FORM 10QSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition Period From ... to ...
Commission File No. 1-11873
K2 DESIGN, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3886065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification
Number)
55 BROAD STREET, 7TH FLOOR
NEW YORK, NEW YORK 10004
(Address of principal executive
offices)
Issuer's telephone number: (212) 547-5234
Check whether the issuer (1) filed all reports required by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Applicable only to Corporate Issuers:
Transitional Small Business Disclosure Format (check one):
Yes___ No X
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 31, 1997
Common stock, par value $.01 3,645,421
Common stock redeemable purchase warrants 1,000,000
Page 1 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - March 31, 1997 (unaudited)
and December 31, 1996 (audited)..............3
Consolidated statements of operations - three
months ended March 31, 1997 (unaudited)
and March 31, 1996 (unaudited)...............4
Consolidated statements of cash flows - three
months ended March 31, 1997 (unaudited)
and March 31, 1996 (unaudited)...............5
Notes to consolidated financial statements..................7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................12
SIGNATURES.......................................................12
Page 2 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1997 1996
(unaudited) (audited)
CURRENT ASSETS:
Cash $3,137,783 $3,867,430
Accounts receivable 2,380,739 2,067,715
Prepaid and other assets 371,801 311,481
Total current assets $5,890,323 $6,246,626
EQUIPMENT AND LEASEHOLD IMPROVEMENTS $628,905 $607,431
RESTRICTED CASH $31,300 $30,000
OTHER ASSETS $10,622 $10,622
Total assets $6,561,150 $6,894,679
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations $63,116 $53,448
Accounts payable 826,670 744,563
Accrued professional fees 14,000 35,000
Accrued compensation 181,298 124,793
Accrued taxes 85,099 97,265
Other accrued expenses 58,388 174,784
Customer advances 159,316 166,169
Total current liabilities $1,387,887 $1,396,022
CAPITAL LEASE OBLIGATIONS $78,897 $76,437
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock $36,454 $36,454
Additional paid-in capital 6,281,184 6,281,183
Retained earnings (deficit) (1,223,272) (895,417)
Total stockholders' equity (deficit) $5,094,366 $5,422,220
Total liabilities and stockholders' equity
(deficit) $6,561,150 $6,894,679
Page 3 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
1997 1996
(unaudited)
REVENUES $1,665,398 $512,434
DIRECT SALARIES AND COSTS 1,191,390 499,109
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 781,281 125,958
DEPRECIATION 56,932 9,113
Income (loss) from operations (364,205) (121,746)
INTEREST INCOME 40,710 0
INTEREST EXPENSE 3,324 982
PROVISION FOR INCOME TAXES 1,036 0
Net income (loss) $(327,855) $(122,728)
NET (LOSS) PER COMMON SHARE $(0.09) $(0.06)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,645,421 2,013,040
Page 4 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(unaudited)
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(327,855) $(122,728)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation 56,932 9,113
Changes in-
Accounts receivable (313,024) (184,411)
Prepaid and other assets (60,320) (49,725)
Restricted cash (1,300) (30,000)
Other assets 0 0
Accounts payable 82,107 127,402
Accrued professional fees (21,000) 1,931
Accrued compensation 56,505 27,479
Accrued taxes (12,166) 11,667
Other accrued expenses (116,396) 14,224
Customer advances (6,853) 22,473
Net cash used in operating activities (663,370) (172,575)
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchase of equipment (50,455) (7,246)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 0 223,475
Payments on line of credit 0 (992)
Principal payments on capital lease obligations (15,822) (8,150)
Net cash used in provided by financing activities (15,822) 214,333
Net increase (decrease) in cash (729,647) 34,512
CASH, beginning of period 3,867,430 17,756
CASH, end of period $3,137,783 $52,268
</TABLE>
Page 5 of 15
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $3,324 $684
State income taxes 1,036 10,505
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Assets acquired under capital lease obligations $26,231 $38,935
Page 6 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company and reflect
all adjustments, consisting of only normal recurring adjustments,
which are, in the opinion of management, necessary for a fair
presentation of financial results for the three month periods ended
March 31, 1997 and 1996, in accordance with generally accepted
accounting principles for interim financial reporting and pursuant
to Form 10-QSB and Regulation SB. Certain information and footnote
disclosures normally included in the Company's annual audited
consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations.
The results of operations for the three month
periods ended March 31, 1997 and 1996 are not necessarily indicative
of the results of operations to be expected for a full fiscal year.
These interim condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements for the fiscal year ended December 31, 1996, which are
included in the Company's Form 10-KSB filed with the Securities and
Exchange Commission.
