U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year Ended: December 31, 2001
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from To
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Commission file number 0-18834
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Klever Marketing, Inc.
(Name of small business issuer in its charter)
Delaware 36-3688583
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
350 West 300 South, Suite 201, Salt Lake City, Utah 84101
(Address of principal executive offices) (zip code)
Issuer's telephone number (801) 322-1221
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Securities registered under Section 12(b) of the Act: NONE Securities registered
under Section 12(g) of the Act:
Common Stock Par Value $0.01
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(Title of class)
1
Check whether the issuer (1) 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
Total pages: 21
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Exhibit Index Page: 18
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $0
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As of March 14, 2002, there were 12,674,807 (1 vote per share) Common,
53,014 (10 votes per share) Class A, 41,177 (10 votes per share) Class B, and
74,243 (10 votes per share) Class C Convertible Preferred Series 1, for a total
of 14,359,147 shares of the Registrant's voting stock, par value $0.01, issued
and outstanding. The aggregate market value of the Registrant's voting stock
held by non-affiliates of the Registrant was approximately $5,600,853 computed
at the closing price as of March 14, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"): NONE
Transitional Small Business Disclosure Format (check one): Yes ; No X
2
TABLE OF CONTENTS
Item Number and Caption Page
PART I
Item 1. Description of Business 4
Item 2. Description of Property 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis or Plan of Operations 9
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 12
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 16
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits and Reports on Form 8-K 18
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
General
The Company was formed for the purpose of creating a vehicle to obtain
capital, to file and acquire patents, to seek out, investigate, develop,
manufacture and market electronic in-store advertising, directory and coupon
services which have potential for profit. The Company is currently in the
process of the commercialization of the patented process, Klever-Kart(R), it has
acquired.
History
The company began as a part of Information Resources, Inc. ("IRI") in
1987, was incorporated as a subsidiary of IRI under the laws of the State of
Delaware on December 8, 1989, and was fully distributed to stockholders of IRI
in a spinoff on October 31, 1990. At the time of the spinoff a portion of the
business and assets of the Company included a software operation in Australia,
which was sold in March, 1993. The Company (VideOCart, Inc.) filed petitions for
relief under Chapter 11 bankruptcy in December 1993. The Company was inactive
until July 5, 1996 when the Company merged with Klever Kart, Inc. in a reverse
merger and changed its name to Klever Marketing, Inc. The Company was in the
development stage during the period from July 5, 1996 to June 30, 1998.
ITEM 2 DESCRIPTION OF PROPERTY
The Company currently leases approximately 1,620 square feet of office
space from Four Cabo's Enterprises, Ltd. on a month to month basis. The lease
payments are approximately $2,025 per month. The office space is used as the
Corporate headquarters. It is located at 350 West 300 South, Suite 203, Salt
Lake City, Utah.
The Company has also entered into lease agreements for the rental of
computer equipment. These leases expire between September 2003 and May 2004. The
total monthly lease payments due on the above leases is approximately $210.
During 2000, the Company entered into a financing agreement for the
purchase of a laser printer. The payments on this agreement are $312 per month
for a term of 36 months.
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ITEM 3 LEGAL PROCEEDINGS
On September 18, 2001, a Complaint was filed in Superior Court of the
State of California, County of San Francisco, by eiKart, L.L.C. ("eiKart")
against the Company. The Complaint arises out of a written agreement between the
Company and eiKart dated May 11, 2001. Pursuant to the agreement, eiKart was to
pursue certain financing sources for the Company. The Complaint also alleges
that eiKart was requested by and performed for the Company certain additional
financing consulting services. The Complaint also claims that the Company
defrauded eiKart by stating that it was seeking interim financing when in
reality, the Company was not seeking financing, but trying to "go private" and
that the Company defrauded eiKart by not executing an amendment to the written
agreement. eiKart seeks payment in the form of stock options and cash as
required pursuant to said written agreement as if all benchmarks were satisfied,
payment for the fair value of financing services rendered (alleged to be in
excess of $300,000) and recovery of damages suffered as a result of the
fraudulent misrepresentations in the amount to be proven at trial. The Company
disputes all claims as invalid and intends to vigorously defend this action.
Management believes that the Company will prevail in this matter, therefore no
provision has been made in the financial statements related to this claim.
ITEM 4 SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
On September 27, 2001, the Company held its annual shareholder meeting.
The following matters were voted on:
Proposal 1: Election of the following nominees as directors of the Company,
to serve a term until the next Annual Meeting of Stockholders and until their
successors shall be duly elected and qualified: D. Paul Smith, Corey A.
Hamilton, Michael L. Mills, Richard J. Trout, William C. Bailey, Leonard D.
Southwick, and C. Terry Warner.
Proposal 2: Approval of amendment to Article V, Section 6 of the
Company's Bylaws with regard to a single person holding the offices of the
Company's President and Chief Executive Officer as set forth in the Proxy
Statement.
Proposal 3: To ratify the selection of Robison, Hill & Co. as the
Company's independent public accountants for the fiscal year ending December 31,
2001.
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PART II
ITEM 5 MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The stock is traded OTCBB with the trading symbol KLMK.
The following table set forth the high and low bid of the Company's
Common Stock for each quarter within the past two years. The information below
was provided by S & P Comstock and reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
2000: High Low
First Quarter $ 4.25 $ 1.88
Second Quarter $ 3.67 $ 2.06
Third Quarter $ 2.50 $ 1.13
Fourth Quarter $ 1.53 $ 0.38
2001:
First Quarter $ 1.12 $ 0.37
Second Quarter $ 1.01 $ 0.60
Third Quarter $ 0.85 $ 0.16
Fourth Quarter $ 0.35 $ 0.11
The number of shareholders of record of the Company's common stock as
of March 14, 2001 was 689.
The Company has not paid any cash dividends to date and does not
anticipate paying cash dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business.
Recent Sales of Unregistered Securities.
The Company sold 526,733 shares of common stock and 74,243 shares of
preferred stock during 2001. The stock was not sold through an underwriter and
was not sold through a public offer. These sales are exempt under Regulation D
Rule 506 of the Securities Act of 1933. (See Item &. Financial Statements,
Statement of Stockholders' Equity, pages F - 7 through F - 9)
On February 7, 2000 the Board of Directors authorized and established
"Class A Voting Preferred Stock Series 1. " ("Class A Shares") as a class of its
$.01 par value, 2,000,000 shares authorized, preferred stock. Class A Shares
consist of 1,000,000 shares, 125,000 shares thereof are
6
designated as Series 1 shares.
Class A Shares are convertible into Common Stock at an initial
conversion price of $2.60 (subject to adjustment).
Holders of Class A Shares shall be entitled to receive when and as
declared by the Board of Directors of the Company out of any funds at the time
legally available therefor dividends at the rate of $2.20 per share per annum,
payable semi-annually on the first day of January and July of each year. Such
dividends shall accrue on each such share from the date of its original issuance
and shall accrue from day to day, whether or not earned or declared. Such
dividend shall be cumulative and may be paid in cash or in kind through the
distribution of .0425 Class A Shares, Series 1, for each outstanding Class A
Share, on each dividend payment date. In addition, each holder of Class A Shares
shall be entitled to receive, when and as declared, a dividend equal to each
dividend declared and paid on the shares of Common Stock, on a share for share
basis. If there is a split or dividend on the Common Stock, then the Class A
Share dividends shall be adjusted as if a similar split or dividend had occurred
with respect to the Class A Shares.
Class A Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class A Shares could then be converted, and shall
have voting rights and powers equal to that of a holder of Common Stock. The
Holders of Class A Shares shall vote with the holders of Common Stock and not as
a separate class.
Class A Shares carry a liquidation preference of $26 per share plus any
accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class A Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 1, 2002. The redemption price shall be $26
per share together with accrued but unpaid dividends on such shares, if any.
