UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C AMENDMENT NO. 1
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
X Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
K2 Digital, Inc.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
X Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
COMMON STOCK
(2) Aggregate number of securities to which transaction applies:
8,760,000
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): BASED UPON
$0.03 PER SHARE WHICH IS THE AVERAGE OF THE BID AND ASKED PRICE AS OF
FEBRUARY 12, 2003.
(4) Proposed maximum aggregate value of transaction: $262,800
(5) Total fee paid: $0
X Fee paid previously with preliminary materials.
X Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $268.24
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(2) Form, Schedule or Registration Statement No.: SCHEDULE 14C
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(3) Filing Party: REGISTRANT
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(4) Date Filed: JULY 22, 2002
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ITEM 1. INFORMATION REQUIRED BY ITEMS OF SCHEDULE 14A (17 CFR 240.14A-101.)
See Exhibit 99.1
ITEM 2. STATEMENT THAT PROXIES ARE NOT SOLICITED
See Exhibit 99.1
ITEM 3. INTEREST OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE ACTED UPON
See Exhibit 99.1
ITEM 4. PROPOSALS BY SECURITY HOLDERS
Not applicable
List of Exhibits:
99.1 Information Statement and Notice of Meeting, dated February__, 2003
K2 DIGITAL, INC.
Information Statement
and Notice of Meeting
February __, 2003
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
Table of Contents
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Page
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CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S LETTER.....................................................................4
QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................5
SUMMARY...........................................................................................................7
THE COMPANIES.....................................................................................................8
K2 Digital, Inc..........................................................................................8
FutureXmedia, Inc.......................................................................................10
THE REVERSE STOCK SPLIT..........................................................................................10
Certificate of Amendment................................................................................11
Exchange Of Stock Certificates..........................................................................11
THE MERGER.......................................................................................................12
Accounting Treatment of the Merger......................................................................12
Regulatory Approvals....................................................................................13
ISSUANCE OF K2 STOCK.............................................................................................13
STOCKHOLDER APPROVAL.............................................................................................13
Dilution................................................................................................13
Appraisal Rights........................................................................................13
Tax Consequences........................................................................................16
Reasons for the Reverse Stock Split.....................................................................17
Recommendations of K2's Board of Directors..............................................................17
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF K2 IN THE MERGER................................................17
MARKET FOR K2'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................................17
DIRECTORS AND OFFICERS...........................................................................................18
Background..............................................................................................18
Director Compensation...................................................................................21
Executive Compensation..................................................................................21
Option Grants in Fiscal 2001............................................................................22
Option Exercises and Year-End Option Value Table........................................................22
Filing Requirements.....................................................................................23
BENEFICIAL OWNERSHIP.............................................................................................23
CHANGE IN CONTROL OF K2..........................................................................................24
MANAGEMENTS DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................24
Overview................................................................................................25
Results of Operations - K2 Digital......................................................................25
Results of Operations - FX..............................................................................26
Continuing Operations, Liquidity and Capital Resources - K2.............................................27
Liquidity and Capital Resources; Plan of Operation - FX.................................................28
Factors Affecting Operating Results and Market Price of Stock...........................................29
FINANCIAL STATEMENTS.............................................................................................32
Page 2 of 62
Table of Contents
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Page
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Unaudited Pro Forma Combined Condensed Financial Statements of K2 Digital, Inc. and FutureXmedia, Inc...32
K2 Digital Inc., Consolidated Financial Statements......................................................38
First Step Distribution Network, Inc. Financial Statements..............................................45
WHERE YOU CAN FIND MORE INFORMATION..............................................................................53
ANNEXES..........................................................................................................55
Section 262 of the Delaware General Corporation Law.....................................................56
Voting Ballot...........................................................................................61
Page 3 of 62
K2 DIGITAL, INC.
770 Lexington Avenue, Sixth Floor
New York, NY 10021
(212) 935-6000
February ______, 2003
Dear Stockholders of K2 Digital, Inc.:
I am writing to you today about K2 Digital, Inc.'s ("K2") proposed
Merger with FutureXmedia, Inc., f/k/a First Step Distribution Network Inc.
("FX").
In connection with the merger, K2 will issue to FX an aggregate of
8,760,000 shares of common stock of K2. Upon completion of the merger, we expect
that the shareholders of FX will own approximately 90% of the outstanding common
stock of K2. K2's common stock is traded on the NASDAQ National Market under the
trading symbol "KTWO.OB" and closed at a price of $0.01 per share on February 7,
2003. The proposed reverse stock split and merger will have a dilutive effect
upon the shareholders of K-2. See "The Merger" in the accompanying Information
Statement.
We cannot complete the merger unless the stockholders of K2 approve the
1-for-5.1 reverse split of shares, the merger and the issuance of K2 common
stock to FX in connection with the merger.
THE BOARD OF DIRECTORS OF K2 HAS UNANIMOUSLY APPROVED THE FOLLOWING
PROPOSALS AND RECOMMENDS THAT YOU APPROVE
1) THE 1-FOR-5.1 REVERSE STOCK SPLIT,
2) THE MERGER WITH FX,
3) THE ELECTION OF NEW DIRECTORS, AND
3) THE ISSUANCE OF K2 COMMON STOCK IN CONNECTION WITH THE MERGER
BY PROVIDING YOUR AFFIRMATIVE VOTE AND SIGNATURE ON THE VOTING BALLOT ATTACHED.
The accompanying information statement provides detailed information
about K2, FX, the combined business and the merger. Please give all of this
information your careful attention.
Sincerely,
/s/ Gary W. Brown
------------------------------------
Gary W. Brown
Chairman and Chief Executive Officer
Page 4 of 62
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL FX AND K2 SHAREHOLDERS RECEIVE IN THE MERGER?
A: If the merger is completed, FX's shareholders will receive a total of
8,760,000 shares of common stock of K2 representing an approximate 90%
ownership of the merged company and K2's shareholders will own
approximately 10% of the merged company.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We expect to complete the merger by the end of March ______, 2003, but
neither K2 nor FX can predict the exact timing of the closing.
Q: WHO MUST APPROVE THE MERGER?
A: In addition to the approvals of the boards of directors of K2 and FX
and FX's stockholders, which have already been obtained, K2's
stockholders must approve the merger, the reverse stock split, election
of new directors and issuance of K2 common stock in connection with the
merger.
Q: WHAT VOTE OF K2 STOCKHOLDERS IS REQUIRED TO APPROVE THE MERGER AND THE
ISSUANCE OF K2 COMMON STOCK IN THE MERGER?
A: The affirmative vote of the holders of at least a majority of the
shares of K2 common stock.
Q: DOES THE BOARD OF DIRECTORS OF K2 RECOMMEND APPROVAL OF THE PROPOSALS?
A: Yes.
Q: HAVE THE DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES OF K-2 VOTED TO
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APPROVE THE MERGER?
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A: Yes, those individuals, owning approximately 50% of the outstanding
shares of K-2 have voted in favor of the merger.
Q: WHAT DO I NEED TO DO NOW?
A: K2 urges you to carefully read this information statement, including
its annexes; and to consider how the merger will affect you as a
stockholder. You also may want to review the documents referenced under
"Where You Can Find More Information" on page 53.
Page 5 of 62
Q: HOW DO I APPROVE THE MERGER?
A: After carefully considering this information statement, including its
annexes, place your vote on the Voting Ballot, attached as Annex C on
the last page of this Information Statement, sign the Voting Ballot and
deliver it to K2 at K2 Digital, Inc., 770 Lexington Avenue, Sixth
Floor, New York, New York 10021, Attention: Gary Brown.
Q: DO I HAVE ANY RIGHTS IF I DO NOT APPROVE THE MERGER?
A: Yes. If you do not vote in favor of the merger, you may have "appraisal
rights". See the Section "Stockholder Approval Appraisal Rights" at
Page 14 of the accompanying Information Statement for a description of
these rights.
Page 6 of 62
SUMMARY
This summary highlights selected information from this Information
Statement and Notice of Meeting (hereinafter referred to as the "Information
Statement") and may not contain all of the information that is important to you.
To understand the merger fully and for a more complete description of the legal
terms of the merger, you should read carefully this entire document, including
all annexes, and the documents to which we have referred you. See "Where You Can
Find More Information" on page 53. This Information Statement is being furnished
by the Board of Directors of K2 Digital, Inc. and is first being sent to the
stockholders of K2 Digital, Inc. on February ___, 2003.
The Special Meeting of Stockholders will be held on March ____, 2003,
at 10:00 AM Eastern Daylight Time, at the offices of K2 Digital, Inc., 770
Lexington Avenue, Sixth Floor, New York, New York 10021. Stockholders of record
as of February ____, 2003 will be entitled to vote on all proposals to come
before the meeting. Representatives of Rothstein, Kass & Company, P.C., K2's
auditors are not expected to attend the meeting.
K2 Digital, Inc. ("K2") is a professional services company, which,
until August 2001 when it sold substantially all of its assets, specialized in
business consulting development and design related to digital communications. K2
provided comprehensive, integrated digital professional service, including
strategic consulting, design and development of digital channels, online
quantitive and usability research, and online marketing. K2 offered digital
consulting and development services including strategic planning, systems
design, creative design, implementation, and performance metrics and analysis.
FutureXmedia, Inc., f/k/a First Step Distribution Network, Inc.
("FSDN"), successor to First Step Consulting, LLC, is a company which was
recently formed to establish a residual original equipment manufacturer sales
and marketing business within the software and hardware personal computer
industry and, more recently, to bring new electronic gaming products to market
through the use of innovative new technologies and channels. FX is a consumer
Internet entertainment company that aggregates rights to successful console and
PC CD-Rom video games and re-distributes them via the Internet.
On January 15, 2002, K2 and FX entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among FX and its shareholders (the "FX
Shareholders") and First Step Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of K2 ("Merger Sub"). Under the terms of the Merger
Agreement, as amended, K2 will acquire First Step by means of a triangular
merger ("the Merger"), pursuant to which the Merger Sub will merge with and into
FX in a tax free reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended.
As a condition to the Merger, K2 is required to implement a 1 for 5.1
reverse split (the "Reverse Stock Split") of the common stock, par value $.01
per share, of K2 ("K2 Common Stock), thereby reducing its outstanding shares of
K2 Common Stock from 4,982,699 shares to approximately 977,000 shares. In the
Reverse Stock Split, fractional shares will be rounded up to the nearest whole
share. The implementation of the Reverse Stock Split is subject to the
Page 7 of 62
approval of the stockholders of K2. The Board of Directors of K2 has approved
the Reverse Stock Split and will submit the Reverse Stock Split to the
stockholders of K2 for their approval.
FX's Shareholders will exchange their respective shares of common
stock, no par value per share, of FX (the "FX Common Stock") for shares of K2
Common Stock. Each share of FX's Common Stock will be converted into the right
to receive approximately one share of K2 Common Stock. The conversion ratio is
after giving effect to the Reverse Stock Split. Pursuant to the Merger
Agreement, the aggregate number of shares of K2 Common Stock issuable to FX's
Shareholders by virtue of the Merger as of the date of the Merger Agreement will
equal approximately ninety percent (90%) of the issued and outstanding K2 Common
Stock.
After the effective date of the Merger, the Merger Sub will cease its
separate legal existence and FX will continue as the surviving corporation.
Upon consummation of the transactions contemplated by the Merger
Agreement and the Reverse Stock Split, K2's current stockholders will own an
aggregate of approximately 977,000 shares of K2 Common Stock or approximately
10% of the outstanding voting securities of K2, and FX Shareholders will own an
aggregate of approximately 8,760,000 shares of K2 Common Stock or approximately
90% of the outstanding voting securities of K2. K2 Common Stock does not have
preemptive rights and there is no cumulative voting. Each share of K2 Common
Stock is entitled to one vote.
THE COMPANIES
K2 DIGITAL, INC.
K2 was founded in 1993 as a general partnership and initially operated
a traditional graphic design business. In August 1994, K2 shifted its principal
business to website design and creation. Thereafter, K2 incorporated as a
Delaware corporation on January 1, 1996. After K2's initial public offering on
July 26, 1996, K2 began to develop its business as a full-service digital
professional services company. K2 has historically provided consulting and
development services including analysis, planning, systems design, creation and
implementation. In November 2000, K2 changed its name from K2 Design, Inc. to K2
Digital, Inc. As discussed below, K2 effectively ceased its operations in August
2001.
