246,000 for the year ended December 31, 2001, related to the warrants issued to a non-employee using the Black-Scholes pricing model.





During March 2002 we issued a warrant to purchase 54,000 shares of common stock at $5.50 per share to an underwriter who exercised a warrant for which he was entitled to receive 54,000 units, each unit consisting of one share of common stock and a warrant to purchase one share of common stock. The original warrant had an exercise price of $6.875 and was re-priced to $2.00 per share. We recorded an expense of $61,020 related to the re-pricing of the warrant using the Black-Scholes pricing model. The newly issued warrant expires on April 30, 2006.





Also in March 2002, we issued a 5-year warrant to purchase 25,000 shares of common stock at $3.00 per share in conjunction with a loan from a director. We allocated $33,750 of the proceeds as the value of the warrants issued using the Black-Scholes pricing model.





On May 27, 2002, we sold 500,000 shares of our common stock in a private placement to Boston Financial Partners, Inc., at a price of $0.75 per share. As consideration for its purchase of such shares, Boston Financial Partners also received a warrant to purchase an additional 500,000 shares of our common stock at an exercise price of $1.00 per share, and we further agreed to reduce to $1.00 the exercise price on all other warrants to purchase shares of our common stock held by Boston Financial Partners and its affiliates. Such warrants represent the right to purchase 1 million shares of common stock and had exercise prices ranging from $5.50 to $7.50 per share. We recorded an expense of $343,390 (related to the reduction of price of the 1 million warrants) using the Black-Scholes pricing model.





On May 31, 2002, we sold to two investors in a private placement an aggregate of 800,000 shares of our common stock at a price of $0.75 per share for total proceeds of $600,000. In connection with the sale of these shares, we also issued to the investors 5-year warrants to purchase an aggregate of 800,000 shares of common stock at an exercise price of $1.25 per share. The warrants may be redeemed by us any time after January 30, 2003 and following a period of at least 30 business days in which our common stock trades at $2.50 per share or more. The redemption price is equal to $.01 per warrant share. One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of the Company. Wyncrest Capital acquired half of the shares and warrants issued in this private
placement. In conjunction with this transaction, we also issued a warrant to purchase 50,000 shares of common stock in September 2002 to Ronald E. Eibensteiner as consideration for the placement. This warrant has a term of 5 years and is exercisable at a price of $1.00 per share.





On June 21, 2002, the Company issued 15,060 warrants to purchase common stock at $0.83, to a vendor in exchange for service completed. The warrants were valued using the Black-Scholes pricing model.





On September 18, 2001, we acquired Champion Business Systems, Inc. in a merger transaction. As consideration for the merger, (i) we paid at closing an aggregate of approximately $512,000 in cash to the former Champion shareholders, (ii) issued 299,184 shares of our common stock, and (iii) issued promissory notes in the aggregate amount of approximately $1 million. We are recording an imputed interest expense of 7% per annum. The notes are payable in equal installments of $256,164 on January 18, May 18, September 18, 2002, and January 18, 2003. In September 2002 several of the note holders re-negotiated an extension of the September payment until December 15, 2002, in the amount of $159,041. In exchange for the extension, we paid 25% of the amount owed to such note holders and agreed to pay monthly interest at
the rate of 12.5% per annum on the unpaid balance of the notes. As consideration for their agreeing to another deferral, each such note holder also received one common stock purchase warrant for every dollar deferred until December 15, 2002. We issued warrants to purchase an aggregate of 119,285 shares of our common stock to 9 persons. The warrants have a term of 5 years and have an exercise price of $1.00 per share. The value of these warrants totaled $82,199, using a Black-Scholes pricing model and a non-cash interest expense has been charged ratably through December 15, 2002.





54


For warrants issued to non-employees in exchange for services, the Company accounts for such warrants in accordance with Emerging Issues Task Force (EITF) Issue No. 96-18. The Company values the fair value of the equity instrument using the Black-Scholes pricing model unless the value of the services is more reliably measurable. The Company recorded expense related to warrants issued in the amount of $612,859, $1,436,393 and $345,800 for the years ended December 31, 2002, 2001 and 2000, respectively.





The following assumptions were used to value the fair value of warrants given for which the fair value of the services were not more reliably measurable: dividend yield of 0%, risk-free interest rate of 4 to 6%, expected life equal to the contractual life of five years and volatility of 74 to 193%.





Information regarding the Companys warrants is summarized below:








****
****

Number

WeightedAverageExercisePrice

RangeofExercisePriceOutstanding at December 31, 1999


10,000

$
60.00

$
60.00Granted


140,694


3.04


1.00-37.50Cancelled or expired





0.00


0.00Exercised





0.00


0.00Outstanding at December 31, 2000


150,694

$
3.24

$$
1.00-60.00Granted-including warrants previouslyissued by Meteor before the merger


7,726,122


5.32


2.50- 7.50Cancelled or expired


(74,678
)

3.81


1.00- 37.50Exercised


(22,682
)

1.00


1.00Outstanding at December 31, 2001


7,779,456

$
5.28

$$
1.00-60.00Granted


1,563,345


1.21


1.00- 5.00Re-priced grants


1,054,000


1.06


1.00- 2.00Cancelled or expired


(19,500
)

3.86


2.43 - 6.87Re-priced cancellations


(1,054,000
)

5.61


5.50 - 7.50Exercised


(54,000
)

2.00


2.00Outstanding at December 31, 2002


9,269,301

$
4.05

$$
1.00-60.00Warrants exercisable at December 31, 2002


9,269,301

$
4.05

$$
1.00-60.00








The weighted average fair value of warrants granted was $1.21 in 2000, $1.41 in 2001 and $0.65 in 2002.








**Stock Subscription Receivable**





In October 1999, a former director of Old AIQ purchased 8,334 shares (125,000 pre 1-for-15 reverse stock split shares) of its common stock at $37.50 per share ($2.50 pre 1-for-15 reverse stock split price) in exchange for a non-recourse note totaling $312,500. The note was recorded as a stock subscription receivable and was due and payable in full 90 days following the date the individual ceased to be a director. In March 2001, the former director resigned from the board. In June 2001, we redeemed the 8,334 shares and cancelled the note.