On September 24, 2000 the Board of Directors authorized and established
"Class B Voting Preferred Stock" ("Class B Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class B Shares consist of
250,000, 125,000 shares thereof are designated as Series 1 shares.
Class B Shares are convertible into Common Stock at an initial
conversion price of $1.70 (subject to adjustment).
Holders of Class B Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the
7
distribution of .0425 Class B Shares, of the same Series for which the dividend
is accrued, for each outstanding Class B Share, on each dividend payment date;
provided, that if such dividends in respect of any period shall not have been
paid or declared and set apart for payment for all outstanding Class B Shares by
each payment date, then until all unpaid dividends thereon shall be paid or set
apart for payment to the holders of such shares, the Corporation may not pay,
declare or set apart any dividend or other distribution on its shares of Common
Stock or other shares junior to the Class B Shares, nor may any other
distributions, redemptions or other payments be made with respect to the shares
of Common Stock or other junior shares. In addition to the foregoing, each
holder of a Class B Share shall be entitled to receive, when and as declared, a
dividend equal to each dividend declared and paid on the shares of Common Stock,
on a share for share basis, so the holders of the Class B Shares shall be
entitled to participate equally on a share for share basis with the holders of
the shares of Common Stock. If there is a share split or dividend on the Common
Stock, then the Class B Share dividends shall be adjusted as if a similar split
or dividend had occurred with respect to the Class B Shares.
Class B Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class B Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class B Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class B Shares shall carry a liquidation preference of $17 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class B Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after March 24, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $17.00 per share together with accrued but unpaid dividends on
such shares, if any.
On January 2, 2001 the Board of Directors authorized and established
"Class C Voting Preferred Stock" ("Class C Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class C Shares consist of
500,000, 125,000 shares thereof are designated as Series 1 shares and 125,000
shares thereof are designated as Series 2 shares.
Class C Shares are convertible into Common Stock at an initial
conversion price of $.66 (subject to adjustment).
Holders of Class C Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the distribution of .0425 Class C Shares,
of the same Series for which the dividend is accrued, for each
8
outstanding Class C Share, on each dividend payment date; provided, that if such
dividends in respect of any period shall not have been paid or declared and set
apart for payment for all outstanding Class C Shares by each payment date, then
until all unpaid dividends thereon shall be paid or set apart for payment to the
holders of such shares, the Corporation may not pay, declare or set apart any
dividend or other distribution on its shares of Common Stock or other shares
junior to the Class C Shares, nor may any other distributions, redemptions or
other payments be made with respect to the shares of Common Stock or other
junior shares. In addition to the foregoing, each holder of a Class C Share
shall be entitled to receive, when and as declared, a dividend equal to each
dividend declared and paid on the shares of Common Stock, on a share for share
basis, so the holders of the Class C Shares shall be entitled to participate
equally on a share for share basis with the holders of the shares of Common
Stock. If there is a share split or dividend on the Common Stock, then the Class
C Share dividends shall be adjusted as if a similar split or dividend had
occurred with respect to the Class C Shares.
Class C Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class C Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class C Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class C Shares shall carry a liquidation preference of $6.60 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class C Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 2, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $6.60 per share together with accrued but unpaid dividends on
such shares, if any.
ITEM 6 MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS
Plan of Operations - The Company's goal is to become the leading supplier of
in-store promotions and advertising technology for grocery and other
mass-merchandise retailers. To accomplish this goal, the Company intends to
expand its product offerings to include: (i) electronic couponing (2003) to
eliminate the need for and reduce the costs related to paper coupons (including
fraud, mis- redemption and mal-redemption); (ii) the establishment of targeted
Internet-type content to enhance customer loyalty; (iii) capturing
Point-of-Selection data in the aggregate for providing data warehousing and
mining services to various interested parties; (iv) certain other in-store
services. Additionally, the Company intends to expand the Klever-Kart System's
application to other retailers including superstores, discount stores, toy
stores and warehouse stores. Following is a description of the Company's growth
strategy, which is dependent upon the Company securing additional financing:
9
Phase I: System Development and Product Movement Test.
The product movement test was completed during third quarter 1997. The test took
place in a Smith's Food and Drug store located in Salt Lake City, Utah.
Information Resources, Inc., an independent company, audited the results of the
test which concluded an average 46.8% incremental product movement.
Phase II: Cost Reduction & Enhancement.
In January 1998, the Company commenced development of the Phase II functional
specification that encompassed cost reductions and system enhancements.
Improvements on the Klever-Kart(R) system included: a significantly smaller and
more sleek design in the appearance and size of the display unit; smaller
trigger units with improved sensitivity, more durable plastics, and improved
sound fidelity. Upon completion of the Phase II functional specification, the
Company began phase II engineering design and development. In September 1999,
the Company began parts procurement and other manufacturing processes.
In early third quarter 2000, the Company installed stores for testing of the
Phase II system. In November 2000, the Company commenced engineering design and
development of Phase III. Phase III focused on improved consumer ergonomics,
enhanced user interface, modular design, improved graphics, and longer battery
life. The Company intends to complete this phase and proceed with a roll out
into stores.
Future Business Development
1. Technological Innovation and Expanded Product Offerings
The Company is in the process of developing various product enhancements for its
retail grocer and consumer goods manufacturer clients and expects to offer these
enhancements throughout 2003. These product enhancements include electronic
coupons, the Klever-Kard* enhancement to existing frequent shopping programs
("Klever-Kard Program").
Electronic Couponing
The Company expects to complete the development and testing of the electronic
coupon feature of the Klever-Kart System in 2003. The Company expects the
electronic coupon feature to be well received by the consumer goods companies,
retailers and consumers because it (i) reduces handling costs for both the
retailer and consumer goods manufacturer; (ii) virtually eliminates mis-
redemption, mal-redemption and fraud associated with paper coupons; and (iii)
makes coupon use convenient for the consumer. In addition, this feature is
expected to permit the consumer goods manufacturer or retailer to electronically
alter the face value of coupon to rapidly customize it for competitive
situations, seasonal trends or to alter its value or expiration based upon
predetermined redemption rates.
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Industry sources indicate the number of coupons redeemed annually in the U.S. is
approximately 5.3 billion with coupon fraud accounting for more than $300
million in losses to the consumer goods companies. The Company believes the
electronic coupon feature of the Klever-Kart System will be superior to
competitor product offerings due to the virtual elimination of mis-redemption,
mal- redemption and fraud associated with paper coupons.
Klever-Kard Program
The Company expects to introduce the Klever-Kard Program in 2003. The
Klever-Kard Program is a frequent shopper program enhancement that is expected
to permit consumer goods companies and retailers to target specific promotional
campaigns to individual consumers based upon demographics and personal buying
history. Further development of the Klever-Kard Program is expected to include
targeted Internet tie-ins, direct mail, rebates, download of shopping
lists/recipes, product sampling and electronic contest entry. Information from
individual consumer card usage is expected to produce individual customer
profiles and track specific marketing and purchasing trends. Using this
precedent in conjunction with the Klever-Kart System, the Company expects to
sell customer shopping behavior information to consumer research companies,
consumer goods companies and retailers.
2. Expand Retailer Base
The Company expects to expand the Klever-Kart System's orientation to other
store formats including superstores, discount stores, toy stores, do-it-yourself
(DIY) stores and warehouse stores. The Company plans to install the Klever-Kart
System in a pilot store at two or more key retailers across the U.S. The Company
believes that the existing Klever-Kart System can be easily adapted to meet the
requirements of retailers operating in a variety of environments.
Results of Operations - The Company was inactive until July 5, 1996 when the
Company merged with Klever Kart, Inc. in a reverse merger and changed its name
to Klever Marketing, Inc. The Company was in the development stage until June
30, 1998. For the years ended December 31, 2001 and 2000, the Company had net
losses of $2,342,405 and 4,066,283, respectively. This decrease in the loss is
primarily due to a decrease in operations.