K2's offices are located at 770 Lexington Avenue, Sixth Floor, New
York, New York 10021 and its telephone number is (212) 935-6000.
Discontinued Operations; Disposition of Assets
On May 15, 2001, K2 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 common stock of K2 that would
have represented fifty-one percent (51%) of the issued and outstanding capital
stock of K2 on a fully diluted basis. At the time of the execution of the letter
of intent, K2 borrowed $250,000 from an affiliate of SGI, for working capital
purposes; the borrowing was secured by a first priority security interest in all
of the assets
Page 8 of 62
of K2. K2 and SGI were ultimately not able to agree on the definitive terms of
the transaction and, in July 2001, K2 and SGI terminated negotiations and the
letter of intent.
On August 29, 2001, K2 sold certain of its fixed and intangible assets
to Integrated Information Systems, Inc., a Delaware corporation ("IIS"),
including certain of K2's customer contracts, furniture, fixtures, equipment and
intellectual property, for an aggregate purchase price of $444,000, of which
$419,000 was paid in cash and $25,000 of capital lease obligations were assumed
by IIS.
Under the terms of the purchase agreement governing the transaction
(the "Purchase Agreement"), IIS assumed K2's office lease obligations, took up
occupancy in K2's premises and made offers of employment to substantially all of
the remaining employees of K2, which offers have been accepted.
In addition to the purchase price and as consideration of K2's release
of certain employees from the non-competition restrictions contained in their
agreements with K2, K2 received from IIS at closing a recruitment and placement
fee of $75,000. In addition, the Purchase Agreement provided for K2 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 K2 and $36,500 due to K2 remained unpaid by IIS.
Under the Purchase Agreement, K2 also received from IIS a cash fee of
$50,000 in return for entering into certain non-competition provisions contained
in the Purchase Agreement, which provide that K2 will not, for a period of five
years from the closing of the Purchase Agreement, (i) engage in any business of
substantially the same character as the business engaged in by K2 prior to the
transaction, (ii) solicit for employment any employee of IIS (including former
employees of K2), or (iii) solicit any client or customer of IIS (including any
customer transferred to IIS under the Purchase Agreement) to do business with
K2.
Accordingly, the aggregate cash consideration delivered to K2 at
closing was $544,000, of which approximately $258,000 was paid directly to an
affiliate of SGI, K2's principal secured creditor, in order to release SGI's
security interest in the assets of K2.
Subsequent to the sale of assets to IIS, K2 effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. K2 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 K2. Accordingly, K2's
remaining operations will be limited to either the sale of K2 or the winding up
of K2's remaining business and operations, subject, in either case, to the
approval of the stockholders of K2. 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 K2. K2 has entered into negotiations with certain
creditors to settle specific obligations for amounts less than reflected in K2's
financial statements. If these
Page 9 of 62
negotiations are unsuccessful, there will not be sufficient cash to repay all of
the obligations of K2.
FUTUREXMEDIA, INC.
FutureXmedia, Inc., f/k/a First Step Distribution was formed to
establish a residual original equipment manufacturer sales and marketing
business within the software and hardware personal computer industry and
commencing in 2002 effectively changed its business focus to bring new gaming
products to market through the use of innovative new technologies and channels.
FX is an Electronic Games Media company, which was formed on December
24, 2001 through the merger with First Step Consulting LLC. The principal
business of FX is to bring new electronic game products to market through the
use of innovative new technologies and channels. Examples include sales of
subscription based electronic game services, sponsorship and hosting of
regional, national, and international electronic game competitions, with
multiple categories of participants, such as amateur status, collegiate status,
professional status and Olympic status. FX is a consumer Internet entertainment
company that aggregates rights to successful console and PC CD-Rom video games
and re-distributes them via the Internet. FX's initial strategic focus is to
create a lucrative secondary distribution "window" for hit titles licensed from
Activision, EA Sports, THQ, Microsoft and other third party game
developers/publishers. Just as the cable and motion picture industries are
developing a video-on-demand infrastructure to deliver hit movies to home
viewers, FX intends to provide a convenient and cost-effective online channel
for gamers to enjoy previously published hit titles on a subscription or
pay-per-view basis. Gamers will pay FX a $9.95 per month subscription fee to
rent games, or, at their option a fee of approximately $19.95 to $29.95 to
download and permanently own each title.
Initial United States operations will focus on licensing and
distributing on-line 3D games, licensed directly from companies such as
Activision, EA Sports, Microsoft and other third party development vendors, as
well as, transactional interface software(s) and hardware solutions tied to the
personal computer original equipment manufacturer, personal computer peripheral,
wireless handheld, DirectTV and Internet portal channel sales. Licensing
discussions with Activision are already under way. FX intends to sell
subscription based entertainment and develop interactive game environments that
will offer the end user a great on-line or competitive TV game experience, at a
fraction of the retail price, while offering the subscriber a continuously
updated selection of 3D games, software products, interactive educational
programs and entertainment content. FX's securities never have been publicly
traded and FX never has paid any dividends. FX's offices are located at
_______________________________________ and the telephone number is
________________.
THE REVERSE STOCK SPLIT
As a condition to the Merger, to be discussed below, K2 is required to
implement a 1 for 5.1 reverse split of K2 Common Stock (the "Reverse Stock
Split"), thereby reducing its
Page 10 of 62
outstanding shares of Common Stock from 4,982,699 shares to approximately
977,000 shares. In the Reverse Stock Split, fractional shares will be rounded up
to the nearest whole share.
Pursuant to the Reverse Stock Split, each holder of K2 Common Stock
immediately prior to the effectiveness of the Reverse Stock Split will receive
one share of new common stock, par value $.01 per share, for every 5.1 shares of
common stock then held.
No fractional shares of new common stock will be issued in connection
with the Reverse Stock Split. Instead, in calculating the number of shares to
which a holder is entitled, K2 will round up to the next whole number. Thus,
holders of common stock who would otherwise be entitled to receive a fractional
share of new common stock because they hold a number of shares of common stock
not evenly divisible by three will receive a full share for such fractional
share.
CERTIFICATE OF AMENDMENT
The Reverse Stock Split will become effective only upon the filing of a
certificate of amendment to the certificate of incorporation of K2 with the
Delaware Secretary of State. If the Reverse Stock Split is approved by the K2
stockholders, the Board of Directors intends immediately to file the certificate
of amendment with the Delaware Secretary of State. Upon the effectiveness of the
proposed amendment, Article Fourth of K2's restated certificate of incorporation
would include an additional paragraph reading substantially as follows:
"(8) The Corporation hereby declares that each 5.1 of the outstanding
shares of the Corporation's Common Stock, par value $.01 per share, as
of the date of filing of this Certificate of Amendment to the Restated
Certificate of Incorporation, be converted and reconstituted into one
share of Common Stock, par value $.01 per share. No fractional shares
shall be issued upon such conversion and reconstitution. Instead the
number of shares of Common Stock to be issued shall be rounded up to
the nearest whole share."
Upon effectiveness of the certificate of amendment, the Reverse Stock
Split will occur without any further action on the part of stockholders. The
Reverse Stock Split will occur without regard to the dates on which stock
certificates are physically surrendered in exchange for certificates
representing shares of new common stock that shareholders are entitled to
receive as a consequence of the Reverse Stock Split.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the effectiveness of the Reverse Stock
Split, transmittal letters will be mailed to each record holder of K2 Common
Stock on the date of such effectiveness. The transmittal letters will be used in
forwarding existing stock certificates for surrender and exchange for new
certificates representing the number of shares of new common stock that
stockholders are entitled to receive as a result of the Reverse Stock Split. The
transmittal letters will be accompanied by instructions specifying other details
of the exchange. Stockholders should not send in their certificates until they
receive a transmittal letter.
Page 11 of 62
After the effectiveness of the Reverse Stock Split, each certificate
representing shares of existing common stock will, until surrendered and
exchanged as described above, be deemed, for all corporate purposes, to evidence
ownership of the whole number of shares of new common stock into which the
shares evidenced by such certificate have been converted.
With the exception of the number of issued and outstanding shares, the
rights and preferences of our common stock prior and subsequent to the Reverse
Stock Split will remain the same.
THE MERGER
On January 15, 2002, K2 entered into an Agreement and Plan of Merger
(the "Merger Agreement") by and among FX, a California corporation and the
shareholders of FX and First Step Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of K2 ("Merger Sub"). In anticipation of the merger, the
K2 formed the Merger Sub. Under the terms of the Merger Agreement, K2 intends to
acquire FX by means of a triangular merger ("the Merger"), pursuant to which the
Merger Sub will merge with and into FX in a tax-free reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986.
After the effective date of the Merger, the Merger Sub will cease its
separate legal existence and First Step will continue as the surviving
corporation. For more detailed information see the Agreement and Plan of Merger
which is incorporated by reference to K2's current report on Form 8-K, filed on
January 17, 2002, and may be located at
www.sec.gov/Archives/edgar/data/1009624/000095012302000445/0000950123-02-000445.txt.
Upon consummation of the transactions contemplated by the Merger
Agreement and the Reverse Stock Split, K2's current stockholders will own an
aggregate of approximately 977,000 shares of common stock, par value $.01 per
share of K2 (the "K2 Common Stock"), or approximately 10% of the outstanding
voting securities of K2, and FX shareholders will own an aggregate of
approximately 8,760,000 shares of K2 Common Stock or approximately 90% of the
outstanding voting securities of K2.
ACCOUNTING TREATMENT OF THE MERGER
In accordance with the recently issued Statement of Financial
Accounting Standards No. 141, "Business Combinations," and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
K2 will use the purchase method of accounting for a business combination to
account for the Merger, as well as the new accounting and reporting regulations
for goodwill and other intangibles. Under these methods of accounting, the
assets and liabilities of FX business, including intangible assets, will be
recorded at their respective fair values. All intangible assets will be
amortized over their estimated useful lives with the exception of goodwill and
any other intangibles with indefinite lives. The financial position, results of
operations and cash flows of FX business will be included in K2's financial
statements prospectively as of the completion of the Merger.
Page 12 of 62
REGULATORY APPROVALS
Other than filings with the Securities and Exchange Commission and
state securities regulators, the filing of the certificate of amendment of the
certificate of incorporation of KS effecting the Reverse Stock Split and the
filing of a certificate of merger with the California and Delaware Secretaries
of State, K2 and FX are not aware of any regulatory approvals that are required
to be obtained in connection with the merger.
ISSUANCE OF K2 STOCK
In connection with the Merger, FX's shareholders will exchange their
shares of common stock, no par value per share, of FX (the "FX Common Stock")
for shares of K2 Common Stock. Each share of FX Common Stock will be converted
into the right to receive one share of K2 Common Stock. The conversion ratio is
after giving effect to the Reverse Stock Split. Pursuant to the Merger
Agreement, the aggregate number of shares of K2 Common Stock issuable to FX
shareholders by virtue of the Merger as of the date of the Merger Agreement will
be 8,760,000 shares, equal to approximately ninety percent (90%) of the issued
and outstanding K2 Common Stock.
The exchange ratio for the merger was determined by the
Board's of FX and K-2 to fairly represent the relative values of the companies,
pre merger and post merger, including their business plans, financial resources
and personal commitments. Since K-2 is essentially out of business, and FX has a
history of losses, the determination necessary involved subjective judgments and
estimates, which may or may not prove to be accurate.
STOCKHOLDER APPROVAL
K2 stockholder approval of the Merger, Reverse Stock Split and issuance
of K2 Common Stock in connection with the Merger is required under Delaware law.
The affirmative vote of the holders of at least a majority of the shares of K2
Common Stock is required to approve i) the Reverse Stock Split, ii) the Merger,
iii) the election of new directors and iv) the issuance of K2 Common Stock in
connection with the Merger.
Any K2 stockholder may abstain from voting on the proposals to approve
i) the Reverse Stock Split, ii) the Merger, iii) the election of directors and
iv) the issuance of K2 Common Stock in connection with the Merger. However, the
required vote to approve these proposals is based on the number of shares voting
at the Meeting of Stockholders rather than outstanding shares and therefore
abstentions will have no effect on the outcome of the proposal. A separate vote
is not required to approve the election of FX directors as this is included as
part of the Merger. A vote in favor of the Merger will include approval of the
election of new directors of the post-merged entity.
