<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, 1999
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 NOVEMBER 12, 1999
----- ---------------------------------
Common stock, par value $.01 per share 3,405,351
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, 1999 (unaudited).....................................3
Consolidated statements of operations - three months and nine months ended
September 30, 1999 (unaudited) and September 30, 1998 (unaudited)..........................4
Consolidated statements of cash flows - nine months ended
September 30, 1999 (unaudited) and September 30, 1998 (unaudited)..........................5
Notes to consolidated financial statements......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................11
SIGNATURES..............................................................................................12
</TABLE>
2
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1999
(unaudited)
ASSETS
<S> <C>
Current Assets:
Cash & cash equivalents $ 2,348,885
Accounts receivable, net of allowance for doubtful
accounts of $100,000 1,398,226
Unbilled revenue 343,964
Prepaid expenses and other current assets 73,146
Investment in securities, at cost 1,679,450
-------------
Total current assets 5,843,671
Fixed assets, net 585,248
Restricted cash 150,711
Other assets 4,710
Total assets $ 6,584,340
=============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 21,108
Accounts payable 501,439
Accrued compensation & payroll taxes 234,185
Deferred revenue 67,542
Other accrued expenses 530,672
Customer advances 88,821
-------------
Total current liabilities 1,443,767
Long-term capital lease obligations 21,839
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
0 shares issued and outstanding -
Common stock, $0.01 par value 9,000,000 shares authorized;
3,741,251 shares issued; 3,404,901 shares outstanding 37,412
Treasury stock; 336,350 shares (585,981)
Additional paid-in capital 6,656,113
Accumulated deficit (988,810)
-------------
Total stockholders' equity 5,118,734
Total liabilities & stockholders' equity $ 6,584,340
=============
</TABLE>
3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -------------------------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
unaudited unaudited unaudited unaudited
<S> <C> <C> <C> <C>
Revenues $ 1,705,708 $ 1,901,265 $ 3,971,914 $ 5,936,879
------------ ----------- ------------- ------------
Direct salaries and costs 989,361 1,448,140 3,120,708 4,116,233
Selling, general and administrative expenses 836,467 655,281 2,188,208 1,876,395
Depreciation 101,595 86,539 301,400 263,818
------------ ----------- ------------- ------------
Loss from continuing operations before interest &
other income, net, income taxes and discontinued
operations, net (221,715) (288,695) (1,638,402) (319,567)
Interest and other income, net 464,170 76,322 2,044,251 135,306
Provision for income taxes (24,128) 18,870 33,073 21,307
------------ ----------- ------------- ------------
Income (loss) from continuing operations 266,583 (231,243) 372,776 (205,568)
Loss from discontinued operations - - - (85,309)
Gain (Loss) from sale of discontinued operations - (107,919) - 2,994,204
============ =========== ============= ============
Net Income (loss) $ 266,583 $ (339,162) $ 372,776 $ 2,703,327
============ =========== ============= ============
Income (loss) per share from continuing
operations -
Basic $ 0.08 $ (0.07) $ 0.11 $ (0.06)
------------ ----------- ------------- -----------
Diluted $ 0.07 $ (0.07) $ 0.10 $ (0.06)
------------ ----------- ------------- -----------
Loss per share from discontinued operations -
Basic $ - $ - $ - $ (0.02)
------------ ----------- ------------- -----------
Diluted $ - $ - $ - $ (0.02)
------------ ----------- ------------- -----------
Gain (loss) from sale of discontinued operations -
Basic $ - $ (0.03) $ - $ 0.83
------------ ----------- ------------- -----------
Diluted $ - $ (0.03) $ - $ 0.81
------------ ----------- ------------- -----------
Net Income (loss) per share -
Basic $ 0.08 $ (0.10) $ 0.11 $ 0.75
============ =========== ============= ============
Diluted $ 0.07 $ (0.10) $ 0.10 $ 0.73
============ =========== ============= ============
Weighted average basic common shares outstanding 3,479,687 3,508,579 3,474,286 3,591,292
============ =========== ============= ============
Weighted average diluted common shares outstanding 3,665,191 3,508,579 3,630,318 3,691,272
============== =========== ============= ============
</TABLE>
4
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 372,776 $ 2,703,327
Gain from sale of securities (1,938,882) -
