<PAGE>
FORM 10-QSB
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 September 30, 1998
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 1-11873
K2 DESIGN, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
13-3886065
(I.R.S. Employer
Identification Number)
30 Broad Street, 16th Floor
New York, New York 10004
(Address of principal executive offices)
Issuer's telephone number: (212) 301-8800
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:
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 OCTOBER 31, 1998
Common stock, par value $.01 per share 3,684,965
Common stock redeemable purchase warrants 1,000,000
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet - September 30, 1998 (unaudited)...................................................................3
Consolidated statements of operations - three and nine months ended
September 30, 1998 (unaudited) and September 30, 1997 (unaudited)........................................................4
Consolidated statements of cash flows - nine months ended
September 30, 1998 (unaudited) and September 30, 1997 (unaudited) .......................................................5
Notes to consolidated financial statements (unaudited)........................................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................................................................9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................................................................13
SIGNATURES........................................................................................................................14
</TABLE>
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
<TABLE>
<CAPTION>
ASSETS September 30,
1998
(unaudited)
--------------
<S> <C>
Current Assets:
Cash $2,919,541
Accounts receivable, net of allowance for doubtful accounts of $84,500 1,258,058
Prepaid expenses and other current assets 981,304
----------
Total current assets 5,158,903
Investment in restricted securities 3,000,000
Equipment and leasehold improvements, net 766,700
Restricted cash 150,711
Other assets 9,172
----------
Total assets $9,085,486
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of capital lease obligations $41,781
Accounts payable 1,266,082
Accrued compensation and payroll taxes 125,949
Other accrued expenses 1,321,636
Customer advances 164,688
----------
Total current liabilities 2,920,136
Long-term capital lease obligations 10,083
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized; 0 shares issued and 0
outstanding
Common stock, $0.01 par value 9,000,000 shares authorized; 36,850
3,684,965 shares issued and outstanding
Treasury Stock (386,781)
Additional paid-in capital 6,400,538
Retained Earnings 104,660
----------
Total stockholders' equity 6,155,267
----------
Total liabilities and stockholders' equity $9,085,486
==========
</TABLE>
3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------------------- -------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $1,901,265 $1,636,991 $5,936,879 $4,384,467
Direct salaries and costs 1,448,140 1,225,886 4,116,233 3,247,227
Selling, general and administrative
expenses 655,281 737,674 1,876,395 1,966,171
Depreciation 86,539 86,305 263,818 202,011
---------- ---------- ---------- ----------
Loss from continuing operations before (288,695) (412,874) (319,567) (1,030,942)
interest and other income, net, income taxes and
discontinued operations
Interest and other income, net 76,322 25,003 135,306 93,878
---------- ---------- ---------- ----------
Loss before income tax provision
and discontinued operations (212,373) (387,871) (184,261) (937,064)
Provision for income taxes 18,870 9,014 21,307 13,970
---------- ---------- ---------- ----------
Loss from continuing operations ($231,243) ($396,885) ($205,568) ($951,034)
Loss from discontinued operations (0) (198,100) (85,309) (445,150)
Gain (loss) from sale of discontinued operations (107,919) 0 2,994,204 0
---------- ---------- ---------- ----------
Net income (loss) ($339,162) ($594,985) $2,703,327 ($1,396,184)
========== ========== ========== ==========
Loss per share from continuing
operations -
Basic ($0.07) ($0.11) (0.06) ($0.26)
Diluted ($0.07) ($0.11) (0.06) ($0.26)
Loss per share from discontinued operations
Basic ($0.00) ($0.05) ($0.02) ($0.12)
Diluted ($0.00) ($0.05) ($0.02) ($0.12)
Gain (loss) per share from sale of
discontinued operations -
Basic ($0.03) $0.00 $0.83 $0.00
Diluted ($0.03) $0.00 $0.81 $0.00
Net income (loss) per share
Basic ($0.10) ($0.16) $0.75 ($0.38)
========== ========== =========== ==========
Diluted ($0.10) ($0.16) $0.73 ($0.38)
========== ========== =========== ==========
Weighted average basic common shares
outstanding 3,508,579 3,680,671 3,591,292 3,657,433
========== ========== =========== ==========
Weighted average diluted common shares
outstanding 3,508,579 3,680,671 3,691,272 3,657,433
========== ========== =========== ==========
4
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $2,703,327 $(1,396,183)
Net gain from sale of discontinued operation (2,994,204) -
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Recognition of deferred compensation 51,640 -
Depreciation 263,818 207,689