55


In December 2000, we entered into a subscription receivable for the purchase of 100,000 shares of common stock at a price of $2.75 per share with a director of the Company. In April 2002, the receivable was paid.





On January 1, 2002, we amended the employment agreement with D. Bradly Olah. Following the amendment of his employment agreement, Mr. Olah was awarded an option to purchase an additional 500,000 shares at $4.00 per share. On January 14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares subject to the option, though none had yet vested, by delivering a promissory note to us in the amount of $2,000,000 and pledging all 500,000 shares acquired as security for the repayment of the note, all in accordance with the terms of the option agreement. See Note 11 - Subsequent Events for a detailed discussion regarding Mr. Olahs severance agreement and cancellation of the promissory note.








**Stock Option Plans**





The Company has five stock option plans. The Company has the 1994 Stock Option Plan, the 1998 Incentive Equity Plan, the 1999 Stock Option Plan, the 2000 Director Stock Option Plan and the 2001 Employee Stock Option Plan. As of December 31, 2002, an aggregate of 9,250,000 shares of the Companys common stock may be granted under these plans as determined by the board of directors. Stock options, stock appreciation rights, restricted stock and other stock and cash awards may be granted under the plans. In general, options vest over a period of ranging from 3 to 4 years and expire 10 years from the date of grant.





Information regarding the Companys stock options is summarized below:








****
****
****
****

Number ofOptions

WeightedAverageExercisePriceOptions outstanding - December 31, 1999


46,997

$
29.52Granted


1,277,000


1.34Canceled or expired


(55,000
)

14.27Exercised





Options outstanding - December 31, 2000


1,268,997

$
2.07Grants related to Meteor merger


2,047,935


3.32Granted


2,384,559


4.16Canceled or expired


(1,004,805
)

2.65Exercised


(641,345
)

2.79Options outstanding - December 31, 2001


4,055,341

$
3.57Granted


2,366,283


1.68Canceled or expired


(1,343,475
)

4.24Exercised


(511,500
)

3.98Options outstanding - December 31, 2002


4,566,649

$
2.38Options exercisable - December 31, 2002


2,938,507

$
3.08Weighted average fair value of optionsgranted during the year ended December 31, 2002




$
1.44Weighted average fair value of optionsgranted during the year ended December 31, 2001




$
4.21Weighted average fair value of optionsgranted during the year ended December 31, 2000




$
0.31




56


Options outstanding under the plans as of December 31, 2002, have exercise prices ranging from $1.00 per share to $37.50 per share and a weighted average remaining contractual life of 7.0 years.





The following information summarizes information about stock options outstanding at December 31, 2002:





Options Outstanding

Options ExercisableRange of Exercise Prices

WeightedAverageNumber|Outstanding

WeightedRemainingContractualLife

Weighted
Average
Exercise
Price

NumberExercisable

WeightedAverageExercisePrice$1.00 to $2.87


2,949,365


6.6 years

$
1.24


1,563,115

$
1.86$3.00 to $5.50


1,596,950


7.5 years

$
4.26


1,355,058

$
4.21$15.00 to $37.50


20,334


1.7 years

$
20.90


20,334

$
20.90$1.00 to $37.50


4,566,649


7.0 years

$
2.38


2,938,507

$
3.08











**NOTE 9 - INCOME TAXES**





The Company has generated net operating loss carryforwards of approximately $15,150,000, which, if not used, will begin to expire in 2019. These net operating losses may currently be limited due to past changes in ownership of the Company. Future changes in the ownership of the Company may place additional limitations on the use of these net operating loss carryforwards.





The benefit from income taxes consists of the following:





Year Ended December 31,****

2002

2001

2000Current income tax expense

$


$


$
Deferred income tax benefit








Total benefit from income taxes

$


$


$






The Companys deferred tax assets are as follows:





December 31,****

2002

2001Net operating loss carryforwards

$
6,210,000

$
4,560,000Federal tax carryback claim refund


290,000


Property and equipment basis difference


(100,000
)

(41,000
)Accrued liabilities and other


195,000


Less: valuation allowance


(6,595,000
)

(4,519,000
)Net deferred tax asset

$


$






Reconciliation between the statutory rate and the effective tax rate for the years is as follows:





December 31,2002

2001

2000Federal statutory tax rate


(35.0
%)

(35.0
%)

(35.0
%)State taxes, net of federal benefit


(6.0
%)

(6.0
%)

(6.0
%)Change in valuation allowance


41.0
%

41.0
%

41.0
%Effective tax rate


0.0
%

0.0
%

0.0
%








57   **NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:**


****


For the Years Ended December 31,****

2002

2001

2000Cash paid for interest, net of original issue discount andwarrants issued for extension of debt

$
75,716

$
19,083

$
37,517NONCASH INVESTING AND FINANCING ACTIVITIES:Issuance of warrants in payment of legal feesand accounts payable


12,500


175,718


22,682Issuance of stock in payment of accounts payable








162,247Conversion of notes payable to common stock


348,758





55,000Issuance of common stock for equipment








378,000Issuance of common stock for license fees








350,001Conversion of notes payable on advance on product purchases








306,000Issuance of common stock to director








225,000Issuance of common stock with non-recoursenote receivable


2,000,000


200,000


Acquisition of certain assets and goodwill recorded, andassumption of certain liabilities on EdgeTechnologies, Incorporated merger





1,512,500


Issuance of note receivable in connection withthe Meteor merger





500,000


Surrender of common stock on stock subscriptionreceivable canceled





312,500


Acquisition of certain assets and goodwill recorded andassumption of certain liabilities on Red WingBusiness Systems, Inc. acquisition





4,302,430


Acquisition of certain assets and goodwill recorded andassumption of certain liabilities on ChampionBusiness Systems, Inc. acquisition





3,191,375


Acquisition of certain assets and goodwill recorded andassumption of certain liabilities on FMSMarketing, Inc. acquisition





1,234,594


Prepaid royalties financed with note payable





1,000,000


Reduction of note payable incurred on prepaid royaltiesacquired due to discount for early payment


50,000





Conversion of Series B Preferred Stock into common stock


365,000














**NOTE 11 - SUBSEQUENT EVENTS (unaudited)**





On January 6, 2003 the Company entered into a severance agreement with D. Bradly Olah, its Chief Executive Officer, effective December 31, 2002. The agreement allows for the payment of Mr. Olahs base salary through May 31, 2003, payment of health and other insurance benefits through December 31, 2003, the extension until December 31, 2007 to exercise options issued in July 2000. In exchange, Mr. Olah resigned as Chief Executive Officer and released the Company from all claims, including a release from his employment agreement dated May 1, 2001 (amended January 1, 2002). In addition, the Company exercised its right to a non-cash repurchase of 500,000 shares of common shares issued to Mr. Olah on January 14, 2002 in exchange for the cancellation of his note receivable to the Company. Mr. Olah will remain as
a Board member.





