SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 1-11873
K2 DIGITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3886065
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
c/o Calvey & Amon LLP
770 Lexington Avenue, 6th Floor, New York, NY 10021
(Address of principal executive offices, including zip code)
Issuer's telephone number: (212) 935-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation SB contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year:
$0
As of March 31, 2004, there were 4,982,699 shares (not including treasury
shares) of the Company's common stock outstanding. Based on the closing sales
price of the Company's common stock on March 31, 2004 of $0.035 per share, the
approximate aggregate market value of the Company's common stock held by
non-affiliates was approximately $174,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated by reference to the Company's Registration
Statement on Form SB-2 and the amendments thereto, as listed in response to Item
13(a)(2).
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes No X
--- ---
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
K2 Digital, Inc. (the "Company" or "K2") was founded in 1993 as a general
partnership and initially operated a traditional graphic design business. In
August 1994, the Company shifted its principal business to Web site design and
creation. Thereafter, the Company incorporated as a Delaware corporation. After
the Company's initial public offering on July 26, 1996, the Company began to
develop its business as a full-service digital professional services company.
The Company historically provided consulting and development services including
analysis, planning, systems design, creative and implementation. In November
2000, the Company changed its name from K2 Design, Inc. to K2 Digital, Inc. As
discussed below, the Company effectively ceased its operations in August 2001.
The Company's offices are located at c/o Calvey & Amon LLP, 770 Lexington Avenue
- 6th Floor, New York, New York 10021 and its telephone number is (212)
935-6000.
DISCONTINUED OPERATIONS
DISPOSITION OF ASSETS
On May 15, 2001, the Company entered into a non-binding letter of intent with
SGI Graphics LLC, a Delaware limited liability company ("SGI") pursuant to which
SGI expressed its interest in purchasing shares of restricted common stock of
the Company that would have represented fifty-one percent (51%) of the issued
and outstanding capital stock of the Company on a fully diluted basis.
Concurrently with the execution of the letter of intent, the Company borrowed
$250,000 from an affiliate of SGI, for working capital purposes pursuant to a
promissory note secured by a first priority security interest in all of the
assets of the Company. The Company and SGI were ultimately not able to agree on
the definitive terms of the transaction and, in July 2001, the Company and SGI
terminated negotiations and the letter of intent.
On August 29, 2001, the Company sold certain of its fixed and intangible assets
to Integrated Information Systems, Inc., a Delaware corporation ("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. The Company recognized an approximate $218,000 gain on the
transaction.
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, 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 December 31, 2001,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remained unpaid by IIS (which was fully reserved for at December 31,
2001). In October 2002, the Company received approximately $9,000 from IIS as a
final payment pursuant to a June 2002 settlement agreement pertaining to the
unpaid balance.
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 operations or any remaining revenue sources beyond those few remaining
receivables not purchased by IIS and not yet collected by the Company.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business (such as one described below) 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 from 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.
On January 15, 2002, K2 and FutureXmedia, Inc., f/k/a First Step Distribution
Network, Inc. ("FX") entered into an Agreement and Plan of Merger (the
"Agreement") by and among FX and its shareholders and First Step Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of K2 ("Merger Sub").
Under the terms of the Agreement, as amended, K2 was to have acquired FX by
means of a triangular merger, pursuant to which the Merger Sub would have been
merged with and into FX in a tax free reorganization. Subsequent to the
execution of the Agreement, FX encountered difficulties in financing its
business and in October, 2003 K2 notified FX that it was exploring other
possible transactions. The proposed merger with FX has now been terminated.
AGREEMENT AND PLAN OF MERGER
On January 30, 2004 the Company signed a non-binding letter of intent (the
"Merger Agreement") with SunriseUSA, Inc. "Sunrise", a Delaware Corporation,
whereby Sunrise will merge with the Company (the "Merger"). The minimum value of
the transaction to K2 shareholders will be 2% of the issued and outstanding
number of shares post merger, with a minimum value of US$533,000. Sunrise is a
privately held holding company that was founded with the objective of
capitalizing on emerging opportunities within rural USA cable markets.
Ultimately, Sunrise will provide bundled telecommunication and cable services
that will represent a convenient alternative to single product offerings of
competing vendors.
The agreement is subject to a number of conditions, including due diligence
review and funding of not less than $5,000,000 equity and a firm commitment of
not less than $25,000,000 in debt financing. In addition, Sunrise will be
responsible for payment of all expenses related to the transaction.
The parties anticipated executing a definitive agreement on or before April 30,
2004 and closing the transaction on or before June 30, 2004.
GOVERNMENT REGULATION
Having effectively ceased operations in August 2001, the Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally. Web site developers such as the
Company face potential liability for the actions of clients and others using
their services, including liability for infringement of intellectual property
rights, rights of publicity,
defamation, libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. Any imposition of liability from the Company's prior operations
could have a material adverse effect on the Company.
EMPLOYEES
As a result of the transaction entered into with IIS in August 2001 and the fact
that the Company has effectively ceased operations, at December 31, 2003, the
Company had only one employee, Gary W. Brown, the Company's current President,
Chief Operating Officer, Chief Financial Officer and Secretary. Since August
2001, Mr. Brown's employment with the Company has been limited to structuring
and negotiating merger transactions, as well as liquidating assets, collecting
accounts receivable and paying creditors. Since December 31, 2001, Mr. Brown has
received no salary, compensation or benefits.
ITEM 2. DESCRIPTION OF PROPERTY
Under the terms of the Purchase Agreement, IIS occupied the Company's premises
and assumed the Company's office lease obligations. Pursuant to an arrangement
with IIS and the landlord for its premises at 30 Broad Street, New York, New
York, until May 2002 the Company occupied a small office space in the premises
occupied by IIS.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date
hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of fiscal
2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was delisted from the Nasdaq SmallCap Market
("NASDAQ") effective August 15, 2001 and currently trades in the
over-the-counter market under the symbol "KTWO.OB." Prior to its delisting, the
Company's common stock was traded on NASDAQ under the symbol "KTWO." The
following table sets forth, for the periods indicated, the range of high and low
price quotes of the Company's common stock as reported by the over-the-counter
bulletin board (for periods subsequent to the delisting) and NASDAQ (for periods
prior to the delisting) from the quarter ended March 31, 2002 through December
31, 2003. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2002 $0.06 $0.03
June 30, 2002 $0.07 $0.03
September 30, 2002 $0.14 $0.03
December 31, 2002 $0.03 $0.02
March 31, 2003 $0.04 $0.02
June 30, 2003 $0.04 $0.02
September 30, 2003 $0.05 $0.03
December 31, 2003 $0.05 $0.03
The approximate number of record holders of the Company's common stock at
December 31, 2003 was 26, not including beneficial owners whose shares are held
by banks, brokers and other nominees.
