UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C AMENDMENT NO. 3
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
$0.035 PER SHARE WHICH IS THE AVERAGE OF THE BID AND ASKED PRICE AS
OF JULY 15, 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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K2 DIGITAL, INC.
770 Lexington Avenue, Sixth Floor
New York, NY 10021
(212) 935-6000
__________, 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 Bulletin Board under the
trading symbol "KTWO.OB" and closed at a price of $0.035 per share on July 15,
2003. The proposed reverse stock split and merger will have a dilutive effect
upon the shareholders of K-2. Each current shareholder of K2 will own
approximately .20 shares of K2 after the merger for each one share currently
owned. 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. Stockholders owning 50.6% of the
issued and outstanding shares of K-2's commons tock have indicated that they
will vote in favor of these three items. These votes will be sufficient to
approve the items and management is therefore not requesting or soliciting your
vote. Approval of these matters is not assumed until the vote has been
registered. If the matters are not approved, the Company will assess other
options which may include a liquidation.
THE BOARD OF DIRECTORS OF K2 HAS UNANIMOUSLY APPROVED THE FOLLOWING
PROPOSALS:
1) THE 1-FOR-5.1 REVERSE STOCK SPLIT,
2) THE MERGER WITH FX WHICH INCLUDES THE ELECTION OF NEW DIRECTORS,
AND
3) THE ISSUANCE OF K2 COMMON STOCK IN CONNECTION WITH THE MERGER.
(EACH FX SHAREHOLDER WILL RECEIVE ONE SHARE OF K2 COMMON STOCK IN
EXCHANGE FOR EACH SHARE OF FX STOCK THEY OWN.)
All the Officers and Directors have indicated that they will vote their
K2 shares in favor of the merger, and when coupled with other shareholders who
have approved the merger, such shares constitute 50.6% of the shares issued and
outstanding.
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.
The Company intends to conduct a meeting to approve these matters at 10
A.M. on _____, 2003. While you are invited to the meeting, your presence is not
required. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
At the meeting it is expected that those shareholders who have
indicated to management that they will vote in favor of the merger will be asked
to sign a written consent. Under the Delaware General Corporation Law, the
execution of the consent by more than 50% of the issued and outstanding shares
of the Company is sufficient to approve all three agenda items.
Sincerely,
/s/ Gary W. Brown
President
SUMMARY TERM SHEET........................................................................... (ii)
QUESTIONS AND ANSWERS ABOUT THE MERGER....................................................... 1
THE COMPANIES................................................................................ 3
K2 Digital, Inc..................................................................... 3
FutureXmedia, Inc................................................................... 5
THE REVERSE STOCK SPLIT...................................................................... 6
Certificate of Amendment............................................................ 6
Exchange Of Stock Certificates...................................................... 7
THE MERGER................................................................................... 7
Accounting Treatment of the Merger.................................................. 7
Regulatory Approvals................................................................ 8
ISSUANCE OF K2 STOCK......................................................................... 8
STOCKHOLDER APPROVAL......................................................................... 8
Dilution............................................................................ 9
Appraisal Rights.................................................................... 9
Tax Consequences.................................................................... 11
Reasons for the Reverse Stock Split................................................. 12
Recommendations of K2's Board of Directors.......................................... 12
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF K2 IN THE MERGER............................ 12
MARKET FOR K2'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 13
DIRECTORS AND OFFICERS....................................................................... 13
Background.......................................................................... 13
Director Compensation............................................................... 16
Executive Compensation.............................................................. 16
Option Grants in Fiscal 2001........................................................ 17
Option Exercises and Year-End Option Value Table.................................... 18
Filing Requirements................................................................. 18
BENEFICIAL OWNERSHIP......................................................................... 18
CHANGE IN CONTROL OF K2...................................................................... 20
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 20
Overview............................................................................ 20
Results of Operations - K2 Digital.................................................. 21
Results of Operations - FX.......................................................... 22
Continuing Operations, Liquidity and Capital Resources - K2......................... 23
Liquidity and Capital Resources; Plan of Operation - FX............................. 24
Factors Affecting Operating Results and Market Price of Stock....................... 25
FutureXmedia, Inc. Financial Statements............................................. 28
WHERE YOU CAN FIND MORE INFORMATION.......................................................... 48
ANNEXES...................................................................................... 50
Section 262 of the Delaware General Corporation Law................................. 51
i
SUMMARY TERM SHEET
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 ___. This Information Statement is being
furnished by the Board of Directors of K-2 Digital, Inc. and is first being sent
to the stockholders of K-2 Digital, Inc. on _______________, 2003.
The Proposed Transaction (See Page ___)
------------------------
In the merger, K-2 will acquire FX by means of a triangular merger (the
"Merger") pursuant to which First Step Acquisition Corp. ("Merger Sub") will
merge with and into FX.
What You Will Be Entitled to Receive in the Merger (See Page ___)
---------------------------------------------------
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 K-2
Common Stock. Each share of FX's Common Stock will be converted into the right
to receive approximately one share of K-2 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 K-2 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 K-2
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, K-2's current stockholders will own an
aggregate of approximately 977,000 shares of K-2 Common Stock or approximately
10% of the outstanding voting securities of K-2, and FX Shareholders will own an
aggregate of approximately 8, 760,000 shares of K-2 Common Stock or
approximately 90% of the outstanding voting securities of K-2. K-2 Common Stock
does not have preemptive rights and there is no cumulative voting. Each share of
K-2 Common Stock is entitled to one vote.
Background of the Merger (see page )
------------------------
ii
In the fall of 2001, our board of directors formed a special committee
to explore our strategic and other alternatives for enhancing shareholder value.
Chaired by Gary Brown, the exploratory committee was comprised entirely of
directors with no interest in a possible sale of the Company different than
those of the unaffiliated stockholders generally and recommended that K-2
explore its strategic alternatives to enhance stockholder value, including a
potential sale transaction.
At the direction of the board of directors, Mr. Brown negotiated the
terms of the merger with the assistance of outside financial and legal advisors.
The merger agreement has been approved by the unanimous vote of all directors
voting on the matter, a majority of whom have no interest in the completion of
the merger different from the interests of our unaffiliated stockholders
generally.
Interest of Our Directors and Executive Officers in the Merger (see page )
---------------------------------------------------------------
When considering the recommendation of our board of directors with
respect to the merger, you should be aware that some of our directors and
executive officers have interests in the merger that are different from, or in
addition to your interests as a K-2 stockholder, which may create potential
conflicts of interest. These interests include
o Each of our current directors will continue in their current
positions with the Company following the merger, although it is
expected that they will resign these positions shortly after the
closing.
o After the merger, the surviving corporation will continue
indemnification arrangements and directors' and officers'
liability insurance of our present and former directors and
officers.
Recommendation of Our Board of Directors (see page )
----------------------------------------
Our board of directors, by a unanimous vote of all directors voting on
the matter, has determined that the merger is fair and in the best interest of
K-2's stockholders.