On February 26, 2003, Mr. Olah agreed to exchange the remaining unpaid base salary and benefits per the January 6, 2003 severance agreement, totaling $58,500, into 292,500 common shares of the Company at a rate of $0.20 per share.





On January 16, 2003, the Board of Directors appointed Jack A. Johnson Chief Executive Officer.





58


On March 3, 2003, the Company received a federal income tax refund of $316,133, including interest of $23,544.





On March 14, 2003, the Company signed an agreement to sell the assets of its Hosted Solutions Business to Stellent Inc. for: (i) $650,000 cash; (ii) the reimbursement of transaction-related expenses incurred by us in the amount of $150,000; and (iii) the assumption of certain obligations, liabilities and employees of the Company. Under Minnesota law, shareholder approval is required when a corporation disposes of all or substantially all of its assets. The assets related to the Hosted Solutions Business, which represented only 23% of our total assets and which generated only 11% of our consolidated revenues for the year ended December 31, 2002, did not constitute the sale of all or substantially all of our assets. Therefore, the transaction is not subject to shareholder approval. Upon completion of
this sale, the Company will no longer operate in the online document management business and will seek alternative business opportunities.








**NOTE 12 - QUARTERLY DATA (unaudited)**





The following is the unaudited quarterly financial data for the years ended December 31, 2002 and 2001, (reported in thousands except per share data):





Quarters EndedMar 31, 02

Jun 30, 02

Sep 30, 02

Dec 31, 02Revenues

$
104

$
166

$
108

$
121Operating expenses


969


1,441


1,348


981Loss from operations


(865
)

(1,275
)

(1,240
)

(860
)Other income (expense)


30


116


(51
)

231Loss from continuing operations


(835
)

(1,159
)

(1,291
)

(629
)Loss from discontinued operations


(502
)

(2,972
)

(346
)

(1,925
)Net loss

$
(1,338
)
$
(4,131
)
$
(1,637
)
$
(2,553
)Basic and diluted net loss per common share:Continuing operations

$
(0.07
)
$
(0.10
)
$
(0.09
)
$
(0.05
)Discontinued operations


(0.05
)

(0.24
)

(0.03
)

(0.14
)Net loss

$
(0.12
)
$
(0.34
)
$
(0.12
)
$
(0.19
)








Quarters EndedMar 31, 01

Jun 30, 01

Sep 30, 01

Dec 31, 01Revenues

$
36

$
258

$
60

$
109Operating expenses


1,169


1,903


2,645


2,686Loss from operations


(1,133
)

(1,645
)

(2,585
)

(2,577
)Other income (expense)


18


89


51


(7
)Loss from continuing operations


(1,115
)

(1,556
)

(2,534
)

(2,584
)Loss from discontinued operations





(288
)

(645
)

(725
)Net loss

$
(1,115
)
$
(1,844
)
$
(3,179
)
$
(3,309
)Basic and diluted net loss per common share:Continuing operations

$
(0.25
)
$
(0.21
)
$
(0.25
)
$
(0.24
)Discontinued operations





(0.04
)

(0.06
)

(0.08
)Net loss

$
(0.25
)
$
(0.25
)
$
(0.31
)
$
(0.32
)








**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**








On December 20, 2001, the Company and Arthur Andersen LLP agreed to terminate their relationship. The Companys Audit Committee and Board of Directors participated in and approved the decision to change independent accountants on December 18, 2001. In connection with its audit of the Companys financial statements for the 2000 and 1999 fiscal years (i.e., the financial statements of Old AIQ for the years ended December 31, 1999 and 2000) and through December 20, 2001, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP to make reference to such disagreements in their
report on the financial statements for such year.





On December 21, 2001, the Company engaged Virchow, Krause & Company, LLP as its new independent accountants. The engagement was approved by the Companys Audit Committee and Board of Directors on December 20, 2001.








59








**PART III**





**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT**





Set forth below are the names of all directors and executive officers of the Company, their respective ages and all positions and offices with the Company held by each person as of March 26, 2003:





Name
Age
Positions with the CompanyKenneth W. Brimmer
47
Chairman of the BoardMark D. Dacko
51
Chief Financial Officer and SecretaryD. Bradly Olah
38
DirectorRonald E. Eibensteiner
52
DirectorWayne W. Mills
48
DirectorPatrick L. Nelson
47
DirectorBrent Robbins
35
DirectorJack A. Johnson
54
Director





Kenneth W. Brimmer currently serves as our Chairman of the Board. Until November 30, 2001 Mr. Brimmer was Chief Executive Officer and Chief Financial Officer. Having been appointed to the board of directors of Old AIQ in 1999, Mr. Brimmer served that company as its Chairman and Chief Executive Officer until its merger with our company on April 30, 2001. Mr. Brimmer was president of Rainforest Cafe, Inc. from April 1997 until April 2000 and was Treasurer from its inception in 1995. Mr. Brimmer is also Chairman of both Hypertension Diagnostics, Inc., and Sterion, Inc. (formerly known as Oxboro Medical, Inc.), both of which are NASDAQ listed companies. Since February 2002, Mr. Brimmer has served as a director of Entrx Corporation (formerly known as Metalclad Corporation) (Nasdaq: ENTX).





Mark D. Dacko has served as our Controller from February 2001 until March 14, 2003, at which time he was appointed our Chief Financial Officer and Secretary. Prior to joining the Company, Mr. Dacko was Controller for PopMail.com, inc. from January 1999 until January 2001, and from November 1994 to December 1998, Mr. Dacko was Controller for Woodroast Systems, Inc.





