U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
C/O SOKOLOW, DUNAUD, MERCADIER & Carreras LLP
770 LEXINGTON AVENUE, 6TH FLOOR
NEW YORK, NEW YORK 10021-8165
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 935-6000
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 October 31, 2002
----- -------------------------------
Common stock, par value $.01 per share............. 4,982,699
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX
PAGE
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheet - September 30, 2002 (unaudited) ....................... 1
Condensed consolidated statements of operations and comprehensive income (loss) -
three and nine months ended September 30, 2002 (unaudited) and September 30, 2001 (unaudited) 2
Condensed consolidated statements of cash flows - nine months ended
September 30, 2002 (unaudited) and September 30, 2001 (unaudited) ........................... 3
Notes to condensed consolidated financial statements ........................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................................... 7
Item 4. Controls and Procedures ..................................................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................................ 10
SIGNATURES ........................................................................................... 11
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 487
Accounts receivable, net of allowance for doubtful accounts
of $ 71,650 --
Other receivables 9,392
Income tax receivable 6,854
Investment in available-for-sale securities 40,700
-----------
Total current assets $ 57,433
===========
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 135,439
Accrued expenses and other current liabilities 109,965
-----------
Total current liabilities $ 245,404
===========
STOCKHOLDERS' DEFICIT
Preferred Stock, $0.01 par value, authorized 1,000,000 shares;
issued and outstanding nil shares $ --
Common Stock, $0.01 par value, authorized 25,000,000 shares;
Issued 5,400,116 shares, outstanding 4,982,699 shares 54,001
Treasury stock, 417,417 shares at cost (819,296)
Additional paid-in-capital 8,313,410
Accumulated other comprehensive income 15,400
Accumulated deficit (7,751,486)
-----------
Total stockholders deficit (187,971)
-----------
Total liabilities and stockholders' deficit $ 57,433
===========
See the accompanying notes to condensed consolidated
financial statements.
1
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Unaudited Unaudited Unaudited Unaudited
Revenues $ -- $ -- $ -- $ --
Other income 16,246 -- 22,617 --
General and administrative expenses 20,850 156,500 97,297 469,500
Impairment of available-for-sale securities 1,328,047 1,328,047
----------- ----------- ----------- -----------
Loss from continuing operations (4,604) (1,484,547) (74,680) (1,797,547)
----------- ----------- ----------- -----------
Discontinued operations
Loss from operations (146,441) (3,306,724)
Gain on disposal 218,110 218,110
----------- ----------- ----------- -----------
71,669 (3,088,614)
----------- ----------- ----------- -----------
Net loss $ (4,604) $(1,412,878) $ (74,680) $(4,886,161)
=========== =========== =========== ===========
Net loss per common share-
basic and diluted
Income (loss) from continuing operations $ (0.00) $ (0.31) $ (0.01) $ (0.42)
Loss from discontinued operations -- 0.02 -- (0.73)
----------- ----------- ----------- -----------
Net loss $ (0.00) $ (0.29) $ (0.01) $ (1.15)
----------- ----------- ----------- -----------
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,805,547 4,979,036 4,265,953
----------- ----------- ----------- -----------
Comprehensive income (loss):
Net loss $ (4,604) $(1,412,878) $ (74,680) $(4,886,161)
Other comprehensive income(loss), unrealized
gain(loss) on available-for-sale securities 17,600 (15,400) 15,400 (42,643)
Reclassification adjustment in light of
permanent decline in investment in
available-for-sale securities 1,328,047 1,328,047
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 12,996 $ (100,231) $ (59,280) $(3,600,757)
=========== =========== =========== ===========
See the accompanying notes to condensed consolidated
financial statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
------------ ------------
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,680) $(4,886,161)
Adjustments to reconcile net loss to net cash used
in operating activities:
Impairment of investment in available-for-sale securities 1,328,047
Non-cash consulting and compensation expense 72,355 187,497
Write-off of deferred issuance and financing costs 757,861
Assets
Gain on disposal of discontinued operations (218,110)
Depreciation and amortization 210,640
Changes in operating assets and liabilities:
Accounts receivable, net 68,807 1,474,404
Prepaid expenses and other current assets (16,246) 2,703
Unbilled revenue 482,773
Accounts payable (70,288) (393,574)
Accrued compensation and payroll taxes (188,955)
Accrued expenses and other current liabilities 15,159 (488,208)
Deferred revenue and customer advances (102,251)
Deferred rent 121,926
Restricted cash 250,000
----------- -----------
Net cash used in operating activities $ (4,893) $(1,461,408)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposal of discontinued operations 528,500
Gross proceeds from sale of available-for-sale securities 94,127
Purchase of equipment (8,074)
----------- -----------
Net cash provided by investing activities $ -- $ 614,553
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations (17,093)
Proceeds from the issuance of common stock 250,000
----------- -----------
Net cash provided by financing activities $ -- $ 232,907
----------- -----------
Net decrease in cash $ (4,893) $ (613,948)
CASH, beginning of period 5,380 735,606
----------- -----------
CASH, end of period $ 487 $ 121,658
=========== ===========
See the accompanying notes to condensed consolidated
financial statements.
3
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") (see Note 3).
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above and in
Note 3, 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 September 30, 2002,
the Company has cumulative losses of approximately $7.8 million, a diminutive
cash balance and working capital and stockholders' deficits of approximately
$188,000. 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 First Step
Distribution Network, Inc. ("First Step"), a California-based
business-consulting firm, in a reverse merger transaction (see Note 7). 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
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 September 30, 2002 and the
financial results for the three and nine months ended September 30, 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.
The results of operations for the three and nine months ended September 30, 2002
and 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/A 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 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.