Liquidity and Capital Resources - The Company requires working capital
principally to fund its current research and development and operating expenses
for which the Company has relied on short-term borrowings and the issuance of
restricted common stock. There are no formal commitments from banks or other
lending sources for lines of credit or similar short-term borrowings, but the
Company has been able to borrow any additional working capital that has been
required. From time to time in the past, required short-term borrowings have
been obtained from a principal shareholder or other related entities.
Cash flows. Operating activities used cash of $1,382,000 and $3,397,000
for 2001 and 2000 respectively. The decrease in the use of cash is due primarily
to a decrease in operations.
Investing activities have used cash of $122,000 and $112,000 for 2001 and
2000,
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respectively. Investing activities primarily represent purchases of phase 2
equipment, patents relating to the electronic in-store advertising, directory
and coupon devices, and purchases of office equipment.
Financing activities provided cash of $1,501,000 and $3,309,000 for 2001
and 2000, respectively. Financing activities primarily represent sales of the
Company's restricted stock, and short term borrowings.
Factors That May Affect Future Results - Management's Discussion and Analysis
contains information based on management's beliefs and forward-looking
statements that involved a number of risks, uncertainties, and assumptions.
There can be no assurance that actual results will not differ materially for the
forward-looking statements as a result of various factors, including but not
limited to the following:
The foregoing statements are based upon management's current
assumptions.
ITEM 7 FINANCIAL STATEMENTS
The financial statements of the Company and supplementary data are included
beginning immediately following the signature page to this report. See Item 13
for a list of the financial statements and financial statement schedules
included.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are not and have not been any disagreements between the Company and
its accountants on any matter of accounting principles, practices or financial
statements disclosure.
PART III
ITEM 9 DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
Executive Officers and Directors
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The following table sets forth the name, age, and position of each
executive officer and director of the Company:
Director's Name Age Office Term Expires
Richard J. Trout 45 President Next annual shareholder meeting
D. Paul Smith 55 CFO/Vice-President
Secretary/Chairman Next annual shareholder meeting
William C. Bailey 67 Director Next annual shareholder meeting
Michael L. Mills 39 Director Next annual shareholder meeting
Leonard D. Southwick 48 Director Next annual shareholder meeting
C. Terry Warner 65 Director Next annual shareholder meeting
Richard J. Trout, age 45, became the Company's President in October 2001
and a director of the Board in September 2000. In the capacity of the Company's
President, Mr. Trout will work side-by-side with Mr. Smith to facilitate the
company's plans for funding, M & A activity, strategic positioning and various
other financial planning and reporting functions. Mr. Trout comes to Klever
Marketing with a strong financial background working for Western Financial Bank
in California as a vice president for 12 years. For the past three years he has
been the CFO and an active board member for Olson Farms Inc.
D. Paul Smith, age 55, became Chairman of the Board in January 2001, and
CFO, Vice- President, and Secretary in October 2001, and has served as director
of the Company since November 2000. Mr. Smith has been an ongoing financial
advisor to the Company for the past five years and has played an active part in
the development of the Company's business plan. Mr. Smith is Chief Financial
Officer for the Arbinger Institute.
William C. Bailey, age 67, was elected as a director of the Company in
June 1994. Mr. Bailey is President and owner of Mount Olympus Waters, Inc. and
founder of Water and Power Technologies. Mr. Bailey served on the Board of
Directors for the American Bottled Water Association and the International
Bottled Water Association from 1975 to 1996, and was the Association's President
in 1978 and again in 1990. He received the industry's first award of Excellence
from IWBA in 1987 and was elected to the Beverage World Water Hall of Fame in
1989. He serves as a member of the Board of Trustees for the Utah Food Industry
Associations Insurance Trust. He is a member of the Board of Trustees for the
Utah Opera, currently serving as Chairman of the Board. He has been a member of
the Board of Directors for KUED 1990- 1996, University of Utah Alumni Board
1990-1994, and a member of the University of Utah's Fine Art's Advisory Board.
He is also a member of the Salt Lake Rotary and served as Secretary 1999-2000.
Michael L. Mills, age 39, was elected as a director of the Company in
December 1998. Mr. Mills is President/CEO of Olson Farms, Inc., a diversified
agricultural and real estate holding company with operations throughout the
western United States. The company deals primarily in the production,
processing, and distribution of eggs, with headquarters in Ontario, California.
Mr. Mills
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has been with the company since 1989. Mr. Mills began his career with Deloitte &
Touche in Los Angeles after graduating from the University of Utah summa cum
laude in accounting and math.
Leonard D. Southwick, age 48, became a member of the Company's Board in
January 2001. Mr. Southwick is currently Vice President and General Manager of
the Metro Auto Group in Southern California and also a director on the Olson
Farms Board. Mr. Southwick provides a successful history of managerial
experience in the planning and execution of high growth operations.
C. Terry Warner, Ph.D., age 65, became a member of the Company's Board in
September 2001. Mr. Warner is a longtime shareholder in the Company. Mr. Warner
is the founder of The Arbinger Company. He received his Ph.D. in philosophy from
Yale University, and has been a senior teacher at Oxford University. He has
taught at the university level for over twenty-five years and has been Dean of
the College of General Studies at Brigham Young University. His area of focus is
moral and social philosophy, and his ideas and writings about human
relationships have been adopted and propagated by business consultants, family
therapists, social psychologists, counselors and doctors of medicine all over
the world. He has been a consultant, advisor and teacher to executives of many
Fortune 500 companies for over fifteen years.
ITEM 10 EXECUTIVE COMPENSATION
Summary Compensation
The following table set forth, for the last three fiscal years, the
annual and long term compensation earned by, awarded to, or paid to the
individuals who were chief executive officer and chief operations officer at any
time during the last fiscal year.
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
---------------------------- ------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Year Annual Restricted Underlying All Other
Ended Compen- Stock Options/ LTIP Compen-
Name and Dec. Salary Bonus sation Award(s) SAR's Payouts sation
Principal Position 31 ($)(1) ($) ($) ($) (no.) ($) ($)
----------------------------------------------------------------------------------------------
Corey A. Hamilton 2001 112,500 (2) - - - - - -
President/CEO 2000 126,875 - - - 200,000 - -
1999 23,538 (1) - - - 100,000 - -
(1)Corey A. Hamilton joined the Company in September 1999 as the Vice President
of Sales and Marketing. In May of 2000, Mr. Hamilton was named President, and
later was named Chief Executive Officer upon Paul G. Begum's resignation in
December 2000.
(2)Corey A. Hamilton resigned from the Company as President and CEO effective
September 30, 2001.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information respecting all individual
grants of options and SARs made during the last completed fiscal year by the
chief executive officer and chief financial officer of the Company.
Number of % of Total Exercise Expiration Potential Realizable
Securities Option Price ($) Date Value at assumed
Underlying Granted to annual rates of
---------- ---------- ---------------
Options Employees stock price
Granted appreciation for
option term ($)
--------------------- -------------- ------------- ----------- -------------- ---------------------
5% 10%
--------------------- -------------- ------------ ------------ -------------- ----------- ----------
Richard J. Trout 25,000 2.4% 1.00 09/07/2002
--------------------- -------------- ------------ ------------ -------------- ----------- ----------
Richard J. Trout 100,000 9.4% 1.00 01/26/2004
--------------------- -------------- ------------ ------------ -------------- ----------- ----------
D. Paul Smith 100,000 9.4% 1.00 01/26/2004
--------------------- -------------- ------------ ------------ -------------- ----------- ----------
Aggregate Option/SAR Exercises in the Last Fiscal Year and year End Option/SAR
Values
The following table sets forth information respecting all individual
grants of options and SARs made during the last completed fiscal year by the
chief executive officer, chief financial officer, and directors of the Company.