D. Bradly Olah, one of the co-founders of Old AIQ, is a member of our board of directors. Through December 31, 2002 Mr. Olah served as our President and Chief Executive Officer and from November 2001 through May 2002, he served as our Chief Financial Officer. Mr. Olah formerly served Old AIQ as its Executive Vice President from November 1999 to March 2001 and as Chief Executive Officer from April 1996 to November 1999. Mr. Olah was also a member of Old AIQs board of directors from its inception in April 1996. He was a director of Natural Resources Geophysical Corporation from 1996 until 1998, when it was sold to Eagle Geophysical of Houston, Texas. He was also the founder/Chairman and Chief Executive Officer and a director of Innovative Gaming Corporation of America from 1991 through February 1996 and also


served as the Chief Financial Officer of that company from 1991 to 1993.





Ronald E. Eibensteiner has been a director of our company since April 30, 2001, the effective date of our merger with Old AIQ and Secretary from December 1, 2001 through June 24, 2002. He was initially appointed to the board of directors of Old AIQ in September 2000. Mr. Eibensteiner is the president of Wyncrest Capital, Inc. and has been a seed investor in several early stage technology companies. Since May 1996, Mr. Eibensteiner has been chairman of the board of directors of OneLink, Inc., a provider of Internet-delivered business intelligence services to the telecommunications industry. From March 1996 until March 2001, he served as a director of IntraNet Solutions, Inc. (now known as Stellent, Inc.), a provider of Web-based document management solutions for corporate intranets. Mr.
Eibensteiner co-founded Diametrics Medical, Inc., a manufacturer of blood gas diagnostic systems, and was chairman of Prodea Software Corporation, a data warehousing software company, until its sale to Platinum technology, inc., in January 1996.





60


Wayne W. Mills was appointed to our board of directors on November 20, 2001. Since February 2002, Mr. Mills has served as Chief Executive Officer and director of Entrx Corporation (formerly known as Metalclad Corporation). Mr. Mills, the Companys largest individual shareholder, is also the owner and president of Blake Capital Partners, LLC, a company that provides capital and consulting services to early stage businesses. Prior to forming Blake Capital Partners in 1999, Mr. Mills was employed for more than 18 years by R.J. Steichen & Co., where he was an investment banker and stockbroker.





Patrick L. Nelson was appointed to the Companys board of directors in September 2002. Mr. Nelson has been partner of Intersect Strategies Group, LLP since January 2002 and from 1991 to 1999 he served as Deputy Commissioner of the State of Minnesota Department of Commerce, Insurance & Registration Division. Effective February 26, 2002, Mr. Nelson resigned as a member of our board as he again has taken a position as a Deputy Commissioner of the State of Minnesota.





Brent Robbins was appointed to the Companys board of directors in November 2002. Since 2001, Mr. Robbins has served as counsel at General Mills, Inc. From 1999 to 2001, he was Vice President of Wyncrest Capital, Inc., a Minneapolis-based company that invests in early stage technology companies. From 1996 to 1999, Mr. Robbins was associated with the Bloomington, Minnesota law firm of Larkin, Hoffman, Daly & Lindgren, Ltd.





Jack A. Johnson joined the Company as President, Chief Operating Officer and as a director in November 2002. Prior to joining the Company, and since 1996, Mr. Johnson served as President of Sopheon Corporation, a Minneapolis, Minnesota based software company, and prior to that he was chief operating officer and chief financial officer of Teltech Resource Network, Inc. On January 16, 2003, the Board of Directors appointed Mr. Johnson Chief Executive Officer. Effective with the sale of our Hosted Solutions Business, Mr. Johnson was hired by Stellent, Inc. as vice president of hosted solutions.





There is no family relationship between any director or executive officer of the Company.





**SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who own more than 10% of our outstanding common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish copies of these reports to us. Based solely on a review of the copies of the Forms 3, 4 and 5 and amendments that we have received, we believe that all such forms required during 2002 were filed on a timely basis, except for the following:





Ronald E. Eibensteiner filed a Form 4 on October 15, 2002 relating to a purchase on October 4, 2002.





Wayne W. Mills filed (i) a Form 4 on September 13, 2002 relating to a purchase on September 9, 2002, (ii) a Form 4 on October 15, 2002 relating to purchases on October 11, 2002, (iii) a Form 4 on October 17, 2002 relating to a purchase on October 14, 2002; and (iv) a Form 4 on December 30, 2002 relating to purchases on or after December 24, 2002.





Patrick L. Nelson filed a Form 3 dated September 4, 2002 on September 18, 2002 and a Form 4 on September 18, 2002 relating to an option grant on September 4, 2002.





D. Bradly Olah filed (i) a Form 4 on September 30, 2002 relating to a transaction on September 24, 2002; (ii) a Form 4 on October 21, 2002 relating to a transaction on October 2, 2002 and (iii) a Form 4 on January 14, 2003 relating to a transaction on December 13, 2002.





Brent Robbins filed a Form 4 on November 21, 2002 relating to a transaction on November 7, 2002.





We have not received copies of any Forms 3, 4 or 5 filed on behalf of Boston Financial Partners, Inc. or its affiliates.





61


**ITEM 11. EXECUTIVE COMPENSATION**





**SUMMARY COMPENSATION TABLE**





The following information sets forth information with respect to the compensation of our Chief Executive Officer and our other executives whose total compensation for the fiscal years ended December 31, 2002, 2001 and 2000 that exceeded $100,000. No other executive officer received salary and bonus in excess of $100,000 during such periods.








Long-Term

All OtherAnnual Compensation

Compensation

CompensationSecuritiesUnderlyingName and Principal Position

Year

Salary

Bonus

Options

PayoutsChief Executive Officer,and President (a)D. Bradly Olah


2002

$
193,653








2001

$
150,000





300,000


2000

$
75,000








Chief Financial OfficerJeffrey M. Traynor (b)


2002

$
61,184

$
45,000


175,000


2001











2000




















(a) D. Bradly Olah was our President (until November 2002) and our Chief Executive Officer until his resignation on December 31, 2002. Mr. Olah was our Chief Financial Officer from December 1, 2001 until May 8, 2002. Mr. Olah will continue to be a member of our board of directors. He formerly served Old AIQ as its Executive Vice President from November 1999 to March 2001 and as Chief Executive Officer from April 1996 to November 1999. Mr. Olah was also a member of Old AIQ board of directors from its inception in April 1996.