Page 13 of 62
DILUTION
The Reverse Stock Split will not alter any stockholder's percentage
interest in K2's equity, except to the extent that the Reverse Stock Split
results in any of K2's stockholders owning a fractional share. In lieu of
issuing fractional shares, K2 will issue to any stockholder who otherwise would
have been entitled to receive a fractional share as a result of effecting the
Reverse Stock Split a whole share of K2 Common Stock. Additionally a result of
the Reverse Stock Split will be that the number of shares of K2 Common Stock
outstanding will be reduced from 4,982,699 to 977,000 and K2's stated capital
will be reduced by approximately $43,413 and its additional paid-in capital will
be increased by the same amount.
In addition, commencing with the effective date of the Reverse Stock
Split, all outstanding options entitling the holders thereof to purchase shares
of K2 Common Stock will entitle such holders to receive, upon exercise of their
options, approximately one-fifth of the number of shares of K2 Common Stock,
which such holders may purchase upon exercise of their options. Also, commencing
on the effective date of the Reverse Stock Split, the exercise price of all
outstanding options will be increased approximately fivefold.
The cumulative effect of the Merger and the Reverse Stock Split will
result in dilution to existing stockholders. Prior to the Merger and the Reverse
Stock Split such stockholders will hold 4,982,699 shares, representing 100%
ownership of K2. Following the Merger and the Reverse Stock Split such shares
will represent approximately 10% ownership of K2.
APPRAISAL RIGHTS
In connection with the consummation of the Merger all stockholders of
K2 Common Stock as of the effective time of the Merger will have certain rights
under the Delaware General Corporation Law (the "DGCL") to dissent and demand
appraisal of and to receive payment in cash of the fair value of their K2 Common
Stock. If the statutory procedures are complied with, such rights could lead to
a judicial determination of the fair value required to be paid in cash to such
dissenting stockholders for their K2 Common Stock. Any such judicial
determination of the fair value of the K2 Common Stock could be based upon
considerations other than or in addition to the market value of the K2 Common
Stock, including asset values and the investment value of the K2 Common Stock.
The value so determined could be more or less than the market value of the K2
Common Stock.
The appraisal rights of dissenting stockholders of K2 are governed by
Section 262 of the DGCL. The following summary of the applicable provisions of
Section 262 of the DGCL is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to the full text of
Section 262 which is set forth in Annex A.
It is anticipated that the Merger will be authorized by a vote of
stockholders holding at least 50.1%, but less than all of the issued and
outstanding K2 Common Stock. This Information Statement is notice that a vote is
being taken for which appraisal rights are provided. Stockholders of K2 Common
Stock are entitled under the provisions of Section 262 of the DGCL, as an
alternative to remaining a stockholder of K2, to a judicial determination of the
fair
Page 14 of 62
value in cash of their K2 Common Stock. The following is a summary of the
procedural steps that must be taken if the right of appraisal is to be validly
exercised.
Any stockholder of K2 Common Stock who did not vote in favor of the
Merger and wishes to exercise his appraisal rights with respect to the Merger
must file with K2, prior to the date of the Meeting of Stockholders being
noticed by this Information Statement, a written demand for appraisal of his K2
Common Stock which includes i) his name and address and ii) a demand for
appraisal of his K2 Common Stock. Failure to vote in favor of the Merger will
not constitute the written notice required to be filed by a dissenting
stockholder. A stockholder voting in favor of the Merger is not entitled to
appraisal rights under Section 262 of the DGCL.
A stockholder may not dissent as to less than all of his K2 Common
Stock. A nominee or fiduciary may not dissent on behalf of any beneficial owner
as to less than all of the K2 Common Stock held of record by such nominee or
fiduciary. Furthermore if the K2 Common Stock is owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand for appraisal
should be made in such capacity and if the K2 Common Stock is owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand for
appraisal should be made by or for all owners of record. An authorized agent,
including one of two joint owners may execute the demand for appraisal for a
holder of record; however such agent must identify the record owner(s) and
expressly state in such demand that the agent is acting as agent for the record
owner(s) of the K2 Common Stock.
A record holder, such as a broker, who holds K2 Common Stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of such beneficial owners with respect to
the K2 Common Stock held for such beneficial owners. All demands for appraisal
should be addressed to K2 at 770 Lexington Avenue, Sixth Floor, New York, New
York 10021, Attention: Gary Brown.
Within ten days of the effective date of the Merger, K2 will notify
each stockholder who has provided a timely demand for appraisal, apprising such
stockholder of the date the Merger was effective along with the amount of K2's
offer for the stockholder's K2 Common Stock. If the stockholder chooses to
accept K2's offer and delivers to K2 the certificate representing such K2 Common
Stock within ten days of the offer, K2 will transmit payment in the amount of
the offer to the stockholder within ten days of receipt of the stockholder's
acceptance of the offer and such stock certificate.
If the stockholder chooses not to accept K2's offer within ten days of
the offer, the stockholder must institute a proceeding in the Delaware Court of
Chancery to receive an appraisal of the K2 Common Stock. The parties to such
appraisal proceeding will bear their own costs and expenses, including the fees
and expenses of their counsel and any experts employed by them. However, the
costs of the appraisal proceeding may be determined by the court and apportioned
among the parties as the court deems equitable in the circumstances.
Any stockholder who has timely demanded appraisal of his K2 Common
Stock shall not have any rights as a stockholder of K2 after the effective date
of the Merger. Any stockholder of
Page 15 of 62
K2 Common Stock contemplating the exercise of his appraisal rights is urged to
review carefully the provisions of Section 262 of the DGCL, attached hereto as
Annex A.
Failure by any stockholder of K2 Common Stock to follow precisely all
of the steps required by the DGCL to perfect appraisal rights will result in the
loss of those rights. In view of the complexities of the foregoing provisions of
the DGCL, stockholders who are considering pursuing their appraisal rights may
wish to consult with legal counsel.
TAX CONSEQUENCES
K2 believes that the Federal income tax consequences of the Reverse
Stock Split to holders of K2 Common Stock will be as follows:
(i) Except as explained in (v) below, no income, gain or
loss will be recognized by a stockholder on the
surrender of the current shares ("Old Shares") or
receipt of the certificate representing new post-split
shares ("New Shares").
(ii) Except as explained in (v) below, the tax basis of the
New Shares will equal the tax basis of the Old Shares
that were held as capital assets.
(iii) Except as explained in (v) below, the holding period of
the New Shares will include the holding period of the
Old Shares if such Old Shares were held as capital
assets.
(iv) The conversion of the Old Shares into the New Shares
will produce no taxable income or gain or loss to K2.
(v) The Federal income tax treatment of the receipt of the
additional fractional interest by a stockholder is not
clear and may result in tax liability not material in
amount in view of the low value of such fractional
interest.
(vi) The Reverse Stock Split should qualify as a
recapitalization described in Section 368(a)(1)(E) of
the Internal Revenue Code of 1986.
K2's opinion is not binding upon the Internal Revenue Service or the
courts, and there can be no assurance that the Internal Revenue Service or the
courts will accept the positions expressed above.
The state and local tax consequences of the Reverse Stock Split may
vary significantly as to each stockholder, depending upon the state in which
he/she resides. Stockholders are urged to consult their own tax advisors with
respect to the Federal, State and local tax consequences of the Reverse Stock
Split.
Page 16 of 62
REASONS FOR THE REVERSE STOCK SPLIT
The conversion of FX's Common Stock to K2 Common Stock as required by
the Merger Agreement will result in an increase in the number of shares of K2
Common Stock outstanding as described above. The objective of the Reverse Stock
Split is to adjust the capital structure of K2 to make the K2 Common Stock a
more attractive trading and investing vehicle, which may be expected to increase
the liquidity and broaden the marketability of the K2 Common Stock.
Except for minor increases in the number of shares outstanding
resulting from the round up provisions in favor of existing stockholders, the
Reverse Stock Split by itself will not affect stockholders' proportionate equity
interest in K2 or the rights of stockholders with respect to each share of K2
Common Stock as to voting, dividends and other matters. Since there is no
consideration received by K2 in connection with the Reverse Stock Split, the
overall capital of K2 will not change as a result of the Reverse Stock Split.
The Reverse Stock Split will become effective upon the filing of a certificate
of amendment to the certificate of incorporation of K2 with the Secretary of
State of the State of Delaware, which will occur no earlier than _____ ___,
2003, which is twenty days after the mailing of this Information Statement.
RECOMMENDATIONS OF K2'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, THE K2 BOARD OF DIRECTORS HAS DETERMINED
THE ISSUANCE OF K2 COMMON STOCK IN CONNECTION WITH THE MERGER TO BE FAIR TO K2
STOCKHOLDERS AND IN THEIR BEST INTEREST AND DECLARED THE ISSUANCE ADVISABLE.
K2'S BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REVERSE STOCK SPLIT, THE
MERGER, THE ELECTION OF NEW DIRECTORS AND THE ISSUANCE OF K2 COMMON STOCK IN
CONNECTION WITH THE MERGER AND RECOMMENDS APPROVAL OF THESE PROPOSALS BY K2'S
STOCKHOLDERS.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF K2 IN THE MERGER
As of February ___, 2003, all K2 directors, executive officers and
affiliates, beneficially owned in the aggregate approximately ____% of the
outstanding shares of K2 common stock, representing ____% of the vote. All
directors and executive officers of K2 have indicated their intention to vote
all shares over which they exercise voting control in favor of the issuance of
K2 Common Stock in connection with the Merger. Following completion of the
Merger, such directors, executive officers and affiliates, will continue to own
approximately _____% of the combined entities.
MARKET FOR K2'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
K2'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, K2's
Common Stock was traded on NASDAQ under the
Page 17 of 62
symbol "KTWO." The following table sets forth, for the periods indicated, the
range of high and low price quotes of K2'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 September 30,
2000 through April 1, 2002. 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
-------------------- ---- ---
September 30, 2000 $10.50 $5.13
June 30, 2000 $ 6.94 $4.13
September 30, 2000 $ 6.75 $3.06
December 31, 2000 $ 4.25 $0.44
September 30, 2001 $ 1.06 $0.28
June 30, 2001 $ 0.46 $0.26
September 30, 2001 $ 0.29 $0.02
December 31, 2001 $ 0.05 $0.02
April 1, 2002 $ 0.07 $0.03
July 1, 2002 $ 0.15 $0.03
September 30, 2002 $ 0.05 $0.03
The approximate number of record holders of K2's common stock at
September 30, 2002 was ____, not including beneficial owners whose shares are
held by banks, brokers and other nominees. K2 never has paid any cash dividends.
DIRECTORS AND OFFICERS
BACKGROUND
Pursuant to the Merger Agreement, the present directors of K2 have
tendered their resignation effective upon the consummation of the Merger and
Messrs Millet and Klein must be elected as directors of K2. Dr. Steven N.
Goldstein resigned as director, effective September 30, 2002. K2 does not have
presently a nominating or compensation committee of the board of directors. Set
forth below are brief descriptions of the current directors and officers of K2
as well as the director nominees.
NAME POSITION
---- --------
Gary W. Brown Director, President, Secretary, Chief Financial
Officer and Chief Operating Officer
Douglas E. Cleek Director
Matthew G. de Ganon Director
David R. Sklaver Director
Robert Millet Nominee for Director
Leslie Klein Nominee for Director
Page 18 of 62
GARY W. BROWN, age 49, has been a director of K2 since February 2000
and joined K2 in April 2000 as Executive Vice President and Chief Operating
Officer. Since August 31, 2001, Mr. Brown has served as President, Secretary,
Chief Financial Officer and Chief Operating Officer of K2. Since November 14,
2001, Mr. Brown has served as Vice President and Managing Director of the Risk
Management Division of Canadian Imperial Bank of Commerce (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 Robert Morris Associates, the trade
association for the financial services risk management industry, and as an
ex-officio member of the RMA National Board. Since 1991, 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. Mr.
Brown has tendered his resignation as director of K2 effective upon the
consummation on the Merger, as required by the Merger Agreement, and has waived
his entitlement to any compensation in connection with his service as a director
of K2 in 2002.
DOUGLAS E. CLEEK, age 39, who co-founded K2 in 1993, has been a
director of K2 since it was reorganized as a corporation in January 1995. From
January 1995 until August 2001, Mr. Cleek served as K2's Executive Vice
President--Chief Creative Officer. From 1993 until 1995, Mr. Cleek was a general
partner of K2. 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 hospitality industry. Mr.
Cleek has tendered his resignation as director of K2 effective upon the
consummation on the Merger, as required by the Merger Agreement, and has waived
his entitlement to any compensation in connection with his service as a director
of K2 in 2002.