Changes in-
Accounts receivable 2,175,095 708,213
Prepaid and other assets (64,816) (793,631)
Restricted cash - (638,614)
Costs in excess of billing (454,428) -
Other assets 901 600
Accounts payable (644,296) (492,033)
Accrued compensation and payroll taxes (34,800) 105,314
Other accrued expenses (200,505) 191,738
Deferred revenue (642,605) 324,900
Customer advances 134,134 (165,615)
---------- -----------
Net cash provided by (used in) operating activities 293,261 (1,947,622)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operation 922,836 -
Purchase of fixed assets (99,604) (629,203)
---------- -----------
Net cash provided by (used in) investing activities 823,232 (629,203)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury Stock (386,781) -
Proceeds from notes payable - 466,667
Principal payments on capital lease obligations (53,159) (47,080)
Capital contribution - 36,725
---------- -----------
Net provided by (used in) financing activities (439,940) 456,312
Net increase (decrease) in cash 676,553 (2,120,513)
Cash, beginning of period 2,242,988 3,867,430
---------- ------------
Cash, end of period $2,919,541 $ 1,746,917
========== ============
</TABLE>
5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest 28,575 26,547
=========== ==========
Income taxes 20,595 13,970
=========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Assets acquired under capital lease obligations - 39,212
=========== ==========
</TABLE>
6
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1998 and 1997
1. ORGANIZATION AND BUSINESS
-------------------------
K2 Design, Inc. ("K2" or the "Company") commenced operations on March 1, 1993
as a partnership. In January 1995 the Partnership contributed its capital into
a newly formed corporation and elected S Corporation status.
Effective January 1, 1996, the Company was reorganized as a Delaware C
corporation having a wholly owned operating subsidiary incorporated in New
York. The reorganized corporation is authorized to issue 9,000,000 shares of
common stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of interactive advertising.
Discontinued Operations
- -----------------------
On June 1, 1998, the Company sold its CLIQNOW! business unit to 24/7 Media,
Inc. ("TFSM") for gross proceeds of $4 million, consisting of approximately $1
million of cash and $3 million of TFSM Convertible Redeemable Preferred Stock.
Net proceeds to the Company were approximately $3.3 million, prior to
transaction costs but after giving effect to payments to certain employees of
the CLIQNOW! business unit. On August 14, 1998, TFSM's registration statement
for its initial public offering was declared effective by the Securities and
Exchange Commission. As a result, the TFSM Convertible Redeemable Preferred
Stock automatically converted on that date into 196,490 shares of common stock
of TFSM, the lock-up in respect of which expires February 14, 1999. These
shares are not registered and may not be publicly sold until the earlier of
(i) the effective date of a registration statement in respect of such shares
and (ii) pursuant to Rule 144, subject to volume and other restrictions,
commencing June 1, 1999. The Company has requested that the shares be
registered pursuant to its contractual arrangements with TFSM. Accordingly,
the consolidated financial statements exclude the results of operations
attributable to the CLIQNOW! business unit, which are consolidated in the line
item "Gain (loss) from sale of discontinued operations." However, although
accounting principles allocate certain Company expenses to the discontinued
operations, certain of those expenses remain even after the sale of CLIQNOW!
(e.g., rent expenses). Therefore, the Company's operating results from
continuing operations for the periods discussed herein are not necessarily
representative of future periods.
2. Net Income (Loss) Per Share of Common Stock
-------------------------------------------
SFAS 128, "Earnings per Share" 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 stockholders by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS is
calculated by dividing income available to common stockholders by the weighted
average number of common shares outstanding adjusted to reflect potentially
dilutive securities.
In accordance with SFAS 128, the following table reconciles net income (loss)
and share amounts used to calculate basic and diluted income (loss) per share:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30
1998 1997 1998 1997
--------------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator: Net Income (loss) ($339,162) ($594,985) $2,703,327 ($1,396,184)
Denominator: Weighted average number 3,508,579 3,680,671 3,591,292 3,657,433
of common shares outstanding - Basic
Weighted average number of common 3,508,579 3,680,671 3,691,272 3,657,433
shares outstanding - Diluted
Net income (loss) per share
Basic ($0.10) ($0.16) $0.75 ($0.38)
Diluted ($0.10)** ($0.16)* $0.73** ($0.38)*
</TABLE>
---------------------------
*Excludes outstanding stock options as of September 30, 1997 as they
are antidilutive.
**Excludes outstanding stock options for the quarter
ended September 30, 1998 as they are antidilutive.