(b) Mr. Traynor became our Chief Financial Officer on May 8, 2002 and was elected to serve as Corporate Secretary on June25, 2002. Effective March 14, 2003, Mr. Traynor resigned from both of these positions.








**OPTION GRANT TABLE**





The following information sets forth information with respect to the grants of options by us during 2002 to our Chief Executive Officer and our other most highly compensated executive officers as of December 31, 2002.





Percent totalNumber of

options/SARsoptions/

granted to

Exercise/



Grant dateSARs

employees in

base

Expiration

presentgranted

fiscal year

price ($)

date

value (c)D. Bradly Olah (a)


500,000


22.1
%
$
4.00


01/14/2012

$
930,000Jeffrey M. Traynor (b)


175,000


7.7
%
$
1.25


05/14/2012

$
168,000








62


(a)
The options granted vest as follows: 166,666 on 1/14/03; and 166,667 on 1/14/04 and 05.


(b)
The options granted vest as follows: 35,000 on 5/14/02, 03, 04, 05 and 06.


(c)
Grant date present value is calculated on the date of the grant using the Black-Scholes option pricing model assuming the following: no dividend yield, risk-free interest rate of 5%, expected volatilities between 74% and 118%, and expected terms of the options from 3 to 5 years. The Black-Scholes option value is then multiplied by the number of options granted.








**AGGREGATED OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUE TABLE**





Shown below is information relating to (i) the exercise of stock options during 2002 by our Chief Executive Officer and each of our other most highly compensated executive officers as of December 31, 2002 and (ii) the value of unexercised options for each of the Chief Executive Officer and such executive officers as of December 31, 2002:





Number of



Number of shares

Value of unexercisedshares



underlying unexercised

in-the-money optionsacquired on

Value

options at Dec. 31, 2002

at Dec. 31, 2002 (b)exercise

realized

Exercisable

Unexercisable

Exercisable

UnexercisableD. Bradly Olah (a)


500,000

$
2,000,000







$


$
60,000




$


$
100,000




$


$
Jeffrey M. Traynor




$



35,000


140,000

$


$






(a)
On January 1, 2002, we amended an employment agreement with our President and Chief Executive Officer, D. Bradly Olah. Following the amendment of this employment agreement, Mr. Olah was awarded an option to purchase an additional 500,000 shares at $4.00 per share. On January 14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares subject to the option, though none had yet vested, by delivering a promissory note to us in the amount of $2,000,000 and pledging all 500,000 shares acquired as security for the repayment of the note, all in accordance with the terms of the option agreement. In November 2002, Jack A. Johnson replaced Mr. Olah as our President. On January 6, 2003 we entered into a severance agreement with Mr. Olah, effective December 31, 2002. The agreement allows for the extension until December 31, 2007, to exercise 100,000 options (at $1.00 per share) issued in July 2000. In exchange, Mr. Olah
resigned as Chief Executive Officer and released the Company from all claims, including a release from his employment agreement dated May 1, 2001 (amended January 1, 2002). In addition, the Company exercised its right to a non-cash repurchase of 500,000 shares of common shares issued to Mr. Olah on January 7, 2002 in exchange for the cancellation of his note receivable to the Company.





(b)
The value of unexercised in-the-money options is based on the difference between the exercise price of the options and $0.22, the fair market value of the Companys common stock on December 31, 2002.








**EMPLOYMENT AGREEMENTS**





D. Bradly Olah





Mr. Olahs employment with our Company is also pursuant to a May 1, 2001 employment agreement, which was amended as of January 1, 2002 in order to increase his base salary from $150,000 to $200,000 and to reflect his appointment as Chief Executive Officer. In addition to his annual base salary, Mr. Olah is eligible for an annual bonus of up to 100 percent of his salary upon the achievement of certain corporate objectives. The agreement also contains non-competition and non-solicitation covenants, prohibiting Mr. Olah from engaging in a competing activity or soliciting company employees or customers for a 12-month period following the termination of his employment. In the event Mr. Olahs employment with us is terminated without cause (as defined therein), Mr. Olah is entitled to a lump
sum severance payment equal to his then-current base salary. In the event Mr. Olahs employment is terminated within one year of a change of control of our Company, he is entitled to receive his base salary for a 24-month period. In connection with the May 1, 2001 employment agreement, Mr. Olah was also awarded options to purchase up to 300,000 shares of our common stock at a price of $5.00 per share, which option vests in equal installments over four years. Following the amendment of his employment agreement in January 2002, Mr. Olah was awarded an option to purchase an additional 500,000 shares at $4.00 per share.





63


On January 14, 2002, Mr. Olah exercised his right to acquire all 500,000 shares subject to the option, though none had yet vested, by delivering a promissory note to us in the amount of $2,000,000 and pledging all 500,000 shares acquired as security for the repayment of the note, all in accordance with the terms of the option agreement





On January 6, 2003 we entered into a severance agreement with Mr. Olah, effective December 31, 2002. The agreement allows for the payment of Mr. Olahs base salary through May 31, 2003, payment of health and other insurance benefits through December 31, 2003, the extension until December 31, 2007 to exercise options issued in July 2000. In exchange, Mr. Olah resigned as Chief Executive Officer (Mr. Olah served as our President until November 25, 2002, at which time we hired Jack A. Johnson to be our President and Chief Operation Officer) and released us from all claims, including a release from his employment agreement dated May 1, 2001 (amended January 1, 2002). In addition, we exercised our right to a non-cash repurchase of 500,000 shares of common shares issued to Mr. Olah on January 7,
2002 in exchange for the cancellation of his note receivable to the Company. Mr. Olah will remain as a Board member.





On February 26, 2003, Mr. Olah agreed to exchange the remaining unpaid base salary and benefits per the January 6, 2003 severance agreement, totaling $58,500, into 292,500 common shares of the Company at a rate of $0.20 per share.





Jeffrey M. Traynor





On May 8, 2002, we entered into a one-year employment agreement with Jeffrey M. Traynor as our Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Traynor is entitled to an annual salary of $120,000 and a guaranteed bonus of $60,000 (the bonus to be paid in four equal installments beginning May 2002, then in August and November 2002, with a final installment due February 2003). Mr. Traynor was also awarded an option to purchase 175,000 shares of the Companys common stock at a price of $1.25 per share, with 35,000 options vesting immediately and the balance vesting ratably over a four-year period.