There were no repurchases by the Company of its common stock on the open market
or from any of its stockholders in fiscal year 2002 or 2003. At December 31,
2003, the Company held a total of 417,417 shares of treasury stock at a cost of
$819,296.
On December 11, 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion Capital Fund II, LLC ("Fusion Capital"), a
Chicago-based institutional investor. On January 26, 2001, the Company issued to
Fusion Capital, as a commitment fee for the Fusion Facility, 380,485 shares of
common stock, as well as warrants to purchase 297,162 shares of common stock at
an exercise price of $.01 per share, exercisable at any time over a five year
period. 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 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 of $0.15 per share on
August 13, 2001, Fusion Capital received 277,351 shares of common stock upon
exercise of the warrant. The shares of common stock and warrants issued to
Fusion Capital were sold pursuant to the exemption from registration provided by
Section 4 (2) of the Securities Act of 1933, as amended, as an offering not
involving any public offering. Because the common stock and warrants were issued
to Fusion Capital as a commitment fee under the Fusion Facility, no proceeds
were received by the Company upon issuance of such common stock and warrants. On
March 4, 2003, the Fusion Facility was terminated.
The Company has not paid any dividends. The Company does not expect to pay cash
dividends on its common stock in the foreseeable future. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors.
ITEM 6. 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 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" commencing on page 7.
OVERVIEW
Founded in 1993, the Company was a digital professional services company that,
until August 2001, provided consulting and development services, including
analysis, planning, systems design, creative and implementation. In August 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, and effectively became a "shell" company
with no revenues and continuing general and administrative expenses.
SUMMARY OF RESULTS
Following is a summary of the Company's operations for the years ended December
31, 2003 and 2002:
2003 2002
-------- --------
Other income $ 58,344 $ 22,640
General and administrative expenses (33,554) (83,544)
-----------------------
Net Income (Loss) $ 24,790 $(60,904)
In 2003, other income represents gain from the sale of 24/7 Real Media, Inc.
common stock and the collection of amounts due to the Company from a vendor.
General and administrative expenses primarily represent ongoing legal and
accounting costs. In 2002, other income represents cash received pursuant to the
IIS settlement (previously reserved for), tax refunds and other miscellaneous
receipts. General and administrative expenses primarily represented cash and
non-cash compensation to the Company's remaining officer, professional fees and
ongoing ancillary costs.
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 30, 2004, the Company
entered into the Merger Agreement described above. Under the terms of the Merger
Agreement, the Company intends to acquire Sunrise by means of a triangular
merger, pursuant to which a subsidiary of the Company will merge with and into
Sunrise in a tax free reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended.
If the Company is unsuccessful in completing the Sunrise transaction,
management's alternative may include a further search for a similar business
combination or strategic alliance. There can be no assurance that the
transaction described above or management's alternative plan will be realized.
The Company's cash balance of $16,593 at December 31, 2003, increased by $8,420
or 103% compared to the $8,173 cash balance at December 31, 2001. This increase
is primarily due to proceeds from the sale of 24/7 Real Media, Inc. common stock
and collection of amounts due to the Company from a vendor.
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.
If the Company is unsuccessful in completing the Sunrise transaction,
management's alternative may include a further search for a similar business
combination or strategic alliance. There can be no assurance that the
transaction described above or management's alternative plan will be realized.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
K2 DIGITAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Consolidated Financial Statements
Consolidated Balance Sheet F-2
December 31, 2003
Consolidated Statements of Operations and Comprehensive Income(Loss) F-3
For the Years Ended December 31, 2003 and 2002
Consolidated Statements of Stockholders' Deficit F-4
For the Years Ended December 31, 2003 and 2002
Consolidated Statements of Cash Flows F-5
For the Years Ended December 31, 2003 and 2002
Notes to Consolidated Financial Statements F-6 - 11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of K2 Digital, Inc.
We have audited the accompanying consolidated balance sheet of K2 Digital, Inc.
and Subsidiary as of December 31, 2003, and the related consolidated statements
of operations and comprehensive income (loss), stockholders' deficit and cash
flows for the years ended December 31, 2003 and 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of K2 Digital, Inc. and
Subsidiary as of December 31, 2003, and the results of their operations and
their cash flows for the years ended December 31, 2003 and 2002 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, during 2001, the Company sold fixed and
intangible assets essential to its business operation and effectively became a
"shell" company with no revenues and continuing general and administrative
expenses. Further, at December 31, 2003, the Company had significant cumulative
losses, a diminutive cash balance and working capital and stockholders'
deficits. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
April 8, 2004
F-1
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS:
Cash $ 16,593
Investment in available-for-sale security 93,800
-----------
Total current assets $ 110,393
===========
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 147,998
Accrued professional fees 31,000
Other accrued expenses 14,000
-----------
Total current liabilities 192,998
-----------
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 8,317,910
Accumulated other comprehensive income 77,700
Accumulated deficit (7,712,920)
-----------
Total stockholders' deficit (82,605)
-----------
Total liabilities and stockholders' deficit $ 110,393
===========
See the accompanying notes to consolidated financial statements.
F-2
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
Revenues $ -- $ --
Other income 58,344 22,640
General and administrative expenses (33,554) (83,544)
--------------------------
Net income (loss) $ 24,790 $ (60,904)
--------------------------
Net income (loss) per common share-
basic and diluted $ 0.005 $ (0.012)
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,979,959
--------------------------
Comprehensive income (loss):
Net income (loss) $ 24,790 $ (60,904)
Other comprehensive income -
Unrealized gain on available-for-sale security 77,700
--------------------------
Comprehensive income (loss) $ 102,490 $ (60,904)
==========================
See the accompanying notes to consolidated financial statements.
F-3
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003 AND 2002
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK TREASURY PAID-IN COMPREHENSIVE DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL INCOME COMPENSATION DEFICIT DEFICIT
------ ------ ----- ------- ------ ------------ ------- -------
Balances, January 1, 2002 5,400,116 $54,001 $(819,296) $8,313,410 $(72,355) $(7,676,806) $(201,046)
Amortization of deferred
compensation 72,355 72,355
Issuance of options for
consulting services 4,500 4,500
Net loss (60,904) (60,904)
--------------------------------------------------------------------------------------------
Balances, December 31, 2002 5,400,116 54,001 (819,296) 8,317,910 -- -- (7,737,710) (185,095)
Other comprehensive income 77,700 77,700
Net income 24,790 24,790
Balances, December 31, 2003 5,400,116 $54,001 $(819,296) $8,317,910 77,700 $ -- $(7,712,920) $ (82,605)
============================================================================================
F-4
See accompanying notes to consolidated financial statements.
