U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
|_| 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 13-3886065
------------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
c/o Calvey & Amon, LLP
770 Lexington Avenue
6th Floor
New York, NY 10021
(Address of Principal Executive Offices)
(212) 935-6000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at May 18, 2004
-------------------------------------- -----------------------------------
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
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheet - March 31, 2004 (unaudited)............................................... 2
Condensed consolidated statements of operations and comprehensive income (loss)
- three months ended March 31, 2004 (unaudited) and March 31, 2003 (unaudited)............................ 3
Condensed consolidated statements of cash flows - three months
ended March 31, 2004 (unaudited) and March 31, 2003 (unaudited)........................................... 4
Notes to condensed consolidated financial statements............................................................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 6
ITEM 3. CONTROLS AND PROCEDURES........................................................................................... 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................................. 9
SIGNATURES ............................................................................................................... 9
CERTIFICATIONS ........................................................................................................... 10-11
1
PART I
FINANCIAL INFORMATION
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash................................................................................................ $ 4,747
Investment in security available-for-sale........................................................... 101,500
-------------
Total current assets.......................................................................... $ 106,247
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................................................. $ 154,172
Accrued professional fees........................................................................ 6,987
Other accrued expenses........................................................................... 5,995
-------------
Total current liabilities..................................................................... 167,154
-------------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding............................................................... --
Common Stock, $0.01 par value, 25,000,000 shares authorized;
5,400,116 shares issued and 4,982,699 shares outstanding...................................... 54,001
Treasury stock, 417,417 shares at cost........................................................... (819,296)
Additional paid-in capital....................................................................... 8,317,910
Accumulated other comprehensive income........................................................... 85,400
Accumulated deficit.............................................................................. (7,698,922)
--------------
Total stockholders' deficit......................................................................... (60,907)
--------------
Total liabilities and stockholders' deficit................................................ $ 106,247
==============
See the accompanying notes to condensed consolidated financial statements.
2
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED
MARCH 31,
2004 2003
Unaudited Unaudited
Revenues $ -- $ --
General and administrative expenses (14,000) 23,071
--------------------- ----------------------
Net income (loss) $ 14,000 $ (23,071)
--------------------- ----------------------
Net loss per common share-
basic and diluted $ -- $ (0.005)
--------------------- ----------------------
Weighted average common shares outstanding -
basic and diluted 4,982,699 4,982,699
--------------------- ----------------------
Comprehensive income (loss):
Net income (loss) $ 14,000 $ (23,071)
Other comprehensive income (loss) -
unrealized gain on available-for-sale securities 7,700 8,800
--------------------- ----------------------
Comprehensive income (loss) $ 21,700 $ (14,271)
===================== ======================
See the accompanying notes to condensed consolidated financial statements.
3
K2 DIGITAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
2004 2003
Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,000 $ (23,071)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Changes in operating assets and liabilities:
Accounts payable 6,175 20,435
Accrued expenses (32,021)
------------------- -------------------
Net cash used in operating activities
(11,846) (2,636)
------------------- -------------------
CASH, beginning of period 16,593 8,173
------------------- -------------------
CASH, end of period $ 4,747 $ 5,537
=================== ===================
See the accompanying notes to condensed consolidated financial statements.
4
K2 DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRIOR BUSINESS AND GOING CONCERN CONSIDERATION
Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company") was a strategic digital services company that
provided consulting and development services including analysis, planning,
systems design and implementation. In August 2001, the Company completed the
sale of fixed and intangible assets essential to its business operations to
Integrated Information Systems, Inc. ("IIS").
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed above, the
Company sold fixed and intangible assets essential to its business operations to
IIS and effectively became a "shell" company with no operational revenues and
continuing general and administrative expenses. Further, at March 31, 2004, the
Company has cumulative losses of approximately $7.7 million, a diminutive cash
balance and working capital and stockholders' deficits of approximately $61,000.
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.
On January 30, 2004, the Company signed a non-binding letter of intent 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 anticipate executing a definitive agreement on or before May 31,
2004 and closing the transaction on or before June 30, 2004.
