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, 2002
|_| Transition report under Section 13 or 15(d) of the Exchange Act
Commission File No. 1-11873
K2 DIGITAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
13-3886065
(I.R.S. Employer Identification Number)
30 Broad Street, 15th Floor
New York, New York 10004
(Address of Principal Executive Offices)
(212) 785-9402
(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 April 30, 2002
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.
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet - March 31, 2002 (unaudited)......... 1
Consolidated statements of operations - three months ended
March 31, 2002 (unaudited) and March 31, 2001 (unaudited)....... 2
Consolidated statements of cash flows - three months ended
March 31, 2002 (unaudited) and March 31, 2001 (unaudited)....... 3
Notes to consolidated financial statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 12
SIGNATURES ............................................................ 13
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
INFORMATION WITH RESPECT TO FINANCIAL STATEMENTS
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. K2 Digital, Inc. has elected not to obtain
such a review from its prior auditor, Arthur Andersen, LLP. No independent
auditor has reviewed the financial statements set forth below or opined that
such statements present fairly, in all material aspects, the financial position,
results of operations, and cash flows of K2 Digital, Inc. for the quarterly
period ended March 31, 2002.
On April 16, 2002 K2 Digital, Inc. filed a form 8-K, indicating that the Board
of Directors had dismissed the accounting firm Arthur Andersen, LLP as the
Company's auditors effective April 10, 2002 and appointed Rothstein, Kass &
Company, P.C. as the Company's independent auditors effective April 10, 2002.
Rothstein, Kass & Company, P.C. will review the financial statements for the
quarterly period ended March 31, 2002 in accordance with Item 310(5)(b) and, if
in the opinion of such accountants, any changes are required, the Company will
file an amended Report on Form 10-QSB in accordance with Securities Exchange Act
of 1934 release No. 34-45589.
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2002
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 2,023
Accounts receivable, net of allowance for doubtful accounts of $50,000 .............. 55,105
Prepaid expenses and other current assets ........................................... 36,500
Investment in securities available for sale ......................................... 23,100
-----------
Total assets .................................................................. $ 116,728
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................... 141,846
Accrued compensation and payroll taxes .............................................. --
Accrued expenses .................................................................... 18,471
Other Current Liabilities ......................................................... 62,099
-----------
Total liabilities ................................................................ 222,416
STOCKHOLDERS' EQUITY:
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 .......................................................... 8,285,409
Accumulated other comprehensive loss ................................................ (86,900)
Deferred compensation ............................................................... (9,855)
Accumulated deficit ................................................................. (7,529,047)
-----------
Total stockholders' equity ............................................................. (105,688)
-----------
Total liabilities & stockholders' equity ...................................... $ 116,728
===========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
1
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
------------------------------
2002 2001
unaudited unaudited
--------- ---------
General and administrative expenses .................................. $ 65,092 $ 170,000
------------ -----------
Loss from continuing operations ...................................... (65,092) (170,000)
Loss from discontinued operations after income taxes ................. -- (1,707,679)
------------ -----------
Net loss ............................................................. $ (65,092) $(1,877,679)
============ ===========
Net loss per share --
Basic and Diluted
Loss from continuing operations ...................................... $ (0.01) $ (0.05)
Loss from discontinued operations .................................... -- $ (0.46)
------------ -----------
Net Loss ............................................................. $ (0.01) $ (0.51)
============ ===========
Weighted average common shares outstanding - basic and diluted ....... 4,972,283 3,681,338
============ ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
--------------------------------
2002 2001
unaudited unaudited
----------- -------------
CASH FROM OPERATING ACTIVITIES:
Net Loss .......................................................... $ (65,092) $(1,877,679)
Adjustments to reconcile net loss to net cash used
In operating activities --
Non-cash compensation expense ..................................... 62,500 62,500
Write-off of deferred issuance and transaction costs .............. -- 254,494
Depreciation ...................................................... -- 90,466
Changes in --
Accounts receivable, net .......................................... 68,808 1,158,056
Prepaid expenses and other current assets ......................... -- (14,379)