MATTHEW G. DE GANON, age 39, has been a director since he joined K2 in
July 1995. Mr. de Ganon resigned from his position as an executive officer of K2
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 K2 in August 2001. He was President of K2 from June 1996 to November 1998 and
was also the Chief Operating Officer of K2 from July 1995 to November 1997. For
the two years prior to joining K2, 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
Page 19 of 62
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. Mr. de Ganon has tendered his
resignation as director of K2 effective upon the consummation on the Merger, as
required by the Merger Agreement, and has waived his entitlement to any
compensation in connection with his service as a director of K2 in 2002.
DAVID R. SKLAVER, age 50, has been a director of K2 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. Mr. Sklaver has
tendered his resignation as director of K2 effective upon the consummation of
the Merger, as required by the Merger Agreement, and has waived his entitlement
to any compensation in connection with his service as a director of K2 in 2002.
ROBERT MILLET, age 35, is Chief Operations Officer--USA Division, First
Step Distribution Network, Inc. Mr. Millet has over ten years experience in
Senior Marketing and Sales positions within the high technology and
entertainment industries. Prior to joining First Step Distribution Network, Inc.
Mr. Millet was a Sr. Vice President and Partner at Hanson & Schwam, a Beverly
Hills public relations and marketing firm. Mr. Millet was instrumental in
creating the initial public offering for his marketing client, Mainframe
Entertainment; and a key force in launching Computer Television Network (CTVN).
While at Hanson & Schwam, Mr. Millet managed the marketing and promotional
strategies of several independent production companies, such as Kushner-Locke,
Paragon, and Handmade Films. Mr. Millet was also instrumental in developing the
Eco-Challenge television sports franchise with MTV, Discovery and USA Networks.
Mr. Millet graduated from the University of California at Los Angeles with a
Bachelor of Arts in Economics.
LESLIE KLEIN, age 55, a director of FX, has for the past five years
been a practicing attorney and principal of Les Klein & Associates, Inc., a law
corporation based in Sherman Oaks, California. Mr. Klein is admitted to practice
law in the State of California and is a licensed certified public accountant.
Page 20 of 62
DIRECTOR COMPENSATION
Directors who are K2 employees 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 K2's
non-employee directors is granted options to acquire 5,000 shares of K2 Common
Stock upon their election or reelection to the Board.
EXECUTIVE COMPENSATION
The following table sets forth, for the last three completed fiscal
years of K2, the total annual compensation paid or accrued by K2 for services in
all capacities for the Chief Executive Officer, and those other executive
officers (the "Named Executives") who were serving in executive capacities at
the end of fiscal 2001 and had aggregate compensation in excess of $100,000.
Annual Long Term
Compensation(1) Compensation
--------------------------------------
Restricted
Stock Option
Name and Principal Position Year Salary ($) Awards Awards
--------------------------------------------------------------------------------
Gary W. Brown, President, Chief 2001 192,539(3) 100,000
Operating Officer, Secretary 2000 151,442 100,000(4) 268,000
and Chief Financial Officer (2) 1999 -- -- --
--------------------------------------------------------------------------------
(1) The value of perquisites and other personal benefits does not exceed 10% of
the officer's salary.
(2) Joined K2 in April 2000 and remains as an officer and director.
(3) Mr. Brown accepted compensation less than provided for in his employment
agreement during 2001, and has received no salary since December 31, 2001.
(4) 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 K2'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.
Mr. Brown signed an employment contract with K2 that expired on
September 30, 2002. The employment contract provided for an annual salary of
$225,000 and a discretionary annual bonus in the form of stock options up to a
maximum of 100,000 shares of K2's Common Stock per year. Upon joining K2, Mr.
Brown also received 100,000 shares of restricted stock and options to purchase
up to 263,000 shares of K2's Common Stock, all of which had vested as of April
14, 2002. Pursuant to his employment contract, Mr. Brown is also subject to a
non-compete restriction for twelve months after the termination of his
employment.
Page 21 of 62
OPTION GRANTS IN FISCAL 2001
The following table sets forth individual grants of stock options made
under K2's 1996 Stock Incentive Plan (the "1996 Plan") and the 1997 Stock
Incentive Plan (the "1997 Plan") during the fiscal year ended December 31, 2001
for the Chief Executive Officer of K2 and each of the Named Executives.
Percent of Total
Options Granted to Exercise or
Number of Securities Employees in Base Price
Underlying Options Fiscal Year(1) ($/Sh) Expiration Date
Name Granted
------------------------------------------------------------------------------------------------
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 $0.75 under the 1997 Plan. None of such options were exercised
during fiscal 2001.
OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The table set forth below shows the value of unexercised options under
the 1996 Plan and the 1997 Plan held on December 31, 2001 by the Chief Executive
Officer and each of the Named Executives.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at December 31, held on December 31,
Acquired 2001 2001 ($)(1)
on Value -----------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------
Gary W. Brown -- -- 268,000(3) 100,000(2) 0 0
-----------------------------------------------------------------------------------------------------------------
(1) Based on the closing price of K2's Common Stock on December 31, 2001, the
last day in fiscal 2001 on which the markets were open for business, which
was $0.03.
(2) Represents grants made under the 1997 Plan.
(3) Represents 246,000 options granted under the 1997 Plan and 22,000 options
granted under the 1996 Plan.
Page 22 of 62
FILING REQUIREMENTS
K2 believes that all filing requirements under Section 16(a) of the
Securities Exchange 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, 2001.
BENEFICIAL OWNERSHIP
The following table sets forth information, as of December 31, 2002, as
to the beneficial ownership of K2 Common Stock (including shares which may be
acquired within 60 days pursuant to stock options) of each director of K2, the
Chief Executive Officer of K2, all directors and executive officers as a group
and persons known by K2 to beneficially own more than 5% of K2's Common Stock.
Except as set forth below, each of the listed persons has sole voting and
investment power with respect to the K2 Common Stock beneficially owned by such
persons. Except as otherwise indicated, the address of each person included in
the table is care of K2, 770 Lexington Avenue, Sixth 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) 18.9
Douglas E. Cleek 430,531(2)(3) 8.7
Gary W. Brown 1,348,069(4) 27.2
David Sklaver 15,000(5) *
Fusion Capital Fund II, LLC 380,485 7.7
Kurt A. & Suzanne L. Shore 263,000 5.3
-----------------------------------------------------------------------------------
All Directors and Executive 2,300,062(6) 46.4
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 K2
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 K2) and Bradley Szollose (a former Secretary and
Director of K2), 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
Page 23 of 62
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' K2 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) Includes: (i) 136,500 shares underlying presently exercisable stock
options; (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 will vest on January
2, 2003 and upon the occurrence of certain change of control transactions;
and (iii) 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.
(5) Includes 15,000 shares underlying presently exercisable stock options.
(6) Includes 345,500 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 2,300,062 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.
CHANGE IN CONTROL OF K2
K2 has entered into the Merger Agreement with FX, a California
corporation, providing for the merger of FX with and into Merger Sub on the
terms and conditions contained in the Merger Agreement. Upon consummation of the
Merger, the shareholders of FX will own approximately 90% of the outstanding
shares of K2 Common Stock. After the consummation of the Merger, Matthew G. de
Ganon will no longer own a controlling interest in K2
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of
financial condition and results of operations should be read in conjunction with
the combined consolidated financial statements, the accompanying notes thereto
and other financial information appearing elsewhere in this Information
Statement. This section and other parts of this Information Statement contain
forward-looking statements that involve risks and uncertainties. The actual
results may differ significantly from the results discussed in the
forward-looking statements.
Page 24 of 62
OVERVIEW
Founded in 1993, K2 operated as a digital professional services company
that, until August 2001, has historically provided consulting and development
services, including analysis, planning, systems design, creative and
implementation. In August 2001, K2 effectively ceased operations as described
below.
FX, successor to First Step Consulting, LLC ("FSC"), was incorporated
as Inficom, Inc. on July 25, 2001. On December 24, 2001, the board of directors
of Inficom, Inc. approved the merger of FSC into Inficom and changed FX's name
to First Step Distribution Network, Inc. FSC was established on June 1, 2000 and
ceased its existence on December 26, 2001.
On December 26, 2001, FSC contributed its net assets to FX in exchange
for 900,000 shares of common stock in FX (a conversion rate of 9,000 shares of
FX for each one percent membership interest in FSC).
FX was initially formed to establish a residual original equipment
manufacturer sales and marketing business within the software and hardware
personal computer industry and commencing in 2002 effectively changed its
business focus to bring new gaming products to market through the use of
innovative new technologies and channels.
RESULTS OF OPERATIONS - K2 DIGITAL
Sale of Assets and Discontinued Operations
On August 29, 2001, K2 sold certain fixed and intangible assets of K2
to IIS, including certain of K2's customer contracts, furniture, fixtures,
equipment and intellectual property, for an aggregate purchase price of
$444,000, of which $419,000 was paid in cash and $25,000 of capital lease
obligations were assumed by IIS.
Under the terms of the Purchase Agreement, IIS assumed K2's office
lease obligations, took up occupancy in K2's premises and made offers of
employment to substantially all of the remaining employees of K2, which offers
have been accepted.
In addition to the purchase price and as consideration of K2's release
of certain employees from the non-competition restrictions contained in their
agreements with K2, K2 received from IIS at closing a recruitment and placement
fee of $75,000. In addition, the Purchase Agreement provided for K2 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 K2 and $36,500 due to K2 remains unpaid by IIS. Collection of
the amounts due is uncertain.
Under the Purchase Agreement, K2 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 K2 will not, for a period of five
years, (i) engage in any business of substantially the
Page 25 of 62
same character as the business engaged in by K2 prior to the transaction, (ii)
solicit for employment any employee of IIS (including former employees of K2),
or (iii) solicit any client or customer of IIS (including any customer
transferred to IIS under the Purchase Agreement) to do business with K2.
Accordingly, the aggregate cash consideration delivered to K2 at
closing was $544,000, of which approximately $258,000 was paid directly to K2
Holdings LLC, an affiliate of SGI, K2's principal secured creditor, in order to
release SGI's security interest in the assets of K2.
Subsequent to the sale of assets to IIS, K2 effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. K2 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 K2. Accordingly, K2's
remaining operations will be limited to either the sale of K2 or the winding up
of K2's remaining business and operations, subject, in either case, to the
approval of the stockholders of K2. The proceeds from the sale of assets plus
the additional payment due from IIS (collection of the which is uncertain),
together with assets not sold to IIS may not be sufficient to repay
substantially all remaining liabilities of K2. K2 has entered into negotiations
with certain creditors to settle specific obligations for amounts less than
reflected in the financial statements reported herein. If these negotiations are
unsuccessful, there will not be sufficient cash to repay all of the obligations
of K2.
Revenues
Revenues were recognized on a percentage-of-completion basis.
Provisions for any estimated losses on incomplete projects were made in the
period in which such losses were determinable. A portion of K2's revenues were
generated on a fixed fee or cap fee basis, as well as on an hourly bill rate
basis. Fiscal 2001 revenue of approximately $2 Million was realized during the
first seven months of 2001 prior to the sale of assets to IIS and termination of
K2's operations effective August 2001. K2 had revenues of approximately $5.2
Million for the full year ended December 31, 2000.
RESULTS OF OPERATIONS - FX
FX was recently formed and has had limited operations to date. A
comparison of the operating results for the period ended December 31, 2000 and
the year ended December 31, 2001 would not be meaningful.
FX has incurred operating losses aggregating approximately $914,000
since inception and, as of September 30, 2002, had a working capital deficiency
of approximately $821,000, a cash overdraft position of approximately $11,000
and a stockholders' deficiency of approximately $601,000. These factors, among
others, indicate that FX may be unable to continue operations as a going
concern. No adjustment has been made in the accompanying financial statements to
the amounts and classifications of assets and liabilities which could result
should FX be unable to continue as a going concern.
Page 26 of 62
General and administrative expenses were $695,000 for the nine months
ended September 30, 2002, compared to approximately 307,000 for the prior nine
month period, an increase of approximately $388,000. The increase is principally
for legal and accounting services in connection with the proposed Merger.
Net loss for the nine months ended September 30, 2002 was approximately
$799,000 compared to approximately $111,000 for the prior nine-month period. The
increased loss was the result of the increased expenses discussed above and no
revenues in 2002.
CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES - K2
Subsequent to the sale of assets to IIS, K2 effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. K2 does not have any ongoing business
operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, K2's remaining operations will be limited to either the sale of K2
or the winding up of K2's remaining business and operations, subject, in either
case, to the approval of the stockholders of K2. 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 K2. K2 has entered into negotiations with certain creditors to
settle specific obligations for amounts less than reflected in the financial
statements reported herein. If these negotiations are unsuccessful, there will
not be sufficient cash to repay all of the obligations of K2.
The Board of Directors of K2 has determined that, subject to
stockholder approval, the best course of action for K2 is to complete a business
combination with a third party with an existing business. On January 15, 2002,
K2 entered into the Merger Agreement described above. Under the terms of the
Merger Agreement, K2 intends to acquire FX by means of a triangular merger,
pursuant to which a subsidiary of K2 will merge with and into FX in a tax free
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986.
As a condition to the Merger, K2 is required to implement the Reverse
Stock Split described above. The implementation of the Reverse Stock Split is
subject to the approval of the stockholders of K2. The Board of Directors of K2
has approved the Reverse Stock Split and is submitting the Reverse Stock Split
to the stockholders of K2 for your approval.
In the event that the transactions contemplated by the Merger Agreement
are not consummated for any reason, K2's remaining assets will not be sufficient
to meet its ongoing liabilities and K2's remaining operations will be wound up
subject to the approval of the stockholders of K2. The anticipated closing date
for the Merger has been postponed due to delays in FX's ability to secure the
financing for the transaction that is required pursuant to the terms and
conditions of the Merger Agreement, as well as delays in the preparation and
finalization of the requisite financial and other information about FX that is
included in this Information Statement. K2 has been informed by representatives
of FX that FX has succeeded in securing the necessary financing and financial
statements and that FX expects to be able to consummate the Merger, subject to
your approval.
Page 27 of 62
K2's December 31, 2001 financial statements contain an opinion
disclosing that those statements have been prepared on a going concern basis,
and that the ability of K2 to continue as a going concern is dependent on
various factors, including the ability to raise additional debt or equity
financing.
K2 expects to keep its expenses at a minimum after the Merger until it
commences significant income producing operations. K2's expenses after the
Merger will consist primarily of salaries, occupancy costs, corporate expenses
associated with its SEC and related reporting requirements and similar expenses.
K2 does not presently have the funds necessary to meet its expected
ongoing expenses. K2 intends to obtain additional funds from borrowings, the
sale of K2 Common Stock, the sale of its equipment or other sources until it
earns operating revenues. Management's plans include a proposed merger with a
publicly traded "shell" company (K2) which would result in K2's assets and
liabilities being assumed by that entity. If K2 is unsuccessful in completing
the proposed Merger, management's alternative plan includes a further search for
a similar business combination or strategic alliance. K2 is currently not in
discussions with any other entity other than FX. There is no assurance that this
transaction or management's alternative plan will be realized.
LIQUIDITY AND CAPITAL RESOURCES; PLAN OF OPERATION - FX
FX's working capital has been provided from shareholder loans, equity
placements and operations. For the period June 1, 2000 (inception) to September
30, 2002 FX has raised approximately $786,000.
As a result of the transactions contemplated in the Merger Agreement,
FX will require additional cash for operations. Neither FX nor K2 presently has
any material commitment for the purchase of equipment or other fixed assets. FX
currently does not expect to hire a significant number of employees (other than
as described above) or acquire or sell plant or equipment during the next 12
months.
FX entered into an agreement (the "April Agreement") in April 2002 with
Digital.Com, Inc. and certain controlling shareholders of Digital.Com, Inc.
pursuant to which these entities agreed to provide FX with a $350,000 bridge
loan and, following the merger between FX and K-2, merge Digital.Com, Inc. with
and into the surviving entity. Effective July 1, 2002 the April Agreement was
terminated. Subsequently, effective November 11, 2002 the parties who had made
the bridge loan to FX agreed to convert the outstanding principal amount of the
loan into 6,600,000 shares of FX's common stock. The transaction was approved by
all of the shareholders of FX.
Following completion of the merger, certain of these shareholders have
agreed to continue to advance operating funds to FX to fund operations until FX
achieves positive cash flow.
Page 28 of 62
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
K2 has effectively discontinued its operations
In August 2001, K2 sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting K2's ability to continue to engage in the business
engaged in by K2 prior to the transaction. Accordingly, K2'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 K2's remaining
business and operations, subject, in either case, to the approval of the
stockholders of K2.
K2's stock has been delisted from the Nasdaq SmallCap Market
K2'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 K2that it had
failed to demonstrate a closing bid price of at least $1.00 per share for 30
consecutive trading days and was in violation of Nasdaq Marketplace Rule
4310(c)(4). In accordance with applicable Nasdaq Marketplace rules, K2 was
provided a 90-day grace period, through June 11, 2001, during which to regain
compliance. On June 20, 2001, K2 requested a hearing, which effectively stayed
the delisting. However, after submission of materials in support of K2's
position to the Panel, the Panel decided to delist K2's Common Stock from the
Nasdaq SmallCap Market as of the open of business on August 15, 2001. The
delisting of K2'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.
Lack Of Liquidity
EACH OF K2 AND FX CONTINUES TO EXPERIENCE SEVERE CASH FLOW PROBLEMS
RESULTING FROM THE DISCONTINUANCE OF K2'S BUSINESS AND LACK OF SIGNIFICANT
REVENUES FOR FX. FURTHER, K2'S INDEPENDENT AUDITORS HAVE INCLUDED A PARAGRAPH IN
THEIR OPINION WHICH INDICATES THAT, BASED ON RECENT OPERATING LOSSES, ALONG WITH
EXISTING WORKING CAPITAL AND ACCUMULATED DEFICITS, THERE IS SUBSTANTIAL DOUBT
ABOUT K2'S ABILITY TO CONTINUE AS A GOING CONCERN.
Each of K2 and FX has a history of losses and may experience future losses.
K2 has incurred net losses of approximately $5.1 million and $1.9
million for the years ended December, 2001 and 2000, respectively and a loss of
approximately $75,000 for the nine months ended September 30, 2002. As of August
2001, K2 effectively ceased operations. FX incurred a loss of approximately
$7,000 for the period June 1, 2000 (inception) to December 31, 2000, an
approximate $110,000 loss for the year ended December 31, 2001 and an
approximate $800,000 loss for the nine months ended September 30, 2002. These
losses are primarily attributable to sales levels insufficient to meet the costs
associated with the development and
Page 29 of 62
marketing of new products and discontinuance of operations. There can be no
assurance that the combined company will generate sufficient revenues to meet
expenses or to operate profitably in the future. These losses present a
significant risk to stockholders. If we cannot achieve profitability or positive
cash flows from operating activities, we may be unable to meet our working
capital and other payment obligations, which would have a material adverse
effect on our business, financial condition and results of operation and the
price of K2 Common Stock. In addition, if we cannot achieve sustained
profitability we will be forced to sell all or part of our business, liquidate
or seek to reorganize.
FX is engaged in a highly competitive business.
The market for electronic games is extremely competitive. In most of
the markets in which we will compete our competitors are more established,
benefit from greater market recognition and have greater financial,
technological, production and marketing resources than we do. Competition could
become even more intense if new companies enter the market or if our existing
competitors expand their product lines. We intend to compete on the basis of
product features and capabilities, performance and price. An increase in
competition could have an adverse effect on our operating results, both in terms
of lost market share and revenues and required investments in research and
development and sales and marketing in order to remain competitive. There can be
no assurance that we will be able to make technological advances or that we will
have sufficient resources to fund the necessary research and development,
marketing and sales efforts that will enable us to profitably compete in our
markets.
The combined entity will need to seek additional capital to fulfill our business
plan.
At September 30, 2002, FX had a cash overdraft position of
approximately $11,000. During the first three fiscal quarters of 2002, working
capital deficit increased from approximately $118,000 at December 31, 2001 to
approximately $821,000 at September 30, 2002.
As of the date of this Information Statement, FX and K2 combined have
no cash or accounts receivable. FX is in various stages of negotiation with
several large potential customers as well as potential sources of financing.
Neither K2 nor FX can offer any assurance as to the outcome of these
negotiations.
K2 outstanding shares may be diluted.
The combined effect of the Merger and Reverse Stock Split will result
in dilution to each K2 stockholder's percentage ownership interest in K2 and
could adversely affect the market price of the K2 Common Stock following the
Merger.
On September 30, 2002, there were outstanding a total of 4,982,699
shares of K2 Common Stock, which after giving effect to the Reverse Stock Split,
will be reduced to 977,000 shares. There would be issuable approximately
8,760,000 additional shares of K2 Common Stock in the Merger to FX shareholders.
[Insert 26] The sale or availability for sale of a significant number of shares
of K2 Common Stock in the public market could adversely affect the market price
of the K2 Common Stock. The availability to K2 of additional equity financing,
Page 30 of 62
and the terms of any such financing, may also be adversely affected by the
foregoing. K2 currently has 25,000,000 authorized shares of K2 Common Stock and
1,000,000 shares of preferred stock, none issued and outstanding.
Insiders own a substantial number of our shares and could limit your ability to
influence the outcome of key transactions, including a change of control
As of September 30, 2002, our executive officers, directors and
entities affiliated with them beneficially owned, in the aggregate,
approximately 46.4% of our outstanding K2 Common Stock. These stockholders, if
acting together, would be able to influence significantly all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
Other factors and events of September 11, 2001
K2 and FX further caution that the factors referred to above and those
referred to as part of particular forward looking statements may not be
exhaustive, and that new risk factors emerge from time to time. Further, the
independent auditors of K2 and FX have included a paragraph in their opinions
which indicates that, based on recent operating losses, along with existing
working capital and accumulated deficits, there is substantial doubt about the
ability to continue as a going concern. Neither K2 nor FX undertakes to update
any forward looking statements it may make or has made on its behalf to reflect
changes in its expectations or assumptions or the risks and uncertainties
referred to. The events of September 11, 2001 resulted in delayed buying
decisions and changes to capital spending plans of many of our potential
customers. We hope that this phenomenon is short-term and most of the business
affected was not necessarily lost but deferred. Coupled with the general
economic slow-down, there can be no assurance of this, however.
Page 31 of 62
FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF K2 DIGITAL, INC.
AND FUTUREXMEDIA, INC.
On January 15, 2002, K2 Digital, Inc. ("K2") entered into an Agreement
and Plan of Merger with FutureXmedia, Inc., f/k/a First Step Distribution
Network, Inc. ("FX" and sometimes referred to as "FSDN") whereby FX will merge
with and into First Step Acquisition Corp., a wholly-owned subsidiary of K2,
with FX being the surviving corporation and existing as a wholly-owned
subsidiary of K2. Under the terms of the merger agreement, the outstanding
common shares of FX will be converted into common shares of K2 under an exchange
ratio that will result in the former shareholders of FX holding approximately
89% or 8,760,000 of the outstanding shares of K2 immediately after the effective
time of the merger.
As the former shareholders of FX will control K2 after the transaction,
the proposed merger will be accounted for as a reverse acquisition under which,
for accounting purposes, FX is deemed to be the acquirer and K2 is deemed to be
the acquired entity. Under these accounting principles, the post-merger company
financial statements will represent FX on a historical basis consolidated with
the results of operations of K2 from the effective date of the merger. Since the
merger is expected to be accounted for as a reverse acquisition with a shell
company, no goodwill is expected to be recorded.
The accompanying unaudited pro forma combined condensed balance sheet
at September 30, 2002 gives effect to the Merger as if it occurred on September
30, 2002. The accompanying unaudited pro forma combined condensed statements of
operations for the nine months ended September 30, 2002 and the year ended
December 31, 2001 gives effect to the Merger as if it had occurred on January 1,
2001.
The unaudited pro forma combined condensed balance sheet at September
30, 2002 was prepared based upon the unaudited historical balance sheets of K2
and FX. The unaudited pro forma combined statements of operations for the nine
months ended September 30, 2002 and the year ended December 31, 2001 were
prepared based upon the unaudited and audited, respectively, historical
statements of operations of K2 and FX.
The unaudited pro forma combined condensed financial statements should
be read in conjunction with the historical financial statements of K2 and FX.