Our board of directors considered several factors in making this
determination. Due to the variety of factors considered, the board of directors
did not assign relative weights to these factors or determine that any factor
was of particular importance. The board reached its conclusion based upon the
totality of the information presented and considered during its evaluation of
the merger and the Company's alternatives.
Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders
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(see page )
K-2 believes that the Reverse Stock Split will not constitute a taxable
transaction for U.S. federal income tax purposes to holders of common stock and
there will be no tax impact to such holders.
Appraisal Rights (see page )
----------------
iii
Stockholders who do not approve of the merger may seek, under Delaware
law, judicial appraisal of the fair value of their shares by the Delaware Court
of Chancery. This value could be more or less than, or the same as, the merger.
In order to assert such rights:
o You must make and deliver to K-2 a written demand for judicial
appraisal in compliance with Delaware law before the vote on the
merger agreement; and
o You must hold your shares of record continuously from the time of
making a written demand for appraisal until the effective time of
the merger.
Merely voting against the merger agreement will not preserve your right
of appraisal under Delaware law.
The Special Meeting (See page )
-------------------
The Special Meeting of Stockholders will be held on __________, 2003,
at 10:00 AM Eastern Daylight Time, at the offices of K-2 Digital, Inc., 770
Lexington Avenue, Sixth Floor, new York, New York 10021. Stockholders of record
as of __________, 2003 will be entitled to vote on all proposals to come before
the meeting although such votes or proxies are not being solicited by
management. Representatives of Rothstein, Kass & Company, P.C., K-2-s auditors
are not expected to attend the meeting. Shareholders owning 50.6% of the issued
and outstanding shares of K-2 common stock have advised management that they
will vote in favor of the merger. No further action on the part of the Company's
Shareholders is necessary to approve the merger.
The Merger Agreement (See page )
--------------------
As a condition to the Merger, K-2 is required to implement a 1 for 5.1
reverse split (the "Reverse Stock Split") of the common stock, par value $.01
per shares, of K-2 ("K-2 Common Stock"), thereby reducing its outstanding shares
of K-2 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 Board of K-2 determined that the exchange ratio was reasonable
in the circumstances, after taking into account the relative value of K-2 and FX
over the next eighteen months. This analysis included a determination that K-2
had no business prospects and that FX's business plan, if executed, could bring
significant shareholder value to K-2's stockholders. The implementation of the
Reverse Stock Split is subject to the approval of the stockholders of K-2. The
Board of Directors of K-2 has approved the Reverse Stock Split and shareholders
of K-2 owning 50.6% of K-2's outstanding shares have indicated they will vote in
favor of the reverse stock split and the Merger.
Information About the Participants (See page )
----------------------------------
iv
K-2 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. ("FX"),
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 intends to aggregate rights to successful console and
PC CD-Rom video games and to re-distribute them via the Internet on a
subscription basis.
v
WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
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 ___, 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, and
issuance of K2 common stock in connection with the merger. Stockholders
owning 50.6 % of the outstanding K-2 common shares have already
indicated that they will vote in favor of these items.
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
outstanding shares of K2 common stock. K2 has been informed that a
majority of the shares outstanding intend to vote at the meeting in
favor of the proposals and therefore NO PROXIES ARE BEING SOLICITED
FORM ANY OTHER STOCKHOLDERS. Approval of the proposals does not require
approval by a majority of disinterested stockholders.
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 AGREED TO
APPROVE THE MERGER?
A: Yes, those individuals, owning approximately 50.6 % of the outstanding
shares of K-2 have indicated they intend to vote in favor of the
merger.
1
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."
Q: DO I HAVE ANY RIGHTS IF I DISAGREE WITH THE MERGER?
A: Yes. Although the Company is not seeking your vote in connection with
the merger, you may have "appraisal rights". See the Section
"Stockholder Approval Appraisal Rights" in this Information Statement
for a description of these rights.
Q: HOW WILL VOTES BE CAST?
A: It is expected that those shareholders who have indicated that they
intend to vote in favor of the merger, will execute a consent at a
special meeting to be held on ______, 2003. Any other shareholder
wishing to vote at the meeting may do so, but such votes are not being
requested nor are they required.
2
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.
3
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 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 (which was
fully reserved for at December 31, 2001). In October 2002, the Company received
approximately $9,000 from IIS as a final payment pursuant to a June 2002
settlement agreement pertaining to the unpaid balance.
Under the Purchase Agreement, 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.
4
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 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
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
5
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 100 North Crescent Drive, Suite 111 Beverly Hills, CA
90210 and the telephone number is (310) 777-3177.
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 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.
6
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.
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
Background of the Merger
------------------------
In August 2001, K-2 effectively ceased operations and commenced a
process of liquidating assets, collecting accounts receivable and paying
creditors. These activities were supervised by the Board of Directors and its
Chairman Gary Brown.
In the fall of 2001 Mr. Brown was approached by representatives of FX
including Mr. Robert Millet and Mr. John McCracken to determine whether the
Company would be interested in exploring a merger transaction. These discussions
were conducted in person in Los Angeles and New York and on the telephone. The
discussions culminated with the approval by K-2's Board of a merger in January
2002 and the preparation of a merger agreement by the Company's professional
advisors. This Agreement was executed on January 15, 2002.
Subsequently, K-2, through Mr. Brown, has continued to work with FX to
develop a business plan for the post-merged entity and the parties have
cooperated in planning for a smooth transition to new management.
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,
7
"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.
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 K2 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 necessarily 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
and iii) the issuance of K2 Common Stock in connection with the Merger. All the
Officers and Directors have indicated that they will vote their K2 shares in
favor of the merger, and when coupled with other shareholders who have approved
the merger and indicated that they will vote in favor thereof, such shares
constitute 50.6% of the shares issued and outstanding.
8
Any K2 stockholder may abstain from voting on the proposals to approve
i) the Reverse Stock Split, ii) the Merger and iii) 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.
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. This right relates to the merger proposal only, and not to any other
matter being voted upon at the meeting. 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
9
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 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 or consent thereto in writing 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 nor will such failure to vote constitute a waiver by such
shareholder under the DGCL. 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.
10
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 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.
11
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.
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 June 2003,
which is twenty days after the mailing of this Information Statement.
APPROVAL BY 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
INCLUDING THE ISSUANCE OF K2 COMMON STOCK IN CONNECTION WITH THE MERGER.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF K2 IN THE MERGER
As of June 30, 2003, all K2 directors, executive officers and
affiliates, beneficially owned in the aggregate approximately 45.5% of the
outstanding shares of K2 common stock, representing 45.5% 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 5% of the combined entities.
12
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 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 March 31, 2003.
These quotations reflect inter-dealer prices, without retail mark-up, markdown
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
December 31, 2002 0.03 $0.01
March 31, 2003 0.035 $0.01
The approximate number of record holders of K2's common stock at
December 31, 2002 was 26, not including beneficial owners whose shares are held
by banks, brokers and other nominees. K2 never has paid any cash dividends.