Unbilled revenue .................................................. -- 284,943
Accounts payable .................................................. (63,882) (267,921)
Accrued compensation and payroll taxes ............................ (5,691) (96,007)
Other accrued expenses and current liabilities .................... -- (263,781)
Deferred revenue and Customer Advances ............................ -- 161,779
Deferred rent ..................................................... -- 133,492
----------- -----------
Net cash used in operating activities ............................. $ (3,357) $ (374,037)
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of investment securities ................. -- 94,127
Purchase of equipment ............................................. -- (8,073)
----------- -----------
Net cash (used in) provided from investing activities ............. -- 86,054
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations ................... -- (7,177)
----------- -----------
Net cash (used in) provided by financing activities ............... -- (7,177)
----------- -----------
Net decrease in cash and cash equivalents ......................... $ (3,357) $ (295,160)
CASH AND CASH EQUIVALENTS, beginning of period .................... $ 5,380 $ 735,606
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 2,023 $ 440,446
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest .......................................................... $ -- $ 660
Income taxes ...................................................... -- $ 4,120
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Business
K2 Digital, Inc., a Delaware corporation ("K2" or the "Company"), is a strategic
digital services company, that historically provided consulting and development
services including analysis, planning, systems design, creative and
implementation.
On August 29, 2001, the Company completed the closing under an agreement (the
"Purchase Agreement") with Integrated Information Systems, Inc., a Delaware
corporation ("IIS") pursuant to which, among other things, IIS purchased
substantially all fixed and intangible assets of the Company, including most of
the Company's customer contracts, furniture, fixtures, equipment and
intellectual property, for an aggregate purchase price of $444,000, of which
$419,000 was paid in cash and $25,000 of which was paid through the assumption
by IIS of capital lease obligations of the Company. IIS also assumed certain
deferred revenues and customer deposits.
Under the terms of the Purchase Agreement, IIS now occupies the Company's
premises and has assumed the Company's office lease obligations. As part of the
same transaction, IIS has also made offers of employment to substantially all of
the remaining employees of the Company, all of which offers have been accepted.
In addition to the purchase price and as consideration of the Company's release
of certain employees from the non-competition restrictions contained in their
agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, under the terms of the
Purchase Agreement, the Company is to receive from IIS an additional placement
fee of $7,500 per key employee and $2,500 per other employee that remains
employed by IIS through December 31, 2001. This additional contingent placement
fee is to be paid by IIS in cash in five monthly installments beginning August
31, 2001, pro rated monthly for the number of employees retained. As of March
31, 2002, $31,000 of these contingent fees had been paid to the Company and
$36,500 due to the Company remains unpaid by IIS. Collection of the amounts due
are uncertain.
Under the Purchase Agreement, the Company also received from IIS a cash fee of
$50,000 in return for entering into certain non-competition provisions contained
in the Purchase Agreement, which provide that the Company will not, for a period
of five years, (i) engage in any business of substantially the same character as
the business engaged in by the Company prior to the transaction, (ii) solicit
for employment any employee of IIS (including former employees of the Company),
or (iii) solicit any client or customer of IIS (including any customer
transferred to IIS under the Purchase and Sale Agreement) to do business with
the Company.
The aggregate consideration delivered to the Company at closing was $544,000, of
which approximately $258,000 was paid directly to K2 Holding LLC, an affiliate
of SGI Graphics, LLC (collectively, "SGI"), the Company's principal secured
creditor, in order to release SGI's security interest in the assets of the
Company.
Accordingly, the operating results relating to the discontinued operations have
been segregated from continuing operations and reported as a separate line item
on the consolidated statements of operations. The Company has restated its
consolidated financial statements for prior periods to conform to the current
year presentation. Gain on disposal of discontinued operations includes actual
gain from the disposal of the discontinued operations.
2. Basis of Presentation
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, 2002 and the
financial results for the three months ended March 31, 2002 and 2001, 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.
4
The results of operations for the three months ended March 31, 2002 and March
31, 2001, 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, 2001,
which are included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission.
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 revenues and expenses
during the reporting periods. Actual results may differ from those estimates.