The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and disclosures of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE:
Net loss per common share has been computed by
dividing net loss by the weighted average number of common shares
outstanding. Statement of Financial Accounting Standards No. 128,
"Earnings per Share" which becomes effective for the period ending
March 31, 1997, establishes new standards for computing and
presenting earnings per share (EPS). The new standard requires the
presentation of basic EPS and diluted EPS. Basic EPS is calculated
by dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to
common shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities.
Previously reported EPS amounts must be restated under the new
standard when it becomes effective. As a result of the loss for the
periods presented, the adoption of this Standard will not have an
impact on earnings per share.
Page 7 of 12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This section and other parts of this Report
contain forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Readers are encouraged to
refer to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 for a further discussion of the Company's
business and the risks and opportunities attendant thereto, in addition
to those set forth herein in the section captioned "--Fluctuations in
Quarterly Operating Results."
OVERVIEW
K2 Design, Inc. (the "Company") was founded in
1993 as a general partnership and initially operated as a traditional
graphic design business. The Company was hired to design a graphical
user interface in March 1994 for Sierra Magazine Online, a proprietary
online service, and in August 1994 for NetMarket Inc., the first company
to perform a secure online transaction on the Internet, at which time the
Company shifted its principal business to Web site design and creation.
After the Company's initial public offering ("IPO") on July 26, 1996, the
Company began to develop its vision to become a full-service interactive
marketing and communications firm, largely in anticipation of demands
from its customers for additional complementary services. Complementary
services the Company now provides include, among others, development of
CD-ROMs, media placement on Web sites, consulting services regarding Web
site usage and user characteristics, development and maintenance of
Company-owned Web site advertising networks, live Internet broadcasts and
the development of brand strategies, intranet design and print collateral
systems.
As a result of the expansion of the Company's
services beyond Web site design and creation, the Company incurred
significant expenses in 1996 and in the first quarter of 1997 in
anticipation of future revenues. Since the Company has engaged in Web
site design and creation only for approximately two years, and has been
providing various other services for less than one year, the Company has
a limited operating history upon which an evaluation of the Company and
its prospects can be based. Management therefore believes that period-
to-period comparisons of the Company's results of operations are not
indicative of future results.
In January 1995, the Company was reorganized as a
New York corporation that elected to be treated as an S corporation for
tax purposes. In January 1996, the Company was reorganized as a Delaware
holding company and the New York corporation became a wholly-owned
operating subsidiary thereof and thus ceased to be an S corporation for
tax purposes. For financial reporting purposes, the Company's
Consolidated Financial Statements include the Company and its wholly-
owned subsidiary.
RESULTS OF OPERATIONS
General
Project-based work for which the Company has been
engaged has generally been completed within 16 weeks, although certain
past, current and future projects have taken and are expected to take
longer to complete. Revenues are recognized on a percentage of
completion basis. Provisions for any estimated losses on uncompleted
projects are made in the period in which such losses are determinable. A
portion of the Company's revenues have been generated on a fixed fee for
service basis. The Company also provides ongoing services to certain
customers, including one customer for which the Company is agency-of-
record. Additionally, the Company has experienced and expects to
continue to experience a longer sale cycle, since its focus has broadened
to encompass a comprehensive interactive marketing initiative as compared
to its former focus on project-based Web site business.
The Company has increased and is currently
increasing its expense levels to accommodate its past growth and
anticipated growth in its business. These expenses are related to, among
other things, a substantial increase in the number of employees, the
relocation of the Company's principal office, the opening of two
additional offices, and investments in equipment. The Company's failure
to expand its business in an efficient manner could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, there can be no assurance that the Company's
revenues will grow at a rate that will support its increasing expense
levels.
The changes in the various line-items discussed
below result from the increase in the Company's expenses since it
consummated a series of securities offerings in 1996 and began to apply
the proceeds to expand services in anticipation of future revenues.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
THREE MONTHS ENDED MARCH 31,
(unaudited)
1997 1996
<S> <C> <C>
Revenues 100.0% 100.0%
Operating Expenses
Direct Salaries and Costs 71.6% 97.4%
Selling, General and Administrative Expenses 46.9% 24.6%
Depreciation 3.4% 1.7%
Total Operating Expenses 121.9% 123.7%
Operating Income (Loss) (21.9)% (23.7)%
Other Income (Expense) 2.2% ----
Income (Loss) before taxes (19.7%) (23.7%)
Income Taxes ---- ----
Net Income (Loss) (19.7%) (23.7%)
</TABLE>
Revenues
Revenues for the three months ended March 31,
1997 and 1996 were $1,665,398 and $512,434, respectively, or an increase
of 225%. The increase in revenues in the quarter ended March 31, 1997 as
compared to that ended March 31, 1996 primarily reflects the expansion of
the Company's core Web site services business. In the three months ended
March 31, 1997, approximately 70% of revenues were attributable to Web
site design and creation services, 16% to media placement and 7% to one
CD-ROM project . During the same period in 1996, approximately 95% of
revenues were attributable to Web site design and creation services and
the balance to traditional graphic design services. Since the Company's
transition from a Web site design firm into an integrated interactive
marketing and communications firm is ongoing, the Company is unable to
predict the relative percentage of its revenues that will be generated
from each of its various services.