Net gain from sale of discontinued operation - (2,994,204)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Recognition of deferred compensation - 51,640
Non-cash compensation expense 219,759 -
Depreciation 301,400 263,818
Changes in -
Accounts receivable (1,129,053) 2,175,095
Prepaid and other current assets (5,300) (64,816)
Unbilled revenue (293,512) (454,428)
Other assets 4,462 901
Accounts payable (281,777) (644,296)
Accrued compensation and payroll taxes 137,543 (34,800)
Accrued taxes (69,556) -
Other accrued expenses (399,671) (200,505)
Deferred revenue 67,542 (642,605)
Customer advances 37,533 134,134
----------- -----------
Net cash provided by (used in)
Operating activities (2,976,736) 293,261
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of discontinued operation - 922,836
Proceeds from sale of investment securities 2,817,732 -
Purchase of equipment (104,005) (99,604)
----------- -----------
Net cash provided by
Investing activities 2,713,727 823,232
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease obligations (26,409) (53,159)
Options exercised 7,875 -
Purchase of treasury stock (199,200) (386,781)
----------- -----------
Net cash used in financing
Activities (217,734) (439,940)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (480,743) 676,553
CASH AND CASH EQUIVALENTS, beginning of period 2,829,628 2,242,988
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,348,885 $ 2,919,541
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for
Interest $ 11,393 $ 28,575
=========== ==========
Income taxes $ 66,873 $ 20,595
=========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Assets acquired under capital lease obligations $ 37,255 $ -
=========== ==========
</TABLE>
5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1999
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 Company 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 e-communications firm, engaged primarily in e-business
strategy and consulting, online marketing, and web-related development and
production.
Discontinued Operations
On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media, Inc.
("TFSM"). As a result of this sale, the Consolidated Statements of Operations
for 1998 reflect the CLIQNOW! Division as a discontinued operation and show
income from discontinued operations separately.
Investment in 24/7 Media, Inc. Stock
As of September 30, 1999, K2 Design, Inc. owned 128,992 shares of common stock
of TFSM. As of that date, the basis of this stock on the books of the Company
was $1,679,450 or approximately $13.02 per share. During September 1999, the
Company sold 17,500 shares of TFSM, yielding net proceeds of $644,200 and
resulting in a gain on such sale of $416,300. In May 1999, the Company sold
50,000 shares of common stock of TFSM for proceeds of $2,173,500 resulting in a
gain of $1,522,500.
2. 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 and nine-month
periods ended September 30, 1999 and 1998, in accordance with generally accepted
accounting principles for interim financial statements and pursuant to Form
10-QSB and Regulation S-B. Certain information and footnote disclosures normally
included in the Company's annual audited consolidated financial statements have
been condensed or omitted pursuant to such rules and regulations.
The results of operations for the three and nine month periods ended September
30, 1999 and 1998 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, 1998, which are
included in the Company's Annual Report on 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 revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
3. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
6
<PAGE>
SFAS 128, "Earnings per Share" establishes standards for computing and
presenting earnings per share (EPS). The 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 shares of
common stock 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator: Net Income (Loss) $ 266,583 $ (339,162) $ 372,776 $ 2,703,327
========== ========== ========== ===========
Denominator: Weighted average number of
common shares outstanding - Basic 3,479,687 3,508,579 3,474,286 3,591,292
Incremental shares of outstanding stock
options 185,504 - 156,032 99,980
---------- ---------- ---------- -----------
Weighted average number of common shares
outstanding - Diluted 3,665,191 3,508,579 3,630,318 3,691,272
========== ========== ========== ===========
Net income (loss) per share
Basic $ 0.08 $ (0.10) $ 0.11 $ 0.75
Diluted $ 0.07 $ (0.10)** $ 0.10 $ 0.73
</TABLE>
**Excludes outstanding stock options of 435,450 as of September 30, 1998 as they
are antidilutive.