At Fiscal Year End
--------------------- --------------- ----------- ------------------------------------------------------------
Shares Value Number of Securities Value of Unexercised in-
Acquired on Realized Underlying Unexercised the-money options ($) (a)
exercise ($) Options
--------------------- --------------- ----------- ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
Richard J. Trout 0 $0 25,000 100,000 $12,750 $51,000
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
Michael L. Mills 0 $0 45,455 100,000 $23,182 $51,000
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
D. Paul Smith 0 $0 0 100,000 $0 $51,000
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
William C. Bailey 0 $0 0 100,000 $0 $51,000
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
Leonard Southwick 0 $0 0 100,000 $0 $51,000
--------------------- --------------- ----------- -------------- ---------------- -------------- ----------------
(a) Based on the closing price of the Company's Common Stock on March 14, 2002
at $.51 per share
Executive Compensation and Benefits
15
The Company provides to all of its full time employees, including
executive officers and directors, health insurance and miscellaneous other
benefits.
ITEM 11 SECURITY OWNERSHIP OF BENEFICIAL OWNERS
AND MANAGEMENT
Principal Shareholders
The table below sets forth information as to each person owning of
record or who was known by the Company to own beneficially more than 5% of the
14,359,147 shares of voting securities that are issued and outstanding as of
March 14, 2002, including options to acquire stock of the Company that are
currently exercisable or will be within the next 60 days, and information as to
the ownership of the Company's Stock by each of its directors and executive
officers and by the directors and executive officers as a group. Except as
otherwise indicated, all shares are owned directly, and the persons named in the
table have sole voting and investment power with respect to shares shown as
beneficially owned by them.
# of
Name and Address Nature of Shares
of Beneficial Owners Ownership Owned Percent
Directors
Principal Shareholders
Paul G. Begum Direct(2) 3,203,660 22.31%
Preferred Shares(2)(3) 15,380 0.11%
----------- -------
Total 3,219,040 22.42%
========= ======
Michael L. Mills Direct(1) 2,029,809 14.14%
Preferred Shares(1)(4) 908,860 6.33%
---------- -------
Total(6) 2,938,669 20.47%
========= ======
C. Terry Warner Direct(6) 902,540 6.29%
Seabury Entities Preferred Shares(5)(6) 717,790 5.00%
16
# of
Name and Address Nature of Shares
of Beneficial Owners Ownership Owned Percent
Directors
Directors and Executive Officers
Michael L. Mills Direct(1) 2,029,809 14.14%
Preferred Shares(1)(4) 908,860 6.33%
---------- -------
Total(6) 2,938,669 20.47%
========= ======
C. Terry Warner Direct(6) 902,540 6.29%
All Executive Officers and
Directors as a Group (6
persons) Direct 4,279,622 29.80%
Preferred Shares(4) 908,860 6.33%
---------- -------
Total(6) 5,188,482 36.13%
========= ======
(1) Because Mr. Mills is president of Olson Farms, executor of the Estate of
Peter Dean Olson, trustee of the Olson Foundation, he has voting and
investment control but disclaims any pecuniary interest. For The Olson
Foundation, Mr. Mills is one of four trustees and does not have voting
or investment power because of a majority-vote rule relation to the
Foundation. The Olson Trust ownership includes 759,765 shares held by
Olson Farms, 20,000 shares held by the Olson Family Trust, 150,000
shares held by the Olson Foundation, 960,945 shares held by the Estate
of Peter D. Olson, and 115,917 shares held by Peter D. Olson IRA. The
Olson Trust ownership also includes 908,860 shares (90,886 preferred
shares, convertible to common shares at a conversion ratio of 10 to 1)
held by Olson Farms (790,560 shares) and Olson Foundation (118,300
shares).
(2) Mr. Begum's ownership includes 31,834 shares held by Mr. Begum,
2,542,967 shares held by Tree of Stars, Inc., a corporation of which Mr.
Begum is a director, officer, and principal shareholder, 538,859 shares
held by PSF, Inc., a private company, of which Mr. Begum is President
and principal shareholder, and 90,000 shares held by the Reed H.
Bradford Center for Christian Living, a 509(a)(1) publicly supported
organization. Mr. Begum's ownership also includes 15,380 shares (1,538
preferred shares, convertible to common shares at a conversion ratio of
10 to 1) held by Tree of Stars.
(3) These shares are Class A Convertible Preferred. The conversion ratio is
10 to 1. Preferred Shares shown in this table are converted to common.
(4) These shares consist of 5,769 Class A, 41,177 Class B, and 43,940 Class
C Convertible Preferred. The conversion ratio is 10 to 1. Preferred
Shares shown in this table are converted to common.
17
(5) These shares consist of 41,476 Class A and 30,303 Class C Convertible
Preferred. The conversion ratio is 10 to 1. Preferred Shares shown in
this table are converted to common.
(6) Total does not include 1,223,600 stock options that are currently
exercisable or will be exercisable in the next 60 days. Mr. Mills has
229,720 options, Mr. Warner has 100,000 options, Seabury Entities has
413,880 options, and the remaining officers and directors as a group
have 480,000 options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 various shareholders loaned the Company $347,100. The notes are
payable within one year plus interest at 10% and 12% per annum. During 1999 and
2000, principle payments of $155,850 and $62,500 were paid toward these loans.
During the year ended December 31, 2000, a shareholder loaned the Company
$1,100,000. This loan is secured by the Company's inventory, accounts
receivable, equipment and any proceeds related to these assets. This note is
payable within one year plus interest at 10% per annum.
During the year ended December 31, 2001, shareholders loaned the Company
$1,017,323. These loans are secured by the Company's inventory, accounts
receivable, equipment, patents, and any proceeds related to these assets. These
notes are payable within one year plus interest at 10% per annum. The total
balance of notes payable due as of December 31, 2001 is $2,246,073.
During the year ended December 31, 2001, the Company accrued additional
related party liabilities. These liabilities resulted from an agreement with a
shareholder and interest due on accrued compensation. The total amount of these
liabilities at December 31, 2001 is $85,409.
On February 1, 2000 an accrued liability in the amount of $306,666.64 was
converted to common shares by exercise of options for the purchase of 579,585
shares at $.86 per share and a note receivable in the amount of $191,776.46. The
note is payable in thirty-six equal installments with interest at the rate of
eight percent. The note is collateralized by 100,000 shares of the Company's
common shares. As of July 31, 2001, the total balance on the note receivable was
$98,375. On July 31, 2001, the Company forgave the remaining amount owed on the
receivable in exchange for 100,000 shares of common stock that were returned to
the Company.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
18
1. Financial Statements
Page
Report of Robison, Hill & Co., Independent Certified Public Accountants....................F-1
Balance Sheets
December 31, 2001, and 2000..............................................................F-2
Statements of Loss
For the Years Ended December 31, 2001, and 2000..........................................F-4
Statement of Stockholders' Equity
For the Years Ended December 31, 2001, and 2000..........................................F-5
Statements of Cash Flows
For the Years Ended December 31, 2001, and 2000.........................................F-10
Notes to Financial Statements
December 31, 2001, and 2000.............................................................F-12
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits are included as part of this
report:
Exhibit
Number Title of Document
3.01 Restated Certificate of Incorporation of Klever Marketing, Inc.
a Delaware corporation (1)
3.02 Certificate of Designation of Rights, Privileges and Preferences: Rights of
A Class Voting Preferred Stock, Series 1, of Klever Marketing, Inc., dated
February 7, 2000 (2)
3.03 Bylaws, as amended (2)
4.01 Amended Certificate of Designation of Rights, Privileges and Preferences:
Rights of A Class of Voting Preferred Stock, Series 1, of Klever Marketing, Inc.,
Dated February 7, 2000 (3)
4.02 Certificate of Designation of Rights, Privileges and Preferences of Class B Voting
Preferred Stock, of Klever Marketing, Inc., dated September 24, 2000 (3)
4.03 Certificate of Designation of Rights, Privileges and Preferences of Class C Voting
Preferred Stock, of Klever Marketing, Inc., dated January 2, 2001 (3)
19
10.01 Separation Agreement between Paul G. Begum and the Registrant
Dated January 8, 2001 (2)
10.02 Stock Incentive Plan, effective June 1, 1998 (2)
10.03 Amended and Restated Promissory Note (Secured) of the Registrant payable to
Presidio Investments, LLC, dated June 27, 2000, with Financing Statement and
Exhibit "A" (2)
10.04 Intercreditor Agreement between Seabury Investors III, Limited Partnership, The
Olson Foundation, Presidio Investments, LLC, and the Registrant dated August
27, 2001.