Certain amounts in FX financial statements have been reclassified to conform to
the K2 presentation.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of the actual results of operations or financial position
that would have been occurred had the Merger and the above-described merger
transactions of K2 and FX occurred. All information contained herein should be
read in conjunction with the financial statements and the notes thereto of and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in K2's annual report filed on Form 10-KSB for the year
ended December 31, 2001 and the quarterly report filed on Form 10-QSB for the
nine-month period ended September 30, 2002, which have been incorporated by
reference.
Page 32 of 62
K2 DIGITAL, INC
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
--------------------------------------------------------------
HISTORICAL
FIRST STEP
DISTRIBUTION PRO FORMA
NETWORK K2 DIGITAL PRO FORMA COMBINED
INC. INC. ADJUSTMENTS COMPANY
CURRENT ASSETS:
Cash $ $ 487 $ -- $ 487
Interest receivable - stockholder 8,884 8,884
Investment in available-for-sale securities 40,700 40,700
Other 66,916 16,246 83,162
--------- ----------- ---------- ------------
Total current assets 75,800 57,433 133,233
--------- ----------- ---------- ------------
PROPERTY AND EQUIPMENT, net 25,337 25,337
--------- ----------- ---------- ------------
OTHER ASSETS
Investments 133,315 133,315
Loans receivable - stockholders 51,000 51,000
Deposit 10,378 10,378
--------- ----------- ---------- ------------
194,693 194,693
--------- ----------- ---------- ------------
$ 295,830 $ 57,433 $ -- $ 353,263
========= =========== ========== ============
CURRENT LIABILITIES:
Cash overdraft $ 10,701 $ $ -- $ 10,701
Accounts payable and accrued expenses 130,319 245,404 375,723
Notes payable, net 326,196d 326,196
Other current liabilities 19,973d 19,973
--------- ----------- ---------- ------------
Total current liabilities 487,189 245,404 732,593
--------- ----------- ---------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, authorized
1,000,000 shares issued and outstanding nil shares
Common Stock:
K2 Digital, Inc. - $0.01 par value 25,000,000
shares authorized 5,400,116 shares issued and
4,982,699 shares outstanding (historical); 54,001 (43,413)a 98,188
1,058,846 issued and 977,000 outstanding (post
reverse stock split); 9,818,846 issued and
9,737,000 outstanding (post merger) 87,600b
Page 33 of 62
FX - no par value, 25,000,000 shares authorized
8,760,000 shares issued and outstanding
(historical) (d) 631,750d (631,750)b
Treasury stock, 417,417 shares (historical); 81,846
shares (post reverse stock split and merger), at
cost (819,296) (819,296)
Additional paid-in capital 104,316 8,313,410 43,413a 1,253,803
(7,751,486)c
544,150b
Accumulated other comprehensive income 15,400 15,400
Accumulated deficit (927,425)d (7,751,486) 7,751,486c (927,425)
--------- ----------- ---------- ------------
Total stockholders' deficit (191,359) (187,971) (379,330)
--------- ----------- ---------- ------------
$ 295,830 $ 57,433 $ -- $ 353,263
========= =========== ========== ============
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
Page 34 of 62
K2 DIGITAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------
Historical
FIRST STEP PRO FORMA
DISTRIBUTION K2 DIGITAL, PRO FORMA COMBINED
NETWORK, INC. INC. ADJUSTMENTS COMPANY
----------- ----------- ----------- -----------
REVENUES $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE
EXPENSES 694,727 97,297 792,024
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (694,727) (97,297) (792,024)
OTHER INCOME (EXPENSE) (103,823) 22,617 (81,206)
----------- ----------- ----------- -----------
NET LOSS $ (798,550) $ (74,680) $ -- $ (873,230)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.83) $ (0.01) $ (0.09)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 966,671 4,979,036 9,736,282
=========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
Page 35 of 62
K2 DIGITAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------------------
HISTORICAL
FIRST STEP
DISTRIBUTION PRO FORMA
NETWORK K2 DIGITAL, PRO FORMA COMBINED
INC. INC. ADJUSTMENTS COMPANY
----------- ----------- ----------- -----------
REVENUES $ 242,321 $ -- $ -- $ 242,321
----------- ----------- ----------- -----------
GENERAL AND
ADMINISTRATIVE EXPENSES 331,645 570,459 902,104
IMPAIRMENT OF AVAILABLE-
FOR-SALE SECURITIES 1,412,747 1,412,747
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (89,324) (1,983,206) (2,072,530)
----------- ----------- ----------- -----------
OTHER EXPENSE (19,836) (19,836)
----------- ----------- ----------- -----------
NET LOSS $ (109,160) $(1,983,206) $ $(2,092,366)
=========== =========== =========== ===========
BASIC AND DILUTED
LOSS PER COMMON SHARE $ (0.12) $ (1.16) $ (0.22)
=========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 881,250 4,440,836 9,630,752
=========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
Page 36 of 62
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
"Pro Forma Adjustments" to the unaudited combined condensed balance
sheet at September 30, 2002 are as follows:
(a) Reflects reverse stock split in 5.1:1 ratio, reducing shares
issued from 5,400,116 to 1,058,846, as follows:
Liabilities and stockholders' deficit:
Reduction of par value for stock split (43,413)
Increase to additional paid-in capital 43,413
(b) Reflects the issuance by K2 of 8,760,000 shares of K2 common stock
to FSDN, in exchange for 100% of the outstanding common stock of
FSDN.
(c) Reflects the elimination of K2's historical accumulated deficit;
the historical accumulated deficit of FSDN has been carried
forward and the remaining equity accounts of FSDN have been
reclassified to reflect the par value of the K2 stock issued with
any differences reflected as additional paid-in capital.
The September 30, 2002 historical balance sheet of FSDN has been
restated to reflect significant subsequent debt and equity transactions, as
discussed in footnote 7 of FSDN's financial statements filed herewith. These
restated balances have been denoted with a (d).
Unaudited pro forma combined basic and diluted share information of K2
and FSDN and earnings per share for the nine months ended September 30, 2002 and
the year ended December 31, 2001 are as follows:
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
K2 historical weighted average shares outstanding 4,979,036 4,440,836
Adjusted for pro forma 5.1:1 reverse split Divided by 5.1 Divided by 5.1
K2 pro forma weighted average shares outstanding 976,282 870,752
FSDN pro forma weighted average shares outstanding 8,760,000 8,760,000
Pro forma combined weighted average shares outstanding 9,736,282 9,630,752
Page 37 of 62
K2 DIGITAL INC., CONSOLIDATED FINANCIAL STATEMENTS
K2's consolidated financial statements for the last two fiscal years
and for the first three quarters of 2002 are incorporated by reference to K2's
annual report on Form 10-KSB/A, filed on May 31, 2002, which may be located at
www.sec.gov/Archives/edgar/data/1009624/000112528202001884/0001125282-02-001884.txt
and to K2's quarterly reports on Form 10-QSB/A, filed on June 28, 2002, August
19, 2002, and November 20, 2002, respectively, which may be located at
www.sec.gov/Archives/edgar/data/1009624/000112528202002124/0001125282-02-002124.txt.,
http://www.sec.gov/Archives/edgar/data/1009624/000112528202002565/0001125282-02-002565.txt and
http://www.sec.gov/Archives/edgar/data/1009624/000100515002001301/0001005150-02-001301.txt.
Page 38 of 62
FIRST STEP DISTRIBUTION NETWORK, INC. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Step Distribution Network, Inc.
(Successor to First Step Consulting, LLC)
We have audited the accompanying balance sheet of First Step
Distribution Network, Inc. (successor to First Step Consulting, LLC) ("FSDN") as
of December 31, 2001, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
2001 and the period June 1, 2000 (inception) to December 31, 2000. These
financial statements are the responsibility of FSDN's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of First Step
Distribution Network, Inc. as of December 31, 2001, and the results of its
operations and its cash flows for the year ended December 31, 2001 and the
period June 1, 2000 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
FSDN will continue as a going concern. As discussed in Note 6 to the financial
statements, FSDN has incurred operating losses since inception and, as of
December 31, 2001, had a significant working capital deficiency and no cash.
These conditions raise substantial doubt about FSDN's ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 6. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Beverly Hills, California
March 29, 2002
Page 39 of 62
FIRST STEP DISTRIBUTION NETWORK, INC.
(Successor to First Step Consulting, LLC)
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
(unaudited)
------------- ------------
ASSETS
CURRENT ASSETS
Due from stockholder $ -- $ 5,717
Deferred issuance costs 66,916
Interest receivable - stockholders 8,884 3,655
--------- ---------
Total current assets 75,800 9,372
--------- ---------
PROPERTY AND EQUIPMENT, NET 25,337
--------- ---------
OTHER ASSETS
Investment 133.315 1,500
Loans receivable - stockholders 51,000 165,570
Deposit 10,378
--------- ---------
194,693 167,070
--------- ---------
$ 295,830 $ 176,442
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ 10,701 $ 918
Due to stockholder 14,602
Accounts payable and accrued expenses 130,319 29,604
Payroll taxes payable 15,973
Customer advances 4,000 4,000
Notes payable, net 676,196 77,785
Other advances 60,000
--------- ---------
Total current liabilities 897,189 126,909
--------- ---------
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value
25,000,000 shares authorized;
1,025,000 and 900,000 shares issued and outstanding at September
30, 2002 (unaudited) and at December 31, 2001, respectively 208,750 108,750
Additional paid-in capital 104,316 56,658
Accumulated deficit (914,425) (115,875)
--------- ---------
Total stockholders' equity (deficit) (601,359) 49,533
--------- ---------
$ 295,830 $ 176,442
--------- ---------
Page 40 of 62
FIRST STEP DISTRIBUTION NETWORK, INC.
(Successor to First Step Consulting, LLC)
STATEMENTS OF OPERATIONS
NINE MONTHS NINE MONTHS JUNE 1, 2000
ENDED ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER DECEMBER 31,
2001 (unaudited) 2001 (unaudited) 31, 2001 2000
---------------- ---------------- ---------- -------------
CONSULTING REVENUE $ -- $ 195,071 $ 242,321 $ 124,948
--------- --------- --------- ---------
EXPENSES
Compensation 176,620 187,176 89,624 101,250
Consultants 112,680 18,900 52,900 12,650
Organization cost 10,000 43,786
Commissions 25,050 28,900 39,750 833
Rent 60,779 25,100 34,100
Payroll and related expenses 31,613
Insurance 26,017
Travel 3,000 6,816 23,764 1,750
Professional fees 207,050 2,000 3,061
Depreciation and Amortization 6,638
--------- --------- --------- ---------
Other 35,280 37,619 44,660 15,180
--------- --------- --------- ---------
694,727 306,511 331,645 131,663
--------- --------- --------- ---------
LOSS FROM OPERATIONS (694,727) (111,440) (89,324) (6,715)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 5,956 3,655
Interest expense (109,779) (23,491)
--------- --------- --------- ---------
(103,823) (19,836)
--------- --------- --------- ---------
NET LOSS $(798,550) $(111,440) $(109,160) $ (6,715)
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 966,671 880,000 881,250 850,000
--------- --------- --------- ---------
LOSS PER COMMON SHARE, basic and
diluted $ (0.83) $ (0.13) $ (0.12) $ (0.01)
--------- --------- --------- ---------
See accompanying notes to financial statements
Page 41 of 62
FIRST STEP DISTRIBUTION NETWORK, INC.
(Successor to First Step Consulting, LLC)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
--------------------------------------------------------------------
BALANCES, June 1, 2000 (inception) -- $ -- $ -- $ --
INTELLECTUAL CAPITAL CONTRIBUTIONS AND
STOCKHOLDERS' SERVICES CONTRIBUTED 850,000 8,750
NET LOSS (6,715)
--------------------------------------------------------------------
BALANCES, December 31, 2000 850,000 8,750 (6,715)
ISSUANCE OF COMMON STOCK 50,000 100,000
ISSUANCE OF OPTIONS 56,658
NET LOSS (109,160)
--------------------------------------------------------------------
BALANCES, December 31, 2001 900,000 108,750 56,658 (115,875)
ISSUANCE OF COMMON STOCK (unaudited) 50,000 50,000
ISSUANCE OF COMMON STOCK IN CONSIDERATION OF
SERVICES RENDERED (unaudited) 75,000 50,000
ISSUANCE OF OPTIONS (unaudited) 47,658
NET LOSS (unaudited) (798,550)
--------------------------------------------------------------------
BALANCES, September 30, 2002 (unaudited) 1,025,000 $ 208,750 $ 104,316 $ (914,425)
--------------------------------------------------------------------
See accompanying notes to financial statements
Page 42 of 62
FIRST STEP DISTRIBUTION NETWORK, INC.
