U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 1-11873
K2 DIGITAL, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3886065
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
c/o Sokolow, Dunaud, Mercadier & Carreras LLP
770 Lexington Avenue
6th Floor
New York, NY 10021
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(Address of Principal Executive Offices)
(212) 935-6000
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required 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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at May 20, 2003
- ----- ---------------------------
Common stock, par value $.01 per share............. 4,982,699
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
THIS FILING INCLUDES UNAUDITED FINANCIAL STATEMENTS THAT HAVE NOT BEEN REVIEWED
IN ACCORDANCE WITH ITEM 310(5)(b) OF REGULATION S-B PROMULGATED BY THE
SECURITIES AND EXCHANGE COMMISSION DUE TO THE DISMISSAL OF OUR AUDITORS,
ARTHUR ANDERSON, LLP. SEE "INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS" IN
THIS FILING FOR MORE INFORMATION.
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K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheet - March 31, 2003 (unaudited).. 2
Condensed consolidated statements of operations and comprehensive
loss - three months ended March 31, 2003 (unaudited) and
March 31, 2002 (unaudited).......................................... 3
Condensed consolidated statements of cash flows - three months
ended March 31, 2003 (unaudited) and March 31, 2002
(unaudited)......................................................... 4
Notes to condensed consolidated financial statements................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 6
Item 3. Controls and Procedures............................................. 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 9
SIGNATURES ................................................................ 10
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PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 5,537
Investment in security available-for-sale...................... 34,100
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Total assets............................................. $ 39,637
==========
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................... 158,903
Accrued expenses and other current liabilities................. 80,100
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Total liabilities........................................... 239,003
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STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding............................. --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
5,400,116 shares issued and 4,982,699 shares outstanding.... 54,001
Treasury stock, 417,417 shares at cost......................... (819,296)
Additional paid-in capital..................................... 8,317,910
Accumulated other comprehensive income......................... 8,800
Accumulated deficit............................................ (7,760,781)
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Total stockholders' deficit....................................... (199,366)
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Total liabilities & stockholders' deficit................ $ 39,637
==========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
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UNAUDITED UNAUDITED
Revenue $ -- $ --
General and administrative expenses 23,071 65,092
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Net loss $ (23,071) $ (65,092)
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Net loss per common share
- basic and diluted $ (0.00) $ (0.01)
========= ==========
Weighted average common shares outstanding
- basic and diluted 4,982,699 4,972,283
========== ==========
Comprehensive loss:
Net loss $ (23,071) $ (65,092)
Other comprehensive income -
unrealized gain on security available-for-sale 8,800 --
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Comprehensive loss $ (14,271) $ (65,092)
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
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2003 2002
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UNAUDITED UNAUDITED
CASH FROM OPERATING ACTIVITIES:
Net Loss $(23,071) $(65,092)
Adjustments to reconcile net loss to net cash used
in operating activities --
Non-cash compensation expense 62,500
Changes in --
Accounts receivable, net 68,807
Accounts payable 20,435 (63,881)
Accrued compensation and payroll taxes (5,691)
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Net cash used in operating activities and net decrease
in cash and cash equivalents (2,636) (3,357)
CASH AND CASH EQUIVALENTS, beginning of period 8,173 5,380
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 5,537 $ 2,023
======== ========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
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K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED (UNAUDITED) FINANCIAL STATEMENTS
1. PRIOR BUSINESS AND GOING CONCERN CONSIDERATION
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company") was a strategic digital services company that
provided consulting and development services including analysis, planning,
systems design and implementation. In August 2001, the Company completed the
sale of fixed and intangible assets essential to its business operations to
Integrated Information Systems, Inc. ("IIS").