Issuance of Shares in the Merger
--------------------------------
K-2 will issue approximately 8,760,000 common shares in the merger. The
holders of K-2 stock are not entitled to preemptive rights in connection with
this issuance. The securities being issued, when coupled with the proposed 5.1
for 1 reverse stock split will have a dilutive effect upon the holders of K-2
shares. Following the merger, each such holder will own approximately one-tenth
of the number of shares owned prior to the merger.
The financial information contained in the Company's Annual Report on
form 10-KSB for the fiscal year ended December 31, 2002, filed on April 15, 2003
is hereby incorporated hereby reference. A copy of such report is being
delivered to the Company's stockholders with this Information Statements.
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 March 31, 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.
13
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
--------------------------------------------------------------------------------
GARY W. BROWN, age 50, has been a director of the Company since
February 2000 and joined the Company in April 2000 as Executive Vice President
and Chief Operating Officer. Since August 31, 2001, Mr. Brown has served as
President, Secretary, Chief Financial Officer and Chief Operating Officer of the
Company. Since November 14, 2001, Mr. Brown has served as Senior Vice President
and Managing Director of the Risk Management Division of Canadian Imperial Bank
of Commerce (CIBC World Markets). Prior to that, Mr. Brown was employed from
July 1980 through June 1999 in various management roles with UBS AG, the
successor organization to Union Bank of Switzerland, including the role of New
York Branch Manager. There he served as Division Head for Structured Finance,
one of UBS's six operating divisions in the Americas prior to the merger of UBS
with Swiss Bank Corporation in 1998. Post-merger, Mr. Brown was designated Chief
Credit Officer-Americas for UBS's investment banking division, Warburg, Dillon
Read, where he was responsible for capital commitments of the firm. Mr. Brown
held various business development and risk management positions throughout his
19-year career at UBS. He also served as President of the New York Chapter of
Risk Management Association, the trade association for the financial services
risk management industry, and as an ex-officio member of the RMA National Board.
From 1991-1999, he has served on the Board of Directors of Sefar Americas, a
subsidiary of Sefar AG, a manufacturer of Swiss synthetic fabrics. Prior to
joining UBS in 1980, Mr. Brown was employed from June 1976 through June 1980
with The Chase Manhattan Bank, having served in various business development
functions. Mr. Brown received a Bachelor of Science degree in Business
Administration from Oral Roberts University in May 1976.
DOUGLAS E. CLEEK, age 40, is a Partner and Creative Director of
Magnitude 9.6, a digital services firm. Mr. Cleek, who co-founded the Company in
1993, has been a director of the Company since it was reorganized as a
corporation in January 1995. From January 1995 until August 2001, Mr. Cleek
served as the Company's Executive Vice President--Chief Creative Officer. From
1993 until 1995, Mr. Cleek was a general partner of the Company. For more than
five years prior to that, Mr. Cleek was an art director/Designer for William
Allen & Co. and its successor, A.J. Bart & Sons, specializing in graphic
promotional materials for the hospitality industry.
MATTHEW G. DE GANON, age 40, is Chief Marketing Officer and Executive
Vice President of Corporate Development for Arcavista Corporation. Mr. de Gannon
has been a director since he joined K2 in July 1995. Mr. de Ganon resigned from
his position as an executive officer of K2
14
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 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 36, is Chief Operations Officer--USA Division,
FutureXmedia, Inc. Mr. Millet has over ten years experience in Senior Marketing
and Sales positions within the high technology and entertainment industries.
Prior to joining FutureXmedia, 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
15
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.
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 $100,000.
Except for Mr. Brown, each of the named executives has resigned his or her
position as an officer of the Company, effective August 2001
Annual Long Term
Compensation Compensation
-----------------------------------
Restricted
Stock Option
Name and Principal Position Year Salary ($) Awards Awards
--------------------------------------------------------------------------------
Gary W. Brown, President, Chief 2002 -- -- --
Operating Officer, Secretary 2001 192,539(3) 100,000
and Chief Financial Officer(2) 2000 151,442 100,000(4) 268,000
Matthew G. de Ganon, Chairman of 2002 --
the Board(3) 2001 164,231 -- --
2000 228,392 -- --
Douglas E. Cleek, Executive Vice 2002 -- -- --
President - Chief Creative 2001 115,837 -- --
Officer(4) 2000 182,423 -- --
Lynn Fantom, Chief Executive 2002 -- -- --
Officer(4) 2001 144,173 -- 200,000
2000 250,000 -- --
16
--------------------------------------------------------------------------------
(1) The value of perquisites and other personal benefits does not exceed 10% of
the officer's salary. The Company effectively ceased operations in August
2001.
(2) Joined K2 in April 2000 and remains as an officer and director.
(3) Resigned as an Officer of the Company effective August 1, 2001.
(4) Resigned as a Director of the Company effective November 6, 2001.
(5) Mr. Brown accepted compensation less than provided for in his employment
agreement during 2001, and has received no salary compensation or benefits
since December 31, 2001.
(6) 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
$225,000 and a discretionary annual bonus in the form of stock options up to a
maximum of 100,000 shares of K2's Common Stock per year. Upon joining K2, Mr.
Brown also received 100,000 shares of restricted stock and options to purchase
up to 263,000 shares of K2's Common Stock, all of which had vested as of April
14, 2002. Pursuant to his employment contract, Mr. Brown is also subject to a
non-compete restriction for twelve months after the termination of his
employment.
OPTION GRANTS IN FISCAL 2001
The following table sets forth individual grants of stock options made
under K2's 1996 Stock Incentive Plan (the "1996 Plan") and the 1997 Stock
Incentive Plan (the "1997 Plan") during the fiscal year ended December 31, 2001
for the Chief Executive Officer of K2 and each of the Named Executives.
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Base Price
Name Granted Fiscal Year ($/Sh) Expiration Date
-----------------------------------------------------------------------------------------------------------------
Gary W. Brown 100,000(2) 33% $0.75 January 2, 2011
Lynn Fantom 200,000(2)(3) 67% $0.75 January 2, 2011
Matthew G. de Ganon -- -- --
Douglas E. Cleek -- -- -- --
-----------------------------------------------------------------------------------------------------------------
(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.
17
(3) All unvested options granted to Ms. Fantom were cancelled upon her
resignation from the Board of Directors effective November 6, 2001.
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 $0.75 under the 1997 Plan. None of such options were exercised
during fiscal 2002.
OPTION GRANTS IN FISCAL 2002
No stock options were granted under the 1996 Plan or the 1997 Plan for
the year-ended December 31, 2002.
OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The table set forth below shows the value of unexercised options under
the 1996 Plan and the 1997 Plan held on December 31, 2002 by the Chief Executive
Officer and each of the Named Executives.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at December 31, held on December 31,
Acquired 2001 2001 ($)
on Value ---------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------
Gary W. Brown -- -- 368,000 100,000 0 0
Lynn Fantom -- -- 400,000 -- -- --
-----------------------------------------------------------------------------------------------------------------
(1) Based on the closing price of K2's Common Stock on December 31, 2002 the
last day in fiscal 2002 on which the markets were open for business, which
was $.025.
(2) Represents grants made under the 1997 Plan.
(3) Represents 346,000 options granted under the 1997 Plan and 22,000 options
granted under the 1996 Plan.