K2 DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 24,790 $(60,904)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Non-cash consulting and compensation expense 76,855
Gain on disposition of liabilities (35,100)
Gain on sale of available-for-sale securities (45,300)
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Accounts receivable, net 68,807
Accounts payable 9,530 (67,259)
Accrued expenses (14,706)
-----------------------------
Net cash provided by (used in) operating activities $(46,080) $ 2,793
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of available-for-sale securities 54,500 --
-----------------------------
Net cash provided by investing activities $ 54,500 --
-----------------------------
Net increase in cash 8,420 2,793
CASH, beginning of year 8,173 5,380
-----------------------------
CASH, end of year $ 16,593 $ 8,173
=============================
See the accompanying notes to consolidated financial statements.
F-5
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Prior business and going concern consideration
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company" or "K2") 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 consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As indicated 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 December 31, 2003, the Company has
cumulative losses of approximately $7.7 million, a diminutive cash balance and
working capital and stockholders' deficits of approximately $83,000. These
conditions raise substantial doubt about the Company's 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.
Management's plan included a proposed business combination with Future X Media,
Inc ("FX") (formerly First Step Distribution Network, Inc.) in a reverse merger
transaction. FX's business strategy was to bring new electronic gaming products
to market through the use of innovative technologies and channels. However, in
October 2003, the Company notified FX, that in light of delays in consummating
the proposed merger with the Company, it was exploring other options to enhance
shareholder value. These options may include a merger or similar transaction
with another entity (see next paragraph), consummation of the merger with FX, or
liquidation of the Company. Subsequently, the proposed merger with FX was
terminated.
In January 2004, the Company signed a non-binding letter of intent with
SunriseUSA, Inc. ("Sunrise") whereby Sunrise would merge with the Company.
Sunrise is a privately-held holding company that was founded with the objective
of capitalizing on emerging opportunities with rural U.S. cable markets.
Ultimately, Sunrise will look to provide bundled telecommunication and cable
services that will represent a convenient alternative to the single product
offerings of some competing vendors. If the Sunrise transaction is consummated,
it is anticipated that the shareholders of Sunrise will thereby acquire
substantially all of the issued and outstanding voting common stock of the
Company. The proposed Sunrise transaction is subject to various conditions
including, but not limited to, due diligence review, Sunshine funding of not
less than $5 million of equity financing and a firm commitment of not less than
$25 million in debt financing.
If the Company is unsuccessful in completing the Sunrise transaction,
management's alternative plan may include a further search for a similar
business combination or strategic alliance. There can be no assurance that the
transaction described above or management's alternative plan will be realized.
2. Summary of significant accounting policies
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's assets and liabilities that qualify as
financial instruments under Statement of Financial Accounting Standards ("SFAS")
No. 107, "Disclosure about Fair Value of Financial Instruments," approximate
their carrying amounts presented in the consolidated balance sheet at December
31, 2003.
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.
F-6
K2 DIGITAL INC, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of significant accounting policies (continued)
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
The Company accounts for its investment in a publicly-traded common stock, 24/7
Real Media, Inc. (formerly 24/7 Media, Inc.) ("24/7 stock"), as
available-for-sale. Available-for-sale securities are carried at fair value
(based upon published closing prices), with the unrealized gains and losses
reported in stockholders' equity (deficit) under the caption accumulated other
comprehensive income (loss). Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in operations.
During the year ended December 31, 2003, the Company sold 40,000 shares of 24/7
stock for aggregate proceeds of approximately $55,000, recognizing a realized
gain of approximately $45,000. At December 31, 2003, the Company had an
approximate $78,000 gross unrealized holding gain on the remaining 70,000 shares
of 24/7 stock. During the years ended December 31, 2003 and 2002, the change in
unrealized holding gain from available-for-sale security was approximately
$78,000 and $0, respectively.
INCOME TAXES
The Company complies with SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-7
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of significant accounting policies (continued)
NET INCOME (LOSS) PER COMMON SHARE
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 income (loss) per common share. Therefore, basic and diluted
income (loss) per common share for the years ended December 31, 2003 and 2002
were the same.
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123 "Accounting for Stock-Based Compensation." The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" but disclose the pro forma effect on net income
(loss) had the fair value of the options been expensed. The Company has elected
to continue to apply APB Opinion No. 25 in accounting for its stock option
incentive plans.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No.149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No.133. SFAS
No. 149 is generally effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003 and should
be applied prospectively. The implementation of SFAS No. 149 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.150
requires certain freestanding financial instruments, such as mandatory
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The provisions of SFAS No.150 are effective at the beginning of the
first interim period beginning after June 15, 2003. The implementation of SFAS
No. 150 did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
F-8
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Stockholders' deficit
The Company had a two-year employment contract with an executive officer, which
expired March 31, 2002. The contract provided for an annual salary of $225,000
and a discretionary bonus in the form of stock options based upon individual and
Company performance. Such agreement also provided for 100,000 shares of
restricted Common Stock, which vested over two years, 50% on April 14, 2001 and
50% on April 14, 2002. The value of the stock at the grant date was $5.00 per
share. As a result of this transaction, the Company incurred $500,000 of
deferred compensation costs, which were amortized over the two-year vesting
period. The Company amortized the residual $72,000 of deferred compensation in
2002.
4. Commitments and contingencies
Although management believes that it has adequately provided for all of its
known liabilities at December 31, 2003, the Company may be exposed to potential
contingencies related to its business activities that have been discontinued. At
the present time, the Company is not aware of any contingencies that would
require accrual or disclosure in the consolidated financial statements pursuant
to SFAS No.5.
5. Income taxes
The provision (benefit) for income taxes on the net income (loss) for the years
ended December 31, 2003 and 2002 differs from the amount computed by applying
the Federal statutory rate due to the following:
2003 2002
------ ------
Statutory Federal income tax rate 34.0 % (34.0)%
State and local taxes, net 5.1 (5.1)
Valuation allowance and other (39.1) 39.1
----------------------
Effective income tax rate -- % -- %
======================
As of December 31, 2003, the Company had net operating loss carryforwards of
approximately $8.0 million for federal and state income tax purposes, which are
available to reduce future taxable income and will expire through 2023 if not
utilized. In addition, a 2001 impairment charge related to the investment in
available-for-sale securities of approximately $0.9 million, net of
approximately $0.5 million deducted during the year ended December 31, 2003 for
2003 sales, is not deductible until the securities are sold. The future tax
benefits associated with the net operating loss carryforwards and impairment
charge were the primary components of an estimated $3.6 million deferred tax
asset at December 31, 2003. A valuation allowance has been established for the
entire amount of the deferred tax asset since its realization is considered
unlikely. Further, a change in the ownership of a majority of the fair market
value of the Company's common stock (such as the change in ownership that would
occur in the contemplated transaction discussed in Note 1) could significantly
delay or limit the utilization of net operating loss carryforwards.