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above, the
Company sold fixed and intangible assets essential to its business operations to
IIS and effectively became a "shell" company with no revenues and continuing
general and administrative expenses. Further, at March 31, 2003, the Company has
cumulative losses of approximately $7.8 million, a diminutive cash balance and
working capital and stockholders' deficits of approximately $200,000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Management's plan includes a proposed business combination with Future X Media,
f/k/a First Step Distribution Network, Inc. ("FX"), a California-based consumer
Internet entertainment firm, in a reverse merger transaction. If the transaction
is consummated, it is anticipated that the shareholders of FX will thereby
acquire substantially all of the issued and outstanding voting common stock of
the Company. The proposed transaction is subject to various conditions
including, but not limited to, a 5.1 to 1 reverse stock split of the Company's
common stock and completion of a shareholders meeting. If the Company is
unsuccessful in completing the preceding transaction, management's alternative
plan may include a further search for a similar business combination or
strategic alliance. There can be no assurances that the transaction described
above or management's alternative plan will be realized. Further, a liquidation
of the Company, through a Chapter 7 filing, may be pursued.
2. BASIS OF PRESENTATION, NET LOSS PER SHARE AND NEW ACCOUNTING PRONOUNCEMENTS
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position as of March 31, 2003 and the
financial results for the three months ended March 31, 2003 and 2002, in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to Form 10-QSB and Regulation S-B. Certain information
and footnote disclosures normally included in the Company's annual audited
consolidated financial statements have been condensed or omitted pursuant to
such rules and regulations.
The results of operations for the three months ended March 31, 2003 and 2002,
respectively, are not necessarily indicative of the results of operations to be
expected for a full fiscal year. These interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the fiscal year ended December 31, 2002, which are included in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of K2
Digital, Inc. and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of 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
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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.
NET LOSS PER SHARE OF COMMON STOCK
The Company complies with SFAS No. 128, "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share. Basic earnings (loss)
per share excluded dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted to common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the effect of
outstanding options is antidilutive, they have been excluded from the Company's
computation of net loss per common share. Therefore, basic and diluted loss per
common share for the three months ended March 31, 2003 and 2002 were the same.
NEW ACCOUNTING PRONOUNCEMENTS
During 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and
No. 148, "Accounting for Stock-Based Compensation Transaction and Disclosure".
SFAS No. 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and did not have a significant impact on the
Company's consolidated financial position, results of operations or cash flows
upon its 2003 implementation. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transactions for voluntary change to either fair value
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation", as amended by SFAS 148. During the
three month periods ended March 31, 2003 and 2002, the Company did not grant
options pursuant to its stock option plans.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to; those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock".
OVERVIEW
Founded in 1993, the Company is a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creation and implementation. In
August 2001, upon the sale of assets to Integrated Information Systems, Inc.
("IIS"), the Company effectively ceased operations.
RESULTS OF OPERATIONS
During the three months ended March 31, 2003 and 2002, the Company, operating as
a "shell," incurred a net loss of approximately, $23,000 and $65,000,
respectively. The Company's 2002 net loss consists primarily of an approximate
$63,000
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non cash compensation charge related to an employment agreement which expired
during the first quarter of 2002. All other costs during the three month periods
ended March 31, 2003 and 2002 relate to ongoing general administrative expenses,
most notably professional fees.
CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business or the winding up of the
Company's remaining business and operations, subject, in either case, to the
approval of the stockholders of the Company. The proceeds from the sale
of assets plus the additional contingent payments from IIS, together with assets
not sold to IIS may not be sufficient to repay substantially all of the
liabilities of the Company. These, among other matters, raise substantial doubt
about the Company's ability to continue as a going concern.
The Board of Directors of the Company has determined that, subject to
stockholder approval, the best course of action for the Company is to complete a
business combination with an existing business. On January 15, 2002, the Company
entered into the Merger Agreement with Future X Media, Inc., ("FX") f/k/a First
Step Distribution Network, Inc. Under the terms of the Merger Agreement, the
Company intends to acquire FX by means of a triangular merger, pursuant to which
a subsidiary of the Company will merge with and into FX in a tax free
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended. The proposed transaction is subject to various conditions
including, but not limited to, a 5.1 for 1 reverse stock split of the Company's
common stock (the "Reverse Stock Split").