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, 2002.
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
18
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 856,866(2) 18.9
Douglas E. Cleek 424,281(2) 8.7
Gary W. Brown 1,348,069(3) 27.2
David Sklaver 15,000(4) *
Lynn Fantom 405,000(5) 7.0
-------------------------------------------------------------------------------
All Directors and Executive
Officers as a group 2,624,935(6) 45.5
(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 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.
(3) 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 (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.
(4) Includes 15,000 shares underlying presently exercisable stock options.
(5) Includes 368,000 shares underlying presently exercisable stock options: (i)
136,500 shares underlying options which vested on April 14, 2001, (ii)
131,500 shares underlying options which vested on April 14, 2002, 50,000
shares underlying options which vested on January 2, 2002 and 50,000 shares
underlying unvested stock options which vested on January 2, 2003: (iii)
50,000 shares of restricted common stock which vested on April 14, 2001 and
(iv) 50,000 shares of restricted common stock which vested on April 14,
2002. Ms. Fantom disclaims beneficial ownership of all shares underlying
unexercised and/or unvested options.
19
(6) Includes 733,000 shares underlying presently exercisable stock options and
50,000 shares underlying unvested stock options. Note that 424,281 of the
2,624,935 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 and Messrs de Ganon and Cleek each disclaim beneficial
ownership of those shares with respect to which they are not beneficial
owners.
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.
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.
20
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, the Company sold certain fixed and intangible
assets of the Company to IIS, including certain of the Company's customer
contracts, furniture, fixtures, equipment and intellectual property, for an
aggregate purchase price of $444,000, of which $419,000 was paid in cash and
$25,000 of capital lease obligations were assumed by IIS. IIS also assumed
certain deferred revenues and customer deposits. The Company recognized an
approximate $218,000 gain on the transaction.
Under the terms of the Purchase Agreement, IIS assumed the Company's
office lease obligations, took up occupancy in the Company's premises and made
offers of employment to substantially all of the remaining employees of the
Company, which offers have been accepted.
In addition to the purchase price and as consideration of the Company's
release of certain employees from the non-competition restrictions contained in
their agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, the Purchase Agreement
provided for the Company to receive from IIS an additional placement fee of
$7,500 per key employee and $2,500 per other employee that remained employed by
IIS through December 31, 2001. This additional contingent placement fee was to
be paid by IIS in cash in five monthly installments beginning August 31, 2001,
pro rated monthly for the number of employees retained. As of December 31, 2001,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remains unpaid by IIS (which was fully reserved for at December 31,
2001). In October 2002, the Company received approximately $9,000 from IIS as a
final payment pursuant to a June 2002 settlement agreement pertaining to the
unpaid balance.
Under the Purchase Agreement, the Company also received from IIS a cash
fee of $50,000 in return for entering into certain noncompetition provisions
contained in the Purchase Agreement, which provide that the Company will not,
for a period of five years, (i) engage in any business of substantially the same
character as the business engaged in by the Company prior to the transaction,
(ii) solicit for employment any employee of IIS (including former
21
employees of the Company), or (iii) solicit any client or customer of IIS
(including any customer transferred to IIS under the Purchase Agreement) to do
business with the Company.
Accordingly, the aggregate cash consideration delivered to the Company
at closing was $544,000, of which approximately $258,000 was paid directly to K2
Holdings LLC, an affiliate of SGI, the Company's principal secured creditor, in
order to release SGI's security interest in the assets of the Company.
Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or any remaining revenue sources. Accordingly, the Company's
remaining operations will be limited to either the sale of the Company or the
winding up of the Company's remaining business and operations, subject, in
either case, to the approval of the stockholders of the Company. The proceeds
from the sale of assets, together with assets not sold to IIS may not be
sufficient to repay substantially all remaining liabilities of the Company. The
Company has entered into negotiations with certain creditors to settle specific
obligations for amounts less than reflected in the financial statements reported
herein. If these negotiations are unsuccessful, there will not be sufficient
cash to repay all of the obligations of the Company.
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 the Company'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 the Company's operations effective August 2001.
RESULTS OF OPERATIONS - FX
FX was recently formed and has had limited operations to date. A
detailed comparison of the operating results for the years ended December 31,
2002 and 2001 and the three months ended March 31, 2003 and 2002 would not be
meaningful.
FX has incurred operating losses aggregating approximately $1.1 million
since inception and, as of March 31, 2003, had a working capital deficiency of
approximately $338,000, no cash and a stockholders' deficiency of approximately
$293,000. These factors, among others, indicate that there is substantial doubt
about FX's ability 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.
Operating expenses were approximately $761,000 for the year ended
December 31, 2002, compared to approximately 332,000 for the prior year, an
increase of approximately $429,000. The increase is principally for professional
services and non-cash compensation. Operating expenses were approximately
$20,000 for the three months ended March 31, 2003, compared to
22
approximately $161,000 for the three months ended March 31, 2002, a decrease of
approximately $141,000. The significant decrease is directly attributable to
FX's diminishing financial resources.
Net loss for the year ended December 31, 2002 was approximately
$995,000 compared to approximately $109,000 for the prior year. The increased
loss was the result of the increased expenses discussed above and no revenues in
2002. Net loss for the three months ended March 31, 2003 was approximately
$27,000 compared to approximately $192,000 for the three months ended March 31,
2002. As referenced in the preceding paragraph, this significant decrease is
directly attributable to FX's diminishing financial resources.
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, 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.
23
K2's December 31, 2002 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. There is no assurance that this transaction or an
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. During three months ended March 31, 2003 and the
years ended December 31, 2002 and 2001, FX has raised approximately $55,000,
$621,000 and $215,000 respectively. The principal shareholders of FX have
continued to provide funds to operate FX and have verbally agreed to continue to
fund FX until operations turn profitable.
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
orally agreed to continue to advance operating funds to FX to fund operations
until FX achieves positive cash flow. While these commitments are not binding on
the parties, FX believes because of their demonstrated high level of interest in
the success of the merged entity, their past investment of operating capital and
tactical and structural support, among other things, that such commitments will
be fulfilled.
24
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 $0.1 million and $5.1
million for the years ended December, 2002 and 2001, respectively. As of August
2001, K2 effectively ceased operations. FX has incurred net losses of
approximately $1.0 million and $0.1 million for the years ended December 31,
2002 and 2001. Additionally, for the three months ended March 31, 2003, K-2 and
FX incurred losses of approximately $23,000 and $27,000, respectively. These
losses are primarily attributable to sales levels insufficient to meet the costs
associated with the development and marketing of new products and discontinuance
of operations. There can be no assurance that
25
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.
As of the date of this Information Statement, FX and K2 combined have
limited current assets and a significant working capital deficiency. FX is in
various stages of negotiation with several large potential customers as well as
internal and external 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 March 31, 2003, 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. 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, 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.
26
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 March 31, 2003, 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.
27
FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF K2 DIGITAL, INC.
AND FUTUREXMEDIA, INC.