F-9
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Stock option plan
The Company has two stock plans, the 1996 Stock Option Plan (the "1996 Plan"),
and the 1997 Stock Incentive Plan (the "1997 Plan", and together with the 1996
Plan, the "Plans"). Pursuant to the Plans, designated employees, including
officers and directors of the Company and certain outside consultants, will be
entitled to receive nonqualified stock options and qualified stock incentive
compensation of up to 225,000 and 500,000 options under the 1996 Plan and 1997
Plan respectively. The number of options available under the 1997 Plan were
increased by an additional 400,000 and 800,000 options in 1999 and 2000,
respectively, to a total of 1,700,000 options. In January 2001, the Board of
Directors and stockholders approved an amendment to the 1997 Plan to increase
the aggregate number of shares reserved for future issuance of the Company's
common stock under the 1997 Plan from 1,700,000 shares to 3,000,000 shares. As
of December 31, 2003, there were 1,135,500 shares of common stock available for
grant under the Plans. The 1996 Plan expires on January 1, 2006 and the 1997
Plan expires on June 12, 2007. Under the terms of the Plans, the minimum
exercise price of options granted cannot be less than 100% of the fair market
value of the common stock of the Company on the option grant date. Options
granted under the Plan generally expire ten years after the option grant date.
For incentive stock options granted to such persons who would be deemed to have
in excess of a 10% ownership interest in the Company, the option price shall not
be less that 110% of such fair market value for all options granted, and the
options expire five years after the option grant date.
A summary of the Plans at December 31, 2003, and 2002 is presented in the table
below:
Weighted Average
Shares Range Exercise Price
---------- --------- ------------------
Outstanding at December 31, 2001 955,250 $0.66 - $6.75 $ 2.55
Granted 40,000 .05 0.05
Expired (12,500) $6.75 6.75
------- ------------- -------
Outstanding at December 31, 2002 982,750 $0.05 - $5.81 $ 2.40
Granted -- -- --
Expired -- -- --
------- ------------- -------
Outstanding at December 31, 2003 982,750 $0.05 - $5.81 $ 2.40
At December 31, 2003, substantially all
outstanding shares are exercisable 982,750
No options were granted for the year ended December 31, 2003. Included in
options granted for the year ended December 31, 2002 are 40,000 options issued
to a consultant for services rendered.
Further information about the Company's outstanding stock options at December
31, 2003 is as follow:
Weighted Average
Number of Remaining Contractual Weighted Average
Range of Exercise Prices Shares Life (in Years) Exercise
------------------------ --------- --------------------- ----------------
$0.05 40,000 8.7 $ 0.05
$0.66 to $1.09 181,000 7.1 0.74
$1.50 to $1.75 435,000 4.7 1.52
$2.50 to $2.94 37,500 5.5 2.60
$5.00 to $5.81 289,250 6.3 5.05
------- ------- ------
Outstanding at December 31, 2003 982,750 5.8 2.40
F-10
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Stock option plan (continued)
The Company accounts for the Plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees" under which no compensation cost is recognized for
stock options granted to employees with an exercise price at or above the
prevailing market price on the date of the grant. Had compensation cost for the
Plans been determined consistent with the fair value approach required by SFAS
No. 123, the Company's net income (loss) and basic and diluted net income (loss)
per common share for the years ended December 31, 2003 and 2002 would have been
the following pro forma amounts (in thousands, except for per share data):
2003 2002
---- ----
Net income (loss), as reported $ 25 $ (61)
Stock-based employee compensation
determined under the fair value
based method, net of related taxes (35) (601)
----- ------
Net loss, proforma $(10) $ (662)
===== ======
Net income (loss) per common share,
basic and diluted:
As reported $.01 $ (0.01)
===== =======
Proforma $ -- $ (0.13)
===== =======
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with following assumptions:
Risk-free interest rate of 4.5%; no expected dividend yields for options
granted; expected lives of 4 years and expected stock price volatility of
approximately 124%.
F-11
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 10, 2002, the Board of Directors of the Company made a determination
not to engage Arthur Andersen LLP ("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, 2002.
During the two years ended December 31, 2001 and through April 10, 2002, there
were no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter of the disagreement in
connection with its reports.
Andersen added an explanatory paragraph to their audit opinion issued in
connection with the Company's financial statements for the fiscal year ended
December 31, 2000 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 Company's financial statements for the fiscal
year ended December 31, 2000 did not include any adjustments that might result
from the outcome of that uncertainty. With the exception of the foregoing, the
audit reports of Andersen on the consolidated financial statements of the
Company as of and for each of the two fiscal years ended December 31, 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
None of the reportable events described under Item 304(a)(1)(iv) of Regulation
S-B occurred within the two years ended December 31, 2001 and through April 10,
2002.
The Company provided Andersen with a copy of the above disclosures. A letter
dated April 10, 2002, from Andersen stating its agreement with our statements is
listed under Item 13(a)(2) in Part IV as Exhibit 16.1 and is incorporated herein
by reference to the Company's Form 8-K filed with the Securities and Exchange
Commission on April 16, 2002.
During the two years ended December 31, 2001, and the subsequent interim period
through April 10, 2002, the Company did not consult with Rothstein regarding any
of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation
S-B.
ITEM 8A. CONTROLS AND PROCEDURES
The chief executive officer and chief financial officer of K2 Digital, Inc.
after conducting an evaluation, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of a date within 90 days
of the filing of this report, has concluded that K2 Digital, Inc.'s disclosure
controls and procedures were effective to ensure that information required to be
disclosed by K2 Digital, Inc. in its reports filed or submitted under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission (the "SEC"). There were no significant
changes in K2 Digital, Inc.'s internal controls or in other factors that could
significantly affect these controls subsequent to that evaluation, and there
were no significant deficiencies or material weaknesses in such controls
requiring corrective actions.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS OF THE COMPANY
Since December 31, 2001, one director has tendered his resignation from the
Company's Board of Directors. Dr. Steven N. Goldstein resigned effective March
31, 2002. Set forth below are the current directors of the Company.
Matthew G. de Ganon, age 41, has been a director since he joined the Company in
July 1995. Mr. de Ganon resigned from his position as an executive officer of
the Company effective August 1, 2001. From that time until April 2002, Mr. de
Ganon was employed by Integrated Information Systems, Inc., which purchased
certain assets of the Company in August 2001. He was President of the Company
from June 1996 to November 1998 and was also the Chief Operating Officer of the
Company from July 1995 to November 1997. Mr. de Ganon is currently President of
Arcavista Corporation, a developer of communications software used to
synchronize information from the Internet to a PC. For the two years prior to
joining the Company, Mr. de Ganon operated a business that created CD-ROM
products and offered consulting services regarding the use of electronic
delivery to publishers of newsletters and directories. Mr. de Ganon is co-author
of the essay, "Overcoming Future Shock on the Superhighway: Suggestions for
Providers and Technocrats," published and presented in the 1994 National Online
Conference Proceedings. From August 1992 to July 1993, Mr. de Ganon was the Vice
President of New Media of Superior Computer Systems, Inc., a software developer.