The financial statements included in the Company's 2001 Annual Report Form
10-KSB and this Quarterly Report Form 10-QSB are unaudited and have not been
reviewed in any manner by any independent public accountant. Historically, K2
Digital, Inc.'s (the "Company") financial statements have been audited by Arthur
Andersen LLP ("Andersen"). On April 10, 2002, the Board of Directors of the
Company made a determination not to engage Andersen, as its independent public
accountants and resolved to appoint Rothstein, Kass & Company, P.C.
("Rothstein") as its independent public accountants to audit its financial
statements for the fiscal year ended December 31, 2001.
On March 18, 2002, the Securities and Exchange Commission issued a release
adopting certain temporary and final rules intended to assure a continuing and
orderly flow of information to investors and the U.S. capital markets and to
minimize any potential disruptions that might otherwise occur as a result of the
indictment of Andersen. In the release, the Commission adopted rules pursuant to
which the Commission will accept filings that include unaudited financial
statements from any Andersen client that is unable to obtain from Andersen (or
elects not to have Andersen issue) a manually signed audit report and is
therefore unable to provide timely audited financial statements. The rules
adopted by the Commission require that any Andersen client electing this
alternative will generally be required to amend their filings within 60 days to
include audited financial statements.
In accordance with these rules, the Company intends to amend its Form 10-KSB no
later than May 31, 2002 in order to file the audited financial statements of the
Company for the fiscal year ended December 31, 2001, any required selected
financial data, a discussion of any material changes from the unaudited
financial statements and any other sections of the Company's annual report,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, that should be amended to reflect any changes in the
financial statements. Furthermore, the results of that audit may necessitate
amendments in this Form 10-QSB for the period ending March 31, 2002.
3. Going Concern
The Company has incurred negative cash flows from operations and sustained net
losses. Furthermore, in August 2001, the Company sold substantially all 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 will be limited to
either the sale of the Company or the winding up of the Company's remaining
business and operations, subject, in either case, to the approval of the
shareholders of the Company. The Company's independent public accountants have
added an explanatory paragraph to their audit opinion issued in connection with
the 2000 financial statements which states that the Company's losses since
inception and dependence on outside financing raise substantial doubt about its
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
4. Net Income (Loss) Per Share of Common Stock
SFAS 128, "Earnings per Share," establishes standards for computing and
presenting earnings per share ("EPS"). The standard requires the presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing income available
to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding adjusted to reflect potentially dilutive securities.
5
In accordance with SFAS 128, the following table reconciles net loss and share
amounts used to calculate basic and diluted loss per share:
Three Months Ended
March 31,
-------------------------------------
2002 2001
-------------- --------------
unaudited unaudited
Numerator: Net Loss ................................. $ (65,092) $ (1,877,679)
Denominator: Weighted average number
of common shares outstanding -
Basic and Diluted .................................... 4,972,283 3,681,338
Net loss per share --
Basic and Diluted
Loss from continuing operations ...................... $ (0.01) $ (0.05)
Loss from discontinued operations .................... - $ (0.46)
------------- -------------
Net Loss ............................................. $ (0.01) $ (0.51)
============= =============
* Excludes all outstanding stock options and warrants as of March 31, 2002 and
2001, as they are antidilutive.
5. Investment in Securities
As of March 31, 2002, the Company held 110,000 shares of common stock of 24/7
Media Inc. These shares have been classified as "investments in securities
available for sale" as a result of the Company's ability and intent to sell such
shares in the near future. In accordance with SFAS No. 115, the shares are
stated at fair market value on the Company's March 31, 2002 consolidated balance
sheet. Management believes that the decline of $1,328,047 in value of such
investment is permanent. Accordingly, such amount, which previously was
reflected in "other comprehensive loss" in the stockholders' equity, was
recorded in the statement of operations as impairment of investment securities
for the year-ended December 31, 2001. Any remaining unrealized holding loss is
reflected as "other comprehensive loss" in the stockholders' equity section of
the balance sheet.