On June 16, 1999, the stockholders of the Company approved an amendment
increasing the number of shares of common stock subject to stock options
issuable under the Company's 1997 Stock Incentive Plan to 900,000 shares.
7
<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 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 review "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 14 of the
Company's 1998 Annual Report on Form 10-KSB for a discussion of these risks and
uncertainties.
General
The Company is a full-service e-communications firm specializing in how to use
technology to help client companies build and improve customer relationship
management. The Company's involvement with its clients extends to business areas
such as communications, customer service, e-commerce and dealer/distribution
extranets. The Company offers clients a range of services including strategy and
research (usability studies, online surveys), management consulting in
organizational behavior as related to the Web, marketing and online advertising,
development and production (web sites, rich media, banners), and web-related
return-on-investment analysis.
Revenues are recognized on a percentage of completion basis, and to a lesser
extent on a time and materials 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 most clients .
On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media, Inc.
("TFSM"). As a result of this sale, the Consolidated Statements of Operations
reflect the CLIQNOW! Division as a discontinued operation and show loss from
discontinued operations and the gain from the sale of discontinued operations
separately. The Company's operating results from continuing operations for the
periods discussed herein are not necessarily representative of future periods.
<TABLE>
<CAPTION>
Percentage of Revenues
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------------
September 30, September 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Unaudited unaudited unaudited unaudited
<S> <C> <C> <C> <C>
Revenues 100.00% 100.00% 100.00% 100.00%
Direct salaries and costs 58.00% 76.17% 78.57% 69.33%
Selling, general and administrative expenses 49.04% 34.47% 55.09% 31.61%
Depreciation 5.96% 4.55% 7.59% 4.44%
Loss from continuing operations before
interest & other
income, net, income taxes and discontinued -13.00% -15.19% -41.25% -5.38%
operations, net
Interest and other income, net 27.21% 4.01% 51.47% 2.28%
Provision for income taxes -1.41% 0.99% 0.83% 0.36%
Income (loss) from continuing operations 15.62% -12.17% 9.39% -3.46%
Loss from discontinued operations 0.00% 0.00% 0.00% -1.44%
Gain (Loss) from sale of discontinued 0.00% -5.68% 0.00% 50.43%
operations
Net Income 15.62% -17.85% 9.39% 45.53%
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
Revenues
Gross revenues for the three months ended September 30, 1999 and 1998 were
approximately $1,706,000 and $1,901,000, respectively, or a decrease of
approximately 10%, due primarily to a decrease in media placement revenues in
the current period. During the three months ended September 30, 1999, MCI
WorldCom, NCR Corporation and VarsityBooks.com, Inc. had accounted for
approximately 39%, 21% and 15%, respectively, of the Company's gross revenues.
During the three months ended September 30, 1998, Wavephore, Inc. had accounted
for approximately 72% of the Company's gross revenues.
Gross revenues for the nine months ended September 30, 1999 and 1998 were
approximately $3,972,000 and $5,937,000, respectively, or a decrease of
approximately 33%, due primarily to a decrease in media placement revenues in
the current period. During the nine months ended September 30, 1999,
VarsityBooks.com, Inc., NCR Corporation and MCI WorldCom accounted for
approximately 32%, 19% and 18%, respectively, of the Company's gross revenues.
During the nine months ended September 30, 1998, Wavephore, Inc., Standard &
Poor's and Bell Atlantic accounted for approximately 25%, 17% and 6%,
respectively, of the Company's gross revenues.