4
3. SALE OF ASSETS AND DISCONTINUED OPERATIONS
BACKGROUND
On August 29, 2001, the Company sold fixed and intangible assets essential to
its business operations 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. IIS also assumed
certain deferred revenues and customer deposits.
Under the terms of the purchase agreement governing the transaction (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 were
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 remained
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
September 30, 2002, $31,000 of these contingent fees had been paid to the
Company and $36,500 due to the Company remains unpaid by IIS. The Company has
entered into a settlement agreement with IIS dated as of June 13, 2002 for
$9,392, representing approximately 20% of the total amount due, including legal
expenses. Subsequent to September 30, 2002, the Company received payment of all
amounts due under the settlement agreement with IIS.
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 Agreement) to do business with the
Company.
The aggregate cash 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.
DISCONTINUED OPERATIONS PRESENTATION
Accordingly, the operating results relating to the discontinued operations have
been segregated from continuing operations and reported as a separate line item
on the accompanying 2001 condensed consolidated statements of operations.
4. 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 and nine months ended September 30, 2002 and 2001
were the same.
5
5. COMMITMENTS AND CONTINGENCIES
The Company had a two-year employment contract with an executive officer that
expired on March 31, 2002. The contract provided for, among other things, annual
cash compensation of $225,000. In consideration of the officer's election to
take a reduced salary in the fourth quarter of 2001 and not to be paid in cash
in 2002 due to the financial condition of the Company, the Company may
compensate the officer through stock options in the future. Compensation expense
was recorded at the reduced amount agreed upon between the Company and the
officer and is included in general and administrative expenses for each
respective period.
Although management believes that it has adequately provided for all of its
known liabilities at September 30, 2002, the Company may be exposed to potential
contingencies related to its business activities that have been discontinued.
Currently, the Company is not aware of any contingency that would require an
adjustment or disclosure in the accompanying consolidated financial statements
pursuant to SFAS No. 5, "Accounting for Contingencies".
6. FUSION CAPITAL AGREEMENT
In December 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion capital Fund II, LLC ("Fusion Capital")
pursuant to which Fusion Capital would purchase up to $12 million of the
Company's common stock in two tranches. Each $6 million tranche is to be
purchased over a period of up to twenty-four months, subject to a six-month
extension or earlier termination at the Company's discretion. The selling prices
of the shares will be equal to the lesser of (1) $15.00 or (2) a price based
upon the future market price of the common stock without any fixed discount to
the market price. After all of the shares of the Company's common stock
purchasable under the first tranche of the common stock purchase agreement have
been purchased by Fusion Capital, the Company has the right to deliver to Fusion
Capital an irrevocable written notice stating that it elects to commence the
second tranche. The obligation of Fusion Capital to commence the second tranche
is subject only to customary conditions, all of which are outside the control of
Fusion Capital. In early 2001, the Company issued to Fusion Capital as a
commitment fee for the Fusion Facility, an aggregate of 677,647 shares of common
stock, 297,162 of these shares were issued in the form of warrants to purchase
shares of common stock at an exercise price of $.01 per share, exercisable at
any time over a five year period. The aggregate commitment fee (or deferred
issuance cost) of approximately $718,000, including warrants valued at
approximately $314,000 using a Black-Scholes option pricing model, was initially
recorded as a "contra account" in the stockholders' equity and was to be applied
over the course of the capital raising activity under the Fusion Facility.
In May 2001, the Company issued 862,069 shares of common stock under the Fusion
Facility to an officer of the Company in exchange for net proceeds of $250,000.
On August 14, 2001, Fusion Capital exercised warrants 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 agreement. 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. Accordingly, deferred issuance costs were
written-off fully during the year ended December 31, 2001.
7. PROPOSED MERGER
In January 2002, the Company entered into an agreement for a proposed merger
with First Step Distribution Network, Inc. ("First Step") on a date to be
decided. Pursuant to 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. 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 of the Company. The proposed transaction is
subject to various conditions including, but not limited to, a 3 for 1 reverse
stock split of the Company's common stock and approval of the Company's
shareholders.
6
In its capital raising efforts, First Step has granted equity interests and
options in the Company (if the transactions with First Step is consummated)
pursuant to convertible debt arrangements, among other debt and equity
instruments.
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, the Company effectively ceased operations as
described below.
RESULTS OF OPERATIONS
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 September 30, 2002,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remains unpaid by IIS. The Company has entered into a settlement
agreement with IIS dated as of September 13, 2002 for $9,392, representing
approximately 20% of the total amount due, including legal expenses. Subsequent
to September 30,2002 the Company received payment for all amounts due under the
settlement agreement with IIS.
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.
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
7
operations or any remaining revenue sources beyond those few remaining
receivable not purchased by IIS and not yet collected by the Company.
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 payment due
form IIS (collection of which is uncertain), together with assets not sold to
IIS may not be sufficient to repay substantially all remaining 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.
Since the Company has ceased this operation, no further discussion
of the Company's former business activities has been presented in this
discussion and analysis.
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 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. The proposed transaction
is subject to various conditions including, but not limited to, a 3 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 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 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 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 first quarter of 2003, subject to the requisite stockholder approval.
The Company's cash balance of $487 at September 30, 2002, decreased by
$4,893 or 91% 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.
8
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
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 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 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 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.
ITEM 4. 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.
9
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***
3.4 Sarbanes-Oxley Act Section 906 Certification
3.5 Sarbanes-Oxley Act Section 302 Certification
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.
*** Incorporated by reference from the Registrant's Form 10-QSB/A filed on June
28, 2002.
10
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: November 19, 2002 By: /s/ Gary Brown
-----------------------------
Gary Brown, President
(Principal Financial and
Accounting Officer)
11