The following disclosures are presented in accordance with SFAS No. 115:
Equity Securities:
Aggregate fair market value....................... $ 23,100
Gross unrealized holding loss..................... $ (86,900)
The Company did not sell any shares of capital stock of 24/7 Media Inc. during
the quarter ended March 31, 2002.
6
6. Fusion Capital Agreement
On December 11, 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion Capital Fund II, LLC ("Fusion Capital"). In
May 2001, the Company issued 862,069 shares of common stock under the Fusion
Facility in exchange for net proceeds of $250,000. On August 14, 2001, Fusion
Capital exercised a warrant to purchase an additional 297,162 shares of the
Company's common stock at an exercise price of $.01 per share. After applying
the net exercise provisions of the warrant, based upon the closing sale price of
the Company's common stock on the Nasdaq SmallCap Market of $.15 per share on
August 13, 2001, Fusion Capital received 277,351 shares of common stock upon
exercise of the warrant.
As a result of the sale of assets of the Company consummated in August 2001, the
Company is currently in default under the Fusion Facility. In addition, due to
the Company's current financial circumstances, the Company does not anticipate
that, even if the current defaults are cured, it will be able to make any
further issuances under the Fusion Facility.
7. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. The Company believes that the provisions of FAS 141 and FAS 142 will not
have a material effect on its results of operations and financial position.
8. NASDAQ Delisting
The Company's common stock was delisted from the Nasdaq SmallCap Market
effective August 15, 2001 and currently trades in the over-the-counter market.
On March 13, 2001, the Staff of the Nasdaq Stock Market notified K2 that it had
failed to demonstrate a closing bid price of at least $1.00 per share for 30
consecutive trading days and was in violation of Nasdaq Marketplace Rule
4310(c)(4). In accordance with applicable Nasdaq Marketplace rules, K2 was
provided a 90-day grace period, through June 11, 2001, during which to regain
compliance. On June 20, 2001, K2 requested a hearing, which effectively stayed
the delisting. However, after submission of materials in support of K2's
position to the Panel, the Panel decided to delist K2's common stock from the
Nasdaq SmallCap Market as of the open of business on August 15, 2001.
9. Recent Events
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 a third party with an existing business. On January
15, 2002, the Company entered into an Agreement and Plan of Merger with First
Step Distribution Network, Inc. and its shareholders. Under the terms of the
agreement, the Company intends to acquire First Step by means of a triangular
merger, pursuant to which a subsidiary of the Company will merge with and into
First Step. If the transaction contemplated by the agreement is consummated, it
is anticipated that the shareholders of First Step will thereby acquire
substantially the majority of the issued and outstanding voting common stock in
the surviving entity. Certain aspects of the transaction are subject to the
prior approval of the stockholders of the Company. There can be no assurance
that the proposed transaction, or any other business combination, will be
completed.
7
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 (unaudited) 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. Readers are encouraged to review the Company's 2001
Annual Report on Form 10-KSB for a discussion of certain of these risks and
uncertainties.
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, creative and
implementation. In August 2001, the Company effectively ceased operations as
described below.
Revenues
Revenues are recognized on a percentage-of-completion basis. Provisions
for any estimated losses on incomplete projects are made in the period in which
such losses are determinable. A portion of the Company's revenues has been
generated on a fixed fee or cap fee basis, as well as on an hourly bill rate
basis. Net revenue represents gross revenue minus media pass through costs and
reimbursable expenses. Net revenue for the year ended December 31, 2001 was
$1,997,106which was realized during the first seven months of 2001 prior to the
sale of assets to IIS and termination of the Company's operations effective
August 2001. The Company had net revenues of $5,162,000 for the full year ended
December 31, 2000.
Sale of Assets and Discontinued Operations
On August 29, 2001, the Company sold certain fixed and intangible
assets of the Company to IIS, including certain of the Company's customer
contracts, furniture, fixtures, equipment and intellectual property, for an
aggregate purchase price of $444,000, of which $419,000 was paid in cash and
$25,000 of capital lease obligations were assumed by IIS.
Under the terms of the Purchase Agreement, IIS assumed the Company's
office lease obligations, took up occupancy in the Company's premises and made
offers of employment to substantially all of the remaining employees of the
Company, which offers have been accepted.