(1) Incorporated herein by reference from Registrant's Form 10KSB, dated June
20, 1997. (2) Incorporated herein by reference from Registrant's Form 10KSB,
dated March 29, 2001. (3) Incorporated herein by reference from Registrant's
Form 10QSB, dated May 15, 2001.
(b)On October 1, 2001, the Company filed a report on 8K reporting as of
September 28, 2001 a reduction of work force under Item 9.
On October 11, 2001, the Company filed a report on 8K reporting the
resignation of Paul G. Begum as a director prior to the annual Stockholders'
Meeting on September 27, 2001, under Item 9. Also reported on the 8K was the
October 1, 2001 resignation of Corey A. Hamilton as President and C.E.O. and as
a director, under Item 9.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
KLEVER MARKETING, INC.
Dated: May 10, 2002 By /S/ Richard J. Trout
------------------------------------
Richard J. Trout
President, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 10th day of May 2002.
20
Signatures Title
/S/ Richard J. Trout
------------------------------------------------------------
Richard J. Trout President
/S/ D. Paul Smith
-------------------------------------------------------------
D. Paul Smith C.F.O., Vice-President, Secretary,
Chairman
/S/ Michael L. Mills
-----------------------------------------------------------
Michael L. Mills Director
/S/ C. Terry Warner
-----------------------------------------------------------
C. Terry Warner Director
21
KLEVER MARKETING, INC.
-:-
FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
TABLE OF CONTENTS
Page
Independent Auditor's Report...............................................................F-1
Balance Sheets
December 31, 2001 and 2000..............................................................F-2
Statements of Loss
For the Years Ended December 31, 2001 and 2000..........................................F-4
Statement of Stockholders' Equity
For the Years Ended December 31, 2001 and 2000..........................................F-5
Statements of Cash flows
For the Years Ended December 31, 2001 and 2000.........................................F-10
Notes to the Financial Statements
December 31, 2001 and 2000.............................................................F-12
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Klever Marketing, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheets of Klever Marketing,
Inc. as of December 31, 2001 and 2000, and the related statements of operations,
changes in stockholders' equity and cash flows for the two years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Klever Marketing,
Inc., as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
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 suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Respectfully submitted,
/S/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
May 6, 2002
F - 1
KLEVER MARKETING, INC.
BALANCE SHEET
December 31,
-------------------------------
ASSETS 2001 2000
------
--------------- --------------
Current Assets
Cash $ - $ 2,870
Accounts Receivable - 8,631
Prepaid Expense 226,272 5,000
Shareholder Receivables 7,964 103,854
Other Assets - 92,339
--------------- --------------
Total Current Assets 234,236 212,694
--------------- --------------
Fixed Assets
Office Equipment 155,876 155,298
Phase 2 Equipment 66,690 -
Less Accumulated Depreciation (105,145) (78,663)
--------------- --------------
Net Fixed Assets 117,421 76,635
--------------- --------------
Other Assets
Patents 2,303,380 2,247,153
Less Accumulated Amortization (1,694,599) (1,477,349)
--------------- --------------
Net Other Assets 608,781 769,804
--------------- --------------
Total Assets $ 960,438 $ 1,059,133
=============== ==============
F - 2
KLEVER MARKETING, INC.
BALANCE SHEET
(Continued)
December 31,
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------------------------------
--------------- --------------
Current Liabilities
Accounts Payable, Trade $ 420,945 $ 192,510
Liability for Overdrawn Cash 3,903 -
Accrued Liabilities 346,011 166,078
Related Party Payables 2,331,482 1,228,750
Short-term Notes Payable 4,828 8,478
--------------- --------------
Total Current Liabilities 3,107,169 1,595,816
Non-Current Liabilities
Lease Obligation Payable 6,246 9,057
--------------- --------------
Total Liabilities 3,113,415 1,604,873
--------------- --------------
Stockholders' Equity
Preferred stock (par value $.01), 2,000,000 shares authorized
168,434 issued and outstanding December 31, 2001
and 94,191 issued and outstanding December 31, 2000 1,684 942
Common Stock (Par Value $.01), 20,000,000 shares
authorized. 12,674,807 shares issued and outstanding
December 31, 2001 and 12,152,768 shares issued and
outstanding December 31, 2000 126,748 121,528
Common Stock to be issued, 435,584 shares at
December 31, 2001 and 2000 4,356 4,356
Treasury Stock, 1,000 shares at December 31, 2001
and -0- shares at December 31, 2000 (1,000) -
Paid in Capital in Excess of Par Value 12,276,665 11,546,459
Retained Deficit (14,561,430) (12,219,025)
--------------- --------------
Total Stockholders' Equity (2,152,977) (545,740)
--------------- --------------
Total Liabilities and Stockholders' Equity $ 960,438 $ 1,059,133
=============== ==============
The accompanying notes are an integral part of these financial statements
F - 3
KLEVER MARKETING, INC.
STATEMENT OF LOSS
For the Year Ended
December 31,
-----------------------------
2001 2000
-------------- -------------
Revenue $ - $ 27,000
-------------- -------------
Expenses
Sales and marketing 33,929 83,617
General and administrative 1,607,942 2,312,875
Research and development 486,958 1,830,349
-------------- -------------
Total Expenses 2,128,829 4,226,841
-------------- -------------
Other income (expense)
Interest income 4,504 11,764
Interest expense (217,939) (68,364)
Loss on sale of assets (41) 190,258
-------------- -------------
Total Other Income (Expense) (213,476) 133,658
-------------- -------------
Income (Loss) Before Taxes (2,342,305) (4,066,183)
Income Taxes 100 100
-------------- -------------
Net Income (Loss) After Taxes $ (2,342,405) $ (4,066,283)
============== =============
Weighted Average Shares
Outstanding 12,557,378 11,978,017
============== =============
Loss Per Share $ (0.19) $ (0.34)
============== =============
The accompanying notes are an integral part of these financial
statements.