On March 14, 2003, we agreed to terms with Mr. Traynor concerning his separation as our Chief Financial Officer and Secretary. Mr. Traynor will continue to provide consulting services for us through April 2003. The Companys Board of Directors filled the vacancy resulting from Mr. Traynors departure by appointing Mark D. Dacko, formerly the Companys Controller, to serve as Chief Financial Officer and Secretary.





Jack A. Johnson





The terms of Jack A. Johnsons employment with us as our President and Chief Operating Officer are described in a letter agreement dated October 23, 2002. Pursuant to the letter agreement, Mr. Johnson was entitled to receive an annual base salary of $180,000 and a $25,000 automatic bonus payable in the second quarter of fiscal 2003. Further, Mr. Johnson was eligible to receive an annual bonus of up to 100 percent of his base salary upon achieving certain performance objectives. Mr. Johnson was also awarded options to purchase 900,000 shares of our common stock, of which 90,000 shares vested immediately with the balance vesting in three equal annual installments. The options have an exercise price of $0.35 per share. On January 16, 2003, Mr. Johnson was appointed President and Chief Executive Officer. In
connection with the sale of our hosted solutions business to Stellent, Inc., Mr. Johnson was hired by Stellent to be its vice president of hosted solutions. Notwithstanding that Mr. Johnson accepted a full-time employment position with Stellent, Mr. Johnson claims to be entitled to a lump sum severance payment from us in an amount exceeding $200,000 (including the $25,000 bonus) pursuant to the terms of an alleged employment agreement with the Company. As we have informed Mr. Johnson, it is our position that he does not have an enforceable employment agreement with us (other than the October 23, 2002 letter agreement) and that he is not entitled to any severance or other payments from us, except for the $25,000 bonus payment.








64





**DIRECTOR COMPENSATION**





Outside Directors of the Company are reimbursed for all reasonable and necessary costs and expenses incurred as a result of being a Director of the Company. In addition, we issue options to our Directors as determined by the Board. Such options vest over a period of years earlier upon a change of control.





During 2002, we issued a total of 100,000 options to two directors, of which options to purchase 50,000 shares are exercisable at $0.56 per share and the remaining 50,000 options are exercisable at $0.35 per share, both vest ratably over three years. These options are non-qualified options granted pursuant to our 2000 Directors Stock Option Plan.





Members of the Board who are also employees of ours receive no options for their services as directors.








**BOARD COMMITTEES**





The Company has an Audit Committee and a Compensation Committee. The Audit Committees oversee the activities of the independent auditors and internal controls. The members of the Audit Committee were Messrs. Brimmer, Nelson and Robbins. (On February 26, 2003, after participating in a regular meeting of the Audit Committee, Mr. Nelson submitted his resignation to the full Board of Directors, informing them of his appointment to serve in the Department of Commerce of the State of Minnesota.) The Compensation Committee makes recommendations to the Board of Directors of the Company concerning salaries and incentive compensation for executive officers of the Company. Messrs. Eibensteiner and Mills serve on the Compensation Committee.








**Report of the Audit Committee**





The Company has established a three-member Audit Committee within the Board of Directors. For the fiscal year ended December 31, 2002, the Audit Committee consisted of Kenneth W. Brimmer, Patrick L. Nelson and Brent Robbins. The Board will proceed with a formal search to replace the vacancy created by the resignation of Mr. Nelson. The primary functions of the Audit Committee are (i) to serve an as independent and objective party to monitor the Companys financial reporting process and internal control system, (ii) to review and appraise the audit efforts of the Companys independent accountants and internal audit department, and (iii) to provide an open avenue of communication among the independent accountants, financial and senior management, the internal audit department, and the
Board of Directors.





The Board of Directors has determined that, except for Mr. Brimmer, each of the Audit Committee members is an independent director, as such term is defined by Section 4200(a)(15) of the listing standards of the National Association of Securities Dealers (NASD). Mr. Brimmer does not meet the definition of independent because, although he is not currently an employee of the Company, he served as the Companys Chief Executive Officer and Chief Financial Officer from April 30, 2001 through November 27, 2001. Section 4350(d)(2) of the NASD listing standards, however, provides that a director who is not independent as defined by Section 4200(a)(13) and is not currently an employee of the Company or an immediate family member of an employee of the Company may be
appointed to the Audit Committee if the Board of Directors determines that is required in the best interests of the Company. Currently, there are only six members of the Companys Board of Directors and the Company has been unsuccessful in recruiting additional directors. The Board of Directors therefore determined that, notwithstanding Mr. Brimmers former employment by the Company, it would be in the Companys best interests to have 3 members on the committee, one of whom does not meet the definition of independent under NASD rules, rather than have only two independent directors serve on the Audit Committee.





65


The Board of Directors has also determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting. The Board of Directors has reviewed, assessed the adequacy of, and approved a written Audit Committee charter, which charter was attached as an exhibit to the Proxy Statement for the 2001 Annual Meeting.





The Audit Committee has reviewed the Companys audited consolidated financial statements for the last fiscal year and discussed them with management.





The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.





The Audit Committee has received and reviewed the written disclosures and the letter from Virchow Krause & Company, LLP, the Companys independent auditors, required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, promulgated by the Independence Standards Board, and has discussed with Virchow Krause & Company, LLP such firms independence.





The Audit Committee, based on the review and discussions described above, has recommended to the Board of Directors that the audited financial statements be included in the Companys Annual Report on Form 10-K for the last fiscal year.





Submitted by the Audit Committee of the Companys Board of Directors:





Kenneth W. Brimmer


Patrick L. Nelson


Brent Robbins











**COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**





The Companys Compensation Committee during the fiscal year ended December 31, 2002, consisted of Messrs. Eibensteiner and Mills. Neither Mr. Eibensteiner nor Mr. Mills have served as an executive officer or employee of the Company. Mr. Eibensteiner did serve as the Companys Secretary until June 24, 2002, however, a position for which he received no compensation. No executive officer or director of the Company served as a member of the compensation committee or board of directors of another entity, one of whose executive officers or directors served on the Companys compensation committee or board of directors.





**BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION**





Decisions on compensation of the Companys executives generally have been made by the Compensation Committee. Each member of the Compensation Committee is a non-employee director. All decisions by the Compensation Committee relating to the compensation of the Companys executive officers are reviewed by the entire Board of Directors. Pursuant to rules designed to enhance disclosure of the Companys policies toward executive compensation, set forth below is a report prepared by the Compensation Committee addressing the compensation policies for the Company and its subsidiaries for the fiscal year ended December 31, 2002 as they affected the Companys executive officers.





The Compensation Committees executive compensation policies are designed to provide competitive levels of compensation that integrate pay with the Companys annual objectives and long-term goals, reward above-average corporate performance, recognize individual initiative and achievements, and assist the Company in attracting and retaining qualified executives. Executive compensation is set at levels that the Compensation Committee believes to be consistent with others in the Companys industry.





66


There are three elements in the Companys executive compensation program, all determined by individual and corporate performance: base salary compensation; annual incentive compensation; and stock grants.





Base salary compensation is determined by the potential impact the individual has on the Company, the skills and experiences required by the job, and the performance and potential of the incumbent in the job.





Annual incentive compensation for executives of the Company is based primarily on corporate operating earnings and revenue growth and the Companys positioning for future results, but also includes an overall assessment by the Compensation Committee of executive managements performance, as well as market conditions.





Awards of stock grants under the 1999 Stock Option Plan are designed to promote the identity of long-term interests between the Companys executives and its shareholders and assist in the retention of executives.





Total compensation opportunities are competitive with those offered by employers of comparable size, growth and profitability in the Companys industry.





Mr. Olah received an annualized base salary of $150,000 until January 2002, at which time the Compensation Committee increased Mr. Olahs annualized base salary to $200,000 for the remainder of the 2002. This increase resulted from the Committees assessment of the complexity of the Companys operations. Following the amendment of his employment agreement in January 2002, the Company granted Mr. Olah an option to purchase up to 500,000 shares of the our common stock at a price of $4.00 per share (with the closing sale price of the Companys common stock on the date of grant being $3.70). Mr. Olah received no cash incentive compensation award for the fiscal year ended December 31, 2002.





The Compensation Committee surveys employee stock option programs of companies with similar capitalization to the Company prior to recommending the grant of options to executives. While the value realizable from exercisable options is dependent upon the extent to which the Companys performance is reflected in the market price of the Companys common stock at any particular point in time, the decision as to whether such value will be realized in any particular year is determined by each individual executive and not by the Compensation Committee. Accordingly, when the Committee recommends that an option be granted to an executive, that recommendation does not take into account any gains realized that year by that executive as a result of his or her individual decision to exercise an option granted in a
previous year.





Submitted by the Compensation Committee of the Companys Board of Directors:





Ronald E. Eibensteiner


Wayne W. Mills








67








**STOCK PERFORMANCE GRAPH**





The following presentation compares the Companys common stock price in the period from May 1, 2001 (the date of which we completed our merger with activeIQ Technologies and adopted their business model) through December 31, 2002, to the ISDEX Internet Index and to the Nasdaq Composite Index.

















4/30/01

6/30/01

9/30/01

12/31/01

3/31/02

6/30/02

9/30/02

12/31/02Active IQ

$
100.00

$
110.19

$
57.41

$
84.26

$
38.89

$
20.37

$
8.33

$
3.89ISDEX Internet

$
100.00

$
95.97

$
44.29

$
70.60

$
62.71

$
41.81

$
31.18

$
42.10Nasdaq Composite

$
100.00

$
102.13

$
70.82

$
92.16

$
87.20

$
69.14

$
55.38

$
63.11











68








**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The following information sets forth the number and percentage of shares of the Companys common stock owned beneficially, as of March 26, 2003, by any person, who is known to the Company to be the beneficial owner of 5 percent or more of the Companys common stock, and, in addition, by each director and each executive officer of the Company, and by all directors and executive officers as a group. Information as to beneficial ownership is based upon statements furnished to the Company by such persons.





Name and Address

Amount of Beneficial Ownership (1)

Percentage of ClassKenneth W. Brimmer


1,041,434 (2
)

7.85720 Smetana Drive, Ste 101Minnetonka, MN 55343Ronald E. Eibensteiner


1,525,734 (3
)

11.3800 Nicollet Mall, Ste 2690Minneapolis, MN 55402Wayne W. Mills


2,524,234 (4
)

18.45020 Blake RoadEdina, MN 55436D. Bradly Olah


868,134 (5
)

6.55720 Smetana Drive, Ste 101Minnetonka, MN 55343Mark D. Dacko


40,000 (6
)

*5720 Smetana Drive, Ste 101Minnetonka, MN 55343Brent Robbins


*


*5720 Smetana Drive, Ste 101Minnetonka, MN 55343Jack A. Johnson


90,000 (7
)

*5720 Smetana Drive, Ste 101Minnetonka, MN 55343All directors and officers as a group


6,089,536 (8
)

38.9Boston Financial Partners, Inc.


2,146,667 (9
)

15.217 Bayns Hill RoadBoxford, MA 01921Gulfstream Financial Partners, LLC


806,300 (10
)

6.02401 PGA Boulevard, Ste 190Palm Beach Gardens, FL 33410





(1)
Except as otherwise indicated, each person possesses sole voting and investment power with respect to the shares shown as beneficially owned.





(2)
Includes 207,834 shares issuable upon exercise of certain warrants. Also includes 450,000 shares issuable upon exercise of options, all of which are vested.





(3)
Includes 633,334 shares issuable upon exercise of certain warrants, of which 533,334 are owned by Wyncrest Capital, Inc., of which Mr. Eibensteiner is the sole director. Also includes 617,400 shares owned by Wyncrest Capital, Inc. Also includes 75,000 shares issuable upon exercisable of options which vest within 60 days.





(4)
Includes 938,334 shares issuable upon exercise of certain warrants, of which 540,000 are owned by Blake Capital, LLC of which Mr. Mills is the sole member. Also includes 271,000 shares owned by Blake Capital, LLC, 30,000 shares owned by Sea Spray, Ltd., a foreign corporation of which Mr. Mills is the sole director. Also includes 150,000 shares owned by Mr. Mills spouse. Mr. Mills disclaims beneficial ownership of these shares.