In addition to the purchase price and as consideration of the Company's
release of certain employees from the non-competition restrictions contained in
their agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, the Purchase Agreement
provided for the Company to receive from IIS an additional placement fee of
$7,500 per key employee and $2,500 per other employee that remained employed by
IIS through December 31, 2001. This additional contingent placement fee was to
be paid by IIS in cash in five monthly installments beginning August 31, 2001,
pro rated monthly for the number of employees retained. As of March 31, 2002,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remains unpaid by IIS. Collection of the amounts due are uncertain.
Under the Purchase Agreement, the Company also received from IIS a cash
fee of $50,000 in return for entering into certain noncompetition provisions
contained in the Purchase Agreement, which provide that the Company will not,
for a period of five years, (i) engage in any business of substantially the same
character as the business engaged in by the Company prior to the transaction,
(ii) solicit for employment any employee of IIS (including former employees of
the Company), or (iii) solicit any client or customer of IIS (including any
customer transferred to IIS under the Purchase Agreement) to do business with
the Company.
Accordingly, the aggregate cash consideration delivered to the Company
at closing was $544,000, of which approximately $258,000 was paid directly to K2
Holdings LLC, an affiliate of SGI, the Company's principal secured creditor, in
order to release SGI's security interest in the assets of the Company.
8
Continuing Operations, Liquidity and 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 any remaining revenue sources beyond those assets not
purchased by IIS. Accordingly, the Company's remaining operations will be
limited to either the sale of the Company 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. The Company has entered into negotiations with certain creditors to
settle specific obligations for amounts less than reflected in the financial
statements reported herein. If these negotiations are unsuccessful, there will
not be sufficient cash to repay all of the obligations of the Company.
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 a third party with an existing business. On January
15, 2002, the Company entered into the Merger Agreement described above. Under
the terms of the Merger Agreement, the Company intends to acquire First Step by
means of a triangular merger, pursuant to which a subsidiary of the Company will
merge with and into First Step in a tax free reorganization within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended.
As a condition to the Merger, the Company is required to implement the
Reverse Stock Split. 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 First Step'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 First Step that will be included in the Company's
proxy statement being prepared in connection with the solicitation of
stockholder approval for the Reverse Stock Split. The Company has been informed
by representatives of First Step that First Step has made significant progress
in securing the necessary financing and financial statements and that First Step
expects to be able to consummate the Merger during the second quarter of 2002,
subject to the requisite stockholder approval.
The Merger Agreement contains a provision for termination of the Merger
Agreement by either the Company or First Step if the Merger is not consummated
by April 30, 2002. On April 8, 2002, the Company and First Step entered into a
side letter under which the Company agreed to waive its right to terminate the
Merger Agreement until June 30, 2002; provided that First Step has delivered to
the Company a true and correct copy of First Step's financial statements (as
described in the Merger Agreement) on or before May 8, 2002.
There can be no assurance that the Merger will in fact be consummated,
or that the shares of the Company's common stock will have any value following
the Merger.
The Company's cash balance of $2,023 at March 31, 2002, decreased by
$3,357 or 62% compared to the $5,380 cash balance at December 31, 2001. This
decrease is primarily due to the fact that the Company effectively ceased its
operations and continues to wind down activities.
Recent Technical Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations
("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The
amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt FAS 142
effective January 1, 2002. The Company believes that the provisions of FAS 141
and FAS 142 will not have a material effect on its results of operations and
financial position.
9
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.
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 First Step'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 First Step that will be included in the Company's
proxy statement being prepared in connection with the solicitation of
stockholder approval for the Reverse Stock Split. The Company has been informed
by representatives of First Step that First Step has made significant progress
in securing the necessary financing and financial statements and that First Step
expects to be able to consummate the Merger during the second quarter of 2002,
subject to the requisite stockholder approval. On April 8, 2002, the Company
agreed to extend its Merger closing date until June 30, 2002, provided that
audited financial statements were delivered to the company by May 8, 2002. The
financial statements have been delivered an dthe proxy is being prepared.