F - 4
KLEVER MARKETING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Common Paid in
Stock Capital in
Preferred Stock Common Stock Treasury to be Excess of Retained
--------------- --------------------
Shares Amount Shares Amount Stock Issued Par Value Deficit
----- -------- ---------- --------- ------------ ------- ----------- -----------
Balance at January 1, 2000 .......... - $ -- 11,275,121 $ 112,751 $ -- $4,589 $ 8,375,350 $(8,152,742)
January 2000 shares to company
for cash at $2.75 per share ...... -- -- 27,273 273 -- -- 74,727 --
February 2000 shares issued for
compensation at $3.99 per share .. -- -- 74,608 746 -- -- 296,939 --
February 2000 exercise of stock
option for cash and note
receivable at $0.86 per share .... -- -- 579,585 5,796 -- -- 492,646 --
February 2000 shares to individual
for cash at $1.07 per share ...... -- -- 28,979 290 -- -- 30,718 --
February 2000 shares canceled and
converted to preferred shares at
$2.75 per share .................. -- -- (100,000) (1,000) -- -- (274,000) --
January & February 2000 shares
issued to companies for cash
at $26 per share ................. 5,769 57 -- -- -- -- 149,943 --
February 2000 shares converted
from common shares at $26
per share ........................ 10,576 106 -- -- -- -- 274,894 --
February 2000 conversion of note
payable to preferred shares at $26 9,615 96 -- -- -- -- 249,904 --
February 2000 shares issued to
company for cash at $26 per
share ............................ 21,285 213 -- -- -- -- 553,162 --
F - 5
KLEVER MARKETING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
Common Paid in
Stock Capital in
Preferred Stock Common Stock Treasury to be Excess of Retained
--------------- --------------------
Shares Amount Shares Amount Stock Issued Par Value Deficit
------ -------- ---------- --------- ------------ ------- ----------- -----------
March 2000 shares issued to
company for accounts payable
at $3.00 per share .................. - $ -- 2,603 $ 26 $ -- $-- $ 7,783 $ --
March 2000 shares issued to
individual for cash at $2.75
per share ........................... -- -- 10,909 109 -- -- 29,891 --
April 2000 exercise of stock option
by individual for cash at $1.07
per share ........................... -- -- 18,193 182 -- -- 19,285 --
April 2000 shares issued to
company for cash at $2.50 per
share ............................... -- -- 40,312 403 -- -- 100,377 --
May 2000 shares issued to
company for cash at $2.75 per
share ............................... -- -- 54,546 546 -- -- 149,455 --
May 2000 shares issued to
companies for accounts payable
at $2.75 per share .................. -- -- 6,885 69 -- -- 18,866 --
May 2000 paid-in capital from
treasury stock transaction .......... -- -- -- -- -- -- 5,980 --
May 2000 shares issued to
individual that were paid for in 1997 -- -- 23,334 233 (23,334) (233) -- --
F - 6
KLEVER MARKETING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
Common Paid in
Stock Capital in
Preferred Stock Common Stock Treasury to be Excess of Retained
--------------- --------------------
Shares Amount Shares Amount Stock Issued Par Value Deficit
------ -------- ---------- --------- -------- ------- ----------- -----------
May 2000 shares issued to
company for cash at $26 per
share ............................... 5,769 $ 58 - $ -- $ -- $ -- $ 149,942 $ --
July 2000 shares issued to
individuals for cash at $1.07
per share ........................... -- -- 68,744 687 -- -- 72,869 --
July 2000 paid-in capital from
treasury stock transaction .......... -- -- -- -- -- -- 10,200 --
September 2000 stock issued to
company for cash at $17.00 per
share ............................... 41,177 412 -- -- -- -- 699,588 --
November & December 2000
shares issued to individuals for
cash at $1.50 to $1.56 per share .... -- -- 48,979 490 -- -- 74,717 --
December 2000 shares issued to
individual for legal services at
$0.89 per share ..................... -- -- 2,697 27 -- -- 2,373 --
December 2000 shares returned at
$1.73 to $2.12 per share ............ -- -- (10,000) (100) -- -- (19,150) --
Net Loss ............................... -- -- -- -- -- -- -- (4,066,283)
------ --- -------- ------- ------ ---------- ----------- -----------
Balance December 31, 2000 .............. 94,191 942 12,152,768 121,528 -- 4,356 11,546,459 (12,219,025)
F - 7
KLEVER MARKETING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
Common Paid in
Stock Capital in
Preferred Stock Common Stock Treasury to be Excess of Retained
--------------- --------------------
Shares Amount Shares Amount Stock Issued Par Value Deficit
------ -------- ---------- --------- -------- ------- ----------- -----------
January 2001 shares issued for
payment of note payable at
$6.60 per share ..................... 37,879 $ 379 - $ -- $ -- $ -- $ 249,621 $ --
January 2001 shares cancelled for
nonpayment .......................... -- -- (4,694) (47) -- -- (9,903) --
March 2001 shares issued for
payment of note payable at
$6.60 per share ..................... 6,061 60 -- -- -- -- 39,940 --
March 2001 shares issued for
research and development
expenses at $1.00 per share ......... -- -- 15,000 150 -- -- 14,850 --
May 2001 shares issued to
company for cash at $6.60
per share ........................... 30,303 303 -- -- -- -- 199,697 --
June 2001 shares issued to
company for cash at $.82
per share ........................... -- -- 1,219 12 -- -- 988 --
August 2001 shares issued to
company for cash at $.82
per share ........................... -- -- 3,466 35 -- -- 2,807 --
August 2001 shares issued for
general and administrative
expenses at $.66 per share .......... -- -- 507,048 5,070 -- -- 329,581 --
F - 8
KLEVER MARKETING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
Common Paid in
Stock Capital in
Preferred Stock Common Stock Treasury to be Excess of Retained
--------------- --------------------
Shares Amount Shares Amount Stock Issued Par Value Deficit
------ -------- ---------- --------- -------- ------- ----------- -----------
September 2001 shares returned
to Company for accounts
receivable of $98,375 -- $ -- -- $ -- $(1,000) $ -- $ (97,375) $ --
Net Loss ................ -- $ -- -- $ -- $ -- $ -- $ -- $ (2,342,405)
------ -------- ---------- --------- -------- ------- ----------- -------------
Balance December 31, 2001 168,434 $ 1,684 12,674,807 $ 126,748 $(1,000) $ 4,356 $12,276,665 $ (14,561,430)
======= ======= ========== ========= ======== ======= =========== =============
The accompanying notes are an integral part of these financial
statements.
F - 9
KLEVER MARKETING, INC.
STATEMENT OF CASH FLOWS
For the Year ended
December 31,
-------------------------------
2001 2000
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,342,405) $ (4,066,283)
Adjustments used to reconcile net loss to net cash provided
by (used in) operating activities:
Stock issued for general and administrative 139,438 603,777
Stock issued for research and development 15,000 -
Stock issued for patents and equipment - 16,189
Write-off of assets 81,388 445,330
Stock issued for account payable - 18,935
Stock issued for interest expense - 20,400
Depreciation and amortization 246,558 233,404
(Increase) decrease in accounts receivable 8,218 (8,631)
(Increase) decrease in shareholder receivable (2,486) (69,712)
(Increase) decrease in other assets & prepaid expense (14,695) (97,339)
Increase (decrease) in accounts payable 228,435 (209,197)
Increase (decrease) in lease obligation payable (2,811) 9,057
Increase (decrease) in related party payables 85,409 -
Increase (decrease) in accrued liabilities 176,283 (293,122)
--------------- --------------
Net Cash Used in Operating Activities (1,381,668) (3,397,192)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/Sale of equipment, net (66,190) (78,019)
Acquisition of patents (56,227) (34,303)
--------------- --------------
Net Cash Used by Investing Activities (122,417) (112,322)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds capital stock issued 483,892 2,521,652
Proceeds from loans 1,307,323 1,062,500
Conversion of note payable to preferred stock (290,000) (250,000)
Stock issued for note payable - (25,000)
Principle payments on lease obligations - -
Cash payments on notes payable - -
--------------- --------------
Net Cash Provided by Financing Activities 1,501,215 3,309,152
--------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,870) (200,362)
Cash and Cash Equivalents at Beginning of the Year 2,870 203,232
--------------- --------------
Cash and Cash Equivalents at End of the Year $ - $ 2,870
=============== ==============
F - 10
KLEVER MARKETING, INC.
STATEMENT OF CASH FLOWS
(Continued)
For the Year ended
December 31,
-------------------------------
2001 2000
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest $ 10,142 $ 14,731
Income Taxes $ 100 $ 100
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
o During February 2000, the Company issued 74,608 shares of common stock
for employee compensation of $297,686.
o During February 2000, the Company issued 579,585 shares of common stock
for employee compensation of $306,667.
o During March 2000, the Company issued 2,603 shares of common stock in
exchange for accounts payable of $7,809.
o During May 2000, the Company issued 18,193 shares of common stock in
exchange for interest payable of $19,467.
o During May 2000, the Company issued 4,529 shares of common stock in
exchange for accounts payable of $12,455.
o During May 2000, the Company issued 2,356 shares of common stock in
exchange for accounts payable of $6,480.
o During May 2000, the company issued 2,000 shares of common stock held in
the treasury in exchange for a forklift.
o During December 2000, the Company issued 2,697 shares of common stock in
exchange for legal expenses of $2,400.
o During December 2000, 10,000 shares of common stock were returned to the
Company. o During January 2001, 4,694 shares of common stock were
canceled. o During January 2001, 37,879 shares of preferred stock were
issued for payment of a note payable.
o During March 2001, 6,061 shares of preferred stock were issued for
payment of a note payable.
o During March 2001, the Company issued 15,000 shares of common stock in
exchange for research and development expenses.
o During July 2001, 100,000 shares of common stock were returned to the
Company.
o During August 2001, 507,048 shares of common stock were issued in
advance for services of $334,652.