(Successor to First Step Consulting, LLC)
STATEMENTS OF CASH FLOWS
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR JUNE 1, 2000
SEPTEMBER 30, SEPTEMBER 30, ENDED (INCEPTION) TO
2002 2001 DECEMBER 31, DECEMBER 31,
(unaudited) (unaudited) 2001 2000
-------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (798,550) $ (111,440) $ (109,160) $ (6,715)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Fair value of equity granted in consideration for services 50,000
Extinguishment of debt for services rendered by stockholder 31,820
Noncash interest 74,254 19,443
Depreciation and amortization 6,639
Stockholders' services contributed 8,750
Investment received in consideration for services (1,500)
Changes in operating assets and liabilities:
Accounts receivable 3,463 (3,463)
Due from stockholder 5,717 (1,500) (4,105) (1,612)
Interest receivable - stockholders (5,229) (3,655)
Deposit (10,378)
Cash overdraft 9,783 (5,544) 918
Due to stockholder 14,602
Accounts payable and accrued expenses 100,715 (2,000) 24,230 5,374
Payroll taxes payable 15,973
Customer advances 4,000
-------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (519,256) (120,484) (50,264) 834
-------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment (80,000)
Loans to stockholders (165,570)
Repayments of loans receivable-stockholders 60,648
Purchases of property and equipment (31,976)
-------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (51,328) (165,570)
-------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 50,000 100,000 100,000
Net proceeds from notes payable and options 527,500 19,650 115,000
Payment of deferred issuance costs (66,916)
Other advances 60,000
-------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 570,584 119,650 215,000
-------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (834) (834) 834
CASH, beginning of period 834 834
-------------------------------------------------------------------
CASH, end of period $ -- $ -- $ -- $ 834
-------------------------------------------------------------------
Page 43 of 62
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Investment purchased through debt financing $ 51,815 $ -- $ -- $ --
---------- ------------ ------------- ----------
Loans receivable from stockholder offset against amounts
due to stockholder $ 22,102 $ -- $ -- $ --
---------- ------------ ------------- ----------
See accompanying notes to financial statements
Page 44 of 62
FIRST STEP DISTRIBUTION NETWORK, INC.
(Successor to First Step Consulting, LLC)
NOTES TO FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 2002 and 2001 is unaudited)
1. Nature of operations and summary of significant accounting policies
Nature of Operations
First Step Distribution Network, Inc. (FSDN or the "Company"), successor to
First Step Consulting, LLC (FSC), was incorporated as Inficom, Inc. on July 25,
2001. On December 24, 2001, the board of directors of Inficom, Inc. approved the
merger of FSC into Inficom and changed FSDN's name to First Step Distribution
Network, Inc. FSC was established on June 1, 2000 and ceased its existence on
December 26, 2001.
On December 26, 2001, FSC contributed its net assets to FSDN in exchange for
900,000 shares of common stock in FSDN (a conversion rate of 9,000 shares of
FSDN for each one percent membership interest in FSC). The contribution of FSC
has been accounted for as a merger of entities under common control and has been
recorded in a manner similar to a pooling of interests.
FSDN was formed to establish a residual original equipment manufacturer sales
and marketing business within the software and hardware personal computer
industry. FSDN engineers business models that increase real and perceived value,
both business-to-business and business-to-consumer, between all types of
businesses. FSDN assists hi-tech companies within the computer, electronic,
internet and digital entertainment arenas in the areas of licensing,
distribution, strategic partnerships, business development, sales, marketing,
business models and strategies, financial strategies, venture capitalization and
initial public offering preparation. It also provides sales staff training in
account infiltration, account sales, contract negotiations and account
management.
Basis of Presentation
The accompanying financial statements have been restated to include the accounts
of previously separate entities which have been combined. Additionally, certain
amounts in the 2001 financial statements have been reclassified to conform to
the September 30, 2002 (unaudited) presentation.
Property and Equipment (unaudited)
Property and equipment is stated at cost. FSDN provides for depreciation on
equipment using the straight-line method over the estimated useful life, ranging
from 5 to 7 years. Leasehold improvements were initially amortized over 3 years,
which was the estimated term of the lease. The lease term was subsequently
reduced and the amortization accelerated to the actual lease term.
Page 45 of 62
Investments
In July 2002 (unaudited), FSDN purchased shares (approximately 1.5%) in a
privately-traded Korean company, Skycam TV, for $131,815. Of this amount,
$51,815 was provided through a loan from Hideo Matsuoka (See Notes 2 and 7). The
investment is being held for investment purposes and is being accounted for as
an available-for-sale security. Accordingly, unrealized gain (loss) on this
investment will be reported as other comprehensive income (loss).
During 2000, FSDN received shares (less than 1%) in a closely-held company in
consideration for services provided. Since the shares are not readily
marketable, the board of directors initially valued the investment at the
estimated value of services rendered. Thereafter, the investment is being
accounted for on the cost method.
FSDN periodically assesses the recoverability of the carrying amount of its
investments. A loss is recognized when expected undiscounted future cash flows
are less than the carrying amount of the investments. The impairment loss is the
difference by which the carrying amount of the asset exceeds its fair value.
Revenue Recognition
FSDN recognizes revenue when it is earned based on the terms of each customer
contract.
Fair Value of Financial Instruments
Financial instruments held by FSDN include cash overdraft, accounts payable and
accrued expenses, customer advances and notes payable. The values of cash
overdraft, accounts payable and accrued expenses and customer advances are
considered to be representative of fair values because of the short maturity of
these instruments. The fair value of the notes payable approximates book value
primarily because the contractual interest rates approximate prevailing market
rates.
FSDN accounts for its loans receivable and advances to stockholders under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan". Under SFAS No. 114, a loan
is impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No. 114 requires lenders to measure impaired
loans based on: (i) the present value of expected future cash flows discounted
at the loans' effective interest rate; (ii) the loan's observable market price;
or (iii) the fair value of the collateral if the loan is collateral-dependent.
An allowance for loan losses is maintained if the measure of an impaired loan is
less than its recorded investment. Adjustments to the allowance are made through
corresponding charges or credits to the provision for loan losses.
Loss per Common Share
Loss per common share is computed based on the weighted average number of common
shares outstanding.
Page 46 of 62
FSDN 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
and convertible debt is antidilutive, they have been excluded from FSDN's
computation of net loss per common share. Therefore, basic and diluted loss per
common share were the same for the nine months ended September 30, 2002 and
2001(unaudited), the year ended December 31, 2001 and the period June 1, 2000
(inception) to December 31, 2000.
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 amounts disclosed in the financial
statements. Actual results may differ from those estimates.
Income Taxes
FSDN complies with SFAS No. 109, "Accounting for Income Taxes," which requires
an asset and liability approach to financial reporting of 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
taxable or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
the deferred income tax assets to the amount expected to be realized.
New Accounting Pronouncements
In 2001 and 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141, 142, 144 and 146, "Business Combinations", "Goodwill and Other
Intangibles", "Accounting for the Impairment or Disposal of Long-Lived Assets"
and "Accounting for Costs Associated with Exit or Disposal Activities". FSDN's
implementation of these pronouncements, if applicable, did not have a
significant impact on its financial position, results of operations or cash
flows.
2. Notes payable and other Advances
At September 30, 2002 (unaudited) and December 31, 2001, notes payable
consist of the following:
Page 47 of 62
September 30, December 31,
2002 2001
(unaudited)
------------------ -------------------
Note payable - Brian C. Lysaght, interest at 5% per annum, due November 6, 2002 (a) $ 100,000 $ 50,000
Note payable - James Quigley, due February 5, 2002, loan fee of $2,000 and
interest at 13% per annum after due date, collateralized by certain assets of
the Company (b) 15,000 20,000
Note payable - John Keller, due February 5, 2002, loan fee of $2,000 and
interest at 13% per annum after due date, collateralized by certain assets of
the Company (e) 20,000 20,000
Note payable - John Keller, due June 10, 2002, loan fee of $2,000 and interest
at 13% per annum after due date, collateralized by certain assets of the
Company (e) 20,000
Note payable - Daniel Keller, due February 5, 2002, loan fee of $1,000 and
interest at 13% per annum after due date, collateralized by certain assets of
the Company (b) 10,000 10,000
Note payable - Robert Millet, interest at 10% per annum, due September 21, 2002 7,500
Note payable - Winston Millet, interest at 10% per annum, due September 21, 2002 7,500 7,500
Note payable - Don Sweda, interest at 10% per annum, due June 10, 2002 (c) 10,000
Note payable - Neil Malow, interest at 10% per annum, due June 8, 2002 (b) 10,000
Note payable - Stephen Zuckerman, interest at 10% per annum, due September 30,
2002, collateralized by certain assets of the Company (d) 100,000
Note pabable - Leslie Klien, interest at 8% per annum, due May 13, 2003 39,500
Note payable - Future Investment Co., interest at 10% per annum, due April 11, 2003 150,000
Note payable - Hideo Matsuoka, interest at 10% per annum, due May 2, 2003 204,815
------------------ -------------------
686,815 115,000
Less: unamortized debt discount 10,619 37,215
------------------ -------------------
Notes payable, net $ 676,196 $ 77,785
------------------ -------------------
(a) The Lysaght note, amended pursuant to a February 2002 Revised Term Sheet
and Agreement ("RTSA"), is convertible into shares of K2 (if the
transaction with K2 is consummated) (see Note 5) at a conversion rate of
the lesser of (a) $0.0375 per share or (b) 80% of the lowest bid price of
K2 during the 20 trading days prior to such conversion, subject to
limitations as defined in the RTSA.
Page 48 of 62
In connection with the issuance of this note, FSDN issued options to
purchase shares of K2 (if the transaction with K2 is consummated) (see
Note 5). FSDN has allocated $73,316 and $36,658 as of September 30, 2002
(unaudited) and December 31, 2001, respectively, as the estimated value
of the options issued with the note. The amount is being amortized as
additional interest expense with a corresponding increase to notes
payable over the life of the note using the effective interest method
until such note is repaid. At September 30, 2002 (unaudited) and December
31, 2001, $62,697 and $6,110 respectively, have been amortized. The
unamortized balances at September 30, 2002 (unaudited) and December 31,
2001 are $10,619 and $30,548, respectively, which are reflected as a
reduction of notes payable.
Pursuant to the Supplemental November 2002 Agreement (see Note 7), the
terms of the Lysaght note have been clarified to reflect a convertibility
to 275,000 shares of K2 (if the transaction with K2 is consummated) (see
Note 5).
(b) These notes include a provision to issue the note holders an aggregate of
35,000 shares of common stock of K2 (if the transaction with K2 is
consummated) (see Note 5). FSDN has accounted for this provision as
options with a cashless exercise price. Accordingly, FSDN has allocated
$25,000 and $20,000 as of September 30, 2002 (unaudited) and December 31,
2001, respectively, as the estimated value of the cashless options issued
with these notes. These amounts are being amortized as additional
interest expense with a corresponding increase to notes payable over the
lives of the respective notes using the effective interest method until
such notes are repaid. At September 30, 2002 (unaudited) and December 31,
2001, $25,000 and $13,333, respectively, have been amortized. The
unamortized balances at September 30, 2002 (unaudited) and December 31,
2001 are $0 and $6,667 respectively, which are reflected as a reduction
of notes payable.
Pursuant to the Supplemental November 2002 Agreement (see Note 7), these
noteholders will receive 60,000 shares of K2 (if the transaction with K2
is consummated) (see Note 5). This provision supersedes the 35,000 share
provision detailed in the preceding paragraph.
(c) This note includes a provision to issue the note holder an aggregate of
7,500 shares of common stock of FSDN. If the transaction with K2 is
consummated (see Note 5), FSDN shall re-register these shares for resale.
FSDN has accounted for this provision as an option with a cashless
exercise price. Accordingly, FSDN has allocated $6,000 as the estimated
value of the cashless option issued with this note as of September 30,
2002 (unaudited). This amount is being amortized as additional interest
expense with a corresponding increase to notes payable over the life of
the note using the effective interest method until the note is repaid.
The estimated value of the cashless option has been completely amortized
as of September 30, 2002.
Pursuant to the Supplemental November 2002 Agreement (see Note 7), this
noteholder will receive 10,000 shares of K2 (if the transaction with K2
is consummated) (see Note 5). This provision supersedes the 7,500 share
provision detailed in the preceding paragraph.