On January 15, 2002, K2 entered into an Agreement and Plan of Merger
with FX 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
as of March 31, 2003 gives effect to the merger as if it occurred on March 31,
2003. The accompanying unaudited pro forma combined condensed statements of
operations for the three months ended March 31, 2003 gives effect to the merger
as if it had occurred on January 1, 2003. The accompanying unaudited pro forma
combined condensed statements of operations for the year ended December 31, 2002
gives effect to the merger as if it had occurred on January 1, 2002.
The unaudited pro forma combined condensed balance sheet as of March
31, 2003 was prepared based upon the unaudited historical balance sheets of K2
and FX. The unaudited pro forma combined condensed statements of operations for
the three months ended March 31, 2003 was prepared based upon the unaudited
historical statements of operations of K2 and FX. The unaudited pro forma
combined condensed statements of operations for the year ended December 31, 2002
was prepared based upon the audited 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 the 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 occurred had 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 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, 2002 which
has been incorporated by reference.
28
K2 DIGITAL, INC
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 2003
HISTORICAL
PRO FORMA
FUTUREXMEDIA, K2 DIGITAL, PRO FORMA COMBINED
INC. (F) INC. ADJUSTMENTS COMPANY
-------------- ------------ --------------- ------------
CURRENT ASSETS:
Cash $ -- $ 5,537 $ 5,537
Interest receivable - stockholder
Deferred costs 125,235 (125,235)d
Investment in available-for-sale securities 34,100 34,100
-------------- ------------ ------------
Total current assets 125,235 39,637 39,637
PROPERTY AND EQUIPMENT, net 18,510 18,510
OTHER ASSETS, investments 26,500 26,500
-------------- ------------ ------------
$ 170,245 $ 39,637 $ 84,647
============== ============ ============
CURRENT LIABILITIES:
Accounts payable and accrued expenses 126,855 239,003 365,858
Payroll taxes payable 16,308 16,308
Notes payable and other advances 320,126 320,126
-------------- ------------ ------------
Total current liabilities 463,289 239,003 702,292
-------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized;
no shares issued or outstanding
Common Stock:
K2 Digital, Inc. - $0.01 par value
25,000,000 shares authorized 54,001 (43,413)a 98,188
5,400,116 shares issued and 4,982,699
shares outstanding (historical);
1,058,847 shares issued and 977,000
shares outstanding (post reverse 87,600 b
stock split); 9,818,847 shares issued
and 9,737,000 shares outstanding
(post merger)
FutureXmedia, Inc. - no par value, 25,000,000
shares authorized 707,700 (707,700)b
8,760,000 shares issued and outstanding
(historical)
Treasury stock, 417,417 shares (historical);
81,847 shares (819,296) (819,296)
(post reverse stock split and merger), at
cost
Additional paid-in capital 136,316 8,317,910 43,413 a 1,258,723
(7,760,781)c
620,100 b
(125,235)d
27,000 g
Accumulated other comprehensive income 8,800 8,800
Accumulated deficit (1,137,060) (7,760,781) 7,760,781 c (1,164,060)
(27,000)g
-------------- ------------ ------------
Total stockholders' deficit (293,044) (199,366) (617,645)
-------------- ------------ ------------
$ 170,245 $ 39,637 $ 84,647
============== ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS.
29
K2 DIGITAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
HISTORICAL
PRO FORMA
FUTUREXMEDIA, K2 DIGITAL, PRO FORMA COMBINED
INC. (F) INC. ADJUSTMENTS COMPANY
-------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ -- $ --
-------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES 20,341 23,071 43,412
-------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (20,341) (23,071) (43,412)
OTHER INCOME (EXPENSE), net (6,307) (27,000) g (33,307)
-------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (26,648) $ (23,071) $ (27,000) $ (76,719)
============== ============= ============= =============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE, basic and diluted $ -- $ -- $ (0.01)
============== ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,760,000 4,982,699 9,737,000e
============== ============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS.
30
K2 DIGITAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
HISTORICAL
PRO FORMA
FUTUREXMEDIA, PRO FORMA COMBINED
INC. (f) K2 DIGITAL, INC. ADJUSTMENTS COMPANY
----------- ----------- ----------- -----------
REVENUES $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES 761,324 83,544 844,868
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (761,324) (83,544) (844,868)
OTHER INCOME (EXPENSE), net (233,213) 22,640 (27,000) g (237,573)
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS $ (994,537) $ (60,904) $ (27,000) $(1,082,441)
=========== =========== =========== ===========
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE, basic and diluted $ (0.49) $ (0.01) $ (0.36)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,025,342 4,979,959 3,001,805 e
=========== =========== ===========
31
"Pro Forma Adjustments" to the unaudited combined condensed balance
sheet and statements of operations 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 8.76 million shares of K2 common stock to FX,
in exchange for 100% of the outstanding common stock of FX;
(c) Reflects the elimination of K2's historical accumulated deficit; the
historical accumulated deficit of FX has been carried forward;
(d) Reflects an adjustment for the approximate cost of the merger.
(e) Pro forma weighted average number of common shares outstanding for the
periods presented is computed as follows:
For the three months ended March 31, 2003 -
K2 historical weighted average shares outstanding 4,982,699
Adjusted for pro forma 5.1:1 reverse split Divided by 5.1
K2 pro forma weighted average shares outstanding 977,000
FX pro forma weighted average shares outstanding 8,760,000
Pro forma combined weighted average shares outstanding 9,737,000
For the year ended December 31, 2002 -
K2 historical weighted average shares outstanding 4,979,959
Adjusted for pro forma 5.1:1 reverse split Divided by 5.1
K2 pro forma weighted average shares outstanding 976,463
FX pro forma weighted average shares outstanding 2,025,342
Pro forma combined weighted average shares outstanding 3,001,805
(f) As more fully described in Note 7 to FX's financial statements, the
historical balance sheet of FX reflects the effect of the November 2002
conversion of $350,000 of short-term debt (originally due in April and May
of 2003), $200,000 by Hideo Matsuoka and $150,000 by Future Investment Co.,
a British Virgin Islands corporation controlled by Mr. Matsuoka, into 6.6
million shares of common stock of FX. The FX stock was distributed to Future
Investment International LLC, a Delaware LLC and certain of its affiliates.
Subsequent to the conversion and a related November 2002 transaction with
preexisting FX stockholders, these shareholders own approximately 75%
of FX.
The conversion price of approximately $0.05 per share was a product of the
terms of the proposed merger with K2, designed to provide the new
shareholders predetermined and majority ownership in the common stock of K2.
As a result, FX's management believes that the approximate $0.05 conversion
per share conversion price to be representative of fair value of FX's
32
common stock. Accordingly, the transaction was accounted for as an even
exchange of value with no gain or loss recognition. Further, given FX's
deteriorated financial condition, among other reasons, FX management
believed that the approximate $0.05 per FX share price was a better
indicator of current fair value of FX commons stock than prior FX common
stock sales or recently published market values of K2 common stock which is
illiquid and thinly and sporadically traded.
(g) Reflects an adjustment to account for the beneficial conversion feature of
certain FX debt, as more fully described in Note 2 (a) to FX's financial
statements.