The accompanying notes are an integral part of these financial
statements.
F - 11
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $2,316,000 for the year ended December 31, 2001 and losses of
approximately $4,066,000 for the year ended December 31, 2000, has a liquidity
problem, and requires additional financing in order to finance its business
activities on an ongoing basis. The Company is actively pursuing alternative
financing and has had discussions with various third parties, although no firm
commitments have been obtained.
The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, and market penetration.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.
Organization and Basis of Presentation
The Company was organized under the laws of the State of Delaware in
December 1989. The Company was in the Development stage from 1989 to 1991. The
Company was an operating company from 1992 to December 8, 1993 when it filed
petitions for relief under Chapter 11 bankruptcy. The Company was inactive until
July 5, 1996 when the Company merged with Klever Kart, Inc. in a reverse merger
and changed its name to Klever Marketing, Inc. The company was in the
development stage until June 30, 1998.
Nature of Business
The Company was formed for the purpose of creating a vehicle to obtain
capital, to file and acquire patents, to seek out, investigate, develop,
manufacture and market electronic in-store advertising, directory and coupon
services which have potential for profit. The Company is currently in the
process of the commercialization of the patented process it has acquired.
F - 12
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
This summary of accounting policies for Klever Marketing, Inc. is
presented to assist in understanding the Company's financial statements. The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Cash Equivalents
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Reclassifications
Certain reclassifications have been made in the 2000 financial
statements to conform with the 2001 presentation.
F - 13
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
Loss per Share
The reconciliations of the numerators and denominators of the basic
earnings per share computations are as follows:
Per-Share
Loss Shares Amount
For the year ended December 31, 2001
Basic Loss per Share
Loss available to common shareholders $ (2,342,405) 12,557,378 $ (0.19)
=============== =============== ==============
For the year ended December 31, 2000
Basic Loss per Share
Loss available to common shareholders $ (4,068,905) 11,978,017 $ (0.34)
=============== =============== ==============
Basic earnings per common share were computed by dividing net loss by
the weighted average number of shares of common stock outstanding during the
year. Diluted loss per common share for the years ended December 31, 2001 and
2000 are not presented as it would be anti-dilutive.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are
computed using the straight- line method over the estimated economic useful
lives of the related assets as follows:
Computer equipment 3 years
Office furniture and fixtures 5-10 years
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the
F - 14
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (continued)
determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
Intangibles
Intangibles associated with certain technology agreements are amortized
over 10 -14 years.
Other Current Assets
During 2000, the Company purchased supplies of batteries and parts
related to research and development of the Klever-Kart System. These supplies
are carried at fair market value on the balance sheet. Due to technological
changes, these supplies have become obsolete. The parts supplies were sold in
January 2001. The batteries were written-off and expensed during 2001.
NOTE 3 - INCOME TAXES
The Company has accumulated tax losses estimated at $15,000,000 expiring
in years 2007 through 2021. Current tax laws limit the amount of loss available
to be offset against future taxable income when a substantial change in
ownership occurs. The amount of net operating loss carryforward available to
offset future taxable income may be limited if there is a substantial change in
ownership.
NOTE 4 - LEASE COMMITMENT
The Company currently leases approximately 1,620 square feet of office
space from Four Cabo's Enterprises, Ltd. on a month to month basis. The lease
payments are approximately $2,025 per month.
The Company has also entered into lease agreements for the rental of
computer equipment. These leases expire between September 2003 and May 2004. The
total monthly lease payments due on the above leases is approximately $210.
During 2000, the Company entered into a financing agreement for the
purchase of a laser printer. The payments on this agreement are $312 per month
for a term of 36 months.
F - 15
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 4 - LEASE COMMITMENT (continued)
The minimum future lease payments under these leases for the next five
years are:
Year Ended December 31,
------------------------------------
2002 $ 8,289
2003 5,774
2004 890
2005 -
2006 -
------------
Total minimum future lease payments $ 14,953
============
NOTE 5 - RESEARCH AND DEVELOPMENT
Research and development of the Klever-Kart System began with the sole
purpose of reducing thefts of shopping carts. A voice-activated alarm system was
envisioned. As time and technology progressed, the present embodiment of the
Klever-Kart System evolved into a "product specific" point-of-purchase
advertising system consisting of an easily readable electronic display that
attaches to any shopping cart, a shelf mounted message sending unit that
automatically sends featured products' ad-message to the display and a host
computer using proprietary software.
During the years ended December 31, 2001 and 2000, the Company expended
$516,606 and $1,830,349, respectively for research and development of the
technology involved with its patents.
Due to technological changes during 2000, the Company decided to
write-off and expense research and development equipment that had been
previously capitalized. The total expense from this write-off is $1,282,845.
NOTE 6- RELATED PARTY TRANSACTIONS
During 1998 various shareholders loaned the Company $347,100. The notes
are payable within one year plus interest at 10% and 12% per annum. During 1999
and 2000, principle payments of $155,850 and $62,500 were paid toward these
loans.
During the year ended December 31, 2000, a shareholder loaned the
Company $1,100,000. This loan is secured by the Company's inventory, accounts
receivable, equipment and any proceeds related to these assets. This note is
payable within one year plus interest at 10% per annum.
During the year ended December 31, 2001, shareholders loaned the Company
$1,017,323. These loans are secured by the Company's inventory, accounts
receivable, equipment and any
F - 16
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 6- RELATED PARTY TRANSACTIONS (continued)
proceeds related to these assets. These notes are payable within one year plus
interest at 10% per annum. The total balance of notes payable due as of December
31, 2001 is $2,246,073.
During the year ended December 31, 2001, the Company accrued additional
related party liabilities. These liabilities resulted from an agreement with a
shareholder and interest due on accrued compensation. The total amount of these
liabilities at December 31, 2001 is $85,409.
On February 1, 2000 an accrued liability in the amount of $306,666.64
was converted to common shares by exercise of options for the purchase of
579,585 shares at $.86 per share and a note receivable in the amount of
$191,776.46. The note is payable in thirty-six equal installments with interest
at the rate of eight percent. The note is collateralized by 100,000 shares of
the Company's common shares. As of July 31, 2001, the total balance on the note
receivable was $98,375. On July 31, 2001, the Company forgave the remaining
amount owed on the receivable in exchange for 100,000 shares of common stock
that were returned to the Company.
NOTE 7- STOCK OPTIONS
The shareholders approved, by a majority vote, the adoption of the 1998
Stock Incentive Plan (the "Plan"). Under the Plan, 3,500,000 shares of common
stock are reserved for issuance upon the exercise of options which may be
granted from time-to-time to officers, directors and certain employees and
consultants of the Company or its subsidiaries. The Plan permits the award of
both qualified and non-qualified incentive stock options. Under the Plan, an
additional 500,000 shares of common stock are reserved for issuance in the form
of restricted stock grants. As of December 31, 1998, no options had been granted
under the Plan. Compensation expense charged to operations in 2001 and 2000 is
$0 and $297,686. The following is a summary of transactions:
Shares Under Option
-------------------------------
December 31,
-------------------------------
2001 2000
--------------- --------------
Outstanding, beginning of year 2,685,049 2,898,098
Granted during the year 2,299,367 864,151
Canceled during the year (2,860,024) (361,699)
Exercised during the year - (715,501)
--------------- --------------
Outstanding, end of year (at prices
ranging from $.01 to $3.00 per share) 2,124,392 2,685,049
=============== ==============
Eligible, end of year for exercise currently (at prices
ranging from $.01 to $3.00 per share) 1,458,500 2,055,752
=============== ==============
F - 17
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 8 - PREFERRED STOCK
On February 7, 2000 the Board of Directors authorized and established
"Class A Voting Preferred Stock Series 1. " ("Class A Shares") as a class of its
$.01 par value, 2,000,000 shares authorized, preferred stock. Class A Shares
consist of 1,000,000 shares, 125,000 shares thereof are designated as Series 1
shares.