Net revenues for the three months ended September 30, 1999, June 30, 1999 and
September 30, 1998 were $1,242,000, $658,000 and $962,000 respectively,
reflecting an increase of 88.7% over the previous quarter and a 29.1% increase
over the same period last year. Net revenues for the nine months ended September
30, 1999 were $2,368,000 compared to $3,487,000 during the same period last
year, or a 32.1% decrease. Net revenues represents gross revenues minus media
cost of sales and reimbursable expense pass-through billings. Media cost of
sales and expenses billed back to clients are included in direct salaries and
costs.
Although the Company has increased its efforts to maintain and enhance client
relationships, loss of major clients without a comparable replacement could
cause quarterly results to fluctuate and could have a material adverse effect on
the Company's financial condition. See "Fluctuations in Quarterly Operating
Results."
Direct Salaries and Costs
Direct salaries and costs include media cost of sales, 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 58.0% of revenues
for the three months ended September 30, 1999 as compared to 76.2% of revenues
for the same period in 1998. The decrease was the result of a higher percentage
of direct costs being billed back to clients as reimbursable expenses, partially
offset by direct salaries remaining similar for both periods with lower revenues
during the 1999 period. In absolute dollars, direct salaries and costs decreased
by approximately $459,000 from approximately $1,448,000 for the1998 quarter to
approximately $989,000 for the 1999 quarter. In the 1999 period, direct salaries
and costs consisted of approximately $177,000 of media placement costs, $457,000
of direct labor costs and $355,000 in other direct expenses. In the 1998 period,
direct salaries and costs consisted of approximately $931,000 of media placement
costs and $470,000 of direct labor costs and $47,000 in other direct expenses.
The decrease in media placement costs in the 1999 period is due primarily to a
reduction in media placement services for clients during that period. Media
placement costs in the 1999 period consisted of 100%online media placement
costs, whereas approximately 50% of the media placement costs in the 1998 period
involved traditional print media and broadcast media. The increase in other
direct expenses during the 1999 period was due primarily to usability and focus
group costs conducted on behalf of two clients, an increase in client-related
costs such as photo shoots, and an increase in allowance for doubtful accounts,
which resulted in an increase to bad debt expense for the period.
9
<PAGE>
As a percentage of revenues, direct salaries and costs increased for the nine
months ended September 30, 1999 to 78.6% of revenues as compared to 69.3% of
revenues during the same period in 1998. This increase was due primarily to
direct salaries remaining similar for both periods with lower revenues during
the 1999 period partially offset by a higher percentage of direct costs being
billed back to clients as reimbursable expenses. In absolute dollars, direct
salaries and costs decreased by approximately $995,000 from approximately
$4,116,000 for the nine months ended September 30, 1998 to approximately
$3,121,000 for the nine months ended September 30, 1999. In the 1999 period,
direct salaries and costs consisted of approximately $1,223,000 of media
placement costs, $1,295,000 of direct labor costs and $603,000 in other direct
expenses. In the 1998 period, direct salaries and costs consisted of
approximately $2,365,000 of media placement costs, $1,338,000 of direct labor
costs and $413,000 in other direct expenses. The decrease in media placement
costs during the 1999 period was due primarily to a reduction in media placement
services for clients during that period, reflecting a shift in the Company's
service mix from traditional media advertising services to more e-communications
consulting.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of labor costs,
professional fees, occupancy costs, travel, office expenses and supplies and
marketing and advertising, among other things and for the three months ended
September 30, 1999 and 1998 were approximately $836,000 (49.0% of revenues) and
$655,000 (34.5% of revenues), respectively, and for the nine months ended
September 30, 1999 and 1998, were approximately $2,188,000 (55.1% of revenues)
and $1,876,000 (31.6% of revenues), respectively. The Company's selling, general
and administrative costs have increased during the three and nine months ended
September 30, 1999 primarily due to noncash compensation charges relating to
option exercises and increased public relations charges.