As a condition to the Merger, the Company is required to implement the Reverse
Stock Split described above. The implementation of the Reverse Stock Split is
subject to the approval of the stockholders of the Company. The Board of
Directors of the Company has approved the Reverse Stock Split and will submit
the Reverse Stock Split to the stockholders of the Company for their approval.
In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations will be wound up subject to the approval of the stockholders of the
Company. The anticipated closing date for the Merger has been postponed due to
delays in FX's ability to secure the financing for the transaction that is
required pursuant to the terms and conditions of the Merger Agreement, as well
as delays in the preparation and finalization of the requisite financial and
other information about FX that will be included in the Company's information
statement being prepared in connection with the solicitation of stockholder
approval for the Reverse Stock Split. The Company has been informed by
representatives of FX that FX has made significant progress in securing the
necessary financing and financial statements and that FX expects to be able to
consummate the Merger during the second quarter of 2003, subject to the
requisite stockholder approval.
The Company's cash balance of $5,537 at March 31, 2003, decreased by $2,636 or
32% compared to the $8,173 cash balance at December 31, 2002. This decrease is
primarily due to the fact that the Company effectively ceased its operations and
continues to wind down activities.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company has effectively discontinued its operations.
In August 2001, the Company sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting the Company's ability to continue to engage in the
business engaged in by the Company prior to the transaction. Accordingly, the
Company's remaining operations have been limited to liquidating assets,
collecting accounts receivable, paying creditors, and negotiating and
structuring the transactions contemplated by the Merger Agreement or the winding
up of the Company's remaining business and operations, subject, in either case,
to the approval of the stockholders of the Company.
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The transactions contemplated by the Merger Agreement may never be consummated.
In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations will be wound up subject to the approval of the stockholders of the
Company. The anticipated closing date for the Merger has been postponed due to
delays in FX's ability to secure the financing for the transaction that is
required pursuant to the terms and conditions of the Merger Agreement, as well
as delays in the preparation and finalization of the requisite financial and
other information about FX that will be included in the Company's information
statement being prepared in connection with the solicitation of stockholder
approval for the Reverse Stock Split. The Company has been informed by
representatives of FX that FX has made significant progress in securing the
necessary financing and financial statements and that FX expects to be able to
consummate the Merger during the first quarter of 2003, subject to the requisite
stockholder approval. On June 28, 2002, the Company agreed to extend its Merger
closing date until July 31, 2002. No further extension has been granted,
although the Company would be prepared to provide such an extension upon certain
conditions being met. Although FX has assured the Company that FX remains
committed to the consummation of the transaction, the transaction is subject to
the satisfaction of a number of conditions and there can be no assurance that
the transaction will be consummated.
ITEM 3. CONTROLS AND PROCEDURES
The Company's President has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the President concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to him in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the President completed his evaluation.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Company*
3.1(a) Amendment to Certificate of Incorporation of the
Company*
3.1(b) Amendment to Certificate of Incorporation of the
Company**
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
3.3 Letter Agreement, dated June 28, 2002, between the
Company and First Step***
4.1 Common Stock Certificate*
4.2 Voting Agreement among Messrs. Centner, de Ganon,
Cleek and Szollose*
99.1 Sarbanes-Oxley Act Section 906 Certification
* Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, No. 333-4319.
** Incorporated by reference from the Registrant's Form 10-KSB for its fiscal
year ended December 31, 2000.
*** Incorporated by reference from the Registrant's Form 10-QSB/A filed on
June 28, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
K2 DIGITAL, INC.
Date: May 20, 2003
By: /s/ Gary Brown
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Gary Brown
President
(Principal Financial and
Accounting Officer)
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary Brown, certify that:
1. I have reviewed this quarterly report of K2 Digital Inc. and its
subsidiary;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly report
is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Gary Brown
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Gary Brown
President
(Principal Financial and
Accounting Officer)
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