3. Contingent Liabilities
The Company may be required to pay approximately $485,000 to an executive
officer pursuant to an agreement with him. The agreement permits such
executive officer to terminate his employment during the six months commencing
December 26, 1998 and receive a lump sum payment to him as of the termination
date equal to the remaining salary under his current employment agreement,
approximately $485,000 as of December 26, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of
the Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of the 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 review "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 13
of the Company's 1997 Annual Report on Form 10-KSB for a discussion of these
risks and uncertainties.
RESULTS OF OPERATIONS
General
The Company is a full-service interactive marketing and
communications company. The Company provides such services as development of
online brand, communications and technical strategies, media placement on Web
sites, consulting services regarding Web site usage and user characteristics,
live Internet broadcasts and the development of CD-ROM discs, and print
collateral systems.
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. Most of the Company's revenues
have been generated on a fixed fee or cap fee basis. The Company also provides
ongoing services to certain customers.
Since November 1997, the Company has begun to reduce expenses in an
effort to bring them in line with revenue levels. Accordingly, the Company
implemented cost cutting measures, including a reduction in selling, general
and administrative personnel, consolidation of offices and a reduction in
usage of independent contractors. Nevertheless, 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 future revenues will
be sufficient to support its existing and anticipated expense levels or that
the Company will be able to maintain these reduced expense levels.
In addition, on June 1, 1998, the Company sold its CLIQNOW! business
unit to 24/7 Media, Inc. ("TFSM") for gross proceeds of $4 million, consisting
of $1 million of cash and $3 million of TFSM Convertible Redeemable Preferred
Stock. Net proceeds to the Company were approximately $3.3 million, prior to
transaction costs but after giving effect to payments to certain employees of
the CLIQNOW! business unit. On August 14, 1998, TFSM's registration statement
for its initial public offering was declared effective by the Securities and
Exchange Commission. As a result, the TFSM Convertible Redeemable Preferred
Stock automatically converted on that date into 196,490 shares of common stock
of TFSM, the lock-up in respect of which expires February 14, 1999. These
shares are not registered and may not be publicly sold until the earlier of
(i) the effective date of a registration statement in respect of such shares
and (ii) pursuant to Rule 144, subject to volume and other restrictions
commencing June 1, 1999. The Company has requested that the shares be
registered pursuant to its contractual arrangements with TFSM. Accordingly,
the discussion below excludes the results of operations attributable to the
CLIQNOW! business unit, which are consolidated in the Company's financial
statements in the line item "Gain (loss) from sale of discontinued
operations." However, although accounting principles allocate certain Company
expenses to the discontinued operations, certain of those expenses remain even
after the sale of CLIQNOW! (e.g., rent expenses). Therefore, the Company's
operating results from continuing operations for the periods discussed herein
are not necessarily representative of future periods.
The changes in the various line items discussed below reflect the
impact of the Company's cost cutting measures implemented commencing in
November 1997, partially offset by a decline in the third quarter of 1998 in
net revenues (i.e., gross revenues less pass-through expenses such as media
placement costs). Management believes that such decline is primarily the
result of a weak sales effort during the first half of 1998 and overall
management realignment. Since the Company's sales cycle is typically several
months, the weak sales effort in the first half of 1998 is also expected to
adversely
9
<PAGE>
impact the fourth quarter of 1998. Additionally, the Company was recently
informed that WavePhore, Inc., which accounted for approximately 70% of third
quarter gross revenue and approximately 25% of nine month gross revenue, will
not be utilizing the Company's services beyond the fourth quarter. It is also
expected that fourth quarter revenue from WavePhore, Inc. will be
significantly reduced as compared to third quarter levels. Accordingly,
management believes that the Company will incur a loss from continuing
operating in the fourth quarter comparable to or greater than that in the
third quarter.*
The Company has began to address this situation by (i) expanding its
senior management team with the recent hire of Lynn Fantom as President and
Chief Executive Officer, (ii) changing the nature of its target customer and
the business sought and (iii) allocating additional resources to its sales
efforts.
<TABLE>
<CAPTION>
Percentage of Revenues Percentage of Revenues
For the Three Months Ended For the Nine Months Ended
September 30, September 30
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues: 100.00% 100.0% 100.00% 100.00%
Operating Expenses:
Direct salaries and costs 76.2% 74.9% 69.3% 74.1%
Selling, general and administrative 34.5% 45.0% 31.6% 44.8%
Depreciation 4.5% 5.3% 4.4% 4.6%
Total operating expenses 115.2% 125.2% 105.3% 123.5%
Loss from continuing operations before (15.2)% (25.2)% (5.3%) (23.5)%
interest and discontinued operations
Interest and other income, net 4.0% 1.5% 2.2% 2.1%
Income (loss) before income tax provision and (11.2)% (23.7)% (3.1)% (21.4)%
discontinued operations
Provision for income taxes 1.0% .5% 0.4% 0.3%
Income (loss) from continuing operations (12.2)% (24.2)% (3.5)% (21.7)%
Loss from discontinued operations (0.0)% (12.1)% (1.4)% (10.1)%
Gain (Loss) from sale of discontinued (5.6)% 0.0% 50.4 0.0%
operations
</TABLE>
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations. See
"Factors Affecting Operating Results and Market Price of Stock"
contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 for a discussion of the risks and
uncertainties which may affect this statement.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) (17.8)% (36.3)% 45.5% (31.8)%
</TABLE>
Revenues
Revenues for the three months ended September 30, 1998 and 1997 were
$1,901,265 and $1,636,991, respectively, or an increase of approximately 16%.