Mr. de Ganon's work focused on UNIX-based 4GL accounting software customization
for corporate clients. From May 1991 to July 1992, Mr. de Ganon was involved in
casting administration for the Motion Picture Group of Universal Studios, Inc.
He was a franchised theatrical agent with the Stone Manners Agency in Los
Angeles, California from August 1987 to May 1991.
Douglas E. Cleek, age 41, who co-founded the Company in 1993, has been a
director of the Company since it was reorganized as a corporation in January
1995. From January 1995 until August 2001, Mr. Cleek served as the Company's
Executive Vice President--Chief Creative Officer. From 1993 until 1995, Mr.
Cleek was a general partner and Co-Creative Director of the Company. While at
the company he helped develop many of the industry's firsts, including one of
the first CASIE awards for the live webcast of IBM's Deep Blue vs. Kasparov. He
has also served as a judge for the CASIE Awards and International Web Page
Awards. He then accepted the position of Creative Director at Integrated
Information Systems, Inc., when IIS purchased certain assets of K2 Digital,
Inc., in August 2001. In March 2002, he resigned his executive position to
pursue other opportunities. He currently holds a position as Creative Director /
Stratetgist at Magnitude 9.6, Inc., headquartered in New York City. For more
than five years prior to that, Mr. Cleek was an art director for William Allen &
Co. and its successor, A.J. Bart & Sons, specializing in graphic promotional
materials for the travel & hospitality industry.
Gary W. Brown, age 50, has been a director of the Company since February 2000
and joined the Company in April 2000 as Executive Vice President and Chief
Operating Officer. Since August 2001, Mr. Brown has served as President,
Secretary, Chief Financial Officer and Chief Operating Officer of the Company.
Since November 2001, Mr. Brown has served as Senior Vice President and Managing
Director of the Risk Management Division of Canadian Imperial Bank of Commerce
(CIBC World Markets). In March 2004, Mr. Brown was appointed Chief Operating
Officer - US Region for CIBC World Markets. Prior to that, Mr. Brown was
employed from July 1980 through June 1999 in various management roles with UBS
AG, the successor organization to Union Bank of Switzerland, including the role
of New York Branch Manager. There he served as Division Head for Structured
Finance, one of UBS's six operating divisions in the Americas prior to the
merger of UBS with Swiss Bank Corporation in 1998. Post-merger, Mr. Brown was
designated Chief Credit Officer-Americas for UBS's investment banking division,
Warburg, Dillon Read, where he was responsible for capital commitments of the
firm. Mr. Brown held various business development and risk management positions
throughout his 19-year career at UBS. He also served as President of the New
York Chapter of Risk Management Association, the trade association for the
financial services risk management industry, and as an ex-officio member of the
RMA National Board. From 1991-1999, he has served on the Board of Directors of
Sefar Americas, a subsidiary of Sefar AG, a manufacturer of Swiss synthetic
fabrics. Prior to joining UBS in 1980, Mr. Brown was employed from June 1976
through June 1980 with The Chase Manhattan Bank, having served in various
business development functions. Mr. Brown received a Bachelor of Science degree
in Business Administration from Oral Roberts University in May 1976.
David R. Sklaver, age 50, has been a director of the Company since 1999. Since
October 2001, Mr. Sklaver has been President and Chief Executive Officer of
UPOC, Inc., a marketing company. From June 1997 to October 2001, Mr. Sklaver was
a General Partner and Chief Executive Officer of Artustry Partnership, a
strategic and creative marketing company, of which he was a founder. Since
October 1995, Mr. Sklaver has also served as President of Phase 2, Inc. From
1993 to 1995, Mr. Sklaver served as President of Wells Rich Greene DDB, an
advertising agency handling Fortune 500 clients. Prior to being promoted to
President, Mr. Sklaver served as Executive Vice President, Director of Client
Services of Wells Rich Greene from 1989 to 1993. From 1986 to 1988, Mr. Sklaver
was Executive Vice President, Account Group Head, at advertising agency BBD
Needham, New York. From 1984 to 1985, Mr. Sklaver was Managing Director of DDB's
Sydney office. From 1978 to 1984, he served in Account Management at DDB New
York. Prior to 1978, Mr. Sklaver held positions at Foote, Cone & Belding
Advertising and Standard Brands, both advertising agencies.
FILING REQUIREMENTS
The Company believes that all filing requirements under Section 16(a) of the
Securities Act of 1934, as amended, applicable to its officers, directors and
greater than 10% beneficial owners were complied with during the fiscal year
ended December 31, 2003.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR FEES
Directors who are employees of the Company receive no additional compensation
for their service as directors. Directors not so employed are entitled to
receive $25,000 in compensation annually and are entitled to be reimbursed for
expenses incurred in connection with meeting attendance. In addition, each of
the Company's non-employee Directors are granted options to acquire 5,000 shares
of the Company's common stock upon their election or reelection to the Board.
Current Directors have not received any compensation for their services to the
Company since the year-ended December 31, 2002. They may, however, be granted
options to acquire Company common stock in the future.
ADVISOR FEES
All non-employees serving as members of the Company's Board of Advisors receive
options to purchase up to 5,000 shares of the Company's common stock upon their
election to the Board of Advisors. There were two members of the Board of
Advisors for the year ending December 31,2001.
EXECUTIVE COMPENSATION
The following table sets forth, for the last three completed fiscal years, the
total annual compensation paid or accrued by the Company for services in all
capacities for the Chief Executive Officer, and those other executive officers
(the "Named Executives") who served in executive capacities during fiscal 2002
and had aggregate compensation in excess of $100,000. Except for Mr. Brown, each
of the Named Executives has resigned his or her position as an officer of the
Company, effective August 1, 2001.
Annual Compensation (1) Long Term Compensation
----------------------- ----------------------
Name and Principal Position Year Salary Bonus Restricted Option
--------------------------- ---- ------ ----- ----------- ------
Stock Awards Awards
------------ ------
Matthew G. de Ganon, Chairman of the Board (2) 2003 -- -- -- --
2002 -- -- -- --
2001 164,231 -- -- --
Douglas E. Cleek, former Executive Vice President -
Chief Creative Officer (2) 2003 -- -- -- --
2002 -- -- -- --
2001 115,837 -- -- --
Gary W. Brown, President, Chief Financial Officer and
Secretary (4)(5) 2003 -- -- -- --
2002 -- -- -- --
2001 192,539 -- -- 100,000
Lynn Fantom, former Chief Executive Officer (2)(3) 2003 -- -- -- --
2002 -- -- -- --
2001 144,173 -- -- 200,000
(1) The value of perquisites and other personal benefits does not exceed 10% of
the officer's salary. The Company effectively ceased its operations in August
2001.