(d) This note is personally guaranteed by Hideo Matsuoka and Robert Millet.
The note also provides for an increased interest rate of 13% per annum
after the stated maturity date if the note is not repaid in full.
(e) Pursuant to the Supplemental November 2002 Agreement (see Note 7), this
noteholder will receive 40,000 shares of K2 (if the transaction with K2
is consummated) (see Note 5).
Page 49 of 62
Other advances (unaudited)
During the nine months ended September 30, 2002 (unaudited), FSDN received
$60,000 in consideration of 120,000 shares to be issued in K2 (see Note 5). In
November 2002, the $60,000 was converted into 120,000 shares of FSDN's common
stock (see Note 7).
3. Income taxes
As of September 30, 2002 (unaudited) and December 31, 2001, FSDN has a net
operating loss carryforward totaling approximately $842,000 and $44,000
respectively to offset taxable income in future years through 2012 and
2011(California), respectively, and 2022 and 2021 (Federal), respectively. At
September 30, 2002 (unaudited), the net operating loss carryforward resulted in
an estimated $261,000 and $74,000 of Federal and state deferred tax assets,
respectively.
At December 31, 2001, the net operating loss carryforward resulted in an
estimated $6,000 and $4,000 Federal and state deferred tax assets, respectively.
A full valuation allowance has been established for these deferred tax assets
since their realization is considered unlikely.
4. Related party transactions
During the year ended December 31, 2001, two of the stockholders of FSDN, in
connection with their tax planning strategies in light of FSC's contribution of
net assets to FSDN (see Note 1), borrowed funds from FSDN aggregating $165,570.
These notes, which accrue interest at 6.5% per annum due annually, are due,
together with unpaid interest, in December 2006. However, during the nine months
ended September 30, 2002 (unaudited), one of the stockholders repaid
approximately $83,000 (including offsetting approximately $22,000 of amounts due
him) and approximately $32,000 was expensed for services rendered, leaving a
receivable balance at September 30, 2002 (unaudited) of approximately $51,000.
Further, subsequent to September 30, 2002, the stockholder repaid the remaining
balance of $51,000 (unaudited) (see Note 7). Interest on these notes for the
nine months ended September 30, 2002 (unaudited) and for the year ended December
31, 2001 is $5,956 and $3,655, respectively.
At September 30, 2002 (unaudited) and December 31, 2001, notes payable to
related parties (Robert and Winston Millet) aggregated $7,500 and $15,000,
respectively (see Note 2 for further detail). During the nine months ended
September 30, 2002 (unaudited), Robert Millet offset his balance of $7,500
against certain loans receivable (see preceding paragraph).
FSDN rented office space from a stockholder on a month-to-month basis through
May 2002. Payments for rent for the nine-month periods ended September 30, 2002
and 2001 (unaudited), the year ended December 31, 2001 and the period June 1,
2000 (inception) to December 31, 2000 were $6,000, $25,100, $34,100 and none,
respectively.
For the year ended December 31, 2001, the period June 1, 2000 (inception) to
December 31, 2000 and the nine month periods ended September 30, 2002 and 2001
(unaudited), compensation to stockholders was approximately $90,000, $101,000,
$177,000 and $187,000 respectively.
Page 50 of 62
5. Proposed merger
FSDN entered into an agreement as of January 15, 2002 for a proposed merger with
K2 Digital, Inc. ("K2") whereby FSDN will merge with and into First Step
Acquisition Corp., a wholly-owned subsidiary of K2, with FSDN being the
surviving corporation and existing as a wholly-owned subsidiary of K2. Under the
terms of the agreement, the outstanding common shares of FSDN will be converted
into common shares of K2 under an exchange ratio that will result in the former
shareholders of FSDN holding approximately 90% or 8.76 million of the
outstanding shares of K2 immediately after the effective time of the merger.
6. Going concern
Through September 30, 2002 (unaudited) and December 31, 2001, FSDN has incurred
operating losses aggregating approximately $914,000 and $116,000, respectively,
since inception.
At September 30, 2002 (unaudited) and December 31, 2001, FSDN had a working
capital deficiency of approximately $821,000 and $118,000, respectively, and at
September 30, 2002 (unaudited), FSDN had a stockholders' deficiency of
approximately $601,000. Further, at September 30, 2002 (unaudited) and December
31, 2001, FSDN had a cash overdraft of approximately $11,000 and $1,000,
respectively. These factors, among others, indicate that FSDN may be unable to
continue operations as a going concern. No adjustment has been made in the
accompanying financial statements to the amounts and classifications of assets
and liabilities which could result should FSDN be unable to continue as a going
concern.
Management's plans include a proposed merger with a publicly traded "shell"
company which would result in FSDN's assets and liabilities being assumed by
that entity (see Note 5). Management believes that such a merger will allow FSDN
to have broader access to capital and to effectuate strategic business
combinations or arrangements using the publicly traded company's securities as
the medium of exchange. If FSDN is unsuccessful in completing the proposed
merger, management's alternative plan includes a further search for a similar
business combination or strategic alliance. There is no assurance that this
transaction, or management's alternative plan, will be realized.
7. Subsequent events (unaudited)
All notes payable as of September 30, 2002 (unaudited), which have become due
and have not been paid, have been verbally extended by the lenders up to the
date of completion of the proposed merger.
In October 2002, a note payable amounting to $39,500 at September 30, 2002 was
offset against loan receivable-stockholder based on an agreement between the
stockholder and the note holder. The remaining loan receivable from the
stockholder was also paid in full in October 2002.
In November 2002, FSDN entered into an agreement ("the November 2002 Agreement")
with Future Investment Co., a British Virgin Islands corporation ("FIC") and
Hideo Matsuoka. The November 2002 Agreement provides for the conversion of
$350,000 of debt, $150,000 by FIC and $200,000 by Hideo Matsuoka, into 6,600,000
shares of common stock of FSDN. The stock was distributed in the name of 18
different individuals and trusts.
Page 51 of 62
In addition to the 6,600,000 shares and pursuant to an agreement related to the
November 2002 Agreement ("the Supplemental November 2002 Agreement"), 1,135,000
shares of FSDN's common stock were designated or issued to existing debt
holders, a vendor and preexisting FSDN stockholders ("preexisting stockholders")
as follows; (i) 120,000 shares to parties who had previously advanced FSDN
$60,000 (see Note 2, other advances); (ii) 438,543 shares to Leslie Klein or his
trust; (iii) 33,333 shares to a vendor for professional services rendered and
(iv) 543,124 shares to Robert Millet, an officer and preexisting stockholder,
and other preexisting stockholders for services rendered and other
considerations. Further, the Supplemental November 2002 Agreement (i) clarifies
(and modifies) the terms of convertible debt and options issued under previous
agreements (see Note 2), (ii) grants an additional 365,000 shares in K2 (if the
transaction with K2 is consummated) and (iii) grants options to purchase an
additional 255,000 shares in K2 in prices ranging from $0.01 to $1.00 per share.
As of November 11, 2002, FSDN has 8,760,000 common shares outstanding.
The following unaudited pro-forma condensed balance sheet is presented as if the
November 2002 transactions occurred as of September 30, 2002 (in thousands):
September 30, 2002 Pro-Forma September 30, 2002
(as reported) Adjustments (as restated)
---------------------- -------------------- ----------------------
Current assets $ 76 $ - $ 76
Noncurrent assets 220 (40) (a) 180
-----------------------------------------------------------------------
Total assets $ 296 $ (40) $ 256
=======================================================================
Notes payable $ 676 $ (390) (a) $ 286
Other advances 60 (60)
Other current liabilities 161 161
-----------------------------------------------------------------------
Total liabilities 897 (450) 447
Common stock 209 423 632
Additional paid-in capital 104 104
Accumulated deficit (914) (13) (927)
-----------------------------------------------------------------------
Total stockholders' deficit (601) 410 (191)
-----------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 296 $ (40) $ 256
=======================================================================
(a) Gives effect to a October 2002 "offsetting" transaction as discussed in a
preceding paragraph.
In December, 2002 FSDN changed its name to FutureXMedia, Inc.
Page 52 of 62
WHERE YOU CAN FIND MORE INFORMATION
K2 files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. K2 stockholders
may read and copy any reports, statements or other information that K2 files at
the Securities and Exchange Commission's public reference room in Washington,
D.C. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the web site maintained by the Securities and Exchange
Commission at http://www.sec.gov.
------------------
The Securities and Exchange Commission allows K2 to "incorporate by
reference" information into this Information Statement, which means that K2 can
disclose important information to its stockholders by referring them to another
document filed separately with the Securities and Exchange Commission. As a
result some of the important business and financial information relating to K2
that you may want to consider on deciding how to vote is not included in this
Information Statement. The information incorporated by reference is deemed to be
part of this Information Statement, except for any information superseded by
information in this Information Statement. This Information Statement
incorporates by reference the documents set forth below that K2 has previously
filed with the Securities and Exchange Commission. These documents contain
important information that you should read about K2 and its finances.
K2 SECURITIES AND EXCHANGE COMMISSION FILINGS (FILE NO. 000-1-11873)
SEC FILING PERIOD
Amendment to Quarterly Report on Form 10-QSB/A Quarter ended September 30, 2002; Filed on November 20, 2002
Quarterly Report on Form 10-QSB Quarter ended September 30, 2002; Filed on November 19, 2002
Quarterly Report on Form 10-QSB Quarter ended June 30, 2002; Filed on August 19, 2002
Amendment to Quarterly Report on Form 10-QSB/A Quarter ended March 31, 2002; Filed on June 28, 2002
Amendment to Annual Report on Form 10KSB/A Fiscal year ended December 31, 2001; filed on May 31, 2002
Quarterly Report on Form 10-QSB Quarter ended March 31, 2002; Filed on May 20, 2002
Annual Report on Form 10-KSB/A Fiscal year ended December 31, 2001; filed on April 16, 2002
Current Report on Form 8-K Filed on April 16, 2002
Current Report on Form 8-K Filed on January 17, 2002
Registration Statement on Form 8-A Filed on June 26, 1996
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You may request a copy of the K2 documents described above, which will
be provided at no cost, by contacting K2 Digital, Inc. 770 Lexington Avenue,
Sixth Floor New York, New York 10021, (212) 935-6000.
K2 is also incorporating by reference additional documents that it may
file with the Securities and Exchange Commission between the date of this
Information Statement and the date of the special meeting of K2 stockholders.
K2 has supplied all information contained in this Information Statement
relating to K2, and FX has supplied all information contained in this
Information Statement relating to itself.
FX is a private company. Information concerning FX, including copies of
all financial statements and documents referred to in this Information Statement
are available, upon request, by contacting First Step Distribution Network, 9601
Wilshire Blvd., Suite 315, Beverly Hills, California 90210 (310) 246-3222.
You should rely only on the information contained in this Information
Statement to vote on the proposal(s) to be considered. Neither FX nor K2 has
authorized anyone to provide you with information that is different from what is
contained in this Information Statement. You should not assume that the
information contained in this Information Statement is accurate as of any date
other than February __, 2003, and the mailing of the Information Statement to
you shall not create any implication to the contrary.
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ANNEXES
Annex A: Section 262 of the Delaware General Corporation Law
Annex B: Voting Ballot
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ANNEX A
K2 DIGITAL, INC.
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SS. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to ss.ss.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
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b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
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(2) If the merger or consolidation was approved pursuant to ss. 228 or ss.
253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or resulting
corporation within 10 days thereafter shall notify each of the holders of
any class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include in
such notice a copy of this section. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
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(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest that the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
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ANNEX B
K2 DIGITAL, INC.
VOTING BALLOT
Number of Shares Voted on this Ballot: _____________________________
The undersigned record holder of the shares shown above hereby casts
one vote for each share in favor of the following proposals:
FOR the Reverse Stock Split described in the Information Statement
dated February ___, 2003.
FOR the Merger described in the Information Statement dated February
___, 2003.
FOR the election of John McCracken, Robert Millet and Leslie Klein as
directors of K2 Digital, Inc.
FOR the issuance of shares pursuant to the Merger described in the
Information Statement dated February ___, 2003.
This Ballot is for use at the Special Meeting of Stockholders of K2
Digital, Inc. to be held on March ___, 2003.
Date: March ___, 2003
------------------------------------
Signature of Record Holder
------------------------------------
Name of Record Holder (please print)
and representative capacity, if any
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