However, net revenues (i.e., gross revenues less pass-through expenses such as
media placement costs) during the same periods were $891,939 and $1,389,163,
respectively, or a decrease of 36%. See Management's Discussion and Analysis
of Financial Condition and Results of Operations--General." During the three
months ended September 30, 1998, WavePhore, Standard & Poors and Lexis-Nexis
accounted for approximately 72%, 8% and 7%, respectively, of the Company's
gross revenues. During the three months ended September 30, 1997, Cox
Interactive Media, Inc., Bell Communications Research, Inc. and American
Express Company accounted for approximately 23%, 19% and 14%, respectively, of
the Company's gross revenues.
Revenues for the nine months ended September 30, 1998 and 1997 were
approximately $5,937,000 and $4,384,000, respectively, or an increase of
approximately 35%. However, during the nine months ended September 1998, net
revenues were $3,373,600 compared to net revenues of $3,700,629 for the 1997
period, a decease of $327,029 or 9%. During the nine months ended September
30, 1998, WavePhore, Standard & Poors, and Bell Atlantic, accounted for
approximately 25%, 17% and 6%, respectively, of the Company's revenues. During
the nine months ended September 30, 1997, WavePhore, Toys "R" Us Corporation
and Bell Communications Research, Inc. accounted for approximately 21%, 10%
and 10%, respectively, of the Company's revenues.
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 stayed relatively stable for the three
months ended September 30, 1998 as compared to the same period in 1997. In
absolute dollars, direct salaries and costs increased by approximately
$222,000 from approximately $1,226,000 for the 1997 quarter to approximately
$1,448,000 for the 1998 quarter. In the 1998 period, direct salaries and costs
consisted primarily of approximately $931,000 of media placement costs, and
approximately $470,000 paid as direct labor costs. In the 1997 period, direct
salaries and costs consisted primarily of approximately $248,000 paid as media
placement costs and approximately $597,000 paid as direct labor costs.
As a percentage of revenues, direct salaries and costs decreased by
approximately 5% in the nine months ended September 30, 1998, as compared to
the same period in 1997. In absolute dollars, direct salaries and costs
increased by approximately $869,000 from approximately $3,247,000 in the nine
months ended September 30, 1997 to approximately $4,116,000 in the nine months
ended September 30, 1998. In the 1998 period, direct salaries and costs
consisted primarily of approximately $2,365,000 of media placement costs, and
approximately $1,338,000 paid as direct labor costs. In the 1997 period,
direct salaries and costs consisted primarily of approximately $684,000 paid
as media placement costs and approximately $1,563,000 paid as direct labor
costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months
ended September 30, 1998 and 1997 were approximately $655,000 (34.5% of
revenues) and $738,000 (45.0% of revenues), respectively, and consisted
primarily of labor costs, professional fees, occupancy costs, travel, office
expenses and supplies and marketing and advertising, among other things. The
decrease in both absolute dollars and as a percentage of revenues reflects the
application of tighter controls in connection with the Company's cost
reduction plan.
Selling, general and administrative expenses for the nine months
ended September 30, 1998 and 1997 were approximately $1,876,000 (31.6% of
revenues) and $1,966,000 (44.8% of revenues), respectively, and consisted
primarily of labor costs, professional fees, occupancy costs, travel, office
expenses and supplies and marketing and advertising, among other things. The
decrease in both absolute dollars and as a percentage of revenues reflects the
application of tighter controls in connection with the Company's cost
reduction plan.
11
<PAGE>
Depreciation
Depreciation expense was approximately $87,000 and $86,000 in the
three months ended September 30, 1998 and 1997, respectively, and
approximately $264,000 and $202,000 in the nine months ended September 30,
1998 and 1997, respectively, and related to depreciation of equipment and
leasehold improvements. The Company's depreciation expenses in 1998 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
As a result of the gain from the sale of discontinued operations, the
Company's net operating loss carry forward has been reduced by approximately
$3 million to approximately $140,000.