33
K2 DIGITAL INC., CONSOLIDATED FINANCIAL STATEMENTS
K2's consolidated financial statements for the last two fiscal years
are incorporated by reference to K2's annual report on form 10-KSB filed on
April 15, 2003. K-2's consolidated financial statements for the three months
ended March 31, 2003 are also incorporated by reference to K-2's Quarterly
Report on Form 10 QSB filed on May 15, 2003. These reports may be located at
ww.sec.gov/Archives/edgar/data/1009624/000112528202001884/
0001125282-02-001884.txt.
34
FUTUREXMEDIA, INC. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
FutureXmedia, Inc.
(Formerly First Step Distribution Network, Inc., successor to First Step
Consulting, LLC)
We have audited the accompanying balance sheet of FutureXmedia, Inc. ("FX")
(Formerly First Step Distribution Network, Inc., successor to First Step
Consulting, LLC) as of December 31, 2002, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years ended December 31, 2002 and 2001. These financial statements are the
responsibility of FX'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 FutureXmedia, Inc. as of
December 31, 2002, and the results of its operations and its cash flows for the
years ended December 31, 2002 and 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that FX will
continue as a going concern. As discussed in Note 6 to the financial statements,
FX has incurred operating losses since inception and, as of December 31, 2002,
had significant working capital and stockholders' deficiencies and no cash.
These conditions raise substantial doubt about FX'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
May 2, 2003
35
FUTUREXMEDIA, INC.
(Formerly First Step Distribution Network, Inc., successor to First Step
Consulting, LLC)
BALANCE SHEET
--------------------------------------------------------------------------------
March 31, 2003
--------------------------------------------------------------------------------
March 31,
2003 December 31,
(unaudited) 2002
------------------- ------------------
ASSETS
CURRENT ASSETS
Deferred costs $ 125,235 $ 125,235
Interest receivable - stockholder 4,307
------------------- ------------------
Total current assets 125,235 129,542
PROPERTY AND EQUIPMENT, net 18,510 19,261
OTHER ASSETS, investments 26,500 26,500
------------------- ------------------
$ 170,245 $ 175,303
=================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 126,855 $ 140,391
Payroll taxes payable 16,308 16,308
Notes payable 265,000 285,000
Other advances 55,126
------------------- ------------------
Total current liabilities 463,289 441,699
------------------- ------------------
STOCKHOLDERS' DEFICIT
Common stock, no par value;
25,000,000 shares authorized;
8,760,000 shares issued and outstanding 707,700 707,700
Additional paid-in capital 136,316 136,316
Accumulated deficit (1,137,060) (1,110,412)
------------------- ------------------
Total stockholders' deficit (293,044) (266,396)
------------------- ------------------
$ 170,245 $ 175,303
=================== ==================
See accompanying notes to financial statements.
36
FUTUREXMEDIA, INC.
(Formerly First Step Distribution Network, Inc., successor to First Step
Consulting, LLC)
STATEMENT OF OPERATIONS
March 31, 2003
--------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER DECEMBER
2003 2002 31, 2002 31, 2001
(UNAUDITED) (UNAUDITED)
------------ ----------- ------------ ------------
CONSULTING REVENUE $ -- $ -- $ -- $ 242,321
OPERATING EXPENSES 20,341 161,078 761,324 331,645
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (20,341) (161,078) (761,324) (89,324)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 2,782 5,956 3,655
Interest expense (6,307) (33,563) (132,354) (23,491)
Impairment of investment (106,815)
------------ ------------ ------------ ------------
(6,307) (30,781) (233,213) (19,836)
------------ ------------ ------------ ------------
NET LOSS (26,648) (191,859) (994,537) (109,160)
============ =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
basic and diluted 8,760,000 905,000 2,025,342 881,250
------------ ------------ ------------ ------------
LOSS PER COMMON SHARE, basic and diluted $ -- $ (0.21) $ (0.49) $ (0.12)
============ =========== ============ ============
See accompanying notes to financial statements.
37
FUTUREXMEDIA, INC.
(Formerly First Step Distribution Network, Inc., successor to First Step
onsulting, LLC)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 2003
-------------------------------------------------------------------------------
COMMON STOCK
--------------------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ----------- -----------
BALANCES, January 1, 2001 850,000 $ 8,750 $ -- $ (6,715) $ 2,035
ISSUANCE OF COMMON STOCK 50,000 100,000 100,000
ISSUANCE OF OPTIONS 56,658 56,658
NET LOSS (109,160) (109,160)
----------- ----------- ------------ ----------- -----------
BALANCES, December 31, 2001 900,000 108,750 56,658 (115,875) 49,533
ISSUANCE OF COMMON STOCK 50,000 50,000 50,000
ISSUANCE OF COMMON STOCK IN CONSIDERATION
OF SERVICES RENDERED 75,000 50,000 50,000
ISSUANCE OF COMMON STOCK AND OPTIONS
PURSUANT TO NOVEMBER 2002 AGREEMENTS 7,735,000 498,950 32,000 530,950
ISSUANCE OF OPTIONS 47,658 47,658
NET LOSS (994,537) (994,537)
----------- ----------- ------------ ----------- -----------
BALANCES, December 31, 2002 8,760,000 707,700 136,316 (1,110,412) (266,396)
NET LOSS (unaudited) (26,648) (26,648)
----------- ----------- ------------ ----------- -----------
BALANCES, March 31, 2003 (unaudited) 8,760,000 $ 707,700 $ 136,316 $(1,137,060) $ (293,044)
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
38
FUTUREXMEDIA, INC.
(Formerly First Step Distribution Network, Inc., successor to First Step
Consulting, LLC)
STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
YEARS ENDED MARCH 31, 2003
-------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2003 2002 2002 2001
(unaudited) (unaudited)
----------- ----------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (26,648) $(191,859) $(994,537) $(109,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of investment 106,815
Noncash compensation 167,320
Noncash interest 26,899 84,873 19,443
Depreciation and amortization 751 12,715
Other 4,307
Increase (decrease) in cash attributable to changes
in operating assets and liabilities:
Accounts receivable 3,463
Due from stockholder (16,934) 5,717 (4,105)
Interest receivable - stockholders (2,782) (652) (3,655)
Other (1,500)
Cash overdraft (918) (918) 918
Due to stockholder 14,602
Accounts payable and accrued expenses (13,536) 24,249 72,787 24,230
Payroll taxes payable 16,308
Customer advances (4,000) 4,000
----------- ---------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (35,126) (162,845) (533,572) (50,264)
----------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment (80,000)
Loans to stockholders (165,570)
Repayments of loans receivable-stockholders 111,648
Purchases of property and equipment (7,905) (31,976)
----------- ---------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,905) (328) (165,570)
----------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 50,000 50,000 100,000
Net proceeds from notes payable and options and advances 135,000 571,135 115,000
Payment of note payable (20,000) (87,235)
Payment of deferred costs
Other advances 55,126
----------- ---------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,126 185,000 533,900 215,000
----------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH 14,250 (834)
CASH, beginning of period (834)
----------- ---------- --------- ---------
CASH, end of period $ -- $ 14,250 $ -- $ --
=========== ========== ========= =========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 5,833 $ -- $ -- $ --
=========== ========== ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Investment purchased through debt financing $ -- $ -- $ 51,815 $ --
=========== ========== ========= =========
Loans receivable from stockholder offset against
amounts due to stockholder $ -- $ -- $ 21,800 $ --
=========== ========== ========= =========
Debt to equity conversion pursuant to November 2002
agreements $ -- $ -- $ 445,450 $ --
=========== ========== ========= =========
Accrual of deferred costs $ -- $ -- $ 38,000 $ --
=========== ========== ========= =========
39
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 IS UNAUDITED)
1. ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
FutureXmedia, Inc. ("FX") (formerly First Step Distribution Network, Inc.