Class A Shares are convertible into Common Stock at an initial
conversion price of $2.60 (subject to adjustment).
Holders of Class A Shares shall be entitled to receive when and as
declared by the Board of Directors of the Company out of any funds at the time
legally available therefor dividends at the rate of $2.20 per share per annum,
payable semi-annually on the first day of January and July of each year. Such
dividends shall accrue on each such share from the date of its original issuance
and shall accrue from day to day, whether or not earned or declared. Such
dividend shall be cumulative and may be paid in cash or in kind through the
distribution of .0425 Class A Shares, Series 1, for each outstanding Class A
Share, on each dividend payment date. In addition, each holder of Class A Shares
shall be entitled to receive, when and as declared, a dividend equal to each
dividend declared and paid on the shares of Common Stock, on a share for share
basis. If there is a split or dividend on the Common Stock, then the Class A
Share dividends shall be adjusted as if a similar split or dividend had occurred
with respect to the Class A Shares.
Class A Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class A Shares could then be converted, and shall
have voting rights and powers equal to that of a holder of Common Stock. The
Holders of Class A Shares shall vote with the holders of Common Stock and not as
a separate class.
Class A Shares carry a liquidation preference of $26 per share plus any
accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class A Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 1, 2002. The redemption price shall be $26
per share together with accrued but unpaid dividends on such shares, if any.
On September 24, 2000 the Board of Directors authorized and established
"Class B Voting Preferred Stock" ("Class B Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class B Shares consist of
250,000, 125,000 shares thereof are designated as Series 1 shares.
F - 18
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 8 - PREFERRED STOCK (continued)
Class B Shares are convertible into Common Stock at an initial
conversion price of $1.70 (subject to adjustment).
Holders of Class B Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the distribution of .0425 Class B Shares,
of the same Series for which the dividend is accrued, for each outstanding Class
B Share, on each dividend payment date; provided, that if such dividends in
respect of any period shall not have been paid or declared and set apart for
payment for all outstanding Class B Shares by each payment date, then until all
unpaid dividends thereon shall be paid or set apart for payment to the holders
of such shares, the Corporation may not pay, declare or set apart any dividend
or other distribution on its shares of Common Stock or other shares junior to
the Class B Shares, nor may any other distributions, redemptions or other
payments be made with respect to the shares of Common Stock or other junior
shares. In addition to the foregoing, each holder of a Class B Share shall be
entitled to receive, when and as declared, a dividend equal to each dividend
declared and paid on the shares of Common Stock, on a share for share basis, so
the holders of the Class B Shares shall be entitled to participate equally on a
share for share basis with the holders of the shares of Common Stock. If there
is a share split or dividend on the Common Stock, then the Class B Share
dividends shall be adjusted as if a similar split or dividend had occurred with
respect to the Class B Shares.
Class B Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class B Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class B Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class B Shares shall carry a liquidation preference of $17 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
The Class B Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after March 24, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $17.00 per share together with accrued but unpaid dividends on
such shares, if any.
F - 19
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 8 - PREFERRED STOCK (continued)
On January 2, 2001 the Board of Directors authorized and established
"Class C Voting Preferred Stock" ("Class C Shares") as a class of its $.01 par
value, 2,000,000 shares authorized, preferred stock. Class C Shares consist of
500,000, 125,000 shares thereof are designated as Series 1 shares and 125,000
shares thereof are designated as Series 2 shares.
Class C Shares are convertible into Common Stock at an initial
conversion price of $.66 (subject to adjustment).
Holders of Class C Shares shall be entitled to receive when and as
declared by the Board of Directors of the Corporation out of any funds at the
time legally available therefore dividends at the rate of the Original Issue
Price divided by 11.8181818 per share per annum, payable semi-annually on the
first day of January and July of each year. Such dividends shall accrue on each
such share from the date of its original issuance and shall accrue from day to
day, whether or not earned or declared. Such dividends shall be cumulative and
may be paid in cash or in kind through the distribution of .0425 Class C Shares,
of the same Series for which the dividend is accrued, for each outstanding Class
C Share, on each dividend payment date; provided, that if such dividends in
respect of any period shall not have been paid or declared and set apart for
payment for all outstanding Class C Shares by each payment date, then until all
unpaid dividends thereon shall be paid or set apart for payment to the holders
of such shares, the Corporation may not pay, declare or set apart any dividend
or other distribution on its shares of Common Stock or other shares junior to
the Class C Shares, nor may any other distributions, redemptions or other
payments be made with respect to the shares of Common Stock or other junior
shares. In addition to the foregoing, each holder of a Class C Share shall be
entitled to receive, when and as declared, a dividend equal to each dividend
declared and paid on the shares of Common Stock, on a share for share basis, so
the holders of the Class C Shares shall be entitled to participate equally on a
share for share basis with the holders of the shares of Common Stock. If there
is a share split or dividend on the Common Stock, then the Class C Share
dividends shall be adjusted as if a similar split or dividend had occurred with
respect to the Class C Shares.
Class C Shareholders shall be entitled to one vote for each share of
Common Stock into which such Class C Shares could then be converted and shall
have voting rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock. The holders of Class C Shares shall vote with the
holders of shares of Common Stock and not as a separate class.
Class C Shares shall carry a liquidation preference of $6.60 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for
combinations, splits, dividends or distributions of shares of stock with respect
to such shares.
F - 20
KLEVER MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Continued)
NOTE 8 - PREFERRED STOCK (continued)
The Class C Shares shall be redeemable by the Company, in whole or in
part, at the option of the Board of Directors of the Company, at any time and
from time to time on or after July 2, 2004 for Series 1, and such date as
determined by the Board of Directors for each additional Series. The redemption
price shall be $6.60 per share together with accrued but unpaid dividends on
such shares, if any.
NOTE 9 - CONTINGENCIES
On September 18, 2001, a Complaint was filed in Superior Court of the
State of California, County of San Francisco, by eiKart, L.L.C. ("eiKart")
against the Company. The Complaint arises out of a written agreement between the
Company and eiKart dated May 11, 2001. Pursuant to the agreement, eiKart was to
pursue certain financing sources for the Company. The Complaint also alleges
that eiKart was requested by and performed for the Company certain additional
financing consulting services. The Complaint also claims that the Company
defrauded eiKart by stating that it was seeking interim financing when in
reality, the Company was not seeking financing, but trying to "go private" and
that the Company defrauded eiKart by not executing an amendment to the written
agreement. eiKart seeks payment in the form of stock options and cash as
required pursuant to said written agreement as if all benchmarks were satisfied,
payment for the fair value of financing services rendered (alleged to be in
excess of $300,000) and recovery of damages suffered as a result of the
fraudulent misrepresentations in the amount to be proven at trial. The Company
disputes all claims as invalid and intends to vigorously defend this action.
Management believes that the Company will prevail in this matter, therefore no
provision has been made in the financial statements related to this claim.
During August 2001, the Company issued 507,048 shares of common stock as
a prepayment for services to be rendered over the next twelve months. This
resulted in a prepaid asset of $193,043 and expenses of $139,438. After three
months the agreement was canceled. The Company is due to receive 380,286 shares
of its own common stock back for the nine months of services that were never
rendered. As of May 6, 2002, the Company has not received the shares.
F - 21