Depreciation
Depreciation expense was approximately $102,000 (6.0% of revenues) and $87,000
(4.6% of revenues) in the three months ended September 30, 1999 and 1998,
respectively, and related to depreciation of equipment, furniture and fixtures,
and leasehold improvements. For the nine months ended September 30, 1999 and
1998, depreciation expense was approximately $301,000 (7.6% of revenues) and
$264,000 (4.4% of revenues) respectively. The Company's depreciation expenses in
1999 have increased as a result of recent acquisitions of computer equipment,
office equipment and leasehold improvements.
Income Taxes
As of December 31, 1998, the Company had a net operating loss carryforward of
approximately $1.2 million. Although the Company was not subject to federal
income taxes in 1998, it was subject to state and local minimum income taxes. In
1999, the Company will again be subject to state and local income taxes
regardless of the net operating loss carryforward.
Income From Continuing Operations
Income from continuing operations was approximately $267,000 and $373,000 for
the three and nine months ended September 30, 1999. This was due primarily to
the $416,000 gain from the sale of 17,500 shares of common stock of TFSM during
September 1999 and the $1,523,000 gain from the sale of 50,000 shares of common
stock of TFSM in May 1999. During the three and nine months ended September 30,
1998, the Company had a loss from continuing operations of $231,000 and
$206,000, respectively.
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 are controlled by
the Company and some of which are externally driven , 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, service mix 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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash of $2,349,000 plus the value of its equity position in TFSM
at cost of $1,679,000, or an aggregate of approximately $4,028,000, has
decreased approximately $1,360,000 or 25.2% as compared to December 31, 1998.
This decrease is due primarily to $2,977,000 cash used in the Company's
operating activities, offset by the proceeds of $2,818,000 from the sale of
shares of common stock of TFSM.
The Company is dependent on its current cash and its investment in TFSM,
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 the 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.* Accordingly, the
Company may not have the funds to relieve any liquidity problems, should they
arise, or to finance any expansion of its business. On July 26, 1999, the TFSM
shares owned by the Company became freely tradable. The Company intends to sell
the majority of its holdings in TFSM over the next twelve months.
Net cash used in the Company's operating activities for the nine months ended
September 30, 1999 was $2,977,000 and related primarily to the loss from
continuing operations before interest and other income, net increases in
accounts receivable and unbilled revenue, as well as decreases in accounts
payable and accrued expenses payable, as indicated in the consolidated statement
of cash flows.
For the nine months ended September 30, 1999, the Company spent approximately
$104,000 on capital expenditures, consisting of computer and office equipment,
furniture, fixtures and leasehold improvements, compared to approximately
$100,000 spent during the nine months ended September 30, 1998. Additional
capital expenditures of approximately $75,000 are expected to be made in
connection with equipment and office leasehold improvements during the quarter
ending December 31, 1999.
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 accounting and job costing
software used by the Company is year 2000 compliant, according to a letter
received from the software manufacturer. The Company's router has been replaced
in order to be year 2000 compliant and a special Year 2000 compliant test
software has been run on the Company's hardware to ascertain that the Company
hardware is compliant. The Company's telecommunications system and accompanying
software have been verified by a third party as being Year 2000 compliant. The
Company is not aware of any programming created by the Company on behalf of a
client that is not year 2000 compliant. The Company is not responsible for
outside modes of communication, sites or facilities over which client media
campaigns or placements occur; however, the Company is not currently aware of
any such delivery vendors that are not year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects with year 2000
compliance. Any year 2000 compliance problems of either the Company or its
clients or vendors could have a material adverse effect of the Company's
business, results of operations and financial condition.
- -----------------
* 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, 1998 for a discussion of the risks and
uncertainties which may affect this statement.
11
<PAGE>
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
(b) None
12
<PAGE>
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 15, 1999 By:
------------------------------------
Lynn Fantom
Chief Executive Officer and President
By:
------------------------------------
Seth Bressman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
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0
0
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