("FSDN"), 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 FSC's name to
FSDN. FSC was established on June 1, 2000 and ceased its existence on December
26, 2001. On December 6, 2002, FSDN changed its name to FutureXmedia, Inc.
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. The ownership of FSC
prior to the contribution of the assets to FSDN was the same as the ownership of
FSDN after the contribution of assets. The members of FSC, pursuant to the
contribution of assets to FSDN, received stock ownership of FSDN in the same
ratio as their ownership in FSC. The primary reason for the contribution of
assets for FSDN was to operate as a corporation.
Nature of Operations
FX was initially formed to establish an original equipment manufacturer sales
and marketing business within the software and hardware personal computer
industry. FX's new business strategy is to bring electronic gaming products to
market through the use of innovative technologies and channels.
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 2002 presentation.
Property and Equipment
Property and equipment is stated at cost. FX 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 reduced and the
amortization accelerated to the actual lease term.
40
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 IS UNAUDITED)
1. ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Property and Equipment (continued)
Property and equipment consists of the following:
MARCH 31, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------------ ------------------
Computer equipment $ 11,109 $ 11,109
Other equipment 9,911 9,911
--------------------- --------------------
21,020 21,020
Less accumulated depreciation 2,510 1,759
--------------------- --------------------
$ 18,510 $ 19,261
==================== ====================
Investments
In July 2002, FX purchased shares (less than 2%) in a privately-held Korean
company, SKY Ghem TV, a cable television station that broadcasts games, for
approximately $132,000. The investment is being accounted for on the cost
method. During the 4th quarter of 2002, FX recognized an approximate $107,000
impairment charge in connection with this investment as a result of a negative
change in the financial position of SKY Ghem TV and a determination that the
current fair value of the stock was significantly below the cost.
During 2000, FX received shares (less than 1%) in a closely-held unrelated
company in consideration for services provided. Since the shares are not readily
marketable, the board of directors initially valued the investment at $1,500,
the estimated value of services rendered. Thereafter, the investment is being
accounted for on the cost method.
Revenue Recognition
FX recognizes revenue when it is earned, based on the terms of each customer
contract.
Fair Value of Financial Instruments
Financial instruments held by FX include accounts payable, accrued expenses and
notes payable. The values of accounts payable and accrued expenses 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.
Loss per Common Share
Loss per common share is computed based on the weighted average number of common
shares outstanding.
FX complies with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which requires dual presentation of basic and diluted
earnings (loss) per
41
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. FX has no securities or other contracts to issue its own common stock.
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
FX 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
During 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Cost Associated with Exit or Disposal Activities" and No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure".
SFAS No. 146, which addresses financial accounting and reporting for costs
associated with exit or disposal activities, did not have a significant impact
on FX's financial position, results of operation or cash flows.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to fair value method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Although FX
utilizes K2 stock-based compensation practices (if the transaction with K2 is
consummated - see Note 5), FX does not currently maintain stock-based employee
compensation plans.
42
2. NOTES PAYABLE AND OTHER ADVANCES
NOTES PAYABLE
At March 31, 2003 (unaudited) and December 31, 2002, notes payable consist of
the following:
MARCH 31, DECEMBER
2003 31, 2002
(UNAUDITED)
------------- -----------
Note payable - Brian C. Lysaght, interest at 5% per annum, due November 6, 2002 (a) $ 100,000 $ 100,000
Note payable - James Quigley, due February 5, 2002, loan fee of $2,000 and interest
at 13% per annum after due date (b) 15,000 15,000
Note payable - John Keller, due February 5, 2002, loan fee of $2,000 and interest
at 13% per annum after due date (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 (e) 20,000 20,000
Note payable - Daniel Keller, due February 5, 2002, loan fee of $1,000 and interest
at 13% per annum after due date (b) 10,000 10,000
Note payable - Don Sweda, interest at 10% per annum, due June 10, 2002 (c) 10,000 10,000
Note payable - Neil Malow, interest at 10% per annum, due June 8, 2002 (b) 10,000 10,000
Note payable - Stephen Zuckerman, interest at 10% per annum,
due September 30, 2002 (d) 80,000 100,000
------------- -----------
$ 265,000 $ 285,000
============= ===========
(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. The difference between the conversion
price and the fair market price will be evaluated pursuant to the
provisions of EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios". If the proposed merger with K2 is consummated, FX anticipates
the beneficial conversion feature will not exceed the amounts of the
proceeds, less previous discount (see next paragraph), or approximately
$27,000. The fair market value of K2's common stock at the date of
issuance was approximately $.03 per share.
43
In connection with the issuance of this note, FX issued options to
purchase shares of K2 (if the transaction with K2 is consummated) (see
Note 5). FX has allocated $73,316 as of December 31, 2002 as the
estimated value of the options issued with the note. The amount was
amortized as additional interest expense with a corresponding increase to
notes payable over the life of the note using the effective interest
method. At December 31, 2002, the entire amount has been fully amortized.
(b) These notes included 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). FX has accounted for this provision as options
with a cashless exercise price. Accordingly, FX has allocated $25,000 as
of December 31, 2002 as the estimated value of the cashless options
issued with these notes. These amounts were amortized as additional
interest expense with a corresponding increase to notes payable over the
lives of the respective notes using the effective interest method. At
December 31, 2002, the entire amount has been fully amortized.
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 included a provision to issue the note holder an aggregate of
7,500 shares of common stock of FX. FX has accounted for this provision
as an option with a cashless exercise price. Accordingly, FX has
allocated $6,000 as the estimated value of the cashless option issued
with this note as of December 31, 2002. This amount was amortized as
additional interest expense with a corresponding increase to notes
payable over the life of the note using the effective interest method.
The estimated value of the cashless option has been fully amortized as of
December 31, 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, majority
stockholder of FX, and Robert Millet, chief operating officer of FX. 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 (see Note 8).
(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).
All notes payable as of December 31, 2002, 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, excluding the Zuckerman note (see
Note 8).
Other Advances
During the year ended December 31, 2002, FX 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 FX's common stock (see Note 7).
At March 31, 2003 (unaudited), other advances of $55,126 represent amounts
advanced by stockholders to reduce a note payable and pay other operating costs.
The advances are non-interest bearing and due on demand.