(2) Resigned as an Officer of the Company effective August 1, 2001.
(3) Resigned as a Director of the Company effective November 6, 2001.
(4) Mr. Brown accepted compensation less than provided for in his employment
agreement during 2001, and has received no salary, compensation or benefits
since December 31, 2001.
(5) 50,000 shares vested on April 14, 2001 and the remaining 50,000 shares
vested on April 14, 2002. Based on the closing price of the Company's common
stock on April 14, 2000 of $5.00 per share, the fair market value of the
restricted stock awards on the date of grant was $500,000.
EMPLOYMENT CONTRACTS FOR EXECUTIVE OFFICERS
Matthew G. de Ganon, Lynn Fantom and Douglas E. Cleek resigned from their
positions as officers of the Company effective August 1, 2001. In connection
with their resignations, Mr. de Gannon and Mr. Cleek executed releases,
releasing the Company from any further liability under their employment
agreements with the Company.
The employment contract between the Company and Lynn Fantom, as Chief Executive
Officer and President of the Company, terminated on December 31, 2000 and a new
employment contract between the Company and Ms. Fantom as Chief Executive Office
and President of the Company was entered into on February 13, 2001 and was
scheduled to terminate on December 31, 2002. Ms. Fantom resigned from her
position as Chief Executive Officer and President of the Company effective
August 1, 2001.
Gary W. Brown joined the Company as Executive Vice President and Chief Operating
Officer on April 14, 2000 and is currently the Company's President, Chief
Financial Officer and Secretary. Mr. Brown signed an employment contract with
the Company that expired on March 31, 2002. The employment contract provided for
an annual salary of $225,000 and a discretionary annual bonus in the form of
stock options up to a maximum of 100,000 shares of the Company's common stock
per year. Upon joining the Company, Mr. Brown also received 100,000 shares of
restricted stock and options to purchase up to 263,000 shares of the Company's
common stock, all of which had vested as of April 14, 2002.
OPTION GRANTS IN FISCAL 2003 AND 2002
No stock options were granted under the 1996 Plan or the 1997 Plan for the
year-ended December 31, 2003 and December 31, 2002.
OPTION GRANTS IN FISCAL 2001
The following table sets forth individual grants of stock options made under the
Company's 1996 Stock Incentive Plan (the "1996 Plan") and the 1997 Stock
Incentive Plan (the "1997 Plan") during the fiscal year ended December 31, 2001
for the each of the Named Executives.
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted Year(1) Price ($/Sh) Expiration Date
---- -------------------- ------------------- ---------------- ---------------
Matthew G. de -- -- -- --
Ganon
Douglas E. Cleek -- -- -- --
Gary W. Brown 100,000(2) 33% $0.75 January 2, 2011
(1) Calculated as a percentage of total options granted to all employees under
both the 1996 Plan and the 1997 Plan.
(2) Such options were granted under the 1997 Plan.
No stock options were granted under the 1996 Plan and 300,000 stock options were
granted under the 1997 Plan to all executive officers and directors as a group
during the fiscal year ended December 31, 2001. Such options are exercisable at
prices per share (reflecting the fair market value on the dates of grant) of
$0.75 under the 1997 Plan. None of such options were exercised during fiscal
2003.
OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The table set forth below shows the value of unexercised options under the 1996
Plan and the 1997 Plan held on December 31, 2003 by each of the Named Executives
or Directors.
Value of
Number of Securities Unexercised In-the-Money
Shares Underlying Unexercised Options held on December 31,
Acquired Options at December 31, 2003 2003 ($)(1)
on Value ---------------------------- -----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------
Matthew G. de Ganon -- -- 6,250(2) -- -- --
Douglas E. Cleek -- -- 6,250(2) -- -- --
Gary W. Brown -- -- 368,000(3) -- -- --
(1) Based on the closing price of the Company's common stock on December 31,
2003, the last day in fiscal 2003 on which the markets were open for business,
which was $0.025.
(2) Represents grants made under the 1996 Plan.
(3) Represents 346,000 options granted under the 1997 Plan and 22,000 options
granted under the 1996 Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
BENEFICIAL OWNERSHIP
The following table sets forth information, as of March 31, 2004 as to the
beneficial ownership of common stock (including shares which may be acquired
within 60 days pursuant to stock options) of each director of the Company, the
Chief Executive Officer of the Company, all directors and executive officers as
a group and persons known by the Company to beneficially own 5% or more of the
common stock. Except as set forth below, each of the listed persons has sole
voting and investment power with respect to the shares beneficially owned by
such person. Except as otherwise indicated, the address of each person included
in the table is c/o the Company, Calvey & Amon, LLP 770 Lexington Avenue, 6th
Floor, New York, New York 10021.
Shares of Common Stock
Name of Owner Beneficially Owned Percent of Class (1)
------------- ------------------ ----------------
Matthew G. de Ganon 936,993(2) 18.8
Douglas E. Cleek 430,531(2)(3) 8.6
Lynn Fantom 405,000(4) 8.1
Gary W. Brown 1,348,069(5) 27.1
Steven N. Goldstein 15,000(6) *
David Sklaver 15,000(6) *
All Directors and Executive 2,720,062(7) 54.6
Officers as a group (6 persons)
*Less than one percent.
(1) Does not give effect to: (i) shares held in treasury and (ii) options held
by persons other than the persons named above.
(2) Messrs. de Ganon and Cleek resigned from their positions as officers of the
Company effective August 1, 2001. Pursuant to a 10-year voting agreement entered
into by Messrs. de Ganon, Cleek, David Centner (a former Chief Operating Officer
and Director of the Company) and Bradley Szollose (a former Secretary and
Director of the Company), effective July 26, 1996 (the "Voting Agreement"), the
voting control over 498,158 shares held by Messrs. Cleek, Centner and Szollose
and 6,250 shares underlying presently exercisable stock options held by Mr.
Cleek are vested in Mr. de Ganon. Such shares subject to the Voting Agreement
must be voted in favor of the election of Mr. de Ganon. In addition, the Voting
Agreement grants each party thereto a right of first refusal as to the sale of
the others' common stock. Messrs. de Ganon, Cleek, Centner and Szollose each
disclaim beneficial ownership of those shares with respect to which they are not
record owners. Mr. de Ganon's holdings also include 6,250 shares underlying
presently exercisable stock options held by him.