During the three months ended March 31, 1997,
WavePhore, Inc., Toys "R" Us Corporation and The Chase Manhattan Bank
accounted for approximately 41%, 14% and 7% of the Company's revenues,
respectively. During the three months ended March 31, 1996, IBM and
Omega Engineering accounted for approximately 60% and 10% of the
Company's revenues, respectively. The increase in revenues in the three
months ended March 31, 1997 as compared to the three months ended March
31, 1996 resulted primarily because (i) the Company's executive
management devoted substantially more time to sales and marketing after
the Company's initial public offering on July 26, 1996, and (ii) the
Company increased its production capacity and sales and account executive
initiatives during the March 31, 1997 quarter.
At the present time, the Company has determined to
maintain its current expense levels, which to a large extent are fixed,
based in part on expectations as to future revenues and will base future
expense levels similarly. As a result, the Company expects that
operating expenses will exceed revenues in the second quarter of 1997.
Direct Salaries and Costs
Direct salaries and costs include all direct labor
costs and other direct costs related to project performance, such as
independent contractors, freelance labor, supplies, and printing and
equipment costs. As a percentage of revenues, direct salaries and costs
decreased to 71.6% from 97.4% in the three months ended March
31, 1997 as compared to the same period in 1996. This decrease resulted
principally from a shift in the responsibilities of certain personnel to
general and administrative functions commencing in late 1996. The
Company's direct salaries and costs for the three months ended March 31,
1997 and 1996 were $1,191,390 and $499,109, respectively, or an increase
of 139%. In the 1997 period, direct salaries and costs consisted
primarily of approximately $373,662 paid as direct salaries, and
secondarily of approximately $327,000 paid to freelance artists and other
independent contractors (approximately $118,000 of which was paid to
vendors of complex computer programming services required for special
features on Web sites). In the 1996 period, direct salaries and costs
consisted primarily of approximately $260,000 paid to freelance artists
and other independent contractors (approximately $150,000 of which was
paid to vendors of complex computer programming services required for
special features on Web sites) and secondarily of $190,000, paid as
direct salaries. The Company has hired programmers in anticipation of
future projects in an effort to reduce reliance on outside vendors of
complex computer programming. Since the preceding sentence is forward
looking, there can be no assurance that the Company will successfully
achieve a net savings by bringing in-house more of the complex programming
required in its business. Among other things, the Company may not be able
to attract and retain personnel capable of performing these services at a
rate less than that provided by outside vendors and even if such persons
can be retained, their efforts may not entirely eliminate reliance on
outside vendors, especially if the Company's complex programming needs
continue to increase rapidly.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for
the three months ended March 31, 1997 and 1996 were approximately
$781,281 (46.9% of revenues) and $126,000 (24.6% of revenues),
respectively, and primarily consisted of professional fees, occupancy
costs, travel costs, office expenses and supplies and marketing and
advertising, among other things. The increase in absolute dollars
reflects the application of the proceeds of the Company's securities
offerings during 1996, consistent with the Company's expansion strategy.
The Company has entered into a lease for
additional office space at 30 Broad Street and intends to consolidate its
50 Broad Street office with and into this 13,700 square foot space. The
lease for 30 Broad Street has an initial term of 6 years and the Company
expects to open this office during the summer of 1997. The lease
provides for fixed rent of approximately $225,000 per annum for the first
three years of the lease and $245,000 per annum thereafter. Under the
lease, the Company is also responsible for utilities and real estate
taxes. The Company further intends to sublet the 50 Broad Street
location for the duration of that lease, which terminates on January 31,
2002. As a result of this expansion, the Company's selling, general and
administrative expenses, particularly occupancy costs, personnel costs
and office expenses and supplies, are expected to increase. Moreover,
the failure of the Company to sublet the 50 Broad Street location would
have a material adverse effect on the Company.