3. INCOME TAXES
As of March 31, 2003 (unaudited) and December 31, 2002, FX has a net operating
loss carryforward totaling approximately $1,137,000 and $1,110,000 respectively
to offset taxable income in future years
44
through 2023 and 2022, respectively (Federal) and 2013 and 2012 respectively
(California). At March 31, 2003 (unaudited) and December 31, 2002, the net
operating loss carryforward resulted in an estimated $352,000 and $344,000,
respectively, of Federal deferred tax assets, and $101,000 and $98,000,
respectively, of State deferred tax assets. A full valuation allowance has been
established for these deferred tax assets. Primarily as a result of the November
2002 Agreement (see Note 7), FX experienced a significant change in ownership
and consistent with Internal Revenue Code Section 382, FX will be unable to use
a majority of the net operating loss carryforwards.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2001, two of the stockholders of FX, in
connection with their tax planning strategies in light of FSC's contribution of
net assets to FX (see Note 1), borrowed funds from FX aggregating $165,570.
These notes, which accrued interest at 6.5% per annum due annually, were due,
together with unpaid interest, in December 2006. However, during the year ended
December 31, 2002, the stockholders repaid approximately $134,000 (including
offsetting approximately $22,000 of amounts due one of the stockholders) and
approximately $32,000 was expensed for services rendered, leaving a receivable
balance at December 31, 2002 of $0. In each of the years ended December 31, 2002
and 2001, interest income on these notes was approximately $4,000.
FX rented office space from a stockholder on a month-to-month basis through May
2002. Payments for rent for the three-month periods ended March 31, 2003 and
2002 (unaudited) and the years ended December 31, 2002 and 2001 were $0, $6,000,
$60,000 and $34,000 respectively.
5. PROPOSED MERGER
FX entered into an agreement as of January 15, 2002 for a proposed merger with
K2 Digital, Inc. ("K2") 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 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 stockholders
of FX holding approximately 90% or 8.76 million of the outstanding shares of K2
immediately after the effective time of the merger. As of March 31, 2003
(unaudited) and December 31, 2002, FX has capitalized approximately $125,000
related to the proposed merger. If the merger is not successful, then the merger
costs will be expensed. If the merger is successful then the merger costs will
be charged against equity.
6. GOING CONCERN
Through March 31, 2003 (unaudited) and December 31, 2002, FX has incurred losses
aggregating approximately $1.1 million since inception.
At March 31, 2003 (unaudited) and December 31, 2002, FX had a working capital
deficiency of approximately $338,000 and $312,000 respectively, a stockholders'
deficiency of approximately $293,000 and $266,000, respectively, and no cash.
Further, for the three months ended March 31, 2003 (unaudited) and for the year
ended December 31, 2002, FX generated no revenues. These factors, among others,
indicate that there is substantial doubt about FX's ability to continue 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.
Management's plans include a proposed merger with a publicly traded "shell"
company which would result in FX's assets and liabilities being assumed by that
entity (see Note 5). Management believes that such a merger will allow FX 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 FX is unsuccessful in completing the proposed merger, management's
alternative plan includes a further search
45
for a similar business combination or strategic alliance. There is no assurance
that this transaction, or management's alternative plan, will be realized.
7. STOCKHOLDERS' EQUITY (DEFICIT)
The November 2002 Agreements
In November 2002, FX entered into an agreement ("the November 2002 Agreement")
with Hideo Matsuoka and Future Investment Co. ("FIC"), a British Virgin Islands
corporation controlled by Hideo Matsuoka. The November 2002 Agreement provides
for the conversion of $350,000 of debt, $200,000 by Hideo Matsuoka and $150,000
by FIC, into 6,600,000 shares of common stock of FX ("the 6.6 Million Share
Conversion").
The conversion price of approximately $0.05 per FX share is a product of the
terms of the proposed merger with K2, which is designed to provide Hideo
Matsuoka a predetermined and majority ownership in the common stock of K2. Given
FX's deteriorated financial condition, among other reasons, FX management
believes that the approximate $0.05 per FX share price is a better indicator of
current fair value than prior common stock sales. The FX stock was distributed
in the name of 18 different individuals and trusts. Related accrued interest and
debt due preexisting FX stockholders, aggregating approximately $35,000, was
also converted to equity.
In addition to the 6.6 Million Share Conversion and pursuant to an agreement
related to the November 2002 Agreement ("the Supplemental November 2002
Agreement"), 1,015,000 shares of FX's common stock, valued at approximately
$53,500 (or approximately $0.05 per share, consistent with the 6.6 Million Share
Conversion), were issued to preexisting FX stockholders as compensation.
The Supplemental November 2002 Agreement also designates 120,000 shares of FX's
common stock to parties who had previously advanced FX $60,000 (see Note 2,
Other Advances). 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.
FX has valued the preceding grants at approximately $33,000 (or approximately
$0.05 per share, consistent with the 6.6 Million Share Conversion).
Other equity activity
In each of the years ended December 31, 2002 and 2001, FX issued 50,000 shares
of its common stock for proceeds of $50,000 in 2002 and $100,000 in 2001. During
the year ended December 31, 2002, FX issued 75,000 shares of its common stock to
a vendor for services rendered.
See Note 2 for discussion of options to purchase shares of K2, issued in
connection with certain notes payable, valued at approximately $104,000.
8. LEGAL MATTERS
On March 27, 2003, Stephen Zuckerman, a note holder (see Note 2), filed a cause
of action in the Los Angeles Supreme Court demanding full payment of the
remaining unpaid principal and interest amounting to $80,472, computed as of
March 18, 2003. Prior to filing the cause of actions Mr. Zuckerman was paid
$20,000 by FX stockholders on behalf of FX. Subsequent to filing the cause of
action, Mr. Zuckerman was paid an additional $25,000 by FX stockholders on
behalf of FX.
46
9. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to March 31, 2003, FX stockholders advanced FX approximately $40,000
for working capital and other purposes (see Note 8).
47
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
Annual Report on Form 10-KSB Fiscal year ended December 31, 2002; Filed on April
15, 2003
Quarterly Report on Form 10Q-SB Quarter ended March 31, 2003; Filed on May 15,
2003
Amendment to Quarterly Report on Quarter ended September 30, 2002; Filed on
Form 10-QSB/A 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 Quarter ended March 31, 2002; Filed on June 28,
10-QSB/A 2002
Amendment to Annual Report on Form Fiscal year ended December 31, 2001; filed on May
10KSB/A 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
48
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
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; Attention: Gary Brown. A
copy of the most current Annual Report, for the year ended December 31, 2002, is
being mailed with this Information Statement.
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 FutureXmedia, Inc., 100 North
Crescent Drive, Suite 111, Beverly Hills, California 90210 (310) 777-3177;
Attention: Elliot Cody.
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
July, 2003, and the mailing of the Information Statement to you shall not
create any implication to the contrary.
49
ANNEXES
Annex A: Section 262 of the Delaware General Corporation Law
50
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:
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a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
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.
52
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
(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
53
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.
(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
54
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.
(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.
55