(3) Includes 6,250 shares underlying presently exercisable stock options.
(4) Ms. Lynn Fantom, the former Chief Executive Officer resigned from her
position as an officer of the Company effective August 1, 2001 and resigned as a
director of the Company effective November 6, 2001. Includes 400,000 shares
underlying presently exercisable stock options, but excludes 200,000 unvested
stock options granted in 2001 that were cancelled upon her resignation from the
company. Ms. Fantom disclaims beneficial ownership of all such shares underlying
unexercised options.
(5) Includes 368,000 shares underlying presently exercisable stock options: (i)
136,500 shares underlying options which vested on April 14, 2001, (ii) 131,500
shares underlying options which vested on April 14, 2002, 50,000 shares
underlying options which vested on January 2, 2002 and 50,000 shares underlying
unvested stock options which vested on January 2, 2003; (iii) 50,000 shares of
restricted common stock which vested on April 14, 2001, and (iv) 50,000 shares
of restricted common stock which vested on April 14, 2002. Mr. Brown disclaims
beneficial ownership of all shares underlying unexercised and/or unvested
options.
(6) Includes 15,000 shares underlying presently exercisable stock options.
(7) Includes 760,500 shares underlying presently exercisable stock options and
50,000 shares underlying unvested stock options, all of which vest upon the
occurrence of certain change of control transactions. Note that 430,531 of the
2,720,062 shares are subject to the Voting Agreement described above and are
therefore listed as beneficially owned by both Mr. de Ganon and Mr. Cleek. These
shares are counted only once for purposes of the aggregate number of shares of
common stock beneficially owned by all directors and executive officers as a
group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATED TRANSACTIONS
On May 15, 2001, Mr. Brown acquired 862,069 shares of common stock of the
Company for an aggregate purchase price of $250,000. Mr. Brown purchased the
shares through the Fusion Facility described above. Mr. Brown acquired the
shares for personal investment purposes and to further demonstrate to a
potential investor in the Company his confidence in the Company and the
alignment of his interests, as an officer and director of the Company, with the
interests of the stockholders of the Company.
PART IV
ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report: Page
1. Independent Auditors' Report................................................................................................F-1
2. Consolidated Financial Statements
Consolidated Balance Sheet - December 31, 2003.................................................................................F-2
Consolidated Statements of Operations and Comprehensive Income (Loss) - For the years ended December 31, 2003 and 2002.........F-3
Consolidated Statements of Stockholders' Deficit - For the years ended December 31, 2003 and 2002..............................F-4
Consolidated Statements of Cash Flows - For the years ended December 31, 2003 and 2002 ........................................F-5
Notes to Consolidated Financial Statements............................................................................F-6 - 11
3. 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
(incorporated by reference from the Registrant's Form 10-KSB for
its fiscal year ended 12/31/00).
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
4.1 Common Stock Certificate*
4.2 Warrant Certificate*
4.4 Warrant Agreement by and between Continental Stock Transfer &
Trust Company and the Company*
4.5 Voting Agreement among Messrs. Centner, de Ganon, Cleek and
Szollose*
10.1 1996 Stock Incentive Plan and Rules Relating thereto*
10.2 1997 Stock Option Plan (incorporated by reference from the
Registrant's Form 10-KSB for its fiscal year ended 12/31/96).
10.3 Amendment to 1997 Stock Option Plan (incorporated by reference from
the Registrant's Form 10-KSB for its fiscal year ended 12/31/00).
10.4 Consulting Agreement with Harvey Berlent*
10.5 Employment Agreement with Matthew G. de Ganon*
10.6 Extension of Employment Agreement with Matthew G. de Ganon
dated November 2, 1998 (incorporated by reference from the
Registrant's Form 10-KSB for its fiscal year ended 12/31/98).
10.7 Amendment to Employment Agreement of Matthew G. de Ganon dated
April 14, 2000 (incorporated by reference from the
Registrant's Form 10-QSB for the quarterly period ended
03/31/00).
10.8 Employment Agreement with Douglas E. Cleek*
10.9 Extension of Employment Agreement with Douglas E. Cleek dated
January 15, 1999 (incorporated by reference from the Registrant's
Form 10-KSB for its fiscal year ended 12/31/98).
10.10 Employment Agreement with Gary W. Brown dated April 14, 2000
(incorporated by reference from the Registrant's Form 10-QSB for
the quarterly period ended 03/31/00).
10.11 Restricted Stock Agreement of Gary W. Brown (incorporated by
reference from the Registrant's Form 10-QSB for the quarterly
period ended 03/31/00).
10.12 Employment Agreement with Lynn Fantom dated February 13, 2001
(incorporated by reference from the Registrant's Form 10-KSB for
its fiscal year ended 12/31/00).
10.13 Agreement of Lease dated as of April 18, 1997, between 30 Broad
Associates, L.P., as landlord, and the Company, as tenant, relating
to 30 Broad Street, New York, New York (incorporated by reference
from the Registrant's Form 10-KSB for its fiscal year ended
12/31/00).
10.14 Amendment to Lease dated as of April 1, 1998, between 30 Broad
Associates, L.P., as landlord, and the Company, as tenant, relating
to 30 Broad Street, New York, New York (incorporated by reference
from the Registrant's Form 10-KSB for its fiscal year ended
12/31/00).
10.15 Second Amendment to Lease dated as of July 10, 2000, between
ASC-CSFB 30 Broad, LLC, as landlord, and the Company, as tenant,
relating to 30 Broad Street, New York, New York (incorporated by
reference from the Registrant's Form 10-QSB for the quarterly
period ended 06/30/00).
10.16 Common Stock Purchase Agreement dated as of December 11, 2000
between the Company and Fusion Capital Fund II, LLC (incorporated
by reference from the Registrant's Current Report on Form 8-K filed
12/11/00).
10.17 Form of Registration Rights Agreement between the Company and
Fusion Capital Fund II, LLC (incorporated by reference from the
Registrant's Current Report on Form 8-K filed 12/11/00).
10.18 Master Transaction Agreement, dated as of August 20, 2001, between
the Company and Integrated Information Systems, Inc. (incorporated
by reference from the Registrant's Current Report on Form 8-K filed
8/30/01).
10.19 Agreement and Plan of Merger, dated as of January 15, 2002, by and
among First Step Distribution Network, Inc. and its shareholders,
First Step Acquisition Corp. and the Company (incorporated by
reference from the Registrant's Current Report on Form 8-K filed
01/17/02).
10.20 Side Letter dated April 8, 2002, by and between the Company and
First Step Distribution Network, Inc. (incorporated by reference
from the Registrant's Annual Report on Form 10-KSB filed 04/16/02).
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
16.1 Letter from Arthur Andersen LLP regarding change in
certifying accountant (incorporated by reference from
the Registrant's Current Report on Form 8-K filed
04/16/02).