2. BASIS OF PRESENTATION, NET LOSS PER SHARE AND STOCK-BASED COMPENSATION
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position as of March 31, 2004 and the
financial results for the three months ended March 31, 2004 and 2003, in
accordance with accounting principles generally accepted in the United States of
America for interim financial statements and pursuant to Form 10-QSB and
Regulation S-B. Certain information and footnote disclosures normally included
in the Company's annual audited consolidated financial statements have been
condensed or omitted pursuant to such rules and regulations.
The results of operations for the three months ended March 31, 2004 and 2003,
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, 2003, which are included in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of K2
Digital, Inc. and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
5
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.
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 excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted to common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the effect of
outstanding options is antidilutive, they have been excluded from the Company's
computation of net loss per common share. Therefore, basic and diluted loss per
common share for the three months ended March 31, 2004 and 2003 were the same.
STOCK-BASED COMPENSATION
The Company complies with the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation", as amended by SFAS No.148 "Accounting
for Stock-based Compensation Transaction and Disclosure". During the three month
periods ended March 31, 2004 and 2003, the Company did not grant options
pursuant to its stock option plans.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to; those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock".
OVERVIEW
Founded in 1993, the Company is a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creation and implementation. In
August 2001, upon the sale of assets to Integrated Information Systems, Inc.
("IIS"), the Company effectively ceased operations.
6
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. These, among other matters, raise
substantial doubt about the Company's ability to continue as a going concern.
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.
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.
The Company's cash balance of $4,747 at March 31, 2004, decreased by $11,846 or
71% compared to the $16,593 cash balance at December 31, 2003. This decrease is
primarily due to certain operating expenses incurred by the Company which has
effectively ceased its operations and continues to wind down activities.
RESULTS OF OPERATIONS
During the three months ended March 31, 2004 and 2003, the Company, operating as
a "shell," incurred a net income (loss) of approximately, $14,000 and $(23,000),
respectively for 2004 and 2003. The Company's 2004 net income is the direct
result of the Company reversing certain liabilities relating to professional
fees that Sunrise has agreed to pay on behalf of the Company. The Company's 2003
net loss consisted primarily of accounting, legal and public company expenses
related to maintaining the "shell" corporation.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
For almost three years, the Company has been a "shell" company with no
operational revenues and continuing general and administrative expenses.
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 in the non-binding letter of intent 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 non-binding letter of intent may never be
consummated.
In the event that the transactions contemplated by the non-binding letter of
intent 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 may be wound up subject to the approval of the stockholders of the
Company. The Company's Board of Directors intends to explore other options,
which may include a merger or similar transaction with another entity, or
liquidation of the Company.
7
ITEM 3. CONTROLS AND PROCEDURES
The Company's President has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the President concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to him in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the President completed his evaluation.
8
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Company*
3.1(a) Amendment to Certificate of Incorporation of the
Company*
3.1(b) Amendment to Certificate of Incorporation of the
Company**
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
3.3 Letter Agreement, dated June 28, 2002, between the
Company and First Step***
4.1 Common Stock Certificate*
4.2 Voting Agreement among Messrs. Centner, de Ganon,
Cleek and Szollose*
31.1 Certification of Chief Executive Officer and
Principal Financial Officer pursuant to Rule
13a-14(a) and 15(d)-14(a) of the Securities Exchange
Act of 1934, as amended, dated May 15, 2004.
32. Certification of Chief Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C. ss
1350 dated May 19, 2004.
* Incorporated by reference from the Company's Registration Statement on Form
SB-2, No. 333-4319.
** Incorporated by reference from the Company's Form 10-KSB for its fiscal year
ended December 31, 2000.
*** Incorporated by reference from the Registrant's Form 10-QSB/A filed on June
28, 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K2 DIGITAL, INC.
Date: May 19, 2004
By: /s/ Gary Brown
-----------------------------
Gary Brown
President
(Principal Financial and
Accounting Officer)
9