69


(5)
Includes 204,501 shares issuable upon exercise of certain warrants. Also includes 223,333 shares issuable upon exercise of options which vest within 60 days. Also includes 165,000 shares and 110,000 shares issuable upon exercise of certain warrants owned by Mr. Olahs spouse; and 15,000 shares and 10,000 shares issuable upon exercise of certain warrants owned by the D. Bradly Olah Irrevocable Trust.





(6)
Represent shares issuable upon the exercise of an option.





(7)
Represent shares issuable upon the exercise of an option.





(8)
Includes 2,104,003 shares issuable upon exercise of certain warrants. Also includes 788,333 shares issuable upon exercise of options which vest within 60 days.





(9)
Includes 1,380,000 shares issuable upon the exercise of certain warrants.





(10)
Includes 705,000 shares issuable upon the exercise of certain warrants.


**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The following describes certain relationships and related transactions that we have with persons deemed to be affiliates of our company. We believe that each of the transactions described below were on terms at least as favorable to our Company as we would have expected to negotiate with unaffiliated third parties.





In December 2000, Old AIQ entered into a subscription receivable for the purchase of 100,000 shares of common stock at a price of $2.75 per share with Mr. Eibensteiner, a director of the Company. On July 30, 2001, Mr. Eibensteiner delivered to our company a cash payment in the amount of $75,000 and a 2-month promissory note in the principal amount of $200,000. In April 2002, the receivable was paid in full.





On March 29, 2002, we borrowed $450,000 from Blake Capital Partners, LLC, an entity wholly owned by Mr. Mills who currently is a director and shareholder. The loan was evidenced by a 90-day promissory note and accrued interest at the rate of 7% annually. In connection with the loan, we also issued to Blake Capital Partners, LLC a 5-year warrant to purchase 25,000 shares of common stock at a price of $3.00 per share. On May 30, 2002, we allowed Blake Capital Partners to convert $150,000 of outstanding principal under the note into 200,000 shares of common stock. We satisfied the remaining outstanding principal and accrued interest in full on June 10, 2002





On May 27, 2002, we sold 500,000 shares of its common stock in a private placement to Boston Financial Partners, Inc., at a price of $0.75 per share, for total proceeds of $375,000 (we received $350,000 in cash and recorded a stock subscription receivable of $25,000). As consideration for its purchase of such shares, Boston Financial Partners also received a warrant to purchase an additional 500,000 shares of our common stock at an exercise price of $1.00 per share, and we further agreed to reduce to $1.00 the exercise price on all other warrants to purchase shares of our common stock held by Boston Financial Partners and its affiliates. Such warrants represent the right to purchase 1 million shares of common stock and had exercise prices ranging from $5.50 to $7.50 per share. Prior to this private placement,
Boston Financial Partners beneficially owned more than 5% of our common stock. In December 2002, the Company finalized an amendment to the agreement and canceled the $25,000 stock subscription receivable.





On May 31, 2002, we sold to two investors in a private placement an aggregate of 800,000 shares of our common stock at a price of $0.75 per share for total proceeds of $600,000. In connection with the sale of these shares, we also issued to the investors 5-year warrants to purchase an aggregate of 800,000 shares of our common stock at an exercise price of $1.25 per share. The warrants may be redeemed by us any time after January 30, 2003 and following a period of at least 30 business days in which our common stock trades at $2.50 per share or more. The redemption price is equal to $.01 per warrant share. Proceeds were allocated to the fair value of the securities issued (common stock and warrant). One of the investors was Wyncrest Capital, Inc., a wholly owned affiliate of Ronald E. Eibensteiner, a director of
the Company. Wyncrest Capital acquired half of the shares and warrants issued in this private placement. In conjunction with this transaction, we also issued an additional 50,000 warrants in September 2002 to Mr. Eibensteiner as consideration for the placement.





70


**ITEM 14. CONTROLS AND PROCEDURES**





(a) Evaluation of disclosure controls and procedures.





Pursuant to Rule 13a-14(c) of the Securities Exchange Act of 1934, within 90 days prior to the filing of the original Form 10-K, filed on March 31, 2003 (the Evaluation Date), the Company carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures of the Company that are
designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files to the SEC is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.





(b) Changes in internal controls.





There were no significant changes in the Companys internal controls or in other factors that could significantly affect the Companys internal controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses.





71








**PART IV**





**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**




(a) EXHIBITS





The following exhibits are filed as part of this Amendment No. 1.





Exhibit No.
Description
Location10.20
Severance Agreement by and between
Incorporated by reference to Exhibit 10.20D. Bradly Olah and the Company
to Registrants Form 10-K dateddated January 6, 2003.
December 31, 200210.21
Severance Agreement by and between
Incorporated by reference to Exhibit 10.21Jeffrey M. Traynor and the Company
to Registrants Form 10-K dateddated March 14, 2003.
December 31, 200223.1
Consent of Virchow, Krause &
Filed herewith electronicallyCompany, LLP.31.1
Certification Pursuant to Section 302
Filed herewith electronically31.2
Certification Pursuant to Section 302
Filed herewith electronically32.1
Certification Pursuant to 18 U.S.C. Section 1350
Filed herewith electronically32.2
Certification Pursuant to 18 U.S.C. Section 1350
Filed herewith electronically





(b) REPORTS ON FORM 8-K





For the quarter ended December 31, 2002, the Company filed no reports on Form 8-K.











72








**SIGNATURES**





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.








**WITS BASIN PRECIOUS MINERALS INC.**
(f/n/a Active IQ Technologies, Inc.) (REGISTRANT)Date: January 14, 2005
By:
/s/ H. Vance WhiteH. Vance WhiteChief Executive Officer








Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on January 14, 2005 by the following persons on behalf of the Registrant, in the capacities indicated.








**** **Signatures**
**Title**/s/ H. Vance White
Chief Executive Officer and DirectorH. Vance White
(principal executive officer)/s/ Mark D. Dacko
Chief Financial Officer, Controller, Secretary and DirectorMark D. Dacko
(principal financial and accounting officer)DirectorNorman D. Lowenthal/s/ Stephen D. King
DirectorStephen D. King





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