21.1 Subsidiary List*
31** Certification of Chief Executive Officer and Principal
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32** Certification of Chief Executive Officer and Principal
Officer Pursuant to Title 18, United States Code,
Section 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from the Company's Registration Statement on Form
SB-2, No. 333-4319.
** Filed herewith.
(B) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K during the last quarter of the period
covered by this report and the current period.
(i) Form 8-K filed October 17, 2003, reporting under Item 5.
(ii) Form 8-K filed February 2, 2004, reporting under Item 5.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
----------
Audit fees for the fiscal years ended December 31, 2002 and 2003 were
approximately $17,500 and $18,500 respectively. Some of these fees were paid by
FX in connection with the contemplated business combination.
Audit Related Fees
------------------
Audit related fees for the fiscal years ended December 31, 2002 and December 31,
2003 were approximately $30,000 and $26,500, respectively. Audit related
services generally included fees for contemplated business combinations and SEC
reporting obligations (Form 10-QSB and Schedule 14c). Some of these fees were
paid by FX in connection with the contemplated business combination.
Tax Fees
--------
Tax fees for the fiscal years ended December 31, 2002 and 2003 were $0.
All Other Fees
--------------
All other fees for products and services provided by Rothstein, Kass & Company,
P.C. was the Company's principal accountant, for the fiscal years ended December
31, 2002 and 2003 were $0.
All audit related services were pre-approved by management, which
concluded that the provision of such services by Rothstein, Kass & Company P.C.
was compatible with the maintenance of that firm's independence in the its
auditing functions.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
K2 DIGITAL, INC.
Dated: April 13, 2004
By: /s/ Gary W. Brown
------------------------------------
Gary W. Brown, President
Signature Title Date
--------- ----- ----
/s/ Matthew G. de Ganon Chairman of the Board, Director April 13, 2004
------------------------------
Matthew G. de Ganon
/s/ Gary W. Brown President, Chief Operating Officer, Chief Financial April 13, 2004
------------------------------ Officer (Principal Financial and Accounting Officer),
Gary W. Brown Secretary and Director
/s/ Douglas E. Cleek Director April 13, 2004
------------------------------
Douglas E. Cleek
/s/ David R. Sklaver Director April 13, 2004
------------------------------
David R. Sklaver
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
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
(incorporated by reference from the Registrant's Form
10-KSB for its fiscal year ended 12/31/00).
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
4.1 Common Stock Certificate*
4.2 Warrant Certificate*
4.4 Warrant Agreement by and between Continental Stock
Transfer & Trust Company and the Company*
4.5 Voting Agreement among Messrs. Centner, de Ganon, Cleek
and Szollose*
10.1 1996 Stock Incentive Plan and Rules Relating thereto*
10.2 1997 Stock Option Plan (incorporated by reference from
the Registrant's Form 10-KSB for its fiscal year ended
12/31/96).
10.3 Amendment to 1997 Stock Option Plan (incorporated by
reference from the Registrant's Form 10-KSB for its
fiscal year ended 12/31/00).
10.4 Consulting Agreement with Harvey Berlent*
10.5 Employment Agreement with Matthew G. de Ganon*
10.6 Extension of Employment Agreement with Matthew G. de
Ganon dated November 2, 1998 (incorporated by reference
from the Registrant's Form 10-KSB for its fiscal year
ended 12/31/98).
10.7 Amendment to Employment Agreement of Matthew G. de Ganon
dated April 14, 2000 (incorporated by reference from the
Registrant's Form 10-QSB for the quarterly period ended
03/31/00).
10.8 Employment Agreement with Douglas E. Cleek*
10.9 Extension of Employment Agreement with Douglas E. Cleek
dated January 15, 1999 (incorporated by reference from
the Registrant's Form 10-KSB for its fiscal year ended
12/31/98).
10.10 Employment Agreement with Gary W. Brown dated April 14,
2000 (incorporated by reference from the Registrant's
Form 10-QSB for the quarterly period ended 03/31/00).
10.11 Restricted Stock Agreement of Gary W. Brown
(incorporated by reference from the Registrant's Form
10-QSB for the quarterly period ended 03/31/00).
10.12 Employment Agreement with Lynn Fantom dated February 13,
2001 (incorporated by reference from the Registrant's
Form 10-KSB for its fiscal year ended 12/31/00).
10.13 Agreement of Lease dated as of April 18, 1997, between
30 Broad Associates, L.P., as landlord, and the Company,
as tenant, relating to 30 Broad Street, New York, New
York (incorporated by reference from the Registrant's
Form 10-KSB for its fiscal year ended 12/31/00).
10.14 Amendment to Lease dated as of April 1, 1998, between 30
Broad Associates, L.P., as landlord, and the Company, as
tenant, relating to 30 Broad Street, New York, New York
(incorporated by reference from the Registrant's Form
10-KSB for its fiscal year ended 12/31/00).
10.15 Second Amendment to Lease dated as of July 10, 2000,
between ASC-CSFB 30 Broad, LLC, as landlord, and the
Company, as tenant, relating to 30 Broad Street, New
York, New York (incorporated by reference from the
Registrant's Form 10-QSB for the quarterly period ended
06/30/00).
10.16 Common Stock Purchase Agreement dated as of December 11,
2000 between the Company and Fusion Capital Fund II, LLC
(incorporated by reference from the Registrant's Current
Report on Form 8-K filed 12/11/00).
10.17 Form of Registration Rights Agreement between the
Company and Fusion Capital Fund II, LLC (incorporated by
reference from the Registrant's Current Report on Form
8-K filed 12/11/00).
10.18 Master Transaction Agreement, dated as of August 20,
2001, between the Company and Integrated Information
Systems, Inc. (incorporated by reference from the
Registrant's Current Report on Form 8-K filed 8/30/01).
10.19 Agreement and Plan of Merger, dated as of January 15,
2002, by and among First Step Distribution Network, Inc.
and its shareholders, First Step Acquisition Corp. and
the Company (incorporated by reference from the
Registrant's Current Report on Form 8-K filed 01/17/02).
10.20 Side Letter dated April 8, 2002, by and between the
Company and First Step Distribution Network, Inc.
(incorporated by reference from the Registrant's Annual
Report on Form 10-KSB filed 04/16/02).
16.1 Letter from Arthur Andersen LLP regarding change in
certifying accountant (incorporated by reference from
the Registrant's Current Report on Form 8-K filed
04/16/02).
21.1 Subsidiary List*
31** Certification of Chief Executive Officer and Principal
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32** Certification of Chief Executive Officer and Principal
Officer Pursuant to Title 18, United States Code,
Section 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from the Company's Registration Statement on Form
SB-2, No. 333-4319.
** Filed herewith.