Although First Step has assured the Company that First Step 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.
The financial statements included in this report are unaudited.
The financial statements included in the Company's annual report on Form 10-KSB
and this quarterly report on Form 10-QSB are unaudited and have not been
reviewed in any manner by any independent public accountant. Historically, the
Company's financial statements have been audited by Arthur Andersen LLP
("Andersen"). On April 10, 2002, the Board of Directors of the Company made a
determination not to engage Andersen, as its independent public accountants and
resolved to appoint Rothstein, Kass & Company, P.C. ("Rothstein") as its
independent public accountants to audit its financial statements for the fiscal
year ended December 31, 2001. Rothstein also serves as the independent auditors
for First Step.
In accordance with rules recently adopted by the Securities and
Exchange Commission, the Company intends to amend this report on Form 10-KSB no
later than May 31, 2002 in order to file the audited financial statements of the
Company for the fiscal year ended December 31, 2001, any required selected
financial data, a discussion of any material changes from the unaudited
financial statements and any other sections of the Company's annual report,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, that should be amended to reflect any changes in the
financial statements. When complete, the audited financial statements of the
Company may contain material differences from the unaudited financial statements
included in this report.
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The Company's stock has been delisted from the Nasdaq SmallCap Market
The Company's common stock was delisted from the Nasdaq SmallCap Market
effective August 15, 2001 and currently trades in the over-the-counter market.
On March 13, 2001, the Staff of the Nasdaq Stock Market notified the Company
that it had failed to demonstrate a closing bid price of at least $1.00 per
share for 30 consecutive trading days and was in violation of Nasdaq Marketplace
Rule 4310(c)(4). In accordance with applicable Nasdaq Marketplace rules, the
Company was provided a 90-day grace period, through June 11, 2001, during which
to regain compliance. On June 20, 2001, the Company requested a hearing, which
effectively stayed the delisting. However, after submission of materials in
support of the Company's position to the Panel, the Panel decided to delist the
Company's common stock from the Nasdaq SmallCap Market as of the open of
business on August 15, 2001. The delisting of the Company's common stock from
The Nasdaq SmallCap Market is likely to materially and adversely decrease the
already limited liquidity and market price of the common stock, and may increase
both volatility and the "spread" between bid and asked prices of the common
stock.
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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*
4.1 Common Stock Certificate*
4.2 Voting Agreement among Messrs. Centner, de Ganon, Cleek and
Szollose*
* 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.
(b) Reports on Form 8-K:
The Company filed two Current Reports on Form 8-K during the period
covered by this Report:
On January 17, 2002 the Company filed a Form 8-K which reported that on
January 15, 2002, K2 Digital, Inc., a Delaware corporation (the "Company")
entered into an Agreement and Plan of Merger (the "Merger Agreement") by and
among First Step Distribution Network, Inc., a California corporation ("First
Step") and its shareholders (the "First Step Shareholders") and First Step
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the
Company ("Merger Sub"). In anticipation of the merger, the Company has formed
the Merger Sub. Under the terms of the Merger Agreement, the Company intends to
merge with First Step by means of a triangular merger ("the Merger"), pursuant
to which the Merger Sub will merge with and into First Step in a tax free
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended.
On April 16, 2002 the Company filed a Form 8-K which reported that on
April 10, 2002, the Board of Directors of the Registrant made a determination
not to engage Arthur Andersen LLP, as its independent public accountants and
resolved to appoint Rothstein, Kass & Company, P.C. as its independent public
accountants to audit its financial statements for the fiscal year ended December
31, 2001. In accordance with rules recently adopted by the Securities and
Exchange Commission, this Form 10-QSB is being filed with financial statements
that have not been reviewed pursuant to Item 310(b) of Regulation S-B. If, upon
completion of a review, there is a change in those financial statements, the
Registrant will amend its Form 10-QSB to present the reviewed financial
statements, a discussion of any material changes from the unreviewed financial
statements and any other section of the Form 10-QSB, that should be amended to
reflect any changes in the financial statements.
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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, 2002
By: /s/ GARY BROWN
------------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
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