Depreciation
Depreciation expense was $56,932 and $9,113 in the
three months ended March 31, 1997 and 1996, respectively, and related to
depreciation of equipment and leasehold improvements. The Company's
depreciation expenses in 1997 have increased significantly as a result of
depreciation of the Company's equipment and leasehold improvement in
connection with the acquisition of computer equipment and the relocation
of its offices.
Income Taxes
Effective January 1995, the Company elected to be
treated as an S Corporation for federal income tax purposes. As a
result, the shareholders were individually liable for federal income tax
on the Company's taxable income. In January 1996, the Company began to
be treated as a C corporation for federal and state income tax purposes.
The Company is also liable for New York state and city income taxes, as
well as Maryland corporation and payroll taxes.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Quarterly revenues and operating results have
fluctuated and will fluctuate as a result of a variety of factors. These
factors, some of which have affected the Company and some of which are
beyond the Company's control, include the timing of the completion,
material reduction or cancellation of major projects, the loss of a major
customer or the termination of a relationship with a channel source,
timing of the receipt of new business, timing of the hiring or loss of
personnel, changes in the pricing strategies and business focus of the
Company or its competitors, capital expenditures, operating expenses and
other costs relating to the expansion of operations, general economic
conditions and acceptance and use of the Internet. In addition, revenues
and operating results are difficult to forecast because of these
fluctuations and because the Company lacks historical financial data for
a significant number of periods. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue
shortfall. Any significant shortfall of demand for the Company's
services in relation to the Company's expectations would have an adverse
impact on the Company's business, operating results and financial
condition. The Company's quarterly operating margins may also fluctuate
from period to period depending on the relative mix of lower cost full
time employees versus higher cost independent contractors.
LIQUIDITY AND CAPITAL RESOURCES
The Company is dependent on its cash of
approximately $3.1 million (at March 31, 1997), together with cash
generated by operations, if any, for working capital in order to be
competitive, to meet the increasing demands for service, quality and
pricing and for any expansion of its business. While the Company
believes that its cash position together with cash expected to be
generated by operations will be sufficient to finance its operations for
at least one year, the Company may nevertheless require future
substantial alternative financing in order to satisfy its working capital
needs, which may be unavailable or prohibitively expensive since the
Company's only assets available to secure additional financing are
accounts receivable. Accordingly, the Company may not have the funds to
relieve any liquidity problems in the next year and thereafter, or to
finance any expansion of its business.
Net cash used in the Company's operating
activities was $(663,370) in the quarter ended March 31, 1997 and
related primarily to a substantial increase in accounts receivable, which
was partially offset by an increase in accounts payable, and to the loss
incurred during the quarter.
In the quarter ended March 31, 1997, the Company
spent approximately $50,000 on capital expenditures, consisting of
furniture, fixtures and leasehold improvements acquired and made in
connection with the Company's recent relocation of its principal offices
and the opening of two sales offices. Additional capital expenditures
are expected to be made in connection with the opening of the 30 Broad
Street office.
In May 1997, the Company also borrowed $500,000
from a bank in order to finance furniture and leasehold improvements to
its new office at 30 Broad Street, New York, NY. The loan has a two-year
term, bears interest at the rate of 8.4% per year, is payable in 23 equal
monthly installments of $8,333 and a final payment of $308,333. This
loan is also secured by all of the Company's assets on deposit with the
bank, which include substantially all of the Company's cash and its
operating accounts.
In addition, the Company financed the purchase of
certain equipment through capital leases. The principal balance of such
leases was $142,000 at March 31, 1997 and is payable in varying
installments through the year 2000.
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Items 1.- 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27.1 - Final Data Schedule (included only in the
electronic filing with the Securities and Exchange Commission)
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with the requirements of the
Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
K2 DESIGN, INC.
Date: August 14, 1997 /S/ DAVID J. CENTNER
--------------------------------
David J. Centner
Chairman Of The Board and
Principal Executive Officer
/S/ NELSON C. HUNTER
--------------------------------
Nelson C. Hunter
Principal Financial and Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
K2 DESIGN, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE
QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,137,783
<SECURITIES> 0
<RECEIVABLES> 2,405,739
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,890,323
<PP&E> 809,279
<DEPRECIATION> 180,374
<TOTAL-ASSETS> 6,561,150
<CURRENT-LIABILITIES> 1,387,887
<BONDS> 78,897
<COMMON> 36,454
0
0
<OTHER-SE> 5,057,912
<TOTAL-LIABILITY-AND-EQUITY> 6,561,150
<SALES> 0
<TOTAL-REVENUES> 1,665,398
<CGS> 1,191,390
<TOTAL-COSTS> 838,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,324
<INCOME-PRETAX> (367,529)
<INCOME-TAX> 1,036
<INCOME-CONTINUING> (368,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (327,855)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