Gain on Sale of Discontinued Operations
On June 1, 1998, the Company sold its CLIQNOW! business unit to TFSM
for gross proceeds of $4 million, consisting of approximately $1 million of
cash and $3 million of TFSM Convertible Redeemable Preferred Stock. Net
proceeds to the Company were approximately $3.3 million, prior to transaction
costs but after giving effect to payments to certain employees of the CLIQNOW!
business unit. The Company recorded a gain on sale with respect to this
transaction of $2,994,204 during the nine months ended September 30, 1998.
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.
The Company's quarterly operating margins may also fluctuate from
period to period depending on the relative mix of media placement and
maintenance versus other forms of advertising. In November 1997, the Company
began to reduce expenses in an effort to bring them in line with current and
anticipated revenue levels. In addition, management believes that the
Company's results of operations in the fourth quarter of 1998 will also
reflect a significant decrease in net revenues as compared to the comparable
quarter of 1997 and an operating loss as the factors that impacted third
quarter 1998 revenues are expected to similarly impact the fourth quarter, and
the loss of WavePhore, Inc. will also have a negative impact on the results
for the fourth quarter.*
Liquidity and Capital Resources
The Company's cash of $2,919,541, plus the value of its equity
position in TFSM at cost of $2,558,339, or an aggregate of approximately
$5,478,000, reflects a decrease of approximately $1,100,000 or 17% as
compared to June 30, 1998. However, on November 13, 1998, the value of such
equity position was approximately $3,488,000, or an increase over cost of
approximately $930,0000.
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations. See
"Factors Affecting Operating Results and Market Price of Stock"
contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 for a discussion of the risks and
uncertainties which may affect this statement.
12
<PAGE>
The Company is dependent on its cash and the TFSM stock, together
with cash generated by operations for working capital in order to be
competitive, to meet the increasing demands of 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 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, should they arise, or to finance any expansion of its business.
Net cash provided by the Company's operating activities was $293,261
for the nine months ended September 30, 1998 and related primarily to a
substantial decrease in accounts receivable, and a decrease in accounts
payable, accrued expenses payable and deferred revenue as is indicated in the
statement of cash flows.
The Company was also required to use approximately $200,000 of its
cash for tax payments in respect of payments to its former CLIQNOW! employees
upon release of certain TFSM stock to them (which occurred on November 13,
1998). In addition, the Company may be required to pay approximately $485,000
to an executive officer pursuant to an agreement with him. The agreement
permits such executive officer to terminate his employment during the six
months commencing December 26, 1998 and receive a lump sum payment to him as
of the termination date equal to the remaining salary under his current
employment agreement, approximately $485,000 as of December 26, 1998. See Note
3 to Financial Statements.
In the nine months ended September 30, 1998 the Company spent
approximately $100,000 on capital expenditures, consisting of computer
equipment, furniture, fixtures and leasehold improvements acquired and made in
connection with the Company's recent relocation of its principal offices.
Additional capital expenditures of approximately $45,000 are expected to be
made in connection with office leasehold improvements.
Year 2000 Compliance
There are issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "year 2000 problem" is
pervasive and complex, as virtually every computer operation will be affected
in some way by the rollover of the two digit year value of 00. The issue is
whether computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company has not verified that companies doing business with it are year 2000
compliant. The Company does not anticipate that it will incur significant
operating expenses or be required to invest heavily in computer systems
improvements to be year 2000 compliant. However, significant uncertainty
exists concerning the potential costs and effects with year 2000 compliance.
Any year 2000 compliance problem of either the Company or its customers could
have a material adverse effect on the Company's business, results of
operations and financial condition.
PART II - OTHER INFORMATION
Items 1., 2., 3., 4., & 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27.1 - Financial Data Schedule (included only in
the electronic filing with the Securities and Exchange Commission)
- --------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
Affecting Operating Results and Market Price of Stock" contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997 for a discussion of the risks and uncertainties which may affect
this statement.
13
<PAGE>
(b) None
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: November 18, 1998 By: /s/ Matthew G. de Ganon
-----------------------
Matthew G. de Ganon
Principal Executive Officer
By: /s/ Seth Bressman
-----------------------
Seth Bressman
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,919,541
<SECURITIES> 0
<RECEIVABLES> 1,258,058
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<CURRENT-ASSETS> 5,158,903
<PP&E> 1,393,453
<DEPRECIATION> 626,754
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<CURRENT-LIABILITIES> 2,920,136
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0
0
<COMMON> 36,850
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